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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-13498
ASSISTED LIVING CONCEPTS INC.
(Exact name of registrant as specified in its charter)
NEVADA 93-1148702
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9955 S.E. WASHINGTON, SUITE 300
PORTLAND, OR 97216
(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:
Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE AUGUST 2005 AMERICAN STOCK EXCHANGE
6% CONVERTIBLE SUBORDINATED DEBENTURES DUE NOVEMBER 2002 AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) have 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) have been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
As of February 28, 1998, 15,683,864 shares of the registrant's Common Stock, par
- -----------------------------------
value $.01 per share, were outstanding. The aggregate market value of the
voting stock held by non-affiliates of the registrant on such date was
approximately $292,111,967.
------------
Part III incorporates by reference the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 20, 1998
PART I
ITEM 1. BUSINESS
OVERVIEW
Assisted Living Concepts Inc. and its subsidiaries ("ALC" or the "Company")
operates, owns, leases and develops free-standing assisted living residences,
primarily in small middle-market rural and suburban communities with a
population typically ranging from 10,000 to 40,000. Currently the Company has
operations in Oregon, Idaho, Iowa, Nebraska, Washington, Arizona, Texas,
Indiana, New Jersey, Ohio, Pennsylvania and South Carolina. The Company also
provides personal care and support services and makes available routine nursing
services (as permitted by applicable regulations) designed to meet the health
care needs of its residents. The Company believes that this combination of
residential, personal care, support and health care services provides a cost-
efficient alternative and affords an independent lifestyle for individuals who
do not require the broader array of medical services that nursing facilities are
required by law to provide.
The Company has experienced significant growth since the completion of its
initial public offering in November 1994, growing from a base of five residences
(137 units) primarily through the development of assisted living residences. As
of February 28, 1998, the Company owned, leased or managed a total of 139
operating assisted living residences representing an aggregate of 5,235 units.
Of these residences, the Company owned 71 residences (2,727 units) and leased 68
residences (2,508 units). For the three months ended December 31, 1997, the
Company's 54 Stabilized Residences (those residences that had been operating for
twelve months prior to the beginning of the period or had achieved 95.0%
occupancy within the first twelve months of operations) had an average occupancy
rate of approximately 94.5% and an average monthly rental rate of approximately
$1,753 per unit. The Company's 105 residences (3,875 units) in operation during
the three months ended December 31, 1997 had an average occupancy rate of
approximately 73.8% and an average monthly rental rate of approximately $1,790
per unit.
The Company is currently developing and, to a lesser extent, seeking to
acquire additional assisted living residences in Washington, Arizona, Indiana,
Iowa, New Jersey, South Carolina and three other states with regulatory and
reimbursement climates which the Company believes are favorable. As of February
28, 1998, the Company had commenced construction on 26 residences (1,006 units).
In addition, at such date, the Company had optioned or had entered into land
purchase agreements for the development of 24 residences (959 units). For the
twelve months ended December 31, 1997, the Company opened 63 residences (2,494
units) and intends to open approximately 60 to 70 residences in 1998. The
Company generally does not acquire sites for development until it has completed
its feasibility analysis and appropriate zoning has been obtained. Capital
expenditures and related start-up costs for 1998, which relate primarily to the
development of new residences, are estimated to total approximately $160 million
to $190 million. Capital expenditures for the twelve months ended December 31,
1997 for the residences completed and under development was $160.8 million.
Pursuant to its development program, the Company has obtained approximately $138
million in financing commitments from health care real estate investment trusts,
$50 million in mortgage financing from a bank and $28 million in tax-exempt bond
financing.
The principal elements of the Company's operating growth strategy are to: (i)
expand market penetration, (ii) service higher acuity residents, (iii)
selectively acquire or develop complementary businesses and (iv) pursue
strategic alliance/joint venture relationships. The Company anticipates that a
majority of its residences revenues will continue to come from private pay
sources. However, the Company believes that locating residences in states with
favorable regulatory and reimbursement climates should provide a stable source
of residents eligible for Medicaid reimbursement to the extent that private pay
residents are not available and, in addition, provide the Company's private pay
residents with alternative sources of income when their private funds are
depleted and they become Medicaid eligible.
Pursuant to its growth strategy, the Company acquired Home and Community Care,
Inc. ("HCI"), a privately held provider of home health care, hospice care and
durable medical equipment and developer of assisted living residences which had
39 assisted living residences (1,567 units) either under construction or
identified for possible development in five states. In addition, the Company
also acquired Carriage House Assisted Living Inc. ("Carriage House"), a
privately held developer and operator of assisted living residences in Nebraska
which operates four assisted living residences (156 units) and has an additional
six residences (198 units) under construction.
2
The Company is a Nevada corporation and its principal executive offices are
located at 9955 S.E. Washington, Suite 300, Portland, Oregon 97216, telephone
number (503) 252-6233.
SERVICES
The Company's residences offer residents a supportive, "home-like" setting and
assistance with activities of daily living. Residents are individuals who, for
a variety of reasons, cannot live alone but do not typically need the 24-hour
skilled medical care provided in nursing facilities. Services provided to these
residents are designed 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. General services in the
Company's residences include the provision of three meals per day, laundry,
housekeeping and maintenance. Available support services include personal care
and routine nursing care, social and recreational services, transportation and
other special services needed by the resident. Personal care includes services
such as bathing, dressing, personal hygiene, grooming, as well as eating and
ambulating assistance. Routine nursing services, which are made available and
are provided according to the resident's individual need and state regulatory
requirements, include assistance with taking medication, skin care and
injections. Organized activities are available for social interaction and
entertainment. Special services available include banking, grocery shopping and
pet care. The Company also provides or arranges access to additional services
beyond its provision of basic housing and related services, including physical
therapy, pharmacy services and the sale or lease of durable medical equipment.
Although a typical package of basic services provided to a resident includes
meals, housekeeping, laundry and personal care, the Company does not have a
standard service package for all residents. Instead, it is able to accommodate
the changing needs of its residents through the use of individual service
contracts and flexible staffing patterns. The Company's multi-tiered rate
structure for the services it provides is based upon the acuity of, or level of
services needed by, each resident. Supplemental and specialized health care
services for those residents requiring 24-hour supervision or more extensive
assistance with activities of daily living are provided by third-party providers
who are reimbursed directly by the resident or a third-party payor (such as
Medicaid or long-term care insurance). The Company assesses the level of need
of each resident regularly.
OPERATIONS
The day-to-day operations of each residence are managed by an on-site program
director who is responsible for the overall 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. The Company consults 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 its residents. Personal care, dietary services, housekeeping
and laundry services are performed primarily by personal service assistants who
are full-time employees of the Company. Maintenance services are performed by
full and part-time employees, while landscaping services are typically performed
by third-party contractors.
The Company manages its residences, which includes the development of
operating standards and the provision of recruiting, training and accounting
services. The Company has established an infrastructure that includes regional
operational managers who oversee the overall performance and finances of each
region, operational managers who oversee the day to day operations of up to ten
to fifteen residences, and team leaders who provide peer support for up to three
to four residences. Financial oversight is managed at the corporate office.
Presently residence personnel are supported by corporate staff based at the
Company's headquarters and three regional offices. Corporate and regional
personnel work with the program directors to establish residence goals and
strategies, quality assurance oversight, development of Company policies and
procedures, development and implementation of new programs, cash management and
treasury functions and human resource management.
3
COMPETITION
The long-term care industry generally is highly competitive and the Company
expects that the assisted living business in particular will become more
competitive in the future. The Company competes with numerous other companies
providing similar long-term care alternatives, such as home health agencies,
life care at home, community-based service programs, retirement communities and
convalescent centers. The Company expects that, as assisted living receives
increased attention and the number of states which include assisted living in
their Medicaid programs increases, competition will grow from new market
entrants, including publicly and privately held companies focusing primarily on
assisted living. Nursing facilities that provide long-term care services are
also a potential source of competition for the Company. 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 the
Company's competitors operate on a not-for-profit basis or as charitable
organizations. Some of the Company's competitors are significantly larger than
the Company and have, or may obtain, greater resources than those of the
Company. The Company believes that there is moderate competition for less
expensive segments of the private market and for Medicaid residents in small
communities. The Company's major competitors are other long-term care
facilities within the same geographic area as its residences because
management's experience indicates that senior citizens who move into living
communities frequently choose communities near their homes.
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 "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. Medicaid provides coverage for certain
financially or medically needy persons, regardless of age, and is funded jointly
by federal, state and local governments. Medicaid reimbursement varies from
state to state. Although a majority of the Company's revenues come from private
payors, the cost structure of the residences has historically been, and is
expected to continue to be, sufficiently low so that the residences are able to
operate profitably if all of their revenues are derived through Medicaid
reimbursements.
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, Washington
currently have operating Medicaid Waiver Programs that allow them to pay for
assisted living care. Without a Medicaid Waiver Program, states can only use
federal Medicaid funds for long-term care in nursing facilities.
During the years ended December 31, 1995, 1996 and 1997, direct payments
received from state Medicaid agencies accounted for approximately 21.4%, 13.8%
and 11.3%, respectively, of the Company's revenue while the tenant-paid portion
received from Medicaid residents accounted for approximately 9.6%, 7.6% and
6.0%, 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.
4
GOVERNMENT REGULATION
The Company's assisted living residences are subject to certain state
regulations and licensing requirements. In order to qualify as a state licensed
facility, the Company's residences must comply with regulations which address,
among other things, staffing, physical design, required services and resident
characteristics. As of February 28, 1998, the Company has obtained licenses in
Oregon, Washington, Idaho, Nebraska, Texas, Arizona, Nebraska, Ohio, New Jersey
Pennsylvania and South Carolina and expects that it will obtain licenses in
other states as required. The Company's 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.
The Company believes that its residences are in substantial compliance with
all applicable regulatory requirements. However, in the ordinary course of
business, a residence can be cited for a deficiency. In such cases, the
appropriate corrective action is taken. No actions are currently pending on any
of the Company's residences.
As a provider of services under the Medicaid program in the United States, the
Company is subject to Medicaid fraud and abuse laws, which prohibit any bribe,
kickback, rebate or remuneration of any kind in return for the referral of
Medicaid patients, or to induce the purchasing, leasing, ordering or arranging
of any goods or services to be paid for by Medicaid. Violations of these laws
may result in civil and criminal penalties and exclusions from participation in
the Medicaid program. The Inspector General of the Department of Health and
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 the Company operates or intends to operate have laws
that prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers if such arrangements are designed to induce or
encourage the referral of patients to a particular provider. The Company at all
times attempts 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 enactment of new laws or regulations will not have a material
adverse effect on the Company's results of operations or financial condition.
Currently, assisted living residences are not regulated as such by the federal
government. State standards required of assisted living providers are less in
comparison with those required of other licensed health care operators. For
instance, the states initially targeted for development or expansion by the
Company do not set staffing ratios. Current Medicaid regulations provide for
comparatively flexible state control over the licensure and regulation of
assisted living residences. There can be no assurance that federal regulations
governing the operation of assisted living residences will not be implemented in
the future or that existing state regulations will not be expanded.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to planned facilities to
create access to the properties by disabled persons. Although the Company
believes that its facilities currently under development are substantially in
compliance with present requirements or are exempt therefrom, if required
changes involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated, additional costs would be incurred by the
Company. Further legislation may impose additional burdens or restrictions with
respect to access by disabled persons, the costs of compliance with which could
be substantial.
The Company's completed acquisition of HCI on October 23, 1997 includes HCI's
home health care and hospice operations. In addition to federal and state
regulation of health care providers, generally, home health care and hospice
operations are subject to federal and state laws covering the nursing services,
therapy services, medical equipment and certain types of home health agency and
hospice activities. Certain of HCI's employees are subject to state laws and
regulations governing the ethics and professional practice of, among others,
medicine, respiratory therapy, physical therapy and nursing. Home health care
and hospice operations are
5
subject to periodic survey by governmental and private accrediting entities to
assure compliance with applicable state licensing, Medicare and Medicaid
certification and accreditation standards, as the case may be. From time to time
in the ordinary course of business, HCI, like other health care companies, has
received survey reports containing deficiencies for alleged failure to comply
with applicable requirements. HCI reviews such reports and attempts to take
appropriate corrective action. The failure to effect such action or to obtain,
renew or maintain any of the required regulatory approvals, certifications or
licenses could adversely affect HCI's business, results of operations or
financial condition and could prevent the programs involved from offering
products and services to patients.
The Balanced Budget Act of 1997 signed by President Clinton on August 5, 1997
(the "Act"), enacted significant changes to the Medicare and Medicaid programs
designed to modernize payment and health care delivery systems while achieving
substantial budgetary savings. In seeking to limit Medicare reimbursement for
home health services, Congress has established a prospective payment system to
replace the current cost-based reimbursement system. The cost based system
reimburses providers for reasonable direct and indirect allowable costs and
ancillary costs. Cost based reimbursement has been subject to limits fixed for
the particular geographic area served by a provider. The prospective payment
system will be implemented beginning in September 1999. An interim payment
system was implemented October 1, 1997 as a temporary measure while the
operational specifics of the prospective system are finalized. This interim
system establishes a limit on the dollar amount that will be paid for the care
of one patient for an entire year, applied in the aggregate to each agency's
patients as a whole. In addition, the limit on allowable charges per visit has
been reduced by 15%. These changes in the reimbursement to home health agencies
participating in the Medicare program are expected to have a significant impact
on the number of visits agencies will provide to each patient, reducing the
number by half or more in many states, such as Texas, where HCI has home health
agencies.
Under provisions of the Act, states will be provided additional flexibility in
managing their Medicaid programs while achieving in excess of $13 billion in
federal budgetary savings over five years. Among other things, the Act repealed
the Boren Amendment payment standard, which had required states to pay
"reasonable and adequate" payments to cover the costs of efficiently and
economically operated hospitals, nursing facilities and certain intermediate
care facilities. States, however, will be required to use a public notice and
comment process in determining rates for such facilities. States also will be
required to take into account during rate-setting procedures the situation of
facilities that serve a disproportionate number of low-income patients with
special needs. The Department of Health and Human Services is required to study
and report to Congress within four years concerning the effect of state rate-
setting methodologies on access to and the quality of services provided to
medicaid beneficiaries.
The Act also provides the federal government with expanded enforcement powers
to combat waste, fraud and abuse in health care. In this regard, provisions of
the Act significantly expand the scope and coverage of civil monetary penalties
for violations of Medicare rules. Specific to home health services, the Act
established guidelines for the frequency and duration of home health services;
clarifying the definition of part-time or intermittent nursing care in order to
clarify the scope of the Medicare benefit and make it easier to identify
inappropriate services. The Act also requires home health agencies to bill for
services based on the location of service delivered rather than the location of
the agency, in an effort to limit high urban reimbursement rates for care
delivered in low-cost areas.
HOME HEALTH MEDICARE CERTIFICATION AND SPECIFIC PROGRAM REFORM. The
General Accounting Office ("GAO") reported to Congress in July 1997, that
federal regulators are failing to adequately police home health agencies,
resulting in extensive and expensive problems in Medicare's home-health program.
In response to the GAO report, the federal government announced on September 15,
1997, that home health care providers will be targeted in a growing federal
crackdown. The announced federal compliance program was launched in an effort to
prevent unscrupulous operators from becoming Medicare providers and
significantly increase the level of scrutiny to which existing companies in the
program are subjected. Under this program, HCFA will double the number of
audits of home health agencies it performs each year, and will increase
substantially the number of claims reviewed.
Also as a result of the compliance initiative, HCFA is currently finalizing
strict new conditions of participation for providers who participate in the
Medicare home health program. These requirements will focus on the expected
patient-centered outcomes of Medicare services. HCFA has developed a core set of
requirements encompassing patient rights, comprehensive assessment, and patient
care planning and coordination, tied together in quality assessment and
performance improvement. As a way of achieving their objective, HCFA is
proposing the incorporation of the OASIS standard assessment data set. Their
goals are to improve outcomes of care and satisfaction for patients, reduce the
burden on providers while increasing flexibility and expectations for continuous
improvement, and increase the amount and quality of information available on
which to base health care choices and efforts to improve quality. There will be
a new emphasis placed on interdisciplinary care for each patient. The financial
impact of these new conditions of participation is unknown, but the
implementation of OASIS can be expected to increase the costs of data collection
and assessment.
Under the new home health regulations, HCFA will require periodic
recertification of home health agencies to determine if they meet the beefed-up
conditions of participation. As part of the re-certification process, agencies
will have to submit an independent audit of their records and practices. If the
provider does not meet the strict new enrollment requirements, they will not be
renewed as providers in Medicare. In addition, home health agencies will be
required to post surety bonds of at least $50,000 before they can enroll or re-
enroll in Medicare. A related rule will require new agencies to have enough
funds on hand to operate for the first three to six months.
The Office of the Inspector General of the U.S.Department of Health and Human
Services (the "OIG"), and GOA concerns about fraud and abuse in the home health
industry have resulted in extensive audits of home health agencies, with large
amounts of money being identified as incorrectly paid to home health agencies,
and subsequently returned to HCFA by the agencies. Intermediaries are performing
"wedge audits" of agencies, from which they arrive at an error rating reflecting
the number of incorrectly paid claims. This error percentage is then applied to
all the invoices submitted by the home health agency for a period of time, and
that percentage of money returned to HCFA. Newly-developed compliance programs
are being instituted in home health agencies to help them stay within the strict
new payment guidelines and avoid issues of fraud and abuse.
6
To the extent the Company expands into home health care, the new home health
regulations by HCFA may require the restructuring of the home health operations
to conform to the new Medicare conditions of participation ultimately adopted.
In addition, the Medicare requirements for new home health care agencies may
require expansion to be achieved through acquisitions rather than through the
development of new agencies.
OPERATION RESTORE TRUST. Under Operation Restore Trust ("ORT"), a two year
demonstration project, the OIG, in cooperation with other federal and state
agencies, has focused on the activities of home health agencies, hospices,
durable medical equipment suppliers and nursing homes in certain states,
including Texas, in which HCI currently operates. Because of the success of ORT,
the next phase of ORT has been expanded to numerous other states and to
additional health care providers including ancillary nursing home services. The
legislation adopted in 1996 expanding ORT also created a stable source of
funding for fraud control activities.
As part of ORT, hospice and home health programs have been audited. According
to public reports, the OIG audits have focused on the hospice eligibility of
long stay patients (those who are in a hospice program for longer than 210
days). In home health, the OIG is concerned with agencies that have high
utilization rates per patient (visits per patient in excess of national or
regional norms). The ultimate disposition of an OIG review and its possible
impact on HCI cannot currently be predicted and there can be no assurance that
an OIG review will not have a material adverse effect on the Company's business,
results of operations or financial condition.
EMPLOYEES
As of February 28, 1998, the Company had approximately 2,100 employees, of
which approximately 770 were full-time employees and approximately 1,330 were
part-time employees. None of the Company's employees are represented by any
labor union. The Company believes that its labor relations are good.
7
ITEM 2. PROPERTIES
The following chart sets forth, as of February 28, 1998, the location,
number of units, date of licensure, ownership status and occupancy rates for the
Company's residences.
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Western Region
- --------------
Idaho
Burley 35 08/97 Leased 36.4% 54.3%
Caldwell 35 08/97 Leased(3) 34.6 42.9
Garden City 48 04/97 Owned(2)(3) 18.9 33.3
Hayden 39 11/96 Leased 33.0 48.7
Idaho Falls 39 01/97 Owned(2)(3) 40.3 61.5
Moscow 39 04/97 Owned(2) 34.8 77.1
Nampa 39 02/97 Leased(3) 46.5 74.4
Rexburg 35 08/97 Owned(2)(3) 13.5 20.0
Twin Falls 39 09/97 Owned 12.7 23.1
Oregon
Astoria 28 08/96 Owned 88.7 85.7
Bend 46 11/95 Owned(2) 95.2 97.8
Brookings 36 07/96 Owned 84.2 94.4
Canby 25 12/90 Leased 99.6 96.0
Estacada 30 01/97 Owned 69.2 90.0
Eugene 47 08/97 Leased 58.8 66.0
Grants Pass 45 11/96 Leased 64.0 68.9
Hood River 30 10/95 Owned(2) 98.2 100.0
Klamath Falls 35 10/96 Leased 73.7 62.9
Lincoln City 33 10/94 Owned(2) 91.6 78.8
Madras 27 03/91 Owned(2) 98.5 100.0
Myrtle Creek 34 03/96 Leased 78.7 97.1
Newberg 26 10/92 Leased 99.5 100.0
Newport 36 06/96 Leased 94.3 94.4
Pendleton 26 04/91 Leased 99.2 100.0
Prineville 30 10/95 Owned(2) 95.9 93.3
Redmond 37 03/95 Leased 92.6 100.0
Silverton 30 07/95 Owned(2) 97.0 100.0
Sutherlin 30 01/97 Leased 62.2 100.0
Talent 36 10/96 Owned 83.2 100.0
Washington
Battleground 40 11/96 Leased 77.5 100.0
Bremerton 39 05/97 Owned(2) 41.8 71.8
Camas 36 03/96 Leased 91.0 100.0
Enumclaw 40 04/97 Owned(2) 54.0 67.5
Grandview 36 02/96 Leased 83.0 86.1
Hoquiam 40 07/97 Leased 35.8 60.0
Kelso 40 08/96 Leased 95.5 100.0
Kennewick 36 12/95 Leased 89.0 94.4
Port Orchard 39 06/97 Owned(2) 63.2 82.1
Port Townsend 39 01/97 Owned(2) -- 66.7
Spokane 39 09/97 Owned(2) 25.1 46.2
Sumner 48 Pending Owned -- --
8
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Western Region Continued (Washington)
- ------------------------------------
Vancouver 44 06/96 Leased 91.1% 95.5%
Walla Walla 36 02/96 Leased 97.1 97.2
Central Region
- --------------
Iowa
Denison 35 Pending Owned -- --
Nebraska
Beatrice 39 10/97 Leased 38.4 51.3
Norfolk 39 10/97 Leased 26.0 28.2
Wahoo 39 10/97 Leased 42.6 41.0
York 39 10/97 Leased 49.6 59.0
Texas
Abilene 38 10/96 Leased 58.6 100.0
Amarillo 50 03/96 Leased 99.4 98.0
Athens 30 11/95 Leased 96.4 100.0
Beaumont 50 04/96 Leased 76.5 92.0
Big Springs 38 05/96 Leased 48.3 57.9
Bryan 30 06/96 Leased 87.4 100.0
Canyon 30 06/96 Leased 95.9 100.0
Carthage 30 10/95 Leased 96.2 83.3
Cleburne 36 01/96 Owned 99.5 100.0
College Station 39 10/96 Leased 66.6 84.6
Conroe 38 07/96 Leased 97.7 100.0
Denison 30 01/96 Owned 89.9 100.0
Gainsville 30 01/96 Leased 97.9 100.0
Greenville 30 11/95 Leased 97.4 100.0
GunBarrel City 30 10/95 Leased 98.7 93.3
Henderson 30 09/96 Leased 98.8 100.0
Jacksonville 39 12/95 Leased 93.5 94.8
Levelland 30 01/96 Leased 89.3 100.0
Longview 30 09/95 Leased 97.1 100.0
Lubbock 50 07/96 Leased 93.6 98.0
Lufkin 39 05/96 Leased 91.5 100.0
Marshall 40 07/95 Leased 98.2 100.0
McKinney 39 01/97 Owned 77.7 92.3
Mesquite 50 07/96 Leased 86.3 98.0
Midland 50 12/96 Owned 61.9 80.0
Mineral Wells 30 07/96 Leased 73.5 86.7
Nagadoches 30 06/96 Leased 96.7 100.0
Orange 36 03/96 Leased 95.5 100.0
Pampa 36 08/96 Leased 96.7 100.0
Plainview 36 07/96 Leased 99.4 100.0
Port Arthur 50 05/96 Owned 96.6 100.0
Rowlett 36 10/96 Owned 86.4 91.7
9
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Central Region Continued (Texas)
- -------------------------------
Sherman 30 10/95 Leased 97.2% 100.0%
Sulphur Springs 30 01/96 Owned 81.8 100.0
Sweetwater 30 03/96 Leased 92.4 100.0
Temple 40 01/97 Leased 55.0 70.0
Wichita Falls 50 10/96 Leased 41.2 66.0
Arizona
Apache Junction 48 Pending Owned -- --
Bullhead City 40 08/97 Leased 45.4 67.5
Lake Havasu 36 04/97 Leased 40.6 80.1
Mesa 50 01/97 Owned -- 14.0
Yuma 48 Pending Owned -- --
Eastern Region
- --------------
Indiana
Bedford 39 Pending Owned -- --
Bloomington 39 Pending Owned -- 23.1
Elkhart 39 9/97 Leased 22.9 28.2
Huntington 39 Pending Owned -- --
Kendalville 39 Pending Owned -- --
Logansport 39 Pending Owned -- 20.5
Madison 39 10/97 Leased 20.5 35.9
Marion 39 Pending Owned -- --
Muncie 39 Pending Owned -- 10.3
New Albany 39 Pending Owned -- --
New Castle 39 Pending Owned -- --
Seymour 39 Pending Owned -- --
Warsaw 39 10/97 Owned 32.5 48.7
New Jersey
Bridgeton 39 Pending Owned -- --
Burlington 39 11/97 Owned -- 46.2
Glassboro 39 03/97 Leased 80.7 100.0
Millville 39 05/97 Leased 55.9 92.3
Pennsville 39 11/97 Owned -- 53.9
Rio Grande 39 11/97 Owned 45.1 87.2
Vineland 39 01/97 Leased 89.0 97.4
Ohio
Bellefountaine 35 03/97 Owned(3) 45.5 91.4
Bucyrus 35 01/97 Owned(3) 58.4 74.3
Cambridge 39 10/97 Owned -- --
Celina 39 04/97 Owned 50.2 74.4
Defiance 35 02/97 Owned(3) 44.0 65.7
Findlay 39 03/97 Owned(3) 8.6 7.7
Fremont 39 07/97 Leased(3) 41.7 48.7
10
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Eastern Region Continued (Ohio)
- ------------------------------
Greenville 39 02/97 Owned(3) 37.5% 64.1%
Hillsboro 39 Pending Owned -- --
Kenton 35 03/97 Owned(3) 16.6 37.1
Lima 39 06/97 Owned(3) 49.8 92.3
Marion 39 04/97 Owned(3) 40.2 48.7
Newark 39 10/97 Leased(3) 31.0 56.4
Tiffin 39 06/97 Leased(3) 35.4 41.0
Troy 39 03/97 Leased 27.5 69.2
Wheelersburg 39 09/97 Leased(3) 13.5 18.0
Zainesville 39 12/97 Owned -- 33.3
Pennsylvania
Butler 39 12/97 Owned -- 25.6
Hermitage 39 Pending Owned -- --
Indiana 39 Pending Owned -- --
Latrobe 39 12/97 Owned -- 18.0
Lower Burrel 39 01/97 Owned -- 25.6
New Castle 39 Pending Owned -- --
Pennshills 39 Pending Owned -- --
Uniontown 39 Pending Owned -- --
South Carolina
Aiken 39 Pending Owned -- 23.1
Clinton 39 11/97 Owned -- 25.6
Greenwood 39 Pending Owned -- --
Summerville 39 Pending Owned -- 25.6
_____________
(1) The initial lease terms range from 10 to 20 years. The Company is
responsible for all costs including repairs to the residences, property
taxes, and other direct operating costs of the residences. Building rent
is recorded on a straight-line basis for those residences which have a
specified rent increase. Building rent is recorded as incurred for those
residences which have annual increases based on an increase in the consumer
price index or other contingency. (See "Liquidity and Capital Resources"
for future commitments regarding lease financing.)
(2) As of February 28, 1997, the Company owned 15 residences which were subject
to permanent mortgage financing with the remaining properties being
unencumbered. (See "Liquidity and Capital Resources" for future commitments
regarding mortgage financing.)
(3) The Company has entered into a noncancelable management agreement with a
joint venture in which the Company owns a 10% interest. The Company manages
the residences for an amount equal to the greater of 8% of gross revenue or
$2,000 per month per residence. The revenues and expenses of the joint
venture are consolidated with those of the Company. (See "Risk Factors -
Anticpated Operating Losses of New Residences")
The Company also leases in total approximately 8,000 square feet of office
space for the Corporate and Regional offices in Portland, Oregon, Dallas, Texas
and Dublin, Ohio.
11
CONSTRUCTION AND DEVELOPMENT ACTIVITIES
The Company is developing additional residences in Washington, Arizona,
Indiana, Iowa, New Jersey, South Carolina and three other states. As of
February 28, 1998, the Company had commenced construction on 26 residences with
a total of 1,006 units. See "Risk Factors - No Assurances as to Ability to
Develop or Acquire Additional Living Residences."
As of February 28, 1998, the Company had optioned or had entered into land
purchase agreements for the development of 24 sites (959 units). The Company has
made option payments or earest money deposits relating to these sites and has
completed or is in the process of completing its demographic analysis and
initial architectural plans for purposes of building assisted living residences.
The Company generally locates its residences in well-established residential
neighborhoods in smaller rural and suburban communities, where the population
typically ranges from 10,000 to 40,000 with a higher than average percentage of
middle aged or elderly individuals. To provide the appropriate level of
personal care efficiently and economically, and to ensure that residents are not
intimidated by residence size, the Company develops residences ranging in size
from 30 to 50 residential units and containing approximately 16,000 to 32,000
total square feet, with studio and one bedroom units comprising an average of
320 square feet and 450 square feet, respectively, of private living space.
The Company either retains outside developers to construct residences or
acquires newly constructed residences from developers under "turn-key"
agreements. The Company approves all aspects of development including, among
other things, market feasibility, site selection, plans and specifications, the
proposed construction budget and selection of the architect and general
contractor. The Company estimates the average construction time for a typical
residence to be approximately five to nine months, depending upon the number of
units. The Company estimates that, once licensed, it takes approximately twelve
months for each residence to achieve a stabilized occupancy level of 95% or
higher. The Company anticipates that each residence will have an operating loss
(prior to depreciation, rent or interest, if any) of $20,000 during the first
four months of operation. To the extent the Company sells and leases back or
otherwise finances a residence, the aggregate loss for the first four months of
operation may increase up to $100,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, par value $0.01 (the "Common Stock"), is listed
and traded 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.
1996 1997
HIGH LOW HIGH LOW
----------- ----------- ---------- ----------
Years ended December 31:
1st Quarter $10.68 $ 7.13 $10.06 $6.63
2nd Quarter 14.50 9.88 11.13 8.88
3rd Quarter 19.75 13.25 10.25 8.25
4th Quarter 22.38 15.75 9.94 7.19
As of February 27, 1998, the Company had approximately 81 holders of record of
Common Stock. The Company is unable to estimate the number of additional
stockholders whose shares are held for them in street name or nominee accounts.
The Company's current policy is to retain any earnings to finance the
operations and expansion of the Company's 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.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical condensed consolidated
financial data for the Company. The selected financial data below should be
read in conjunction with the consolidated financial statements of the Company,
including the notes thereto, and the information in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 15 to 24.
Years ended December 31,
(in thousands, except per share data)
1995 1996 1997
-------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue............................................... $ 4,067 $ 18,949 $ 48,673
Operating expenses:
General operating expenses.......................... 2,779 12,116 30,271
Corporate general and administrative................ 1,252 1,649 2,780
Building rentals.................................... 798 4,152 9,828
Depreciation and amortization....................... 296 990 3,021
------- -------- --------
Total operating expenses.......... 5,125 18,907 45,900
------- -------- --------
Operating income (loss)............................... (1,058) 42 2,773
Other income, net..................................... 483 107 3,563
------- -------- --------
Income (loss) before income taxes (575) 149 6,336
Provision for income taxes -- -- 2,127
------- -------- --------
Net income (loss)..................................... $ (575) $ 149 $ 4,209
======= ======== ========
Net income (loss) per share (basic)................... $ (.10) $ .02 $ 35
Net income (loss) per share (diluted)................. $ (.10) $ .01 $ .34
Weighted average common shares outstanding (basic).... 6,000 8,802 11,871
Weighted average common shares outstanding (diluted).. 6,000 11,292 14,190
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................................... $(5,320) $(26,372) $ 40,961
Total assets.......................................... 53,546 130,507 298,305
Long-term debt, excluding current portion............. 24,553 32,683 126,212
Stockholders' equity.................................. 15,644 59,059 141,015
14
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share data)
1996 Quarterly Financial Data 1997 Quarterly Financial Data
-------------------------------------------------- -------------------------------------------------
Results of Operation 1st 2nd 3rd 4th Year to 1st 2nd 3rd 4th Year to
Qtr Qtr Qtr Qtr Date Qtr Qtr Qtr Qtr Date
------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Revenue $2,750 $3,742 $ 5,171 $ 7,286 $18,949 $ 9,244 $10,848 $12,505 $16,076 $48,673
Operating income (loss) (178) (93) (41) 354 42 845 904 421 603 2,773
Net income (loss) (187) 16 (238) 558 149 664 967 996 1,582 4,209
Weighted average
Basic shares outstanding 6,000 6,003 10,530 11,004 8,802 11,004 11,044 11,084 14,429 11,871
Diluted shares outstanding 6,000 6,003 10,530 13,025 11,292 13,144 13,280 13,517 16,721 14,190
Basic EPS(1) $ (.03) $ .01 $ (.02) $ .04 $ .02 $ .06 $ .09 $ .09 $ .11 $ .35
Diluted EPS(1) $ (.03) $ .01 $ (.02) $ .01 $ .01 $ .06 $ .08 $ .09 $ .11 $ .34
(1) Quarter net income (loss) per share amounts may not add to the full year
total due to rounding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company operates, owns, leases and develops free-standing assisted living
residences, primarily in small middle-market rural and suburban communities with
a population typically ranging from 10,000 to 40,000. Currently the Company has
operations in 13 states. The Company also provides personal care and support
services, and makes available routine nursing services (as permitted by
applicable regulations) designed to meet the personal and health care needs of
its residents.
The Company has experienced significant growth since the completion of its
initial public offering in November 1994, growing from a base of five residences
(137 units) primarily through the development of assisted living residences. As
of February 28, 1998, the Company owned or leased a total of 139 residences
(5,235 units). Of these the Company owned 71 residences (2,727 units) and
leased 68 residences (2,508 units).
The Company derives its revenues primarily from resident fees for the delivery
of assisted living services. Resident fees typically are paid monthly by
residents, their families, state Medicaid agencies or other responsible parties.
Resident fees include revenue derived from a multi-tiered rate structure which
varies based on the level of care required. Resident fees are recognized as
revenues when services are provided. Operating expenses include (i) residence
operating expenses, such as staff payroll, food, property taxes, utilities,
insurance and other direct residence operating expenses, (ii) general and
administrative expenses consisting of corporate and support function such as
legal, accounting and other administrative expenses, (iii) building rentals and
(iv) depreciation and amortization.
15
As of December 31, 1997, the Company was operating or had received a
Certificate of Occupancy on 130 residences (4,888 units) of which 105 residences
(3,875 units) had operating results.
Operating results for the year ended December 31, 1997, including the
operating results of 105 residences (3,875 units) and the Company's corporate
overhead, are not necessarily indicative of the Company's future operating
financial performance as the Company intends to significantly expand its
operating base of residences in 1998 and 1999. Based on the Company's
development schedule, the number of residences planned to open in 1998 ranges
from 60 to 70. The Company anticipates that each residence will have an
operating loss (prior to depreciation, rent or interest, if any) of $20,000
during the first four months of operation. To the extent the Company sells and
leases back or otherwise finances a residence, the aggregate loss for the first
four months of operation may increase up to $100,000. The Company estimates the
aggregate losses to be incurred during 1998 due to the opening of buildings will
range from $1.0 million to $3.2 million.
The estimated cost to complete construction and fund start up losses for the
new residences that are currently planned to be developed during the 12 months
ended December 31, 1998 is between $160 million and $190 million. The Company
anticipates that it will use a combination of the proceeds received from the
common stock offering and convertible debentures completed in October of 1997,
construction lines of credit, sale and leaseback transactions and cash generated
from operations to fund this development activity. The total capitalized cost to
develop, construct and open a new residence, including land acquisition and
construction costs currently ranges from approximately $1.6 million to $3.5
million. These costs vary considerably based on a variety of site-specific
factors. See "Liquidity and Capital Resources" and "Risk Factors - Need for
Additional Financing to Fund Future Development and Acquisitions; Leverage."
In April 1997, in order to mitigate the impact of start-up losses associated
with the opening of newly constructed residences, the Company entered into a
joint venture agreement with a third-party investor to operate certain new
assisted living residences owned and developed by the Company. Pursuant to the
joint venture agreement, the Company has acquired a 10% interest for $300,000
and the joint venture partner has acquired a 90% interest for $2.0 million in
the joint venture. The joint venture concurrently entered into a non-cancelable
management agreement with the Company pursuant to which the Company manages the
properties operated by the joint venture for an amount equal to the greater of
8% of gross revenues or $2,000 per month per property. As of December 31, 1997,
17 residences owned or leased by the Company were being operated by the joint
venture. The revenues and expenses of the joint venture are consolidated with
those of the Company. In addition, the Company recognizes 10% of the losses or
profits, if any, of the joint venture, net of management fees paid to the
Company. The Company may seek to acquire the joint venture partner's 90%
interest in the future, but currently has no contractual right to purchase such
interest. While the use of such joint venture agreements is intended to mitigate
the impact on the Company of start-up losses associated with the opening of new
residences the Company may, to the extent it does not acquire the partner's
interest, forgo a portion of future operating profits, if any, from the
residences operated by the joint venture. The Company expects it will, from time
to time, enter into up to five to ten additional partnering arrangements per
quarter, which may be similar to the current structure, for some of its future
development projects. There can be no assurance that the Company will be able to
enter into any such future arrangements or, if entered into, that such
arrangements will achieve the desired results.
16
The following table sets forth, for periods presented, the number of total
residences and units operated, average occupancy rates and the sources of
revenue for the Company. The portion of revenues received from state Medicaid
agencies are labeled as "Medicaid state portion" while the portion of the
Company's revenues that a Medicaid-eligible resident must pay out of his or her
own resources is labeled "Medicaid resident portion".
Year ended December 31,
Total Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 19 51 105
Units operated (end of period) 595 1,768 3,875
Average occupancy rate 82.3% 80.4% 74.4%
Sources of revenue
Medicaid state portion 21.4% 13.8% 11.3%
Medicaid resident portion 9.6% 7.6% 6.0%
Private 69.0% 78.6% 82.7%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units operated, average occupancy
rates and the sources of revenue for the Company. Stabilized Residences are
defined as those residences which were operating for more than twelve months
prior to the beginning of the period or had achieved a 95% occupancy rate as of
the beginning of the reporting period.
Year ended December 31,
Stabilized Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 5 7 27
Units operated (end of period) 137 204 905
Average occupancy rate 99.1% 96.5% 95.8%
Sources of revenue:
Medicaid state portion 23.9% 19.9% 13.1%
Medicaid resident portion 11.3% 11.5% 7.5%
Private 64.8% 68.6% 79.4%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units operated, average occupancy
rates and the sources of revenue for the Company. Start-up Residences are
defined as those residences which were operating for less than twelve months
prior to the beginning of the period or had not achieved a 95% occupancy rate
as of the beginning of the reporting period.
Year ended December 31,
Start-up Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 14 44 78
Units operated (end of period) 458 1,564 2,970
Average occupancy rate 77.3% 76.9% 66.0%
Sources of revenue:
Medicaid state portion 16.4% 11.2% 10.6%
Medicaid resident portion 6.3% 6.0% 5.3%
Private 77.3% 82.8% 84.1%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
17
The following table sets forth, for the periods presented for Same Store
Residences, the total number of residences and units operated, average occupancy
rates and the sources of revenue for the Company. Same Store Residences are
defined as those residences which were operating throughout comparable periods.
Year ended December 31,
Same Store Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 5 19 51
Units operated (end of period) 137 595 1,768
Average occupancy rate 99.1% 82.3% 80.4%
Sources of revenue:
Medicaid state portion 23.9% 21.4% 13.8%
Medicaid resident portion 11.3% 9.6% 7.6%
Private 64.8% 69.0% 78.6%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
The following tables relating to Stabilized Residences, Start-up Residences
and Same Store Residences exclude the effects of corporate level expenses,
including general and administrative expenses and corporate level interest
expense. In addition, the following tables exclude the effect of the
capitalization of corporate and property level interest expense.
The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).
Year ended December 31,
Stabilized Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Revenue $2,699 $4,084 $18,453
Residence operating expenses 1,667 2,412 10,437
---------------- ---------------- ----------------
Residence operating income 1,032 1,672 8,016
Building rentals 500 780 3,517
Depreciation and amortization 116 120 543
---------------- ---------------- ----------------
Total other operating expenses 616 900 4,060
---------------- ---------------- ----------------
Operating income 416 772 3,956
Other interest expense, net 147 217 1,107
---------------- ---------------- ----------------
Income before taxes $ 269 $ 555 $ 2,849
================ ================ ================
The following tables sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).
Year ended December 31,
Start-up Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Revenue $ 1,368 $14,865 $29,024
Residence operating expenses 1,112 9,704 19,017
---------------- ---------------- ----------------
Residence operating income 256 5,161 10,007
Building rentals 298 3,372 6,277
Depreciation and amortization 180 809 2,256
---------------- ---------------- ----------------
Total other operating expenses 478 4,181 8,533
---------------- ---------------- ----------------
Operating income (loss) (222) 980 1,474
Other interest expense, net 4 603 1,525
---------------- ---------------- ----------------
Income (loss) before taxes $ (226) $ 377 $ (51)
================ ================ ================
18
The following table sets forth, for the periods presented, the results of
operations for the 19 residences which were operating for both periods in their
entirety (in thousands).
Year ended December 31,
Same Store Residences 1996 1997
- ---------------------------------------------------------------- ---------------- ----------------
Revenue $10,877 $12,397
Residence operating expenses 6,565 7,056
---------------- ----------------
Residence operating income 4,312 5,341
Building rentals 2,170 2,270
Depreciation and amortization 473 449
---------------- ----------------
Total other operating expenses 2,643 2,719
---------------- ----------------
Operating income 1,669 2,622
Other expense, net 722 782
---------------- ----------------
Income before taxes $ 947 $ 1,840
================ ================
RESULTS OF OPERATIONS
Year ended December 31, 1997 to year ended December 31, 1996
The Company had net income of $4.2 million or $.34 per diluted share, on
revenue of $48.7 million for the year ended December 31, 1997, compared to net
income of $149,000 or $.01 per diluted share, on revenues of $18.9 million for
the year ended December 31, 1996.
Revenue. For the year ended December 31, 1997, revenues were $48.7 million as
compared to $18.9 million for the year ended December 31, 1996, an increase of
$29.8 million. Of this increase, $15.1 million or 50.7% related to the opening
of an additional 54 operating residences (2,107 units) since December 31, 1996.
The remaining $14.7 million or 49.3% of the increase was attributable to the 51
residences that had operating results as of December 31, 1997. For the year
ended December 31, 1997, revenues for the 19 Same Store Residences were $12.4
million as compared to $10.9 million for the year ended December 31, 1996, an
increase of $1.5 million or 13.8%. This increase for the 19 Same Store
Residences was primarily attributable to increases in average monthly rents to
$1,772 from $1,670 during 1997. Of the $48.7 million in revenues reported
for the year ended December 31, 1997, $18.5 million or 38.0% was attributable to
Stabilized Residences, $29.0 million or 59.6% was attributable to Start-up
Residences and the remaining $1.2 million was mainly due to the ancillary
revenues in connection with the acquisition of HCI.
General Operating Expenses. For the year ended December 31, 1997, general
operating expenses were $30.3 million as compared to $12.1 million for the year
ended December 31, 1996, an increase of $18.2 million. Of this increase, $10.5
million or 57.7% related to the opening of an additional 54 operating residences
(2,107 units) since December 31, 1996. The remaining $7.7 million or 42.3% of
the increase was attributable to the 51 residences that had operating results as
of December 31, 1997. For the year ended December 31, 1997, residence operating
expenses for the 19 Same Store Residences were $7.1 million as compared to $6.6
million for the year ended December 31, 1996, an increase of $500,000 on these
19 residences. This increase is due to the increase in staffing and food costs
to accommodate the increase in occupancy. Occupancy at these 19 residences
increased to 96.1% from 89.8% during the period. Of the $30.3 million in
residence operation expenses reported for the year ended December 31, 1997,
$10.4 million or 34.3% was attributable to Stabilized Residences, $19.0 million
or 62.7% was attributable to Start-Up Residences and approximately $900,000 was
attributable to the ancillary services provided by HCI.
Corporate General and Administrative. Corporate general and administrative
expenses for the year ended December 31, 1997 were $2.8 million compared to $1.6
million for 1996. This increase is a direct result of additional staffing to
19
cover the increase in corporate activity, travel associated with new residences
located in other states, and the establishment and on-going expenses of the
regional offices.
Building Rentals. Building rentals for the year ended December 31, 1997 were
$9.8 million, compared to the year ended December 31, 1996 of $4.2 million which
represents an increase of 133%. The increase in building rentals is directly
related to the 36 operating leases entered into during 1997, of which 30 were
sale lease back transactions. The Company ended the year with 67 leases compared
to the 31 leases at the end of 1996.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1997 was $3.0 million, compared to the depreciation for the
year ended December 31, 1996 of $990,000 which represents an increase of 303%.
This increase is the result of additional facilities developed and owned by the
Company during 1997.
Other Income, Net. Interest expense, net of capitalized interest, was
$930,000 for the year ended December 31, 1997 compared to $0 for the year ended
December 31, 1996. The Company's gross interest expenses was $8.3 million for
the year ended December 31, 1997 compared to $2.2 million for the year ended
December 31, 1996, an increase of $6.1 million. The increase in interest
expense is due to temporary construction financing to fund development activity.
Capitalized interest for the year ended December 31, 1997 was $7.4 million
compared to $2.2 million for the year ended December 31, 1996.
Interest Income was $1.6 million for the year ended December 31, 1997 compared
to $455,000 for the year ended December 31, 1996, an increase of $1.2 million.
The increase in interest income is directly related to the offerings completed
in October of 1997 from which the Company received approximately $155 million
net of offering expense of approximately $8.4 million.
Other income (expense) was $2.9 million for the year ended December 31, 1997
compared to an expense of $348,000 for the year ended December 31, 1996, an
increase of $3.2 million. Approximately $2.3 million of other income for the
year ended December 31, 1997 represents that portion of the net operating losses
of a joint venture (including management fees paid to the Company) attributable
to the Company's joint venture partner. The remaining $600,000 related to
development fees received by the Company from HCI prior to its acquisition by
the Company. The $348,000 expense for the year ended December 31, 1996 is a
combination of a one-time charge of $426,000 relating to the conversion of $6.1
million of its $20.0 million 7% Debentures and, a gain on sale of real property
of $82,000 for the year ended December 31, 1996.
Income (Loss) Before Income Taxes. Income before income taxes for the year
ended December 31, 1997 was $6.3 million compared to $149,000 for the year ended
December 31, 1996, an increase of $6.2 million. The Company's income before
income taxes has continued to increase as the number of operating residences
increases. As the Company has matured in certain of its regions and occupancy
has increased, the operating income of the residences in such regions has been
able to cover general corporate overhead plus provide additional income.
Provision for Income Taxes. The Company's provision for income taxes for the
year ended December 31, 1997 was $2.1 million compared to $0 for the year ended
December 31, 1996. The Company utilized all its operating loss carryforwards
from previous periods to offset taxes otherwise payable through 1996.
Net Income (Loss). The Company achieved net income of $4.2 million or $.34
per diluted share for the year ended December 31, 1997, compared to $149,000, or
$.01 per diluted share for the year ended December 31, 1996. This is due to the
number of residences opened in 1997 and the stabilization of those residences
opened in 1996.
Year ended December 31, 1996 to year ended December 31, 1995
The Company had net income of $149,000 or $.01 per diluted share on revenue of
$18.9 million for the year ended December 31, 1996, compared to a net loss of
$575,000 or $.10 per diluted share, on revenues of $4.1 million for the year
ended December 31, 1995. The Company incurred a one-time charge of $426,000
during 1996 for the exchange of
20
405,666 shares of Common Stock on $6.1 million of 7% convertible debentures. The
Company's net income prior to this one-time charge was $574,000 or $.07 per
diluted share.
Revenue. For the year ended December 31, 1996, revenues were $18.9 million as
compared to $4.1 million for the year ended December 31, 1995, an increase of
$14.8 million. Of this increase $14.7 million or 99.0% related to the opening
of an additional 32 operating residences (1,173 units) since December 31, 1995.
For the year ended December 31, 1996, revenues for the Same Store Residences
were $2.8 million as compared to $2.7 million for the year ended December 31,
1995, an increase of $154,000 or 5.8% This increase for the Same Store
Residences was primarily attributable to increases in average monthly rents to
$1,756 from $1,704 during the period. Of the $18.9 million in revenues reported
for the year ended December 31, 1996, $4.1 million or 21.7% was attributable to
Stabilized Residences and $14.8 million or 78.3% was attributable to Start-Up
Residences.
General Operating Expenses. For the year ended December 31, 1996, general
operating expenses were $12.1 million as compared to $2.8 million for the year
ended December 31, 1995, an increase of $9.3 million. Substantially all of this
increase was attributable to the addition of 32 operating residences (1,173
units) since December 31, 1995. For the year ended December 31, 1996, residence
operating expenses for the Same Store Residences were relatively unchanged at
approximately $1.6 million. Of the $12.1 million in general operating expenses
reported for the year ended December 31, 1996, $2.4 million or 19.8% was
attributable to Stabilized Residences and $9.7 million or 80.2% was attributable
to Start-Up Residences.
Corporate General and Administrative. Corporate general and administrative
expenses for the year ended December 31, 1996 was $1.6 million compared to $1.3
million for 1995. This increase is a direct result of additional staffing to
cover the increase in corporate activity, travel associated with new residences
located in other states, and the establishment and on going expenses of the
regional offices.
Building Rentals. Building rentals for the year ended December 31, 1996 was
$4.2 million, compared to $798,000 for the year ended December 31, 1995 which
represents an increase of 426%. The increase in building rentals is directly
related to the additional 22 sale leaseback transactions completed
during 1996. The Company ended the year with 31 leases compared to the
nine leases at the end of 1995.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 was $990,000, compared to the depreciation for the year
ended December 31, 1995 of $296,000 which represents an increase of 234%. This
increase is the result of an additional 14 residences that were developed
by the Company in 1996 and were still owned as of December 31, 1996.
Other income, net. For the year ended December 31, 1996, net interest
expense was $0 compared to $96,000 for the year ended December 31, 1995. Gross
interest expense for 1996 was $2.2 million as compared to $673,000 for 1995, an
increase of $1.5 million. Of the increase, $1.4 million or 93.3% was
attributable to the full year effect of interest expense associated with the 7%
Debentures and the balance of $100,000 and 6.7% was attributable to mortgage
bond financing. The Company capitalized $2.2 million of interest expense for
1996 compare to $577,000 for the comparable period in 1995. Interest income for
the year ended December 31, 1996 was $455,000 as compared to $579,000 in 1995.
In addition, in September 1996, the Company incurred a one-time charge of
$426,000 relating to the conversion of $6.1 million of its $20.0 million 7%
Debentures.
Net Income (Loss). The Company achieved net income of $149,000 or $.01 per
diluted share for the year ended December 31, 1996, compared to a net loss of
$575,000, or $.10 per diluted share for the year ended December 31, 1995. This
is due to the number of residences opened in 1996 and the stabilization of those
residences opened in 1995.
21
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had positive working capital of $41.0
million. The Company had $63.4 million in cash and cash equivalents as of
December 31, 1997, compared to $2.1 million as of December 31, 1996. The
increase is attributed primarily to the underwritten public offering of 4.1
million shares of Common Stock and $86.3 million in principal amount of
Convertible Subordinated Debentures due 2002 completed in October of 1997 which
netted the Company approximately $155 million after deducting underwriters
discounts and offering expenses.
22
Net cash provided by operating activities was approximately $6.9 million for
the year ended December 31, 1997. The primary source of funds was from net
income of $4.2 adjusted for noncash changes in depreciation and amortization of
$3.0 million. Other operating type items netted to a use of cash of $300,000. As
of December 31, 1997, restricted cash balances were $1.9 million.
Net cash used in investing activities totaled approximately $85.0 million for
the year ended December 31, 1997. The primary use of cash was $160.8 million
related to the development of new assisted living residences in Idaho, Oregon,
Washington, Arizona, Texas, Indiana, Ohio, New Jersey, Pennsylvania and South
Carolina. This was offset by proceeds of $74.1 million related to the sale
lease back of 30 residences. In addition, the Company completed the acquisitions
of Carriage House and HCI using $4.9 million. The Company received $6.6 million
from restricted funds that were released by the Washington Housing Finance
Commission.
Net cash provided by financing activities totaled $139.4 million during the
year ended December 31, 1997. The Company entered into an additional 19
construction financing loans which netted the Company $43.4 million. As of
December 31, 1997, the Company had repaid $63.5 million of construction
financing with $2.2 million in construction financing remaining. The Company
completed mortgage financing with Idaho Housing and Finance Association on four
Idaho Properties for $7.4 million.
Capital expenditures for 1998 are estimated to approximate $160 million to
$190 million, related primarily to the development of additional residences. As
of February 28, 1998, the Company had started construction on 26 residences
(1,006 units) in Washington, Indiana, Pennsylvania, Arizona, Ohio, Iowa,
Nebraska, New Jersey, South Carolina and Louisiana. The Company had also entered
into agreements pursuant to which it may purchase, subject to completion of due
diligence and various other conditions, 24 (959 units) undeveloped sites. The
Company intends to utilize current working capital resources to develop
additional residences. In addition, as of February 28, 1998, the Company had
outstanding $138 million in commitments from several health care REITs to
finance additional residences through sale and leaseback transactions and $50
million in mortgage financing. The Company also anticipates being able to
continue to utilize tax-exempt bond financing for approximately $28 million from
the states of Ohio, Oregon and Washington. The Company does not anticipate any
significant capital expenditures within the foreseeable future with respect to
the residences developed since 1994 and those currently operating or those
pending licensure as of February 28, 1998.
The Company expects that its cash on hand, together with cash flow from
operations and available REIT and mortgage financing, will be sufficient to
meet its operating requirements and to fund its anticipated growth for at least
the next 12 months. The Company expects to use a wide variety of financing
sources to fund its future growth, including public and private debt and equity,
conventional mortgage financing, unsecured bank financing, among other sources.
There can be no assurances that financing from such sources will be available in
the future, or if available that such financing will be available, on terms
acceptable to the Company.
As of December 31, 1997, the Company had invested excess cash balances in
short-term certificates of deposit.
INFLATION
Management believes that the Company's operations have not been materially
adversely affected by inflation. The Company expects salary and wage increases
for its skilled staff will continue to be higher than average salary and wage
increases, as is common in the health care industry. The Company expects that
it 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.
23
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which established requirements for disclosure
of comprehensive income. The objective of SFAS No. 130 is to report all changes
in equity that result from transactions and economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other non-owner changes in equity. The Company will comply with the
provisions of SFAS No. 130 in 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
changes the way segment information is reported for public companies and
requires those companies to report selected segment information in interim
financial reports to stockholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company plans
to adopt SFAS No. 131 for the fiscal year ended December 31, 1998.
RISK FACTORS
Except for the historical information contained herein, the matters discussed
herein are forward looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The following discussion highlights
some of these risks and others are discussed elsewhere herein or in other
documents filed by the Company with the Securities and Exchange Commission.
ANTICIPATED OPERATING LOSSES OF NEW RESIDENCES. The Company anticipates that
each residence will have an operating loss (prior to depreciation, rent or
interest, if any) of $20,000 during the first three to four months of operation.
To the extent the Company sells a residence and leases it back or otherwise
finances it, the aggregate loss may increase by up to an additional $100,000.
The Company currently plans to open 60 to 70 residences in 1998. The Company
estimates that the losses to be incurred during 1998 due to start-up residences
could range from $1.0 million to $3.2 million. The success of the Company's
future operations is directly tied to the expansion of its operational base.
There can be no assurance that the Company will not experience unforeseen
expenses, difficulties, complications and delays in connection with the
expansion of its operational base which could have a material adverse effect on
the Company's financial condition and results of operations.
In April 1997, in order to mitigate the impact of start-up losses associated
with the opening of newly constructed residences, the Company entered into a
joint venture agreement with a third-party investor to operate certain new
assisted living residences owned and developed by the Company. Pursuant to the
joint venture agreement, the Company has acquired a 10% interest for $300,000
and the joint venture partner has acquired a 90% interest for $2.0 million in
the joint venture. The joint venture concurrently entered into a non-cancelable
management agreement with the Company pursuant to which the Company will manage
the properties operated by the joint venture for an amount equal to the greater
of 8% of gross revenues or $2,000 per month per property. As of December 31,
1997, 17 residences owned or leased by the Company were being operated by the
joint venture. The revenues and expenses of the joint venture are consolidated
with those of the Company. In addition, the Company will recognize 10% of the
losses or profits, if any, of the joint venture, net of the effect of management
fees paid to the Company. The Company may seek to acquire the joint venture
partner's 90% interest in the future, but has no contractual right to purchase
such interest. While the use of such joint venture agreements is intended to
24
mitigate the impact on the Company of start-up losses associated the opening of
new residences or otherwise, the Company may, to the extent it does not acquire
the partner's interest, forgo a portion of future operating profits, if any,
from the residences operated by the joint venture. The Company expects it will,
from time to time, enter into additional partnering arrangements, which may be
similar to the current structure, for some of its future development projects.
There can be no assurance that the Company will be able to enter into any such
future arrangements or, if entered into, that such arrangements will achieve the
desired results.
Due to the completion of the common stock and convertible subordinated
debenture offerings in October of 1997 and the completion of the acquisitions of
Carriage House and HCI, the Company expects to retain ownership of a greater
number of its assisted living residences as well as to accelerate its
development program. Historically, the Company has relied extensively on
sale leaseback financings from REITs to finance its development efforts. The
Company also expects to make additional investments in its management
infrastructure to further support its growth strategy. While the Company
believes that the resulting effects of the recent completed offerings, the
increased focus on asset ownership, its accelerated development program and
anticipated additions to its corporate infrastructure will negatively impact its
earnings prospects over the next 12 to 18 months, it believes that these
measures will positively affect its long-term prospects.
NO ASSURANCE AS TO ABILITY TO DEVELOP OR ACQUIRE ADDITIONAL ASSISTED LIVING
RESIDENCES. The Company's prospects for growth are directly affected by its
ability to develop and, to a lesser extent, acquire additional assisted living
residences. While the Company currently plans to open 60 to 70 residences in
1998, there can be no assurance that such residences will be completed. The
success of the Company's growth strategy will also depend upon, among other
factors, the Company's ability to obtain government licenses and approvals, the
Company's ability to obtain financing and the competitive environment for
development and acquisitions. The nature of such licenses and approvals and the
timing and likelihood of obtaining them vary widely from state to state,
depending upon the residence, or its operation, and the type of services to be
provided. The successful development of additional assisted living residences
will involve a number of risks, including the possibility that the Company may
be unable to locate suitable sites at acceptable prices or may be unable to
obtain, or may experience delays in obtaining, necessary zoning, land use,
building, occupancy, and other required governmental permits and authorizations.
The Company is dependent upon these permits and authorizations to construct and
operate its residences and any delay or inability to obtain such permits could
adversely affect the results of operations. The Company may also incur
construction costs that exceed original estimates, may not complete construction
projects on schedule and may experience competition in the search for suitable
development sites. The Company relies on third-party general contractors to
construct its new assisted living facilities. There can be no assurance that
the Company will not experience difficulties in working with general contractors
and subcontractors, which could result in increased construction costs and
delays. Further, facility development is subject to a number of contingencies
over which the Company will have little control and that may adversely affect
project cost and completion time, including shortages of, or the inability to
obtain, labor or materials, the inability of the general contractor or
subcontractors to perform under their contracts, strikes, adverse weather
conditions and changes in applicable laws or regulations or in the method of
applying such laws and regulations. Accordingly, if the Company is unable to
achieve its development plans, its business, financial condition and results of
operations could be adversely affected. There can be no assurance that the
Company will be successful in developing or acquiring any particular residence,
that the Company's rapid expansion will not adversely affect its operations or
that any residence developed or acquired by the Company will be successful. The
various risks associated with the Company's development or acquisition of
assisted living residences and uncertainties regarding the profitability of such
operations could have a material adverse effect on the Company's financial
condition and results of operations.
NEED FOR ADDITIONAL FINANCING TO FUND FUTURE DEVELOPMENT AND ACQUISITIONS. To
achieve its growth objectives, the Company will need to obtain sufficient
financial resources to fund its development, construction and acquisition
activities. The estimated cost to complete and fund start-up losses for new
facilities that will be developed during 1998 is between $160 million and $190
million; accordingly, the Company's future growth will depend on its ability to
obtain additional financing on acceptable terms. The Company will, from time to
time, seek additional funding through public and/or private financing sources,
including equity and/or debt financing. If additional funds are raised by
issuing equity securities, the Company's stockholders may experience dilution.
There can be no assurance that adequate funding will be available as needed or
on terms acceptable to the Company. A lack of available funds may require the
Company to delay or eliminate all or some of its development projects and
acquisition plans.
25
The Company's aggregate annual fixed debt and lease payment obligations as of
February 28, 1998 totaled approximately $16.7 million. These fixed payment
obligations will significantly increase as the Company pursues its development
plan. Failure to meet these obligations may result in the Company being in
default of its financing agreements and, as a consequence, the Company may lose
its ability to operate any individual residence or other residences which may be
cross-defaulted. There can no assurance that the Company will generate
sufficient cash flow to meet its current or future obligations. The Company has
not historically covered its fixed charges with earnings. In addition, the
Company anticipates, there is a risk that, upon completion of construction,
permanent financing for newly developed residences may not be available or may
be available only on terms that are unfavorable or unacceptable to the Company.
GEOGRAPHIC CONCENTRATION; DEPENDENCE ON STATE MEDICAID WAIVER PROGRAMS. As
of December 31, 1997, 28.5% of the Company's properties are in Texas, 15.4% are
in Oregon, 13.1% in Ohio and 10.8% in Washington; therefore, the Company is
dependent on the economies of Texas, Oregon, Ohio and Washington and, to a
certain extent, on the continued funding of state Medicaid waiver programs.
During the year ended December 31, 1995, 1996 and 1997, direct payments received
from state Medicaid agencies accounted for approximately 21.4%, 13.8%, and
11.3%, respectively of the Company's revenue while the tenant-paid portion of
Medicaid residents accounted for approximately 9.6%, 7.6%, and 6.0%,
respectively, of the Company's revenue during these periods. The Company
expects that state Medicaid reimbursement programs will constitute a significant
source of revenue for the Company in the future. The Company intends to
continue developing and operating assisted living residences in other states.
Adverse changes in general economic factors affecting these states' respective
health care industries or in these states' laws and regulatory environment,
including Medicaid reimbursement rates, could have a material adverse effect on
the Company's financial condition and results of operations.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS. A portion of the Company's
revenues will be dependent upon reimbursement from third-party payors, including
state Medicaid programs and private insurers. For the years ended December 31,
1995, 1996 and 1997, the Company received, as a percentage of total revenue,
under Medicaid programs 21.4%, 13.8%, and 11.3%, respectively. Furthermore,
there can be no assurance the Company's proportionate percentage of revenue
received from Medicaid programs will not increase. The revenues and
profitability of the Company will be affected by the continuing efforts of
governmental and private third-party payors to contain or reduce the costs of
health care by attempting to lower reimbursement rates, increasing case
management review of services and negotiating reduced contract pricing. In an
attempt to reduce the federal and certain state budget deficits, there have
been, and management expects that there will continue to be, a number of
proposals to limit Medicaid reimbursement in general. Adoption of any such
proposals at either the federal or the state level could have a material adverse
effect on the Company's business, financial condition, results of operations and
prospects.
GOVERNMENT REGULATION. Federal and state governments regulate various aspects
of the Company's business. The development and operation of assisted living
facilities and the provision of health care services are subject to federal,
state and local licensure, certification and inspection laws that regulate,
among other matters, the number of licensed beds, the provision of services,
equipment, staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters, resident
characteristics, physical design and compliance with building and safety codes.
Failure to comply with these laws and regulations could result in the denial of
reimbursement, the imposition of fines, suspension or decertification from the
Medicare and Medicaid program and, in extreme cases, the revocation of a
facility's license or closure of a facility. There can be no assurance that
federal, state, or local governments will not impose additional restrictions on
the Company's activities that could materially adversely affect the Company.
State and local laws regulating the Company's operations vary significantly
from one jurisdiction to another. In certain states in which the Company is
currently developing assisted living facilities, a certificate of need or other
similar approval may be required for the acquisition or construction of new
facilities, the expansion of the number of licensed units or beds or services,
or the opening of a home health care agency or hospice. The Company could be
adversely affected by the failure or inability to obtain such approval, changes
in the standards applicable for such approval and possible delays and expenses
associated with obtaining such approval.
26
Federal and state fraud and abuse laws, such as "anti-kickback" laws and
"self-referral" laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. Although the Company has established policies and procedures
that it believes are sufficient to ensure that its facilities will operate in
substantial compliance with applicable regulatory requirements, there can be no
assurance that such fraud and abuse laws will be interpreted in a manner
consistent with the practices of the Company.
PRICING PRESSURES. The health care services industry is currently experiencing
market-driven reforms from forces within and outside the industry that are
exerting pressure on health care and related companies to reduce health care
costs. These market-driven reforms are resulting in industry-wide consolidation
that is expected to increase the downward pressure on health care service
providers' margins, as larger buyer and supplier groups exert pricing pressure
on health care providers. The ultimate timing or effect of market-driven
reforms cannot be predicted. No assurance can be given that any such reforms
will not have a material adverse effect on the Company's business, results of
operations, financial condition and prospects.
HEALTH CARE REFORM. Health care and related services is an area of extensive
and dynamic regulatory change. Changes in the law, new interpretations of
existing laws, or changes in payment methodology, may have a dramatic effect on
the definition of permissible or impermissible activities, the relative costs
associated with doing business and the amount of reimbursement by both
government and other third-party payors and may be applied retroactively.
In addition, to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. Congress and state legislatures can be expected to continue to
review and assess alternative health care delivery systems and payment
methodologies and public debate of these issues can be expected to continue in
the future. The ultimate timing or effect of legislative efforts cannot be
predicted and may impact the Company in different ways. There can be no
assurances that either the states or the federal government will not impose
additional regulations upon the activities of the Company or HCI which might
adversely affect their businesses, the financial condition, results of
operations and prospects.
STAFFING AND LABOR COSTS. The Company will compete with other providers of
long-term care with respect to attracting and retaining qualified personnel.
The Company will also be dependent upon the available labor pool of low-wage
employees. A shortage of nurses and/or trained personnel may require the
Company to enhance its wage and benefits package in order to compete. No
assurance can be given that the Company's labor costs will not increase, or
that, if they do increase, they can be matched by corresponding increases in
revenues.
COMPETITION. The long-term care industry is highly competitive and the Company
expects that the assisted living business, in particular, will become more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives, such as home health
agencies, life care at home, community-based service programs, retirement
communities and convalescent centers. The Company expects that as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid
27
waiver programs increases, competition will grow from new markets entrants,
including publicly and privately held companies focusing primarily on assisted
living. Nursing facilities that provide long-term care services are also a
source of competition to the Company. Moreover, in the implementation of the
Company's expansion program, the Company expects to face competition for
development and acquisitions of assisted living residences. Some of the
Company's present and potential competitors are significantly larger and have,
or may obtain, greater financial resources than those of the Company.
Consequently, there can be no assurance that the Company will not encounter
increased competition in the future which could limit its ability to attract
residents or expand its business and could have a material adverse effect on the
Company's financial condition, results of operations and prospects.
DIFFICULTIES OF MANAGING RAPID GROWTH. The Company expects that the number of
residences which it owns, leases or otherwise operates will increase
substantially as it pursues its growth strategy. This rapid growth will place
significant demands on the Company's management resources. The Company's
ability to manage its growth effectively will require it to continue to expand
its operational, financial and management information systems and to continue to
attract, train, motivate, manage and retain key employees. To the extent such
growth is attributable to acquisitions of existing facilities or businesses, the
Company's success will depend partly on its ability to integrate effectively
such facilities and businesses into the Company's management, information and
operating systems. If the Company is unable to manage its growth effectively,
its business, financial condition and results of operations could be adversely
affected.
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL. The Company depends,
and will continue to depend, upon the services of Mr. McBride, its Chief
Executive Officer, Dr. Wilson, its Chief Operating Officer and President, Ms.
Marsh, its Vice President/Controller and Chief Accounting Officer, Mrs. Baldwin,
its Director of Operations, Mr. Gordon, its Vice President/Treasurer, Ms. Haile,
its Vice President/Financial Operations, Ms. Campbell, its Senior Vice
President/General Counsel and Ms. Gorshe, its Vice President/Community
Relations. The Company has entered into employment agreements with Mr. McBride
and Dr. Wilson and has obtained a $500,000 key employee insurance policy
covering Dr. Wilson's life. The Company is also dependent upon its ability to
attract and retain management personnel who will be responsible for the day-to-
day operations of each residence. The loss of the services of any or all of such
officers or the Company's inability to attract additional management personnel
in the future could have a material adverse effect on the Company's financial
condition or results of operations.
LIABILITY AND INSURANCE. The provision of health care services entails an
inherent risk of liability. In recent years, participants in the long-term care
industry have become subject to an increasing number of lawsuits alleging
malpractice or related legal theories, many of which involve large claims and
significant defense costs. The Company currently maintains liability insurance
intended to cover such claims and the Company believes that its insurance is in
keeping with industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
the Company insurance coverage (e.g., claims for punitive damages) will not
arise. A successful claim against the Company not covered by, or in excess of,
the Company's insurance coverage could have a material adverse effect upon the
Company's financial condition and results of operations. Claims against the
Company regardless of their merit or eventual outcome, may also have a material
adverse effect upon the Company's ability to attract residents or expand its
business and would require management to devote time to matters unrelated to the
operation of the Company's business. In addition, the Company's insurance
policies must be renewed annually. There can be no assurance that the Company
will be able to obtain liability insurance coverage in the future or that, if
such coverage is available, it will be available on acceptable terms.
ENVIRONMENTAL RISKS. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be held liable for the cost of removal or remediation of
certain hazardous or toxic substances, including, without limitation, asbestos-
containing materials, that could be located on, in or under such property. Such
laws and regulations often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of the hazardous or toxic
substances. The costs of any required remediation or removal of these
substances could be substantial and the liability of an owner or operator as to
any property is generally not limited under such laws and regulations and could
exceed the property's value and the aggregate assets of the owner or operator.
The presence of these substances or failure to remediate such substances
properly may also adversely affect the owner's ability to sell or rent the
property, or to borrow using the property as collateral. Under these laws and
regulations, an owner, operator or an entity that arranges for the disposal of
hazardous or toxic substances, such as
28
asbestos-containing materials, at a disposal site may also 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 its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. As a result, the presence, with or without the Company's knowledge,
of hazardous or toxic substances at any property held or operated by the
Company, or acquired or operated by the Company in the future, could have an
adverse effect on the Company's business, financial condition and results of
operations. Environmental audits performed on the Company's properties have not
revealed any significant environmental liability that management believes would
have a material adverse effect on the Company's business, financial condition or
results of operations. No assurance can be given that existing environmental
audits with respect to any other Company's properties reveal all environmental
liabilities.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock could
be subject to significant fluctuations in response to various factors and
events, including the liquidity of the market for the Common Stock, variations
in the Company's operating results, new statutes or regulations or changes in
the interpretation of existing statutes or regulations affecting the health care
industry generally or assisted living residence businesses in particular. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuation also may adversely affect the
market price of the Common Stock.
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
29
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages as of February 28, 1998 and
positions are as follows:
WILLIAM MCBRIDE III, age 37, is a co-founder of the Company and has been a
director since its formation, and currently serves as Chief Executive Officer
and Chairman of the Board of Directors. From August 1992 to September 1997 Mr.
McBride served as President and Chief Operating Officer of LTC Properties, Inc.
( LTC ), a health care real estate investment trust specializing in the long-
term care industry, which was co-founded by Mr. McBride in 1992. Prior to
founding LTC., Mr. McBride was employed from April 1988 to July 1992 by Beverly
Enterprises, Inc., an owner/operator of long-term care facilities, retirement
living facilities and pharmacies where he served as Vice President, Controller
and Chief Accounting Officer. From 1982 to 1988, Mr. McBride was employed by
the public accounting firm of Ernst & Young.
DR. KEREN B. WILSON, age 49, is a co-founder of the Company and became the
President/Chief Operating Officer of the Company upon its formation in July
1994, and currently serves as Vice Chair of the Board of Directors. Dr. Wilson
has over twenty years of experience in aging service delivery systems and has,
for the past twelve years, focused primarily on assisted living. From 1988 to
September 1994, Dr. Wilson was the President and sole director of Concepts in
Community Living, a corporation which specializes in the development and
management of assisted living residences. From 1992 to August 1994, Dr. Wilson
was also President of Sterling Management Company, a company which provides
management services to private (non-Medicaid) assisted living facilities in the
state of Kansas. From 1986 to 1988, Dr. Wilson was a Senior Vice President at
Milestone, Inc., an assisted living development and management company. Prior to
1986, Dr. Wilson was an owner and management agent for Park Place Living Center
in Portland, Oregon, and the Director of Research and Education for the Oregon
Association of Homes for the Aging in Portland, Oregon. Since 1983, Dr. Wilson
has also been an Associate Professor at the Institute for Aging at Portland
State University. In these capacities, Dr. Wilson was responsible for
designing, developing and managing the state of Oregon's first assisted living
residence along with the state's first Medicaid-eligible assisted living
residence.
RHONDA S. MARSH, age 31, joined the Company as Controller in November 1995,
and currently serves as Vice President, Controller and Chief Accounting Officer.
From March 1995 to October 1995, Ms Marsh was Compliance Controller and Acting
Accounting Manager for Integrated Measurement Systems, Inc. From November 1992
to March 1995 Ms. Marsh worked at KPMG Peat Marwick L.L.P, an international
accounting firm. From 1989 to October 1992, she was the Corporate Controller of
Evergreen International Aviation, Inc.
STEPHEN GORDON, age 48, was appointed Vice President and Treasurer in January
of 1998. He also served as Chief Administrative Officer from July 1995 and
Chief Financial Officer from December 1995 and has over twenty years of
financial services industry experience, and currently serves as Vice President
and Treasurer. From April 1990 to July 1995, Mr. Gordon was the manager of
Housing Finance for the Oregon Housing and Community Services Department. In
this capacity, Mr. Gordon was instrumental in the development of over 5,000
units of affordable housing for the state. Under the state's elderly and
disabled program, Mr. Gordon was responsible for the funding of over 1,000 units
of assisted living housing for the elderly. Mr. Gordon has a Bachelor of
Science Degree from the University of California, Los Angeles.
NANCY GORSHE, age 47, joined the Company as Vice President of Community
Relations in January of 1998 and has over twenty years of experience in the
field of geriatric health, community and long term care and housing. Prior to
joining ALC, 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.
SANDRA CAMPBELL, age 51, joined the Company as Senior Vice President, Legal
Counsel and Secretary in January of 1998. Ms. Campbell has over 15 years of
experience in practicing law in real property, secured transactions and general
business law. Prior to joining ALC she was a partner in the law firm, 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.
CONNIE J. BALDWIN, age 53, has over twenty years of experience in designing
and implementing services to the elderly and joined the Company in February 1995
as Director of Operations. From December 1993 to January 1995, Ms. Baldwin was
Executive Director for the Center for Developing Older Adult Resources, a non-
profit entity in Phoenix, Arizona. From
30
September 1990 to December 1993, she was the Health Care Administrator for
Managed Care Systems, a division of the state of Arizona's Long-Term Care
Medicaid Program. In addition, Ms. Baldwin has held the position of Manager of
Home and Community Based Care in the State of Oregon with the Senior and
Disabled Services Department and was instrumental in the development of the
State's assisted living rules.
JANE HAILE, age 41, joined the company as Treasurer in 1996, and currently
serves as Vice President of Financial Operations. From October 1995 to June
1996, Ms. Haile was Acting Controller for Analogy, Inc. From 1991 to 1996, Ms.
Haile was the Reporting Manager for MMI Companies, Inc., a healthcare insurance
and risk management provider.
Information concerning the directors of the Company is incorporated by
reference to the section entitled "Election of Directors" in the Company's
definitive Proxy Statement with respect to the Company's 1998 Annual Meeting to
be filed with the Securities and Exchange Commission within 120 days of December
31, 1997 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 20, 1998, to be
filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of the Stockholders to be held May 20, 1998, to
be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of the Stockholders to be held May 20, 1998,
to be filed pursuant to Regulation 14A.
31
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 2, 1997, the Company filed a report on Form 8-K reporting the
Company's plans to acquire Home and Community Care, Inc., the resignation of Mr.
Andre Dimitriadis from the Board of Directors of the Company as of September 8,
1997 and the election of Mr. William McBride III as the Company's New Chief
Executive Officer and the election of Dr. Keren Brown Wilson who has been the
Chief Executive Officer and President of the Company as the Chief Operating
Officer, President and Vice Chairman of the Company.
On October 6, 1997, the Company filed a report on Form 8-K of a preliminary
prospectus supplement to the prospectus dated October 2, 1997 for the proposed
offering of 3,000,000 shares of the Company's common stock and the concurrent
offering of $50,000,000 of convertible subordinated debentures due 2002.
On October 21, 1997, the Company filed a report on Form 8-K containing certain
material contracts.
32
ASSISTED LIVING CONCEPTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14(a))
PAGE
1. FINANCIAL STATEMENTS:
Independent Auditors' Report 34
Consolidated Balance Sheets, December 31, 1996 and 1997 35
Consolidated Statements of Operations, Years Ended
December 31, 1995, 1996 and 1997 36
Consolidated Statements of Stockholders' Equity,
Years Ended December 31, 1995, 1996 and 1997 37
Consolidated Statements of Cash Flows,
Years Ended December 31, 1995, 1996 and 1997 38
Notes to Consolidated Financial Statements 39-52
2. FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules.
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors, Stockholders
of Assisted Living Concepts Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Assisted Living
Concepts Inc. and subsidiaries as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Assisted Living
Concepts Inc. and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 13, 1998
34
ASSISTED LIVING CONCEPTS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA AMOUNTS)
December 31,
ASSETS 1996 1997
--------------------- --------------------
Current assets:
Cash and cash equivalents $ 2,105 $ 63,394
Funds held in trust 8,515 1,956
Accounts receivable, net of allowance for doubtful accounts of $33 at
1996 and $79 at 1997 730 2,185
Prepaid expenses 365 904
Other current assets 678 3,600
--------------------- --------------------
Total current assets 12,393 72,039
--------------------- --------------------
Property and equipment 59,574 100,751
Construction in progress 53,458 103,795
Total property and equipment 113,032 204,546
Less accumulated depreciation 674 2,477
--------------------- --------------------
Property and equipment - net 112,358 202,069
--------------------- --------------------
Goodwill 362 13,397
Other assets 5,394 10,800
--------------------- --------------------
Total assets $130,507 $298,305
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,864 $ 1,859
Construction payable 16,002 18,883
Accrued real estate taxes 704 2,354
Other accrued expenses 691 3,993
Other current liabilities 544 1,256
Accrued income taxes - 411
Construction financing 18,850 2,150
Current portion of long-term debt 110 172
--------------------- --------------------
Total current liabilities 38,765 31,078
Convertible subordinated debentures 13,915 100,165
Long-term debt 18,768 26,047
--------------------- --------------------
Total liabilities 71,448 157,290
--------------------- --------------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized;
none issued or outstanding
Common Stock, $.01 par value; 80,000,000 shares authorized; issued and
outstanding 11,030,500 shares in 1996 and 15,646,478 shares in 1997 110 156
Additional paid-in capital 59,678 137,379
Fair market value in excess of historical cost of acquired net assets
attributable to related party transactions (239) (239)
Retained earnings (deficit) (490) 3,719
--------------------- --------------------
Total stockholders' equity 59,059 141,015
--------------------- --------------------
Total liabilities and stockholders' equity $130,507 $298,305
===================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
35
ASSISTED LIVING CONCEPTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
1995 1996 1997
---- ---- ----
Revenue $ 4,067 $18,949 $48,673
Operating expenses:
General operating expenses 2,779 12,116 30,271
Corporate general and administrative 1,252 1,649 2,780
Building rentals 64 3,240 8,419
Building rentals to related party 734 912 1,409
Depreciation and amortization 296 990 3,021
------- ------- -------
Total operating expenses 5,125 18,907 45,900
------- ------- -------
Operating income (loss) (1,058) 42 2,773
Other income (expense):
Interest expense (96) -- (930)
Interest income 579 455 1,601
Other income (expense) -- (348) 2,892
------- ------- -------
483 107 3,563
------- ------- -------
Income (loss) before income taxes (575) 149 6,336
Provision for income taxes -- -- 2,127
------- ------- -------
Net income (loss) $ (575) $ 149 $ 4,209
======= ======= =======
Net income (loss) per common share (basic) $ (.10) $ .02 $ .35
Net income (loss) per common share (diluted) $ (.10) $ .01 $ .34
Weighted average common shares outstanding (basic) 6,000 8,802 11,871
Weighted average common shares outstanding (diluted) 6,000 11,292 14,190
The accompanying notes are an integral part of these consolidated financial
statements.
36
ASSISTED LIVING CONCEPTS INC.
CONSOLIDATED STATEMENTS STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Total
Common Stock Additional Fair Market Accumulated Stockholders'
Shares Amount Paid-In Capital Value in Excess Deficit Equity
-------- -------- ---------------- --------------- ------------- ---------------
Balance at December 31, 1994 6,000 $ 60 $ 16,462 $(239) $ (64) $ 16,219
Net loss -- -- -- -- (575) (575)
-------- -------- ---------------- --------------- ------------- ---------------
Balance at December 31, 1995 6,000 60 $ 16,462 (239) (639) 15,644
Net proceeds from secondary public
offering 4,192 42 37,299 -- -- 37,341
Exercise of employee stock options 28 -- 132 -- -- 132
Conversion of subordinated
debentures 810 8 5,785 -- -- 5,793
Net income -- -- -- -- 149 149
-------- -------- ---------------- --------------- ------------- ---------------
Balance at December 31, 1996 11,030 110 59,678 (239) (490) 59,059
Net proceeds from secondary public
offering 4,140 42 72,086 -- -- 72,128
Shares issued for acquisition 337 3 5,073 5,076
Exercise of employee stock options 139 1 542 -- -- 543
Net income -- -- -- -- 4,209 4,209
-------- -------- ---------------- --------------- ------------- ---------------
Balance at December 31, 1997 15,646 $156 $137,379 $(239) $3,719 $141,015
========= ======== ================ =============== ============= ===============
The accompanying notes are an integral part of these consolidated financial
statements.
37
ASSISTED LIVING CONCEPTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
1995 1996 1997
-------------------------------------
Operating activities:
Net income (loss) $ (575) $ 149 $ 4,209
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 296 990 3,021
Gain on sale of property - (82) (36)
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable, net (78) (594) (1,454)
Prepaid expenses (192) (144) (539)
Other current assets (62) (341) (2,922)
Other assets (2,828) (1,868) (1,421)
Accounts payable 821 866 (5)
Accrued expenses 4,350 (3,311) 4,952
Other current liabilities 157 196 712
Accrued income taxes - - 411
--------- --------- ---------
Net cash provided by (used in) operating activities 1,889 (4,139) 6,928
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases (sales) of investment securities - (8,500) 6,559
Proceeds from sale and leaseback transactions 8,067 50,045 74,086
Purchases of property and equipment (45,901) (121,556) (160,768)
Acquisitions, net of cash acquired - (4,868)
--------- --------- ---------
Net cash used in investing activities (37,834) (80,011) (84,991)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from short-term construction
borrowings expected to be refinanced - 18,850 43,357
Construction draws 7,250 8,752 2,881
Repayments of construction financing - - (63,497)
Proceeds from long-term debt 3,505 14,365 7,350
Payments on long-term debt (18) (88) (5,516)
Proceeds from issuance of common stock - 37,473 76,963
Debt issuance costs of offerings and long-term debt - (432) (8,436)
Proceeds from issuance of convertible subordinated debentures 19,200 - 86,250
--------- --------- ---------
Net cash provided by financing activities 29,937 78,920 139,352
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (6,008) (5,230) 61,289
Cash and cash equivalents, beginning of period 13,343 7,335 2,105
--------- --------- ---------
Cash and cash equivalents, end of period $ 7,335 $ 2,105 $ 63,394
========= ========= =========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 154 $ 2,201 $ 7,080
Cash payments for income taxes - - 1,547
The accompanying notes are an integral part of these consolidated financial
statements.
38
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Assisted Living Concepts Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to senior citizens 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
nursing services designed to meet the needs of its residents.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Assisted
Living Concepts Inc. and its wholly owned subsidiaries that manage, own and
develop assisted living residences and provide ancillary services such as home
health, hospice and durable medical equipment. The consolidated financial
statements also include residences the Company owns or leases but are operated
through joint venture agreements. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit and highly liquid
investments with maturities of three months or less at the date of purchase.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at the lower of cost or net realizable
value with depreciation computed over the assets' estimated useful lives on the
straight-line basis as follows:
Buildings 40 years
Furniture and equipment 7 years
Interest incurred during construction periods is capitalized as part of the
building costs. Capitalized interest was $2.2 million and $7.4 million for the
years ended December 31, 1996 and 1997.
Maintenance and repairs are charged to expense as incurred, and significant
betterments and improvements are capitalized.
Asset impairment is analyzed by the rental demand by geographical region 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. For those assets the Company
intends to hold and use, the fair value of the asset is used in its calculation
of the impairment loss. There were no impairment losses for any of the periods
presented.
Construction in progress includes pre-acquisition costs and other direct
costs related to acquisition, development and construction of residences. If a
project is abandoned, any costs previously capitalized are expensed.
39
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL
Costs in excess of the fair value of the net assets of companies
acquired in purchase transactions have been recorded as goodwill and are being
amortized over periods ranging between 15 and 20 years on a straight-line basis.
Amortization of goodwill was $28,000, $30,000 and $128,000, respectively, for
the years ended December 31, 1995, 1996 and 1997. Management maintains an
impairment review policy whereby the future economic benefit of the recorded
balance is substantiated at the end of each reporting period based on the
estimated undiscounted cash flows from operating activities compared with the
carrying value of the goodwill. If the aggregate future cash flows are less than
the carrying value, a write down would be required, measured by the difference
between the present value of the anticipated future cash flows and the carrying
value of the goodwill. No impairment losses have been recognized in any of the
periods presented.
DEFERRED FINANCING COSTS
Financing costs included in other assets are deferred and amortized to
interest expense over the term of the related debt using the interest method.
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes under which deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to the differences between
the financial statement carrying amounts of the existing assets and liabilities
and their respective tax bases (temporary differences).
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 nursing, and personalized assistance on a
fee for service basis.
NET INCOME (LOSS) PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standard No.
128, Earnings Per Share (FAS 128) in the fourth quarter of 1997 and has restated
all previously reported amounts. Basic earnings per share (EPS) and diluted EPS
replace primary EPS and fully diluted EPS. Basic EPS is calculated using income
(loss) attributable to common shares (after deducting preferred dividends)
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS is calculated using income (loss) attributable to common
shares (after deducting preferred dividends and considering the effects of
dilutive potential common shares) divided by the weighted average number of
common shares and dilutive potential common shares outstanding for the period.
CLASSIFICATION OF EXPENSES
40
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All expenses (except interest, depreciation, amortization, residence
operating expenses) associated with corporate or support functions have been
classified as corporate general and administrative expense. All other expenses
incurred by the Company have been classified as general operating expenses.
USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, and the reported amounts of revenue and
expenses during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' financial
statements to conform with the current year's presentation. Such
reclassifications had no effect on previously reported net income (loss) or
stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable approximate fair value because of the short-term nature of
these accounts. The fair value of funds held in trust is based on current
market values. The carrying amount of the Company's debt, construction
financing and convertible subordinated debentures approximates fair value
because the interest rates approximate the current rates available to the
Company.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB)
Issued Statement of Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for stock-based
compensation issued to employees. The Statement encourages, but does not
require financial reporting to reflect compensation expense for grants of stock,
stock options and other equity instruments to employees based on change in the
fair value of the underlying stock. The Company continues to apply the existing
accounting rules contained in APB Option No. 25, "Accounting for Stock Issued to
Employees." While recognition for employee stock-based compensation is not
mandatory, SFAS 123 requires companies that choose to continue applying the
provisions of APB No. 25 to disclose pro forma net income and earnings per share
data (See note 12).
The 1994 Employee Stock Option Plan combines an incentive and
nonqualified stock option plan, a stock appreciation rights ("SAR") plan and a
stock award plan (including restricted stock). The 1994 Plan is a long-
41
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
term incentive compensation plan and is designed to provide a competitive and
balanced incentive and reward program for participants.
CONCENTRATION OF CREDIT RISK
State Medicaid reimbursement programs constitute a significant source
of revenue for the Company. Adverse changes in general economic factors
affecting the health care industries or laws and regulatory environment,
including Medicaid reimbursement rates, could have a material adverse effect on
the Company's financial condition and results of operations. As of December 31,
1997, 28.5% of the Company's properties are in Texas, 15.4% are in Oregon, 13.1%
in Ohio and 10.8% in Washington. During the years ended December 31, 1995, 1996
and 1997, direct payments received from state Medicaid agencies accounted for
approximately 21.4%, 13.8% and 11.3%, respectively, of the Company's revenue
while the tenant paid portion received from Medicaid residents accounted for
approximately 9.6%, 7.6% and 6.0%, 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 VENTURES
Home and Community Care, Inc. ("HCI") was acquired effective
October 23, 1997 at a purchase price of $5.3 million in cash and the
assumption of approximately $6.6 million in liabilities. HCI stockholders are
entitled to receive certain "earnout" payments over a two-year period based on
the number of HCI's assisted living residence sites which ALC elects to
complete. For each completed residence, HCI stockholders will receive an
additional $7,500 per unit (approximately $300,000 per residence) in cash. HCI
also operates five home health care agencies (three Medicare certified), one
home health care branch agency, two hospice agencies and two home medical
equipment offices primarily in Texas. In addition HCI manages two hospice
agencies. HCI's home health agencies provide home care to residents in 14 of the
Company's assisted living residences, as well as to persons living in
surrounding communities.
The acquisition was accounted for as a purchase, and the operating
results of HCI have been included in the Company's consolidated financial
statements since the date of acquisition. The cost of the acquisition has been
allocated based on the estimated fair value of the net assets acquired of
approximately $3.4 million. The excess of the aggregate purchase price over the
fair market value of net assets acquired of approximately $8.4 million has been
recorded as goodwill and is being amortized on a straight-line basis over 20
years.
The Company acquired Carriage House Assisted Living Inc. ("Carriage
House") effective October 31, 1997. For a purchase price of $5.2 million with
the exchange of 337,460 shares of Common Stock for all of the outstanding common
stock of Carriage House and assumed approximately $3.2 million in liabilities.
Carriage House currently operates 4 facilities with 156 units and has an
additional 6 facilities with 198 units under construction. All units are located
in Nebraska.
The acquisition was accounted for as a purchase and the operating
results of Carriage House have been included in the Company's consolidated
financial statements since the acquisition date. The cost of the acquisition
has been allocated based on the estimated fair value of the net assets acquired
of approximately $3.7 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.
42
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated results of operations
for the years ended December 31, 1996 and 1997 assume that HCI and Carriage
House acquisitions occurred as of January 1 of each year (in thousands, except
per share amounts):
(UNAUDITED) TOTAL
- ----------- -------------
1996
- ----
Net sales $20,082
Net loss (403)
Net loss per common share:
Basic $ (.05)
Diluted (.04)
1997
- ----
Net sales $54,492
Net loss 3,941
Net loss per common share:
Basic $ .33
Diluted .32
The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions had been completed as of the
beginning of the periods presented. In addition, they are not intended to be a
projection of future results of operations and do not reflect any of the
efficiencies that might have be achieved from combined operations.
During 1997 the Company entered into a joint venture agreement with a
third party investor to operate certain new assisted living residences owned or
leased by the Company. Pursuant to the joint venture agreement, the Company has
acquired a 10% interest for $300,000 and the joint venture partner has acquired
a 90% interest for $2 million. The joint venture concurrently entered into a
non-cancelable management agreement with the Company pursuant to which the
Company manages the properties operated by the joint venture for an amount equal
to the greater of 8% of gross revenues or $2,000 per month per residence. As of
December 31, 1997, seventeen residences owned or leased by the Company were
being operated by the Company. The revenues and expenses of the joint venture
are consolidated with those of the Company. In addition, the Company recognized
10% of the losses related to these residences and recorded $2.3 million in loss
reimbursement as other income for the year ended December 31, 1997.
3. FUNDS HELD IN TRUST
The Company issued $8,500,000 in tax-exempt bonds to provide
permanent financing on five Washington residences. Four of the five properties
have been completed and the Company has received $6,500,000. The remaining
$1,956,000 will be released towards the end of the first quarter of 1998 once
the residence has been completed and licensed. The funds are being held in
trust by a national bank on behalf of the Company and are invested in Guaranteed
Investment Certificates that are 100% collaterallized. The funds are restricted
for construction.
43
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LEASES
During the last four years, the Company has entered into agreements to
lease seven assisted living residences in Oregon three of which were completed
in 1997. The leases, which have fixed terms of 10 years, have been accounted for
as operating leases (the "Oregon Leases"). Aggregate deposits on these
residences as of December 31, 1996 and 1997 were $224,000 and $176,000,
respectively, which are reflected in other assets. In addition during 1995, 1996
and 1997, the Company completed the sale of five, 25 and 30 residences under
sale and leaseback arrangements, respectively. The Company sold the residences
for approximately $8.1 million in 1995, $50 million in 1996 and $74.1 million in
1997, and leased them back over initial terms ranging from 12 to 20 years.
During 1996, four of the 25 properties were repurchased, at cost, for $7.6
million, in connection with a $50.2 million sale and leaseback commitment with
LTC, Properties, Inc. ("LTC"). In addition, the Company assumed four leases that
were acquired with the Carriage House purchase that was completed in October of
1997. All residences were sold at approximately cost and any nominal difference
is being amortized over the life of the lease. Building rent is recorded as
incurred for the residences which have annual increases based on increases in
the consumer price index.
In connection with the Oregon Leases, the Company entered into a
"Lease Approval Agreement" with the State of Oregon, Housing and Community
Services Department (OHCS) and the lessor of the residences, pursuant to which
the Company is obligated to comply with the terms and conditions of certain
regulatory agreements (see Notes 6 and 7) to which the lessor is a party.
As of December 31, 1997, future minimum lease payments under operating leases
are as follows (in thousands):
Years Ended December 31,
------------------------
1998 $ 15,245
1999 15,251
2000 15,256
2001 15,256
2002 15,250
Thereafter 120,502
---------------------
$196,760
=====================
5. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following (in thousands):
1996 1997
-------- --------
Land $ 3,850 $ 6,308
Buildings 53,839 90,393
Equipment 613 1,419
Furniture 1,272 2,631
-------- --------
Total property and equipment 59,574 100,751
Construction in progress 53,458 103,795
-------- --------
Sub-total 113,032 204,546
Less accumulated depreciation 674 2,477
-------- --------
Total $112,358 $202,069
======== ========
44
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Land and buildings and certain furniture and equipment on 16 residences serve as
collateral for long-term debt (see Note 7). Depreciation expense was $200,000,
598,000, $2,116,000, for the years ended December 31, 1995, 1996 and 1997,
respectively.
As of December 31, 1997, the Company had begun construction on 34 residences
(1,296 units) ($50.0 million). Construction in progress also includes 21
residences (857 units) ($49.4 million) that have received a certificate of
occupancy, but are pending licensure. As of December 31, 1997, the Company had
also entered into agreements pursuant to which it may purchase, subject to
completion of due diligence and various other conditions, 33 additional sites
(1,337 units). The Company has capitalized $3.4 million in conjunction with the
due diligence associated with these 33 sites. The remaining $600,000 relates to
costs associated with site selection and pre-acquisition costs.
As of December 31, the Company had capitalized all costs incurred in
connection with the development of these properties consisting of the following
(in thousands):
1996 1997
------- --------
Land purchased and earnest deposits $ 5,763 $ 8,791
Construction costs and architectural fees 40,403 80,325
Other costs, including interest, legal fees, building permits
and other development costs 7,292 14,679
------- --------
Total $53,458 $103,795
======= ========
During the years ended December 31, 1995, 1996 and 1997, the Company capitalized
$577,000, $2.2 and $7.4 million, respectively, of interest cost relative to
financing of construction in process. In addition, the Company capitalized
payroll costs that are directly related to the construction and development of
the residences of $1.5 and $2.5 million for the years ended December 31, 1996
and 1997, respectively. Of the 130 residences the Company had opened or had
received certificates of occupancy, 67 were leased and 63 were owned.
6. OTHER ASSETS
Pursuant to lease agreements, residents are required to provide
security deposits, and in certain cases, the last month's rent. Such deposits
have been recorded as other current assets and are restricted as to use by the
Company. The Company has recorded a liability for these deposits, which is
reflected in other current liabilities in the consolidated financial statements
(See note 8).
7. CONVERTIBLE SUBORDINATED DEBENTURES
In August 1995, the Company completed the offering of $20 million 7%
Convertible Subordinated Debentures ("7% Debentures") due August, 2005. The 7%
Debentures are convertible at any time at or prior to maturity, unless
previously redeemed, at a conversion price of $7.50 per common share, which
equates to an aggregate of approximately 2.7 million shares of the Company's
common stock and bears interest payable semiannually on January 31 and July 31
of each year subject to adjustments under certain circumstances. The 7%
Debentures are unsecured and subordinated to all other indebtedness of the
Company. The Debentures are subject to redemption, as a whole or in part, at any
time or from time to time commencing after July 31, 1998 at the Company's option
on at least 30 days and not more than 60 days prior notice.
In September 1996, $6.1 million of the 7% Debentures were converted to
811,332 shares of the Company's common stock which resulted in $13.9 million of
7% Debentures remaining. The Company incurred a one-time charge of $426,000 in
1996 in connection with the conversion.
45
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1997, the Company completed the offering of $86.3 million
of 6% Convertible Subordinated Debentures (6% Debentures) due November 2002. The
6% Debentures are convertible at any time at or prior to maturity, unless
previously redeemed, at a conversion price of $22.57 per common share, which
equates to an aggregate of 3.8 million shares of the Company's common stock and
bears interest payable semi annually on May 1 and November 1 of each year,
commencing May 1, 1998. The 6% Debentures are unsecured and subordinated to all
other indebtedness of the Company. The 6% Debentures are subject to redemption,
as a whole or in part, at any time from time to time commencing after November
15, 2000 at the Company's option on at least 30 days and not more than 60 days
prior notice.
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands): December 31,
1996 1997
--------------- -------------
Trust Deed Notes, payable to the
State of Oregon Housing and Community
Services Department through 2028 $10,378 $10,256
Variable Rate Multifamily Revenue Bonds,
payable to the Washington State Housing
Finance Commission Department
through 2028 8,500 8,500
Variable Rate Demand Revenue Bonds, Series
1997 payable to the Idaho Housing and Finance
Association through 2017 - 7,350
Capital lease obligations payable through 2002
with a weighted average interest rate of 10.1%. - 113
--------------- -------------
Total long-term debt $18,878 $26,219
Less current portion 110 172
--------------- -------------
Long-term debt $18,768 $26,047
=============== =============
The Trust Deed Notes payable to the State of Oregon Housing and
Community Services Department ("OHCS") are secured by buildings, land, furniture
and fixtures of six Oregon residences, payable in monthly installments including
interest at effective rates ranging from 7.375% to 11.80%. These notes have
scheduled maturity dates ranging between January 2021 and October 2028. The
Variable Rate Multifamily Revenue Bonds are payable to the Washington State
Housing Finance Commission Department and are currently secured by a letter of
credit for $1,956,000. The bonds had a weighted average interest rate of 3.91%
during 1997. The bonds were issued to provide permanent financing for five
Washington residences, one of which is still under construction. The Variable
Rate Demand Housing Revenue Bonds, Series 1997 are secured by deeds of trust
that encumber each of four Idaho residences. The bonds had a weighted average
interest rate of 3.77% during 1997. These bonds are payable to the State of
Idaho Housing and Finance Association and were issued to provide financing for
four Idaho facilities which were completed during 1997.
46
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997, the following annual principal payments are scheduled
(in thousands):
Years Ending December 31,
-------------------------
1998 $ 172
1999 654
2000 672
2001 703
2002 738
Thereafter 23,280
--------
Total $ 26,219
========
The Company has lease approval agreements with OHCS on four Oregon
Residences that the Company leases from a related party. The Company is
obligated to comply with the terms and conditions of the underlying trust deed
and regulatory agreements relating to the leased buildings. During 1997, the
Company entered into two lease agreements with ALF for two Oregon residences
with the same terms as the previous four agreements. In addition, the Company
entered into a lease agreement with Oregon Heights Partners for one Oregon
residence. Under the terms of the OHCS debt agreements, the Company is required
to maintain a capital replacement escrow account to cover expected capital
expenditure requirements for the Oregon Leases, which as of December 31, 1996
and 1997, was $61,000 and $136,000, respectively, and is reflected in other
assets in the accompanying financial statements. In addition, for the loans in
the Company's name, a contingency escrow account in the amount of 3% of the
original loan balance is required. This account had a balance of $373,000 and
$351,000, respectively, as of December 31, 1996 and 1997 and is reflected in
other assets in the accompanying financial statements (See note 6).
Distribution of any assets or income of any kind to the Company is limited to
once per year after all reserve and loan payments have been made, and only after
receipt of written authorization from OHCS.
As of December 31, 1996 and 1997, the Company was restricted from
paying dividends on $394,000 and $860,000 of income and retained earnings,
respectively, in accordance with the terms of the regulatory agreements with
OHCS. Allowable distributions are determined once per year and approved by the
State of Oregon based on calculations set forth in the regulatory agreements.
Although the majority of the funds have been released, no distributions were
made during the years ended December 31, 1996 and 1997. As a further condition
of the debt agreements, the Company is required to comply with the terms of
certain Regulatory Agreements which provide, among other things, that in order
to preserve the federal income tax exempt status of the bonds, the Company is
required to lease at least 20% of the units of the projects to low or moderate
income persons as defined in Section 142(d) of the Internal Revenue Code.
There are additional requirements as to the age and physical condition
of the residents with which the Company must also comply. Non-compliance with
these restrictions may result in an event of default and cause acceleration of
the scheduled repayment.
During 1996 and 1997, the Company received $18.9 and $43.2 million of
mortgage financing on 19 residences to be converted to sale leaseback
transactions by June of 1998 from LTC. As of December 31, 1997,
the Company had converted or had repaid the mortgage financing on all the
properties except one ($2.2 million) which was subsequently sold and leased back
after December 31, 1997. The $2.2 million is recorded as construction
financing. Interest was paid on a monthly basis ranging from 9.9% to 10.4% per
annum. These mortgage financing agreements were in connection with a $50
million commitment with LTC to
47
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provide financing through sale and leaseback arrangements. The commitment was
renegotiated and $22.5 million is still remaining to close through September 30,
1998.
9. INCOME TAXES
The Company incurred tax operating losses for the years ended December
31, 1995 and 1996 as such, no provision for income tax has been recorded. The
components of income tax expense for the year ended December 31, 1997 are as
follows:
Current Deferred Total
------- -------- -----
Federal $586 $1,069 $1,655
State 282 190 472
---- ------ ------
Total $868 $1,259 $2,127
==== ====== ======
The provision for income taxes differs from the amount of income determined by
applying the applicable U.S. statutory federal rate to pretax income as a result
of the following temporary differences:
Year ended December 31,
1995 1996 1997
------ ------ ------
Statutory federal
tax rate 34.0% 34.0% 34.0%
Increase (decrease)
in rate from:
State taxes, net of
federal tax
benefits - - 3.8
Change in valuation allowance
allocated to income tax expense (34.0%) (34.0%) (1.5)
Other - - (2.7)
------ ------ ------
Effective tax rate - - 33.6%
====== ====== ======
An analysis of the significant components at December 31, 1996 and 1997 for
deferred tax assets and liabilities, consists of the following (in thousands):
1996 1997
------- -------
Deferred tax assets:
Net operating loss carryforward $ 837 $ 358
Other 45 107
Deferred tax liabilities:
Property and equipment, primarily due
to depreciation (195) (562)
Deferred pre-opening costs (304) (313)
Prepaid expenses (140) (282)
Other (149) (209)
Valuation allowance (95) (358)
------- -------
Net deferred tax asset (liability) $ - $(1,259)
======= =======
The valuation allowance for deferred tax assets as of December 31, 1995, 1996
and 1997 was $241, $95 and $358, respectively. The net change in the total
valuation allowance for the years ended December 31, 1995, 1996 and 1997 was
$186, $(146) and $264, respectively.
48
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the acquisitions discussed in Note 2, the Company
acquired net operating loss carryforwards for federal and state tax purposes
approximating $950,000 which are available to offset future taxable income, if
any, through 2012. The future use of these net operating loss carryforwards is
subject to certain limitations under the Internal Revenue Code and therefore,
the Company has established a valuation allowance of $358,000 to offset the
deferred tax asset related to the loss carryforwards. Additionally, any tax
benefit realized from the use of the acquired operating loss carryforwards will
be applied to reduce goodwill.
10. RELATED PARTY TRANSACTIONS
The Company leases six residences from Assisted Living Facilities,
Inc. ("ALF"), two of which were entered into during 1997. The
spouse of the Company's president owns a 25% interest in ALF. During the years
ended December 31, 1996 and 1997, the Company paid ALF aggregate lease deposits
of $35,700 and $31,500, respectively, and aggregate rentals of $912,000 and $1.1
million, respectively. In addition, in 1997 the Company leased one residence
from Oregon Heights Partners ("OHP") in which the president's spouse owns
65% interest. The Company paid OHP $50,000 in lease deposits and $278,000 in
rent expense in 1997.
In 1997, supportive Housing Services, Inc. ("SHS"), a company that is
owned 80% by the president's spouse, provided services to the Company for market
feasibility analysis, pre-acquisition services and construction management
oversight residences of the Company under development. The Company paid
$480,000 for these services during the last quarter of 1997.
The Company acquired HCI in October of 1997, several employees of the
Company including two members of the board of directors owned 35.1% of the
outstanding common stock in HCI. Prior to the Company acquiring HCI, the Company
reported $600,000 in other income related to the development and licensing fees
earned from HCI. These fees were directly associated with the use of the
Company's architectural plans and pre-acquisition strategies for the development
and site selection of assisted living residences. (See note 11)
11. TRANSACTIONS WITH LTC PROPERTIES, INC.
During the period November 1994 to September 1997, two members of the
Company's Board of Directors served as executive officers and director of LTC.
In September 1997, Andre Dimitriadis resigned from the Company's Board of
Directors and William McBride resigned as an executive officer and director of
LTC. The Company engaged in the following transactions with LTC during 1995,
1996 and 1997:
Sale and leasebacks 1995 1996 1997
--------- ----------- -----------
Number of residences 2 13 20
Number of units 60 472 788
Sales price of residences (millions) $ 3.2 $ 26.2 $ 51.4
Annual rent paid
1995 $ 61,000 $ - $ -
1996 $328,000 $1,600,000 $ -
1997 $355,000 $1,688,000 $1,857,000
49
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sale and leasebacks 1995 1996 1997
-------- ---------- ----------
Residences repurchased
Number of residences - 4 -
Number of units - 146 -
Sales price of residences (millions) $ - $7,800,000 $ -
The Company sold the residences at approximate cost, and leased them
back over initial terms ranging from 12 to 20 years.
As a result of its acquisition of Carriage House in October 1997, the
Company became the tenant on four assisted living facilities leased by Carriage
House from LTC. Since the acquisition date, the Company has incurred $159,000 in
lease expense related to those four residences.
During 1996 and 1997, the Company received from LTC $18.9 and $43.2
million, respectively, of mortgage financing on 19 residences. As of December
31, 1997, the Company had converted all of such mortgages to sale leaseback
financings or had repaid then, except for one mortgages ($2.2 million) which was
converted to a sales leaseback financing subsequent to December 31, 1997.
Interest was paid on a monthly basis ranging from 9.9% to 10.4% per annum. Such
mortgage financing was in connection with a $50 million sale leaseback financing
commitment with LTC. This commitment was renegotiated in October 1997 and $22.5
million of such commitment must be closed by September 30, 1998. In addition,
$100 million of sale leaseback financing commitments with LTC remained
outstanding at December 31, 1997 which must be closed by December 31, 2000.
The Company incurred $158,000 and $5.4 million in interest expense
related to these mortgage financings in the years ended 1996 and 1997,
respectively.
LTC Development Services, Inc. a company that is owned 100% by LTC
provided services to the Company for market feasibility analysis, pre-
acquisition services and construction management oversight on several of the
residences under development. The Company paid $414,906 for these services
during 1997.
The Company acquired HCI in October of 1997, LTC owned 41.2% of the
outstanding common stock in HCI. Prior to the Company acquiring HCI, the
Company reported $600,000 in other income related to the development and
licensing fees earned from HCI. These fees were directly associated with the
use of the Company's architectural plans and pre-acquisition strategies for the
development and site selection of assisted living residences. (See note 10)
The Company acquired Carriage House in October of 1997, LTC owned 9.1%
of the outstanding common stock of Carriage House.
12. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") and which provides
for the issurance of incentive and non-qualified stock options restricted stock.
The Plan is administered by the Compensation Committee of the Board of Directors
which sets the terms and provisions of options granted under the Plan. Incentive
options may be granted only to officers or other full-time employees of the
Company, while non-qualified options and restricted stock may be granted to
directors, officers or other employees of the Company, or consultants who
provide services to the Company.
Under the 1994 Amended and Restated Stock Option Plan, the Company may
grant options or award restricted stock to its employees for up to 2,208,000
shares of common stock. The exercise price of each option equals the market
price of the Company's stock on the date of grant. Each option shall expire on
the date specified in the option agreement, but not later than the tenth
anniversary of the date on which the option was granted. Such options vest three
years from the date of issuance and are exercisable within seven to ten years
from the date of vesting. Each option is exercisable in equal installments as
designated by the Compensation Committee at the option price designated by the
Compensation Committee; however, incentive options cannot be less than the fair
market value of the common stock on the date of grant. All options are
nontransferable and subject to adjustment by the Compensation Committee upon
50
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
changes in the Company's capitalization. The Board of Directors, at its option,
may discontinue the Plan or amend the Plan at any time.
The per share weighted-average fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1996 and 1997,
respectively: dividend yield of zero percent, expected volatility of 36.61 and
39.81%, respectively, risk-free interest rate has been fixed at 6.69 and 5.66%,
respectively, based on the 10-year treasury rate on March 11, 1997 and March 25,
1998, respectively and term of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
1996 1997
------------ ------------
Net income as reported $ 149 $4,209
Net income pro forma 50 3,534
Net income per diluted common share as reported $ .01 $ .30
Net income per diluted common share as pro forma .00 .29
Pro forma net income reflects only options granted in 1996 and 1997. Therefore,
the full impact of calculating compensation costs for stock options under SFAS
123 is not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the option's vesting period of three years
and compensation cost for options prior to January 1, 1995 is not considered.
The resulting pro forma compensation costs may not be representative of that
expected in the future years.
A summary of the status of the Company's stock option plan as of
December 31, 1995, 1996 and 1997 and changes during the years ending on those
dates is presented below:
1995 1996 1997
---- ---- ----
Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ---------------- --------- ---------------- --------- ----------------
Options at beginning of the year 440,000 $4.63 806,068 $5.43 1,105,202 $ 6.15
Granted 430,500 6.17 563,400 8.22 940,350 15.08
Exercised -- -- (28,170) 4.69 (179,777) 6.05
Canceled (64,432) 4.88 (236,096) 8.79 (235,815) 9.53
--------- ---------- --------- ---------- --------- ----------
Options at end of the year 806,068 $5.43 1,105,202 $6.15 1,629,967 $10.82
========= ========== ========= ========== ========= ==========
Options exercisable at end of year 146,670 381,988 567,756
Weighted-average fair
value of options exercisable
during the year $ 3.69 $ 5.14 $ 5.49
51
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarized information about fixed stock options outstanding
at December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
------------- ------------------ ------------------ ------------- ------------------
$4.63 to 4.63 40,000 5.92 $ 4.63 40,000 $4.63
$4.63 to 4.63 278,166 6.02 4.63 273,665 4.63
$4.81 to 5.81 88,600 7.51 5.72 59,066 5.72
$6.38 to 6.50 208,964 7.69 6.45 136,024 6.50
$6.69 to 7.38 180,603 8.52 7.36 52,275 7.36
$7.50 to 14.88 173,684 9.29 11.54 6,726 8.58
$15.13 to 16.0 21,500 9.62 15.79 0 0.00
$16.50 to 16.50 556,100 9.90 16.50 0 0.00
$16.63 to 20.50 82,100 9.79 17.70 0 0.00
$22.38 to 22.38 250 9.84 22.38 0 0.00
------------- ------------------ ------------------ ------------- ------------------
$4.63 to $22.38 1,629,967 8.50 $10.82 567,756 $5.49
============= ================== ================== ============= ==================
In October 1997, the Company awarded 250,000 shares of non-voting
restricted stock to two key executive officers. No cash consideration was paid
for such shares by the recipients. Such shares vest in three equal annual
installments, commencing on the fourth anniversary of grant. The Company will
record compensation expense equal to the fair market value of such shares as
they vest.
13. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company's board of directors
adopted a Non-Officer Stock Option Plan (the "Non-Officer Plan") pursuant to
which up to 500,000 shares of Common Stock are issuable pursuant to non-
qualified options granted under the Non-Officer Plan. Officers, directors and
significant employees of the Company are not eligible to participate in the Non-
Officer Plan.
14. NON-CASH INVESTING AND FINANCING ACTIVITIES
The following is a summary of non-cash investing and financing activities for
the year ended December 31, 1997 (in thousands):
December 31, 1997
In October of 1997, the Company acquired all of the outstanding capital stock
of Carriage House as follows:
Fair value of assets acquired $8,279
Issuance of 337,460 shares of the Company's common stock, net of expenses 5,076
Liabilities assumed 3,203
In October of 1997, the Company acquired all of the outstanding capital stock of
HCI as follows:
Fair value of assets acquired $11,877
Cash paid 5,262
Liabilities assumed 6,615
15. LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of Management of the Company, although
the outcomes of these suits and claims are uncertain, in the aggregate they
should not have a material adverse effect on the Company's business, financial
condition are results of operations.
52
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ASSISTED LIVING CONCEPTS INC.
Registrant
March 30, 1998 By: RHONDA S. MARSH
---------------
Name: Rhonda S. Marsh
Title: Vice President, Chief Accounting
Officer and Controller
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 William McBride III and Keren Brown Wilson, and
each of them, the lawful attorney and agent or attorneys and agents with power
and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable to comply with the Securities and
Exchange Act of 1934, as amended, and any rules or regulations or requirements
of the Securities and Exchange Commission in connection with this Annual Report
on Form 10-K. Without limiting the generality of the foregoing power and
authority, the powers granted include the power and authority to sign the names
of the undersigned officers and directors in the capacities indicated below to
this Annual Report on Form 10-K or amendment or supplements thereto, and each of
the undersigned hereby ratifies and confirms all that said attorneys and agent,
or either of the, shall do or cause to be done by virtue hereof. This Power of
Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the dated indicated opposite his or her name.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
WILLIAM MCBRIDE III Chairman of the Board & March 30, 1998
------------------- Chief Executive Officer,
William McBride III (Principal Executive Officer)
KEREN BROWN WILSON Vice Chairman, President and March 30, 1998
------------------ Chief Operating Officer
Keren Brown Wilson
RHONDA S. MARSH Vice President & Controller March 30, 1998
--------------- (Principal Financial Officer and
Rhonda S. Marsh Accounting Officer)
GLORIA CAVANAUGH Director March 30, 1998
----------------
Gloria Cavanaugh
RICHARD C. LADD Director March 30, 1998
---------------
Richard C. Ladd
BRADLEY RAZOOK Director March 30, 1998
--------------
Bradley Razook
53
ASSISTED LIVING CONCEPTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASSISTED LIVING CONCEPTS INC., AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- --------------------------------------------------------------------------------
2.1 Merger Agreement between the Company and CCL Sub, Inc.
(incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-1, File No. 33-
83938).
2.2 Agreement and Plan of Corporate Separation and Reorganization
between Concepts In Community Living, Inc. and Keren Wilson
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-1, File No. 33-
83938).
2.3 Assignment, Bill of Sale, License, and Assumption Agreement
between Concepts In Community Living, Inc., and CCL Sub, Inc.
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-1, File No. 33-
83938.)
2.4 Purchase Agreement between the Company and Lincoln City Limited
Partnership (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1,
File No. 33-83938).
2.5 Letter Purchase Agreement between the Company and Madras Senior
Residence, LRW partners, Keren Brown Wilson and Joseph Hughes
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-1, File No. 33-
83938).
3.1 Articles of Incorporation of the Company (Incorporated by
reference to the same titled exhibit to the Company's
Registration Statement on Form S-1, File No. 33-83938).
3.2 By laws of the Company (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on Form
S-1, File No. 33-83938).
4.1 Indenture, dated as of August 15, 1995, between the Company and
Harris Trust and Savings Bank, as Trustee, in respect of the
Company's 7.0% Convertible Subordinated Debentures due 2005.
(Incorporated by reference to the same titled exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1995, File No. 1-83938).
4.2 Form of 7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to the
Company Quarterly Report on Form 10-Q for the period ended
September 30, 1995, File No. 1-83938).
4.3 Registration Rights Agreement dated August 2, 1995 between the
Company and the Purchasers of its 7% Convertible Subordinated
Debentures due 2005 (Incorporated by reference to the same
titled exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1995, File No. 1-83938).
4.4 Indenture, dated as of October 2, 1997 by and between the
Company and Harris Trust and Savings Bank, as Trustee providing
for Issuance of Securities in Series. (Incorporated by reference
to Exhibit 4.1 to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498)
4.5 Rights Agreement dated as of June 12, 1997, between Assisted
Living Concepts Inc. and American Stock Transfer & Trust
Company, as Rights Agent, which includes the form of Certificate
of Resolution Establishing Designations, Preferences and Rights
of Series A Junior Participating Preferred Stock of Assisted
Living Concepts Inc. as Exhibit A, the form of Right Certificate
as Exhibit B and the Summary of Rights to Purchase Preferred
Shares as Exhibit C (Incorporated by reference to the same
titled exhibit to the Company's Form 8-K, dated July 24, 1997,
File No. 1-83938).
10.1 Restricted Stock Agreement dated October 3, 1997 by and between
the Company and William McBride III. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K,
dated October 20, 1997, File No. 1-13498)
54
10.2 Restricted Stock Agreement dated October 3, 1997 by and between the
Company and Keren Brown Wilson (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498)
10.3 Employment Agreement dated October 3, 1997 by and between the
Company and William McBride III. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498)
10.4 Amended and Restated Employment Agreement dated October 3, 1997 by
and between the Company and Keren Brown Wilson (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
8-K, dated October 20, 1997, File No. 1-13498)
10.5 Indemnification Agreement dated October 3, 1997 by and between the
Company and William McBride III (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498)
10.6 Indemnification Agreement dated October 3, 1997 by and between the
Company and Keren Brown Wilson. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498)
10.7 Amended and Restated 1994 Stock Option Plan of the Company.
(Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated October 20, 1997, File No. 1-
13498)
10.8 Merger Agreement dated as of October 4, 1997 by and between the
Company and Home and Community Care, Inc. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K,
dated October 20, 1997, File No. 1-13498)
10.9 $20,440,000 Agreement to Purchase and Leae Assisted Living
Residences dated October 3, 1997 by and between the Company and LTC
Properties, Inc. (Incorporated by reference to the same titled
exhibit to the Company's Report on Form 8-K, dated October 20, 1997,
File No. 1-13498)
10.10 $50,000,000 Agreement to Purchase and Lease Assisted Living
Residences dated October 3, 1997 by and between the Company and LTC
Properties, Inc. (Incorporated by reference to the same titled
exhibit to the Company's Report on Form 8-K, dated October 20, 1997,
File No. 1-13498)
10.11 Management Agreement dated as of April 1, 1997 by and between the
Company and Health Equity Investors, LLC. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K,
dated October 20, 1997, File No. 1-13498)
10.12 Joint Venture Agreement dated as of April 1, 1997 by and between the
Company and Health Equity Investors, LLC. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K,
dated October 20, 1997, File No. 1-13498)
10.13 Form of Employment Agreement Between Company and Certain Executive
Officers.
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Calculation of Earnings Per Share
23.1 Consent of KPMG Peat Marwick LLP
27.0 Financial Data Schedule Article 5 of Regulation S-X
55