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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
____________________________________
[MARK ONE]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER 1-11999
________________________________________
ALTERNATIVE LIVING SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 39-1771281
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
450 N. SUNNYSLOPE ROAD, SUITE 300 53005
BROOKFIELD, WI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 789-9565
_________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for 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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $546,029,751 as of March 5, 1998. The number of
outstanding shares of the Registrant's Common Stock is 21,832,796 shares as of
March 5, 1998.
_______________________________
Documents Incorporated by Reference
Part III incorporates information by reference from the Proxy Statement
for the registrant's Annual Meeting of Stockholders to be held on May 14, 1998.
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The statements in this annual report on Form 10-K relating to matters that are
not historical facts, including, but not limited to, statements found in Item
1. "Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from expectations. These include, without limitation,
securing necessary licensing and permits, construction delays, cost increases
on new construction, business conditions, adverse changes in general economic
conditions and availability of financing for these developments. These and
other risks are set forth in the reports filed by the Company with the
Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
OVERVIEW
Alternative Living Services, Inc. (the "Company" or "ALS") is a leading
national assisted living company operating 223 assisted living residences with
an aggregate capacity of approximately 9,500 residents as of December 31, 1997.
Of these residences, the Company owns 32, leases 121, holds majority equity
interests in entities which own 19 and lease 15, holds minority equity
interests in entities which own 7 and lease 13, and manages 16 for other
owners. The Company's rapid growth over the last several years has had a
significant impact on the Company's results of operations and accounts for
substantially all of the changes in its results of operations for the years
ended 1997, 1996 and 1995. As of December 31, 1997, 1996 and 1995, the Company
operated or managed residences with an aggregate capacity to accommodate
approximately 9,500, 5,200 and 1,100 residents, respectively.
Since 1993, the Company has grown significantly as a result of its aggressive
development and acquisition activities, which have focused on purposeful built,
free-standing assisted living residences. The Company intends to continue its
development strategy and, at December 31, 1997, was constructing 109 residences
and developing an additional 58 residences. Of these residences, at least 110
with an aggregate capacity of approximately 5,000 residents are expected to
open during 1998.
In October 1997, the Company completed its merger (the "Sterling Merger") with
Sterling House Corporation ("Sterling"), which at the time of the merger
operated 104 residences with an aggregate capacity of approximately 3,900
residents. In May 1996, the Company acquired New Crossings International
Corporation ("Crossings"), an assisted living company which operated 15
Crossings residences with a capacity to accommodate approximately 1,420
residents throughout the western United States; and in January 1996, the
Company acquired Heartland Retirement Services, Inc. ("Heartland"), an assisted
living company which operated 20 WovenHearts residences with an aggregate
capacity of approximately 330 residents throughout Wisconsin. The Sterling
Merger was accounted for as a pooling-of-interests and both of the 1996
transactions were accounted for as purchases.
As a result of the Sterling Merger: (i) Sterling became a wholly-owned
subsidiary of the Company; (ii) the Company issued approximately 5,550,000
shares of common stock in exchange for the Sterling common stock then
outstanding; (iii) the Company assumed Sterling's 6.75% Convertible
Subordinated Debentures (the "6.75% Debentures"); and (iv) Sterling stock
options then outstanding were converted into options to acquire common stock
based on the merger exchange ratio. The Company recorded charges to earnings in
the quarter ended December 31, 1997 related to the Sterling Merger in the
aggregate amount of $10.4 million. Of the $10.4 million merger related costs
recognized in the fourth quarter of 1997, $4.7 million represent exit costs for
duplicate facility locations, systems consolidation, severance arrangements and
consolidation of corporate office functions. These exit costs are reflected as
a non-recurring restructuring charge in the Statements of Operations. The
balance of the merger related costs, $5.7 million, represent investment
banking, legal, accounting, printing and consulting costs related to the
transaction and are included in general and administrative expense as required
under the pooling-of-interests accounting method.
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ASSISTED LIVING PRODUCT LINES
The Company operates multiple residence models designed to meet the increasing
personal and health care needs of the private pay elderly population. Each
residence model offers a full range of assisted living services, and its
dementia residence model also offers specialized care for residents with
Alzheimer's disease and other dementias. Each of the Company's residence
models targets a distinct segment of the elderly population through site
selection, building design, staffing, service and care plans, as well as
pricing structures based on the needs and characteristics of each targeted
segment. All of the Company's residences incorporate its philosophy of
preserving resident's privacy, encouraging individual choice and fostering
independence in a "home-like" setting.
Frail-Elderly Models. The Company's frail-elderly residence models offer
residents a choice of private or shared, fully-furnished accommodations with
ongoing health assessments by a nurse, 24-hour assistance with activities of
daily living ("ADL's"), three meals a day plus snacks, organized social
activities, housekeeping and personal laundry services. All residents are
assessed at admission to determine the level of care and service required and
placed in one of four levels ranging from basic care to three different levels
of advanced care. In addition, each of the Company's frail-elderly residence
models offers its residents participation in the RISE and ESP ancillary support
programs. See "--Assisted Living Care and Service Programs." The Company's
frail-elderly residence models are described below.
- - Wynwood. These multi-story residences are designed to serve primarily
upper income frail elderly individuals in metropolitan and suburban
markets. The Wynwood residences typically range in size from 37,500 to
45,000 square feet and accommodate 60 to 78 residents. To achieve a more
residential environment in these large buildings, each wing or
"neighborhood" in the residence contains design elements scaled to a
single-family home and includes a living room, dining room, patio or
enclosed porch, laundry room and personal care area, as well as a care
giver work station. The Company generally maintains a minimum care giver
to resident ratio of approximately one to 10 at each of these residences
and increases staffing levels to a ratio as high as one to six to
accommodate the care needs of the resident population. The Company
customarily charges monthly rates per resident ranging from $1,800 to
$2,700 for a shared room and from $2,500 to $3,100 for a private room.
- - Sterling House. These apartment-style residences are generally located in
select suburban communities and in small or medium sized towns with
populations of 10,000 or more persons. These residences range in size
from 20,000 to 30,000 square feet and usually contain from 33 to 50
private apartments, offering residents a choice of studio, one-bedroom and
one-bedroom deluxe apartments. These apartments typically include a
bedroom area, private bath, living area, individual temperature control
and kitchenettes and range in size from 320 to 420 square feet. Like the
Crossings model, common space is dispersed throughout the building and it
is residentially scaled. The Company generally maintains care staff to
resident ratios ranging from approximately one to eight to one to 16,
depending on the care needs of the residents. The Company customarily
charges monthly rates per resident from $1,300 to $2,800 depending on the
apartment type, level of services required, resident acuity and the
geographic location of the residence.
- - Crossings. These apartment-style residences are generally located in
metropolitan markets. Apartment-style residences are favored in certain
markets in the United States, particularly throughout Western states. The
Company believes this residence model enables it to capture a broader
segment of the assisted living market. These multi-story residences range
in size from 45,000 to 65,000 square feet and accommodate 60 to 80
residents, who choose among studio, one-bedroom and two-bedroom
apartments. These apartments typically include a bedroom, a kitchenette,
a full bathroom and a living/dining area and range in size from 280 to 700
square feet. Like the Sterling House residence model, common space is
dispersed throughout the buildings and includes a central dining room, a
library, various activity rooms, laundry rooms and a beauty shop. The
Company generally maintains care staff to resident ratios ranging from
approximately one to 12 to one to 16, depending upon the care needs of the
residents. The Company customarily charges monthly rates per resident
ranging from $1,500 to $3,300.
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- - WovenHearts. These residences are designed to meet the needs of frail
elderly individuals in smaller markets who may be experiencing the early
stages of Alzheimer's disease. WovenHearts residences range in size from
7,000 to 12,000 square feet, accommodate 20 residents and are being expanded
to accommodate 36 residents. These single-story residences resemble, and
can generally be constructed on a site suitable for, a single family home.
These residences have multiple common areas that are easily accessible from
any resident room and include a living room, a den, an entertainment room,
several personal care areas as well as a large kitchen area which opens into
an adjoining dining room. This design allows residents to participate in
familiar daily activities (such as assisting with meals, laundry and
housekeeping) which promote maintenance of their functional abilities. Most
of the resident units are private and fully furnished, though shared
accommodations are also available. The Company generally maintains a
minimum care giver to resident ratio of approximately one to 12 at its
WovenHearts residences. The Company customarily charges monthly rates per
resident ranging from $1,700 to $2,200.
Dementia Model. The Company's specially designed, free-standing dementia
residence model serves the programmatic needs of individuals with Alzheimer's
disease and other dementias. The Company's dementia model residents typically
require higher levels of care and services as a result of their progressive
decline in cognitive abilities, including impaired memory, thinking and
behavior. These residents require increased supervision because they are
typically highly confused, wander prone and incontinent. As a result, these
residences have a staffing pattern which includes a full-time nurse and a care
giver to resident ratio of approximately one to six. Due to the generally high
level of care required by residents, a single-tier pricing structure is used.
The Company's dementia residence model is described below.
- - Clare Bridge. The Company's Clare Bridge dementia residence model ranges
in size from 20,500 to 28,000 square feet, is a single-story residence
accommodating 38 to 52 residents and is primarily located in metropolitan
and suburban markets. The Company seeks to create a "home-like" setting
that addresses the resident's cognitive limitations using internal
neighborhoods consisting of rooms which are scaled to the size typically
found in an upper-income, single family home with the same level of
furniture, fixtures and carpeting. Key features specific to the needs of
Clare Bridge residents generally include indoor wandering paths, a
simulated "town-square" area, secure outdoor spaces with raised gardening
beds, directional aids to assist in "wayfinding" such as signs,
color-coded neighborhoods and memory boxes with the resident's photograph
outside of their unit, and specifically designed furniture suitable for
incontinent residents. The Company generally charges monthly rates per
resident ranging from $2,800 for a shared room to $4,000 for a private
room in its Clare Bridge residences.
In addition, the Company Sterling House model can be expanded to serve the
needs of individuals with Alzheimer's disease and other more severe dementias
through the addition of a Sterling Cottage. The Sterling Cottage is typically
a 12 apartment modular addition to a Sterling House residence that includes
separate entrances, an internal wandering path and more intensive care giver
staffing. The Company customarily charges monthly rates per resident from
$2,800 to $3,500 for services delivered in the Sterling Cottage setting.
ASSISTED LIVING CARE AND SERVICE PROGRAMS
The Company offers a full range of assisted living care and services based upon
individual resident needs. Prior to admission, all residents are assessed by
the Company's professional staff to determine the appropriate residence model
and level of care and services required by such residents. Subsequently,
individual care plans are developed by residence staff in conjunction with the
residents, their families and their physicians. These plans are periodically
reviewed, typically at six month intervals, or when a change in medical or
cognitive status occurs. Each of the Company's assisted living residence
models is designed to accommodate residents as they age in place and require
increasing levels of care. To oversee the delivery of care and services, the
Company assigns a licensed nurse to each of its residences. The Company
believes that this level of attention to the health care needs of its residents
enables them to remain in the Company's residences, in many cases, for the rest
of their lives. At each of the Company's frail elderly residence models,
residents are placed in one of several care levels depending upon their
individual needs. At its Clare
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Bridge residences, the Company currently uses a single care structure. The
Company's care levels include a basic care program, several advanced care
programs as well as additional ancillary service programs as further described
below.
Basic Care. At this level, residents are provided with a variety of
services, including 24 hour assistance with ADLs, ongoing health
assessments by a professional nurse, three meals per day and snacks,
coordination of special diets planed by a registered dietitian,
assistance with coordination of physician care, physical therapy and
other medical services, social and recreational activities, housekeeping
and personal laundry services.
Advanced Care. The Company also offers higher levels of personal and
health care services to residents who require more frequent or intensive
physical assistance or increased care and supervision due to cognitive
impairments. The Company offers three advanced care levels which provide
residents with increasing levels of care and services dependent on the
residents' changing needs. Rates charged for these services are added to
the rate charged for basic care. The Company generally charges an
additional $300 to $750 per month depending upon the level and frequency
of care required and staffing needs. Residents in the highest care level
are typically very physically frail or experiencing early stages of
Alzheimer's disease or other dementia. Physically frail residents may
require complex medication management, assistance with most or all ADLs,
two-person transfer from a wheelchair or incontinence care. Residents
with cognitive impairment may require frequent staff interaction and
intervention due to confusion.
RISE (Restoring Independence, Strength and Energy). Crossings residences
also offer RISE, a one-on-one exercise program designed to help residents
regain their independence and become healthier, and stronger by improving
flexibility, balance, strength and endurance. The program is targeted to
residents with health concerns related to Parkinson's disease, strokes,
osteoarthritis, osteoporosis, congestive heart disease, hip fractures and
other limitations in ambulation and mobility. Monthly rates for the
program range from $90 to $400 depending on the frequency and duration of
sessions.
ESP (Extended Support Program). ESP, also offered at Crossings
residences, is a program designed to provide additional structure and
personal attention to residents with early stages of dementia. Regularly
scheduled group recreational activities and social events help residents
build self-esteem and decrease anxiety related to confusion and
disorientation. The ESP program has been successful in retaining
residents who, due to their dementia, might otherwise need to relocate to
a more supportive environment. The monthly program rates range from $325
to $450.
Access to Specialized Medical Services. The Company assists its
residents with the coordination of access to medical services from third
parties, including home health care, rehabilitation therapy, pharmacy
services and hospice care. These providers are often reimbursed directly
by the resident or a third party payor, such as Medicare. In the future,
the Company may elect to provide these services directly using its own
skilled employees or through a joint venture agreement with a skilled
provider.
Alzheimer's Care. The Company believes it is one of the leading
providers of care to residents with cognitive impairments, including
Alzheimer's and other dementias, in its free-standing Clare Bridge
residences. The Company's programs provide the attention, care and
services needed to help cognitively impaired residents maintain a higher
quality of life. Specialized services include assistance with ADLs,
behavior management and a life-skills based activities program, the goal
of which is to provide a normalized environment that supports resident's
remaining functional abilities. Whenever possible, residents participate
in all facets of daily life at the residence, such as assisting with
meals, laundry and housekeeping.
Residents requiring greater levels of supervision or more specialized
programming due to Alzheimer's disease or other dementias may be
recommended for transfer to one of the Company's Clare Bridge residences.
In the event that a resident's acuity level reaches a level such that
the
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Company is unable to meet the resident's needs, the Company maintains
relationships with local hospitals and skilled nursing facilities to
facilitate resident transfers.
JOINT VENTURES AND STRATEGIC ALLIANCES
In further support of its development strategy, the Company has formed
strategic alliances and joint ventures with established real estate
development partners. These alliances and joint ventures have enabled the
Company to develop and construct additional residences while reducing the
investment of, and associated risk to, the Company.
Joint Venture with Continuing Care Concepts, Inc. In 1994, the Company
established a joint venture with Continuing Care Concepts, Inc. ("CCC") to
develop, own and operate assisted living residences in target market areas
throughout Pennsylvania, Delaware and New Jersey (the "ALS-East Territory").
CCC is a corporation owned and controlled by DeLuca Enterprises, Inc., an
eastern Pennsylvania-based commercial real estate development and construction
company. The joint venture arrangement between ALS and CCC contemplates the
joint development of residences in the ALS-East Territory, and CCC will have a
right of first refusal to provide 20% of the equity for any future residences
developed by ALS in the ALS-East Territory. Losses from the operation of
residences jointly owned by ALS and CCC are allocated on a basis consistent
with the respective partners' interest in cash distributions and economic
substance of the joint venture arrangement which results in losses
disproportionately allocated to CCC to the extent of its capital account. Upon
the six month anniversary of the opening of a residence jointly owned by ALS
and CCC, CCC shall have the right to require the Company to purchase CCC's
interest in such residence (put option) and the Company shall have an option to
acquire (call option) CCC's interest in such residence at a purchase price
based upon the appraised fair market value of the residence.
Joint Venture with Days Development Company. The Company has established a
joint venture (the "ALS-Carolina J.V.") with Days Development Company, L.C. a
Roanoke, Virginia-based commercial real estate development and construction
company ("Days") to develop, own and operate assisted living residences in
target market areas throughout North and South Carolina (the "ALS-Carolina
Territory"). The joint venture arrangement between ALS and Days contemplates
the joint development of residences in the ALS-Carolina Territory through
November 2000. Days or its affiliates will serve as ALS's exclusive general
contractor in the ALS-Carolina Territory, and Days will have a right of first
refusal to provide 20% of the equity for any future residences developed by ALS
in the ALS-Carolina Territory. Losses from the operation of residences jointly
owned by ALS and Days are allocated on a basis consistent with the respective
partners' interest in cash distributions and economic substance of the joint
venture arrangement which results in losses disproportionately allocated to
Days to the extent of its capital account. Upon the six month anniversary of
the opening of a residence jointly owned by ALS and Days, Days shall have the
right to require the Company to purchase Days' interest in such residence (put
option) and the Company shall have an option to acquire (call option) Days'
interest in such residence at a purchase price based upon the appraised fair
market value of the residence.
Joint Venture with Pioneer Development Company. The Company has entered into a
joint venture relationship (the "ALS-Northeast J.V.") with Pioneer Development
Company, a Syracuse, New York-based commercial real estate development and
construction company ("Pioneer"), to develop, own and operate assisted living
residences in targeted market areas throughout New York, Massachusetts,
Connecticut and Rhode Island (the "ALS-Northeast Territory"). Pioneer and the
Company agreed to capitalize and form separate project entities during a
five-year development term commencing in September 1996 to develop, construct,
open and operate residences in the ALS-Northeast Territory, with the Company
and Pioneer owning and funding either a 51% and 49% equity interest, or an 80%
and 20% equity interest, respectively, in such project entities. During such
development term, the Company and Pioneer have agreed not to independently
engage in other competitive activities in the ALS-Northeast Territory, subject
to certain limited exceptions. Pioneer will provide development and
construction management services to the ALS-Northeast J.V. and ALS will manage
the ALS-Northeast residences, all pursuant to agreed upon arrangements. Losses
from the operation of residences jointly owned by ALS and Pioneer are allocated
on a basis consistent with the respective partners' interest in cash
distributions and economic substance of the joint
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venture arrangement which results in losses disproportionately allocated to
Pioneer to the extent of its capital account.
With respect to each ALS Northeast Territory residence, upon the first to occur
(i) such residence achieving a 75% occupancy or (ii) the six-month anniversary
of the opening of such residence, Pioneer shall have the right to require the
Company to purchase Pioneer's interest in the residence (put option) and the
Company shall have an option to acquire (call option) Pioneer's interest in
such ALS-Northeast residence. The purchase price payable upon exercise of the
put and call options are based on the appraised fair market value of the
residence and shall be payable in cash and/or shares of common stock.
Fee Development Relationship with Western Communities Corporation. In May
1996, the Company entered into a Pre-Construction Coordination Agreement (the
"WCC Agreement"), with Western Communities Corporation, a Tempe, Arizona-based
construction and development firm ("WCC"), pursuant to which WCC is responsible
for (i) locating suitable sites in communities in Arizona designated by the
Company ("Project Areas") for development of the Company's assisted living and
dementia care residences; (ii) assisting the Company in its site selection
process; and (iii) obtaining all required governmental approvals within a
specified time period. WCC is entitled to a project development fee of $50,000
per project site and to reimbursement of 110% of costs and expenses. If WCC
does not obtain the required approvals within the specified time, it must
refund the development fee (but not costs and expenses) for that project site
to the Company; however, the obligation to refund such fee is limited to the
first four Project Areas designated by the Company in each of 1996 and 1997.
Upon acquisition of a project site, the parties intend to enter into a mutually
satisfactory construction management agreement pursuant to which WCC will
manage the construction of the facility. The WCC Agreement provides that
during the two year term of the WCC Agreement, the Company and WCC will not
enter into a similar agreement with any other person and that WCC will not
locate or develop sites for assisted living or dementia care residences in
Arizona without first offering such sites to the Company.
Sterling Development Partnerships. In February 1997, Sterling formed a wholly
owned subsidiary, Coventry Corporation ("Coventry"), to enter into joint
venture agreements with certain development partners. Pursuant to the
applicable joint venture agreements, Coventry holds interests in various
limited liability companies and limited partnerships (the "Development
Partnerships") formed to develop Sterling House residences. The Company's
development partners generally provide construction management expertise,
access to existing relationships with local contractors, suppliers and
municipal authorities, knowledge of local and state building codes and zoning
laws and assistance with site location for new residences while investing
capital and sharing in the development risk of new properties. The Company
participates in financing residences, contributes operational and industry
expertise and has management responsibility for the residences. The Company
has both the option, at its election, and an obligation, at the election of its
development partners, to acquire the equity interests of the other partners at
fair market value (subject to certain limitations) at predetermined times.
Losses from operation of residences jointly owned by Coventry and the
Development Partners are disproportionately allocated to the Development
Partners to the extent of their capital accounts.
GOVERNMENT REGULATION
Health care is an area of extensive and frequent regulatory change. The
assisted living industry is relatively new and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels is evolving.
The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities. In some states in which the Company operates, the term
"assisted living" may have a statutory definition limited to a particular type
of program or population. Some of the Company's assisted living residences may
fall into other licensing categories or may not require licensing in states
with specific "assisted living" programs, although such residences may offer
services requiring licensure (e.g., licensed home care services). Although
regulatory requirements vary from state to state, these requirements generally
address, among other things: personnel education, training and records;
staffing levels; facility services, including administration and assistance
with self-administration of
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medication, and limited nursing services; physical residence specification;
furnishing of residence units; food and housekeeping services; emergency
evacuation plans; and residence rights and responsibilities. New Jersey and
Connecticut also requires each assisted living residence to obtain a
Certificate of Need ("CON") prior to its opening. The Company's residences are
also subject to various state or local building codes and other ordinances,
including safety codes. Management anticipates that the states which are
establishing regulatory frameworks for assisted living residences will require
licensing of assisted living residences and will establish varying requirements
with respect to such licensing.
The Company has obtained all required licenses for each of its residences and
expects that it will obtain all required licenses for each new residence. Each
of the Company's licenses must be renewed annually or biannually. The Company
has also obtained a CON for each residence under construction or development in
New Jersey and is in the process of obtaining CONs for the residences under
development in Connecticut.
Like other health care facilities, assisted living residences are subject to
periodic survey or inspection by governmental authorities. From time to time
in the ordinary course of business, the Company receives deficiency reports.
The Company reviews such reports and seeks to take appropriate corrective
action. Although most inspection deficiencies are resolved through a plan of
correction, the reviewing agency typically is authorized to take action against
a licensed facility where deficiencies are noted in the inspection process.
Such action may include imposition of fines, imposition of a provisional or
conditional license or suspension or revocation of a license or other
sanctions. Any failure by the Company to comply with applicable requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its residences
are in substantial compliance with all applicable regulatory requirements. No
actions are currently pending against any of the Company's residences nor have
any of the Company's residences been cited in the past for any significant
non-compliance with regulatory requirements.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or, the recommending of, a particular provider of
health care items or services. The Medicare/Medicaid anti-kickback law has
been broadly interpreted to apply to certain contractual relationships between
health care providers and sources of patient referral. Similar state laws vary
from state to state, are sometimes vague and seldom have been interpreted by
courts or regulatory agencies. Violation of these laws can result in loss of
licensure, civil and criminal penalties, and exclusion of health care providers
or suppliers from participation in (i.e., furnishing covered items or services
to beneficiaries) the Medicare and Medicaid programs. Although the Company
receives only a small portion of its total revenues from certain Medicaid
waiver programs and is otherwise not a Medicare or Medicaid provider or
supplier, it is subject to these laws because (i) the state laws typically
apply regardless of whether Medicare or Medicaid payments are at issue and (ii)
as required under some state licensure laws, and for the convenience of its
residents, some of the Company's assisted living residences maintain contracts
with certain health care providers and practitioners, including pharmacies,
home health organizations and hospices, through which the health care providers
make their health care items or services (some of which may be covered by
Medicare or Medicaid) available to the Company's residents. There can be no
assurance that such laws will be interpreted in a manner consistent with the
practices of the Company.
In order to comply with the terms of the revenue bonds used to finance nine of
the Company's residences, the Company is required to lease a minimum of 20% of
the apartments in each such residence to low or moderate income persons as
defined pursuant to the Internal Revenue Code of 1986, as amended.
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. A portion of
the Company's personnel is paid at rates related to the federal minimum wage
and accordingly, increases in the minimum wage will result in an increase in
the Company's labor costs.
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The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
the Company currently operates. Principally, these regulations require that
certain written disclosures be made prior to the offer for sale of a franchise.
The disclosure documents are subject to state review and registration
requirements and must be periodically updated, not less frequently than
annually. In addition, some states have relationship laws which prescribe the
basis for terminating a franchisee's rights and regulate both the Company's and
its franchisee's post-termination rights and obligations.
Management is not aware of any non-compliance by the Company with applicable
regulatory requirements that would have a material adverse effect on the
Company's financial condition or results of operations.
COMPETITION
The long-term care industry is highly competitive and, given the relatively low
barriers to entry and continuing health care costs containment pressures, the
Company expects that the assisted living segment of such industry will become
increasingly competitive in the future. The Company competes with other
providers of elderly residential care on the basis of the breadth and quality
of its services, the quality of its residences and, with respect to private pay
patients or residents, price. The Company also competes with other providers
of long-term care in the acquisition and development of additional residences.
The Company's current and potential competitors include national, regional and
local operators of long-term care residences, extended care centers,
assisted/independent living centers, retirement communities, home health
agencies and similar providers, many of which have significantly greater
financial and other resources than the Company. In addition, the Company
competes with a number of tax-exempt nonprofit organizations which can finance
capital expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company and which are generally exempt from income tax.
While the Company's competitive position varies from market to market, the
Company believes that it competes favorably in substantially all of the markets
in which it operates based on key competitive factors such as the breadth and
quality of services offered, residence quality, recruitment and retention of
qualified health care personnel and reputation among local referral sources.
TRADEMARKS
Sterling House(R), Crossings(R) and WovenHearts(R) are registered service marks
of the Company and the Company claims service mark protection in the marks
Alternative Living ServicesSM , WynwoodSM, and Clare BridgeSM.
EMPLOYEES
At December 31, 1997, the Company employed approximately 3,475 full-time
employees and 2,460 part-time employees. None of the Company's employees are
represented by a collective bargaining group.
THE COMPANY AND ITS PREDECESSORS
The Company was organized in December 1993, and was initially capitalized by
Evergreen Healthcare, Inc. ("Evergreen") and Care Living Centers, Inc. ("CLC").
Evergreen, then a NYSE-listed operator of long-term care facilities, merged
with GranCare, Inc. ("GranCare") in July 1995. At the time of the Company's
organization, CLC was owned 25% by William F. Lasky, the Company's Chief
Executive Officer, and 75% by two other shareholders. Pursuant to the terms of
an acquisition agreement between Evergreen, CLC and Alternative Living
Services, a Wisconsin general partnership owned 50% by Mr. Lasky and 50% by two
other individuals (the "ALS Partnership"), the Company was initially
capitalized with (i) $2.7 million contributed by Evergreen, of which $330,000
was in cash, $170,000 was in satisfaction of a short-term advance and $2.2
million was in common stock subscribed in exchange for a 51 % interest in the
Company and (ii) certain assets and contractual rights owned by CLC were
contributed in exchange for the remaining 49% interest in the Company issued to
CLC. Immediately prior to the consummation of the transaction (i) Assisted
Care, Inc. ("Assisted Care"), a corporation formed by the shareholders of CLC
in 1989 to develop
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assisted living facilities outside of the State of Wisconsin, was merged with
and into CLC and (ii) the ALS Partnership conveyed certain of its assets
relating to its assisted living business to CLC. Assisted Care and the ALS
Partnership were under common control through Mr. Lasky and one other
shareholder.
ITEM 2. PROPERTIES
The table below sets forth certain information with respect to the Company's
residences which are operated by the Company as of December 31, 1997. The
Company owns, leases, holds equity interest in or manages, on behalf of third
parties, these residences.
OPERATING RESIDENCES
OWNED (1) LEASED (2) UNCONSOLIDATED (3) MANAGED (4) TOTAL
------------ ------------ -------------------- -------------- -----------
LOCATION RES. CAP. RES. CAP. RES. CAP. RES. CAP. RES. CAP.
- -------- ----- ----- ----- ----- --------- --------- ------ ------ ---- -----
AZ 2 86 -- -- -- -- -- -- 2 86
CA -- -- 1 140 -- -- -- -- 1 140
CO 4 215 4 376 1 42 3 142 12 775
FL 3 166 17 700 5 210 -- -- 25 1,076
ID 1 76 2 158 -- -- -- -- 3 234
KS 6 176 11 357 -- -- 1 43 18 576
MA -- -- -- -- -- -- 1 72 1 72
MI 5 224 5 168 -- -- -- -- 10 392
MN 2 40 8 259 -- -- 1 72 11 371
NC 3 158 1 38 -- -- -- -- 4 196
ND -- -- 1 63 -- -- -- -- 1 63
NJ 1 50 -- -- -- -- -- -- 1 50
NV -- -- 2 155 -- -- -- -- 2 155
NY 8 580 1 80 -- -- -- -- 9 660
OH 2 84 4 153 6 242 1 42 13 521
OK 1 33 22 763 1 46 2 64 26 906
OR -- -- 8 650 -- -- -- -- 8 650
PA 2 52 4 281 -- -- -- -- 6 333
TX -- -- 21 799 4 166 1 35 26 1,000
WA -- -- 4 404 -- -- -- -- 4 404
WI 11 201 20 503 3 55 6 48 40 807
- -- ----- ----- ----- ----- --------- --------- ------ ------ ---- -----
TOTAL 51 2,141 136 6,047 20 761 16 518 223 9,467
===== ===== ===== ===== ========= ========= ====== ====== ==== =====
(1) Owned residences are those that are wholly or majority owned by the
Company and may be subject to one or more mortgages.
(2) Leased residences are those that are operated by the Company and are leased
from a third party.
(3) Unconsolidated residences are those residences operated by ALS in which ALS
owns a minority equity interest.
(4) Managed residences are those residences that ALS operates under
management arrangements but does not possess an ownership interest. ALS
has an option to purchase or lease nine of these residences.
86% of all operating residences are four years old or less and the remaining
14% range from five to eleven years old.
At December 31, 1997, the Company was in various stages of constructing 109
residences and is developing 58 residences. Set forth below is certain
information with respect to residences in construction and residence sites in
development on December 31, 1997.
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UNDER CONSTRUCTION UNDER DEVELOPMENT
--------------------- ---------------------
LOCATION RESIDENCES CAPACITY RESIDENCES CAPACITY
- -------- ---------- --------- ---------- ---------
AZ 6 280 5 263
CO 2 92 4 200
CT -- -- 2 130
DE 1 72 -- --
FL 20 894 6 248
IN 6 252 6 256
MI 20 720 -- --
MN 8 310 -- --
NJ 3 102 9 376
NY 1 52 4 180
NC 13 608 1 42
OH 7 295 4 169
OR 1 54 1 52
PA 7 290 3 116
SC 10 414 2 84
TN 2 88 6 254
WA -- -- 5 260
WI 2 62 -- --
- --
TOTAL 109 4,585 58 2,630
=== ===== === =====
Certain of the residences under construction or development may be
owned directly by joint venture entities in which the Company will
own varying percentages of equity interests. See "Business - Joint
Ventures and Strategic Alliances."
"Construction" means that construction activities have occurred
(ground breaking) and are ongoing. "Development" means that the site
is under "control" (pursuant to purchase agreements or options or
otherwise) and development activities with respect to the site have
commenced and are ongoing (such as site permitting, preparation of
surveys and architectural plans, and negotiation of construction
contracts).
Residences under development may not in fact be constructed for a variety of
reasons, including zoning, permitting, health care licensing and cost related
issues. In addition to residences listed in the table above as "under
development," the Company is also engaged in preliminary development activities
with respect to other possible sites for future residences.
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to its business, the Company is not
currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of stockholders was held on October 23, 1997 in
Chicago, Illinois.
(b) The meeting did not involve the election of directors.
(c) The matters voted upon and the results of the voting were as follows:
(1) The stockholders voted 9,593,623 shares in the affirmative
and 44,630 shares in the negative to approve and adopt the Agreement
and Plan of Merger dated as of July 30, 1997, as amended as of
September 2, 1997, by and among the Company, Sterling and Tango
Merger Corporation ("Merger Sub"), a wholly owned subsidiary of the
Company, pursuant
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to which Merger Sub would merge with and into Sterling.
Stockholders holding 10,435 shares abstained from voting on this
proposal.
(2) The stockholders voted 9,628,615 shares in the affirmative
and 23,315 shares in the negative to approve the proposed amendment
to the Amended and Restated Bylaws of the Company to (i) amend the
bylaw provision regarding filling vacancies arising on the Company's
Board of Directors; (ii) add a bylaw provision establishing an
executive committee of the Company's Board of Directors; and (iii)
amend the bylaw provision regarding amendments to the Company's
Amended and Restated Bylaws. Stockholders holding 41,400 shares
abstained from voting on this proposal.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed and traded on the American Stock Exchange
(AMEX) under the symbol "ALI". The Common Stock has been listed on the AMEX
since August 6, 1996, the date of the Company's initial public offering. The
number of holders of record of the Company's Common Stock as of March 3, 1998
was approximately 3,600.
The following table sets forth, for the periods indicated, the high and low
closing prices for the Common Stock as reported on AMEX.
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High Low
------- -------
1997:
First Quarter...................... 17-3/4 11-7/8
Second Quarter..................... 23-1/4 14-7/8
Third Quarter...................... 25-1/2 21-3/16
Fourth Quarter..................... 29-9/16 23
1996:
Third Quarter (commencing 8/6/96).. 15-1/8 12-7/8
Fourth Quarter..................... 15-1/4 10-7/8
The Company has never paid or declared cash dividends and currently intends to
retain any future earnings for the operation and expansion of its business.
Any determination to pay cash dividends in the future will be at the discretion
of the Board of Directors and will be dependent on the Company's financial
condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated historical financial data of the Company presented
below for each of the five years ended December 31, 1997 has been derived from
the Company's audited consolidated financial statements appearing elsewhere in
this report and should be read in conjunction with those financial statements
and related notes. The selected consolidated financial data presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto included in the report (in thousands, except per
share data).
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YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
THE COMPANY PREDECESSOR
-------------------------------------------------------------------- ----------
1997 1996 1995 1994 1993(1) 1993(1)
----------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA :
Revenue:
Operating revenue.............................. $130,744 $55,637 $15,061 $7,228 $ 823 $2,641
----------- ------------- -------------- ----------- -------- ------------
Operating expenses:
Residence operations.......................... 81,558 35,977 8,717 3,185 300 1,672
Lease expense................................. 25,524 9,035 944 697 19 563
General and administrative.................... 22,168 11,143 5,890 3,489 545 423
Depreciation and amortization................. 9,271 4,223 1,275 346 31 101
Non-recurring charge.......................... 4,656 976 -- -- -- --
----------- ------------- -------------- ----------- -------- ------------
Total operating expenses................... 143,177 61,354 16,826 7,717 895 2,759
----------- ------------- -------------- ----------- -------- ------------
Operating loss................................. (12,433) (5,717) (1,765) (489) (72) (118)
Other income (expense):
Interest expense, net......................... (3,932) (3,231) (984) (397) (79) (48)
Equity in losses of unconsolidated affiliates. (226) (52) (716) (299) -- --
Minority interest in losses of consolidated
subsidiaries................................. 8,440 76 160 48 (10) --
Other, net.................................... (112) (31) 479 -- -- --
----------- ------------- -------------- ----------- -------- ------------
Total other income (expense), net.......... 4,170 (3,238) (1,061) (648) (89) (48)
----------- ------------- -------------- ----------- -------- ------------
Loss before income taxes....................... (8,263) (8,955) (2,826) (1,137) (161) (166)
Income taxes (benefit)......................... -- (159) (991) -- 15 --
----------- ------------- -------------- ----------- -------- ------------
Loss before extraordinary item................. (8,263) (8,796) (1,835) (1,137) (176) (166)
Extraordinary item - loss from early retirement
Of financing agreements........................ -- -- (1,176) -- -- --
----------- ------------- -------------- ----------- -------- ------------
Net loss................................... $ (8,263) $(8,796) $ (3,011) $(1,137) $ (176) $ (166)
=========== ============= ============== =========== ======== ============
Basic loss per common share:
Loss before extraordinary item (2)............ $ (0.44) $ (0.57) $ (0.24) $(0.26)
Extraordinary item (2)........................ -- -- (0.15) --
----------- ------------- -------------- -----------
Basic and diluted loss per common
share (2)..................................... $ (0.44) $ (0.57) $ (0.39) $(0.26)
Weighted average common shares =========== ============= ============== ===========
outstanding (2)............................... 18,651 15,429 7,782 4,322
=========== ============= ============== ===========
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------- -------------
THE COMPANY PREDECESSOR
------------------------------------------------------------------- -------------
1997 1996 1995 1994 1993(1) 1993(1)
---------- ---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 79,838 $39,455 $20,394 $ 896 $ 324 --
Short-term investments......................... 90,000 -- -- -- -- --
Working capital (deficit)...................... 129,528 20,532 10,425 (1,723) (472) (369)
Total assets................................... 553,552 204,353 82,450 18,160 3,341 759
Long-term obligations.......................... 318,069 68,625 23,663 7,365 678 134
Stockholders' equity........................... 143,897 91,064 45,466 3,765 25 349
(1) The Company was organized in December 1993. In connection with the
initial capitalization of the Company, substantially all of the tangible
assets of two operating companies were contributed to the Company
(collectively, referred herein as the "Predecessor"). Statement of
Operations data for periods prior to December 14, 1993 reflect the results
of operations of the Predecessor. Statement of Operations data for the
Company for 1993 are for the period from December 14, 1993 (inception)
through December 31, 1993. Per share amounts for the Predecessor, for
periods prior to the inception of the Company, are not presented as they
would not provide comparable or meaningful information.
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(2) Basic and diluted per share amounts are the same since potentially
issuable shares related to stock options and convertible debt would have
an anti-dilutive effect.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading national assisted living company operating 223
assisted living residences with an aggregate capacity of approximately 9,500
residents as of December 31, 1997. Of these residences, the Company owns 32,
leases 121, holds majority interests in entities which own 19 and lease 15,
holds minority interests in entities which own 7 and lease 13, and manages 16
for other owners. The Company's rapid growth over the last several years has
had a significant impact on the Company's results of operations and accounts
for substantially all of the changes in its results of operations for the
years ended 1997, 1996 and 1995. As of December 31, 1997, 1996 and 1995, the
Company operated or managed residences with an aggregate capacity to
accommodate approximately 9,500, 5,200 and 1,100 residents, respectively.
Since 1993, the Company has grown significantly as a result of its aggressive
development and acquisition activities, which have focused on purposeful built,
free-standing assisted living residences. The Company intends to continue its
development strategy and, at December 31, 1997, was constructing 109 residences
and developing an additional 58 residences. Of these residences, at least 110
with an aggregate capacity of approximately 5,000 residents are expected to
open during 1998.
In October 1997, the Company completed the Sterling Merger, which at the
time of the merger operated 104 residences with an aggregate capacity of
approximately 3,900 residents. In May 1996, the Company acquired Crossings, an
assisted living company which operated 15 Crossings residences with a capacity
to accommodate approximately 1,420 residents throughout the western United
States; and in January 1996, the Company acquired Heartland, an assisted living
company which operated 20 WovenHearts residences with an aggregate capacity of
approximately 330 residents throughout Wisconsin. The Sterling Merger was
accounted for as a pooling-of-interest and both of the 1996 transactions were
accounted for as purchases.
As a result of the Sterling Merger, (i) Sterling became a wholly-owned
subsidiary of the Company; (ii) the Company issued approximately 5,550,000
shares of common stock in exchange for the Sterling common stock then
outstanding; (iii) the Company assumed the 6.75% Debentures; and (iv) the
Sterling stock options then outstanding were converted into options to acquire
common stock based on the merger exchange ratio. Of the $10.4 million merger
related costs recognized in the fourth quarter of 1997, $4.7 million represent
exit costs for duplicate facility locations, systems consolidation, severance
arrangements and consolidation of corporate office functions. These exit costs
are reflected as a non-recurring restructuring charge in the Statement of
Operations. The balance of the merger related costs, $5.7 million, represent
investment banking, legal, accounting, printing and consulting costs related to
the transaction and are included in general and administrative expense as
required under the pooling-of-interests accounting method.
The following discussion and analysis relates to, and should be read in
conjunction with, the consolidated financial statements included elsewhere
herein. These financial statements give retroactive effect to the Sterling
Merger consummated on October 23, 1997, which has been accounted for as a
pooling-of-interests. See "Index to Consolidated Financial Statements."
YEARS ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Operating Revenue. Operating revenues for the year ended December 31, 1997
were $130.7 million representing an increase of $75.1 million, or 135%, from
the $55.6 million for the comparable 1996 period. Substantially all of this
increase resulted from the addition of newly constructed residences, the
acquisition of Crossings in May 1996 and other acquisitions. The Company
operated 223 residences at December 31, 1997 compared to 136 residences at
December 31, 1996.
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Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1997 increased to $81.6 million from $36.0 million for the
comparable 1996 period primarily as a result of an increase in the number of
residences operated during the 1997 period. Operating expense as a percentage
of operating revenue for the year ended December 31, 1997 and 1996 was 62.4%
and 64.7%, respectively.
Lease Expense. Lease expense for the year ended December 31, 1997 was $25.5
million, compared to $9.0 million in the comparable period in 1996. Such
increase was attributable to the acquisition of Crossings residences in May
1996, 13 residences of which are leased, the sale/leaseback of 12 residences in
December 1996 and utilization of sale/leaseback financing totaling $160.7
million during 1997.
General and Administrative Expense. General and administrative expenses for
the year ended December 31, 1997 were $16.5 million, before Sterling Merger
related charges of $5.7 million, compared to $11.1 million for the comparable
1996 period. General and administrative expense, before Sterling Merger
related charges, as a percentage of operating revenue declined from 20% in the
year ended December 31, 1996 to 13% in the year ended December 31, 1997. The
increase in general and administrative expenses was primarily attributable to
salaries, related payroll taxes and employee benefits for additional corporate
personnel retained to support the Company's rapid growth. The $5.7 million of
Sterling Merger costs represents investment banking, legal, accounting and
consulting costs related to the transaction. The Company expects that its
general and administrative expenses will continue to decrease as a percentage
of operating revenue as the Company grows and achieves additional economies of
scale.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1997 was $9.3 million, representing an increase of $5.0
million, or 120%, from $4.2 million for the comparable period in 1996. This
increase resulted primarily from depreciation of fixed assets and amortization
of pre-opening costs on the larger number of new residences that opened during
1997 and the fourth quarter of 1996. The Company amortizes pre-opening costs
over a twelve month period from the date the residence is available for
occupancy.
Non-recurring Charge. The Company recorded a $4.7 million non-recurring charge
related to the Sterling Merger. The non-recurring charge established reserves
for exit costs for duplicate facility locations, systems consolidation,
severance arrangements and consolidation of corporate office functions.
Interest Expense, and Interest Income. Interest expense, net of interest
income, was $3.9 million for the year ended December 31, 1997 compared to $3.2
million for the comparable period in 1996. Gross interest expense for the 1997
period was $13.4 million compared to $7.0 million for the 1996 period, an
increase of $6.4 million. This increase is primarily attributable to the
issuance of the 7% Convertible Subordinated Debentures due 2004 (the "7%
Debentures") in May 1997, the issuance of the 6.75% Debentures in May 1996 and
an increase in the amount of construction financing used in the 1997 period as
compared to the 1996 period. The Company capitalized $6.7 million of interest
expense in the 1997 period compared to $1.9 million in the comparable 1996
period due to increased construction activity in 1997. Construction in progress
was $114.3 million at December 31, 1997 compared to $53.1 million at December
31, 1996. Interest income for the 1997 period was $2.8 million as compared to
$1.9 million for the 1996 period. This increase was primarily due to the
investment of the proceeds received from the 7% Debentures issued in May
1997.
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the year ended December 31, 1997 was
$8.4 million, representing an increase of $8.4 million from $76,000 for the
comparable period in 1996. The increase was primarily attributable to the
increase in the number of residences owned by the Company with joint venture
partners. During 1997, the Company had 39 residences held in consolidated
joint venture relationships compared to one residence held in a consolidated
joint venture relationship during 1996.
Net Loss. As a result of the foregoing, the net loss for the year ended
December 31, 1997 was $8.3 million compared to a net loss of $8.8 million for
the comparable period in 1996.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Operating Revenue. Operating revenues for the year ended December 31, 1996
were $55.6 million, representing an increase of $40.5 million, or 269%, from
$15.1 million for 1995, due to the increased number of residences operated
during 1996. Substantially all of this increase resulted from newly
constructed residences and acquisitions. The Company operated 136 residences at
December 31, 1996 compared to 37 residences at December 31, 1995.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1996 were $36.0 million representing an increase of $27.3 million,
or 313%, from $8.7 million for 1995. The increase primarily resulted from the
increased number of residences operated during the 1996 period. Operating
expenses as a percentage of operating revenue for the year ended December 31,
1996 and 1995 was 64.7% and 57.6%, respectively.
Lease Expense. Lease expense for the year ended December 31, 1996 was $9.0
million, representing an increase of $8.1 million from $944,000 for 1995. Such
increase was primarily attributable to the increased utilization of
sale/leaseback financing during 1996, including the acquisition of 15 Crossings
residences in May 1996, 13 of which residences were financed under
sale/leaseback arrangements. The Company completed $91.0 million of
sale/leaseback transactions in 1996.
General and Administrative. General and administrative expenses for year ended
December 31, 1996 were $11.1 million, representing an increase of $5.2 million,
or 88%, from $5.9 million for 1995. The increase in expenses was primarily
attributable to salaries, related payroll taxes and employee benefits relating
to additional corporate personnel retained to support the Company's growth
strategy.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 was $4.2 million, representing an increase of $2.9
million, or 231%, from $1.3 million for 1995. This increase resulted primarily
from a greater number of new openings during 1996 and related amortization of
pre-opening costs.
Non-Recurring Charge. The Company recorded a non-recurring charge of $976,000
in 1996 related to the acquisitions of Heartland and Crossings. The charge
related to the establishment of a reserve for the costs associated with the
physical downsizing of the Crossings corporate office and employee separation
costs at Crossings and Heartland. In 1996, the Company applied costs of
$166,000 against this reserve primarily related to employee separation costs.
Through December 31, 1997, the Company has applied additional costs totaling
$600,000 against the reserve. The Company believes that the provisions for the
non-recurring charge continue to be adequate and will not require material
adjustment in future periods.
Interest Expense and Interest Income. Interest expense, net of interest
income, was $3.2 million for the year ended December 31, 1996 compared to $1.0
million for the year ended December 31, 1995. Gross interest expense in 1996
was $7.0 million as compared to $1.8 million in 1995, an increase of $5.2
million. This increase was primarily attributable to the issuance of the 6.75%
Debentures in May 1996, the bridge financing incurred in January 1996 to
finance the Heartland acquisition, an increase in mortgage financing of
existing residences in 1996 compared to 1995, and increased construction
financing in 1996 compared to 1995. The Company capitalized $1.9 million of
interest expense in 1996 compared to $407,000 in 1995, reflecting the increased
construction activity in 1996. Construction in progress was $53.1 million at
December 31, 1996 compared to $8.4 million at December 31, 1995. Interest
income for 1996 was $1.9 million as compared to $439,000 for 1995. This
increase was primarily due to the investment of proceeds received from the
Company's initial public offering and the issuance of the 6.75% Debentures,
both of which occurred in 1996.
Equity in Losses of Unconsolidated Affiliates. Equity in net losses from
investments in unconsolidated affiliates was $52,000 for the year ended
December 31, 1996, representing a decrease of $664,000, or 93%, from equity in
losses of unconsolidated affiliates of $716,000 in 1995. These losses were
primarily
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attributable to the Company's investment in five Michigan residences and losses
of unconsolidated affiliates of Sterling, all of which were acquired and
consolidated in late 1995 and 1996.
Net Loss. As a result of the foregoing, the net loss for l996 was $8.8 million
compared to $l.8 million for 1995, an increase of $7.0 million.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1997, 1996 and 1995, the Company experienced
cash flow deficits from operations of $141,000, $1.7 million and $1.3 million,
respectively. These cash flow deficits were primarily a result of the
Company's significant development of new residences, which typically incur cash
flow deficits during the lease-up period and general and administrative
expenses necessary to support the Company's early growth. In 1997, the cash
flow deficit was also caused by restructuring and transaction costs of
approximately $4 million which were expended to effect the Sterling Merger.
During the year ended December 31, 1997, the Company raised approximately $454
million of financing. Financing was provided by $48.0 million in net proceeds
from the May 1997 offering of the 7% Debentures, a concurrent offering of 5.25%
Convertible Subordinated Debentures due 2002 (the "5.25% Debentures") and
common stock in December 1997 which provided net proceeds of $121.8 million and
$60.7 million, respectively, $160.7 million of sale/leaseback financing, $14.6
million of secured bridge loan financing incurred in advance of anticipated
sale/leaseback transactions involving the encumbered residences, $23.8 million
of net additional construction and permanent loan financing, $8.0 million of
unsecured short-term financing, $10 million in short-term financing to be paid
off as construction is completed on six residences pursuant to a sale/leaseback
agreement, $6.4 million of minority partner contributions and cash from
operations. In addition, the Company assumed existing debt of $21.6 million
and $7.6 million of financing under an operating lease on four properties
acquired in 1997.
The above financing was used to fund $293.2 million in construction and
development activity, $23.2 million in acquisition activity, $5.6 million in
joint venture minority interest buy-outs, $91.6 million in investment
purchases, and operating cash flow deficits. The remaining $40.4 million of
financing resulted in an increase in cash and cash equivalents at year end.
In December 1997, the Company completed the offering of $125 million of the
5.25% Debentures and 2,800,000 shares of common stock (together, the
"Concurrent Offering"). Net proceeds to the Company from the Concurrent
Offering totaled $182.5 million. In January 1998, overallotment options were
exercised by the underwriters of the Concurrent Offering resulting in
additional net proceeds to the Company of $27.5 million. Due to the Concurrent
Offering proceeds received in December 1997, the Company had working capital of
approximately $129.5 million at December 31, 1997, compared to working capital
of $20.5 million at December 31, 1996.
On November 21, 1997, the Company completed a sale/leaseback transaction
totaling $62 million of which (i) $41 million was used to repay secured bridge
loan financing outstanding, $6.0 million of which was classified as short-term,
(ii) $14 million was held in escrow to fund construction in progress on six
residences and (iii) $5 million was available to fund future development
activities. This transaction involved the sale and immediate leaseback by the
Company of 24 residences having an aggregate capacity of 775 residents.
Giving effect to the Sterling Merger, the Company's earnings were inadequate to
cover fixed charges by $23.2 million for the year ended December 31, 1997 and
$10.7 million for the year ended December 31, 1996. The Company expects that
its earnings will not be sufficient to cover its fixed charges in future
periods. Accordingly, the Company may have to incur additional indebtedness in
the future to cover its fixed charges.
To achieve its growth objectives, the Company will need to obtain sufficient
financing to fund its development, construction and acquisition activities.
This need for financing has increased substantially due to the Sterling Merger.
The Company has plans to develop approximately $400 million of residences
through the end of 1998. Historically, the Company has financed its
development program and acquisitions
18
20
through a combination of various forms of real estate financing (mortgage and
sale/leaseback financing), capital contributions from joint venture partners
and the sale of its securities. The Company currently has executed non-binding
letters of intent with various health care REITs for financing commitments
aggregating approximately $548 million, $292 million of which has been utilized
by the Company through December 31, 1997. In addition, the Company has
obtained $130 million of commitments from conventional financing lenders for
the purpose of providing permanent financing on stabilized residences. As of
December 31, 1997, $8 million of this conventional financing has been utilized.
In addition to financing construction and development costs, the Company will
require capital resources to meet its operating and working capital needs
incurred primarily through the start-up and lease-up phases of new residences.
The Company believes that its cash on hand, financing under these commitments
and other financing that the Company expects to be able to access and equity
contributions from its joint venture development partners, will be sufficient
to fund its growth strategy for the next 14 months.
A lack of funds may require the Company to delay or eliminate all or some of
its development projects and acquisition plans. In addition, the Company may
require additional financing to enable it to acquire additional residences, to
respond to changing economic conditions, to expand the Company's development
program or to account for changes in assumptions related to its development
program. There can be no assurance that any newly constructed residences will
achieve a stabilized occupancy level and attain a resident mix that meet the
Company's expectations or generate sufficient positive cash flow to cover
operating and financing costs associated with such residences. There can be no
assurance that the Company will be successful in securing additional financing
or that adequate funding will be available and, if available, will be on terms
that are acceptable to the Company.
The Company is obligated under its joint venture arrangements to purchase the
equity interests of its joint venture partners upon the election of such
partners upon agreed upon terms and conditions. See "Business -Joint Ventures
and Strategic Alliances." Within the next twelve months, the Company will
become subject to such contingent purchase obligations with respect to equity
interests held by joint venture partners, exercisable at their election,
related to certain of the Company's residences. At such times as such
contingent purchase obligations are exercisable, the Company may also elect to
exercise its rights to purchase such interests. Based on a number of
assumptions, including assumptions as to the number of residences to be
developed with joint venture partners, the timing of such development, the time
at which such options will be exercised and the fair market value of such
residences at the date such options are exercised, the Company estimates that
it may require approximately $25 million to $30 million to satisfy these
purchase obligations during 1998.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company. Inflation
could, however, affect the Company's results of operations due to the Company's
dependence on its senior resident population who rely on liquid assets and
relatively fixed incomes to pay for the Company's services. As a result, the
Company may not be able to increase residence service fees to account fully for
increased operating expenses. In structuring its fees, the Company attempts to
anticipate inflation levels, but there can be no assurance that the Company
will be able to anticipate fully or otherwise respond to any future
inflationary pressures. In addition, given the significant amount of
construction and development activity which the Company anticipates,
inflationary pressures could affect the Company's cost of new product
deployment and financing. There can be no assurances that financing will be
available on terms acceptable to the Company.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits rather
than four to define the applicable year, any of the Company's computer systems
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000 (the so-called "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
19
21
The Company is in the process of evaluating its computer systems to determine
what modification (if any) are necessary to make such systems compatible with
the year 2000 requirements. However, because many of the Company's computer
systems have been put into service within the last several years, or are
currently being replaced with year 2000 compliant systems, the Company does not
expect any such modifications to have a material adverse effect on the
Company's consolidated financial position or results of operations. There can
be no assurance, however, that the computer systems of other companies on which
the Company's systems rely will be timely modified, or that a failure to modify
such systems by another company, or modifications that are incompatible with
the Company's systems, would not have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES:
Independent Auditors' Report.................................................................................... 21
Consolidated Balance Sheets, as of December 31, 1997 and 1996................................................... 22
Consolidated Statements of Operations for Years Ended December 31, 1997, 1996 and 1995.......................... 23
Consolidated Statements of Changes in Stockholders' Equity for Years Ended December 31,
1997, 1996 and 1995............................................................................................. 24
Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996 and 1995.......................... 25
Notes to Consolidated Financial Statements...................................................................... 26-38
20
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alternative Living Services, Inc.:
We have audited the accompanying consolidated balance sheets of Alternative
Living Services, Inc. and subsidiaries (the Company) as of December 31, 1997
and 1996, and the related consolidated statements of operations, changes in
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 consolidated 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 consolidated financial position of the
Company at December 31, 1997 and 1996, and the consolidated results of its
operations and 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
Chicago, Illinois
February 17, 1998
21
23
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 79,838 $ 39,455
Short-term investments.................................. 90,000 --
Accounts receivable:
Trade.................................................. 6,120 2,032
Construction due from REIT............................. 439 3,848
Other.................................................. 1,213 143
Pre-opening costs, net of amortization.................. 5,785 2,688
Other current assets.................................... 15,438 4,198
-------- --------
Total current assets................................. 198,833 52,364
-------- --------
Property and equipment, net............................... 323,613 132,922
Long-term investments..................................... 4,435 2,835
Investments in and advances to unconsolidated affiliates.. 1,607 1,649
Goodwill, net............................................. 5,380 5,216
Other assets.............................................. 19,684 9,367
-------- --------
Total assets......................................... $553,552 $204,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations........... $ 2,677 $ 985
Short-term notes payable................................ 18,900 8,335
Accounts payable........................................ 20,645 11,771
Accrued expenses........................................ 21,603 7,579
Deferred rent and refundable deposits................... 5,480 3,162
-------- --------
Total current liabilities................................. 69,305 31,832
-------- --------
Long-term obligations, less current installments.......... 108,069 33,625
Convertible debt.......................................... 210,000 35,000
Deferred gain............................................. 12,421 6,944
Minority interest......................................... 9,860 5,888
Stockholders' equity:
Common stock............................................ 214 185
Additional paid-in capital.............................. 165,206 104,139
Accumulated deficit..................................... (21,523) (13,260)
-------- --------
Total stockholders' equity........................... 143,897 91,064
-------- --------
Total liabilities and stockholders' equity........... $553,552 $204,353
======== ========
See accompanying notes to consolidated financial statements.
22
24
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
--------------- --------------- ---------------
Revenue:
Resident service fees.......................... $128,856 $54,210 $11,981
Other.......................................... 1,888 1,427 3,080
-------- ------- -------
Operating revenue................................. 130,744 55,637 15,061
-------- ------- -------
Operating expenses:
Residence operations........................... 81,558 35,977 8,717
Lease expense.................................. 25,524 9,035 944
General and administrative..................... 22,168 11,143 5,890
Depreciation and amortization.................. 9,271 4,223 1,275
Non-recurring charge........................... 4,656 976 --
-------- ------- -------
Total operating expenses.................... 143,177 61,354 16,826
-------- ------- -------
Operating loss.................................... (12,433) (5,717) (1,765)
Other income (expense):
Interest expense, net.......................... (3,932) (3,231) (984)
(Loss) gain on sale of assets.................. (29) -- 439
Equity in losses of unconsolidated affiliates.. (226) (52) (716)
Other (expense) income......................... (83) (31) 40
Minority interest in losses of consolidated
subsidiaries.................................. 8,440 76 160
-------- ------- -------
Total other income (expense), net........... 4,170 (3,238) (1,061)
-------- ------- -------
Loss before income taxes.......................... (8,263) (8,955) (2,826)
Income tax benefit................................ -- (159) (991)
-------- ------- -------
Loss before extraordinary item.................... (8,263) (8,796) (1,835)
Extraordinary item - loss from early retirement
of financing agreements.......................... -- -- (1,176)
-------- ------- -------
Net loss.................................... $ (8,263) $(8,796) $(3,011)
======== ======= =======
Basic loss per common share:
Loss before extraordinary item................. $ (0.44) $ (0.57) $ (0.24)
Extraordinary item............................. -- -- (0.15)
-------- ------- -------
Basic and diluted net loss per common share....... $ (0.44) $ (0.57) $ (0.39)
======== ======= =======
Weighted average common shares outstanding........ 18,651 15,429 7,782
======== ======= =======
See accompanying notes to consolidated financial statements.
23
25
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL
---------------------
ACCUMULATED
SHARES AMOUNTS DEFICIT TOTAL
------ ------- ----------- ------
BALANCES AT DECEMBER 31, 1994.................. 4,323 $ 5,219 $ (1,453) $ 3,766
Proceeds from issuance of common stock......... 2,403 21,786 -- 21,786
Shares issued in connection with acquisitions.. 529 5,408 -- 5,408
Shares issued - termination fee................ 97 988 -- 988
Net proceeds from private placement............ 4,303 19,029 -- 19,029
Retirement of stock held by minority
stockholder................................... (381) (2,500) -- (2,500)
Common stock issued for contributed capital.... 917 -- -- --
Net loss....................................... -- -- (3,011) (3,011)
------ -------- -------- --------
BALANCES AT DECEMBER 31, 1995.................. 12,191 49,930 (4,464) 45,466
Proceeds from issuance of common stock......... 3,873 41,648 -- 41,648
Shares issued in connection with acquisitions.. 2,483 12,877 -- 12,877
Purchase and retirement of common stock........ (12) (163) -- (163)
Shares issued - options exercised.............. 4 32 -- 32
Net loss....................................... -- -- (8,796) (8,796)
------ -------- -------- --------
BALANCES AT DECEMBER 31, 1996.................. 18,539 104,324 (13,260) 91,064
Proceeds from issuance of common stock......... 2,800 60,744 -- 60,744
Shares issued - options exercised.............. 52 352 -- 352
Net loss....................................... -- -- (8,263) (8,263)
------ -------- -------- --------
BALANCES AT DECEMBER 31, 1997.................. 21,391 $165,420 $(21,523) $143,897
====== ======== ======== ========
See accompanying notes to consolidated financial statements.
24
26
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
---------------- -------------- -------------
Cash flows from operating activities:
Net loss.................................................................. $ (8,263) $ (8,796) $ (3,011)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 9,271 4,223 1,275
Loss (gain) on sale of assets............................................. 29 -- (439)
Income tax benefit........................................................ -- (159) (991)
Equity in net loss from investments in unconsolidated affiliates.......... 226 52 716
Minority interest in losses of consolidated subsidiaries.................. (8,440) (76) (160)
Loss on early retirement of financing agreement........................... -- -- 676
Stock option compensation................................................. -- -- 412
(Increase) decrease in trade accounts receivable.......................... (4,333) (1,293) 170
Increase in pre-opening costs............................................. (3,097) (2,688) --
Increase in other current assets.......................................... (7,899) (782) (359)
Increase (decrease) in accounts payable................................... 7,486 (344) 1,054
Increase in accrued expenses.............................................. 8,583 4,397 269
Increase in accrued merger charges........................................ 5,863 -- --
Changes in other assets and liabilities, net.............................. 433 3,777 (897)
--------- -------- --------
Net cash used in operating activities....................................... (141) (1,689) (1,285)
--------- -------- --------
Cash flows from investing activities:
Payments for property, equipment and project development costs............ (294,153) (115,711) (24,616)
Construction receivable due from REIT..................................... -- (3,848) --
Net proceeds from sale of property and equipment.......................... 2,188 -- 1,102
Acquisitions of affiliates and facilities, net of cash.................... (23,189) (9,998) (1,011)
Changes in investments in and advances to unconsolidated affiliates....... (1,148) (252) (4,894)
Purchase of limited partnership interests................................. (5,590) -- --
Increase in long-term investments......................................... (1,600) (1,663) (1,183)
Increase in short-term investments.......................................... (90,000) -- --
--------- -------- --------
Net cash used in investing activities....................................... (413,492) (131,472) (30,602)
--------- -------- --------
Cash flows from financing activities:
Repayments of short term borrowings....................................... (34,335) (13,844) (5,782)
Repayments of long-term obligations....................................... (53,887) (39,626) (14,020)
Proceeds from issuance of debt............................................ 145,943 39,612 23,700
Proceeds from issuance of convertible debt................................ 175,000 35,000 --
Payments for financing costs.............................................. (7,131) (1,602) (221)
Proceeds from sale/leaseback transactions................................. 160,748 91,034 8,118
Issuance of common stock and other capital contributions.................. 61,285 41,648 40,815
Contributions by minority partners and minority stockholders.............. 6,393 -- 1,275
Retirement of stock held by minority stockholders......................... -- -- (2,500)
--------- -------- --------
Net cash provided by financing activities................................... 454,016 152,222 51,385
--------- -------- --------
Net increase in cash and cash equivalents................................... 40,383 19,061 19,498
--------- -------- --------
Cash and cash equivalents:
Beginning of period....................................................... 39,455 20,394 896
--------- -------- --------
End of period............................................................. $ 79,838 $ 39,455 $ 20,394
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized..................... $ 11,660 $ 6,086 $ 1,494
========= ======== ========
Cash paid (received) during year for income taxes......................... $ 94 $ -- $ (13)
========= ======== ========
See accompanying notes to consolidated financial statements.
25
27
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT BUSINESS AND ACCOUNTING POLICIES
(A) BUSINESS
Alternative Living Services, Inc. (the "Company") develops, owns,
and operates assisted living residences. As of December 31, 1997,
the Company operated and managed 223 residences with approximate
capacity of 9,500 residents located throughout the United States.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Results of
operations of the majority-owned subsidiaries are included from
the date of acquisition. All significant intercompany balances
and transactions with such subsidiaries have been eliminated in
the consolidation. Investments in other affiliated companies in
which the Company has a minority ownership position are accounted
for on the equity method.
(C) USE OF ESTIMATES
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(D) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and
other transactions. This Statement requires that all items that
are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This Statement is required to be adopted
for fiscal years beginning after December 15, 1998.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This Statement establishes standards
for the way that public business enterprises report information
about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to
stockholders. It also establishes standards for related
disclosures about products and services geographic areas and major
customers. This statement is required to be adopted for fiscal
years beginning after December 15, 1998.
(E) CASH EQUIVALENTS
26
28
The Company considers all highly liquid investments with original maturities
of less than ninety days to be cash equivalents for purposes of the consolidated
financial statements. Also see footnote 13.
27
29
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company determines fair value of financial assets based on
quoted market values. The fair value of debt is estimated based
on quoted market values, where available, or on current rates
offered to the Company for debt of the same maturities.
The Company's financial instruments exposed to concentrations of
credit risk consist primarily of cash and short-term investments.
The Company places its funds into high credit quality financial
institutions and, at times, such funds may be in excess of the
Federal Depository Insurance Corporation limits.
(G) LONG-LIVED ASSETS
Property and equipment are stated at cost, net of accumulated
depreciation. Property and equipment under capital leases are
stated at the present value of minimum lease payments.
Depreciation is computed over the estimated lives of the assets
using the straight-line method. Buildings and improvements are
depreciated over 20 to 40 years, and furniture, fixtures, and
equipment are depreciated over three to seven years. Maintenance
and repairs are expensed as incurred.
Goodwill represents the costs of acquired net assets in excess of
their fair market values. Amortization of goodwill is computed
using the straight-line method over the expected periods to be
benefited, generally 40 years. The Company's management
periodically evaluates goodwill for impairment based upon
expectations of nondiscounted operating cash flows in relation to
the net capital investment in the entity. Accumulated
amortization of goodwill was $314,264 and $163,000 as of December
31, 1997 and 1996, respectively.
(H) DEFERRED COSTS AND PRE-OPENING COSTS
Deferred costs, which are included in other assets, are composed
of organization costs and deferred financing costs. Organization
costs are amortized on a straight-line basis over five years.
Deferred financing costs are amortized using the
effective-interest method over the term of the related debt.
Pre-opening costs are amortized over 12 months from the date a
residence is available for occupancy.
(I) REVENUE
Revenue, which is recorded when services are rendered, consists
primarily of resident service fees which are reported at net
realizable amounts. Other revenue consists primarily of
management fees and franchise fees which are charged to
unconsolidated affiliates and third parties. Those fees are
recognized as earned in accordance with signed agreements and reported
at net realizable amounts.
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the expected future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(K) NET LOSS PER COMMON SHARE
28
30
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share. The Company adopted this standard, as
required, for its December 31, 1997 financial statements. For the
years presented, the Company presents both basic and diluted
earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that
could occur if common stock equivalents were exercised and then
shared in the earnings of the Company. For all periods presented,
common stock equivalents in the form of stock options and
convertible debentures would be anti-dilutive. As such, per the
requirements of SFAS No. 128, basic and diluted earnings per share
are the same amount.
(L) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995
financial statements to conform with the 1997 presentation.
(2) BUSINESS COMBINATIONS AND ACQUISITIONS
Alternative Living Services, Inc. merged with Sterling House Corporation
("Sterling") on October 23, 1997 (the "Sterling Merger"). On that date,
the Company issued approximately 5,550,000 shares of its common stock in
exchange for approximately 5,045,000 shares of Sterling's common stock
then outstanding based on an exchange ratio of its shares of common stock
for each share of Sterling's common stock (the "Exchange Ratio").
The consolidated financial statements give retroactive effect to the
Sterling Merger, which has been accounted for using the
pooling-of-interests method; and as a result, the financial position,
results of operations and cash flows are presented as if the combining
companies had been consolidated for all periods presented. The
consolidated statements of stockholders' equity also reflect retroactive
combination of the accounts of the Company and Sterling for all periods
presented, with adjustments to outstanding shares based upon the Exchange
Ratio.
The consolidated financial statements, including the notes thereto,
should be read in conjunction with the historical consolidated financial
statements of the Company and Sterling included in their respective
Annual Reports on Forms 10-K dated March 31, 1997.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below (in thousands):
29
31
1996 1995
------------- -------------
Operating revenue:
Alternative Living Services, Inc......... $39,599 $10,464
Sterling House Corporation............... 16,038 4,597
------- -------
Combined............................ $55,637 $15,061
======= =======
Extraordinary loss:
Alternative Living Services, Inc......... $ -- $ --
Sterling House Corporation............... -- (1,176)
------- -------
Combined............................ $ -- $(1,176)
======= =======
Net loss:
Alternative Living Services, Inc.......... $(7,811) $(1,746)
Sterling House Corporation................ (726) (2,183)
Effect of restated income (taxes) benefit. (259) 918
------- -------
Combined............................ $(8,796) $(3,011)
======= =======
Basic and diluted loss per share:
Alternative Living Services, Inc.......... $ (0.79) $ (0.37)
Sterling House Corporation................ (0.14) (0.78)
------- -------
Combined............................ $ (0.57) $ (0.39)
======= =======
There were no transactions between the Company and Sterling prior to
the Sterling Merger.
In addition to the Sterling Merger, the Company completed the following
acquisitions in 1996 and 1997:
- Heartland Retirement Services, Inc., an operator of 20 assisted
living residences headquartered in Madison, Wisconsin in January
1996;
- New Crossings International Corporation, a company which
operated 15 assisted living facilities headquartered in Tacoma,
Washington in May 1996;
- The general and limited partnership interests in five Michigan
limited partnerships owned by unrelated investors in May 1996;
- The minority interests in three partnerships in May 1996;
- A residence the Company had previously leased in August 1996;
- A 45-unit assisted living facility located in Liberal, Kansas in
August 1996;
- Two residences the Company managed located in Brown Deer and
Sussex, Wisconsin in September 1996;
- Six assisted living residences located in northern Wisconsin in
December 1996;
- A residence under construction located in Mesa, Arizona in May 1997;
- A majority interest in two residences located in upstate New York in
May 1997;
- A leasehold interest in a residence located in upstate New York in
May 1997;
- The remaining ownership interests in four residences located in
central Wisconsin in June 1997;
- Two assisted living residences located in Nevada in June 1997;
30
32
- Two assisted living residences located in upstate New York in June
1997;
- A leasehold interest in three assisted living residences located in
Minnesota in September 1997;
- Two assisted living residences located in Colorado in September
1997 from a franchisee of the Company.
The cost of the 1996 acquisitions totaled $21.8 million and were
accounted for using the purchase method. In addition to cash, the
Company issued 2,482,589 shares of common stock with an estimated fair
value of $12.9 million, and incurred $11.6 million of debt to effect the
acquisitions. Goodwill related to the acquisitions of $4.9 million is
being amortized over 40 years.
Excluding the Sterling Merger, the aggregate purchase price for all 1997
acquisitions totaled $45 million, $22.2 million of which was paid in cash
and the remainder was debt assumed by the Company. All 1997 acquisitions
(other than the Sterling Merger) have been accounted for using the
purchase method.
(3) SHORT-TERM AND LONG-TERM INVESTMENTS
A summary of short-term and long-term investments at December 31, follows:
(IN THOUSANDS)
1997 1996
---------------- ---------------------
MARKET MARKET
COST VALUE COST VALUE
------- ------- ------ --------
Short-term investments:
Commercial paper, maturing 3/31/98,
yielding 5.50%-5.57%..................... $90,000 $90,000 $ -- $ --
======= ======= ====== ======
Long-term investments:
U.S. Treasury obligations and
certificates of deposit, maturing at
various times through 1999, restricted
as collateral for letters of credit
and debt service reserves................ $ 4,435 $ 4,435 $2,835 $2,835
======= ======= ====== ======
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, follows
(in thousands):
1997 1996
-------- ---------
Land and improvements.......................... $ 34,143 $ 11,389
Buildings and leasehold improvements........... 160,991 64,573
Vehicles, furniture, fixtures, and equipment... 23,702 9,143
Construction in progress....................... 114,277 53,127
-------- --------
Total property and equipment................... 333,113 138,232
Less accumulated depreciation.................. (9,500) (5,310)
-------- --------
Property and equipment, net................. $323,613 $132,922
======== ========
At December 31, 1997, property and equipment includes $9.0 million of
buildings and improvements and $251,623 of fixtures and equipment held
under capital leases and related financing obligations. Combined related
accumulated amortization totaled $1.4 million.
Interest is capitalized in connection with the construction of residences
and is amortized over the estimated useful lives of the residences.
Interest capitalized in 1997, 1996 and 1995 was approximately $6.7
million, $1.9 million and $407,000, respectively.
31
33
Construction in progress at December 31, 1997 and 1996 consisted
principally of costs related to the construction of assisted living
residences with outstanding construction commitments totaling
approximately $196.9 million and $72.8 million, respectively.
(5) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Investments in and advances to unconsolidated affiliates consist of the
following at December 31 (in thousands):
1997 1996
------ ------
Investments in unconsolidated affiliates........................ $ 345 $ 285
------ ------
Long-term advances to unconsolidated affiliates:
Partnerships................................................. $1,262 $1,089
Notes receivable............................................. -- 275
------ ------
Total advances to unconsolidated affiliates................. 1,262 1,364
------ ------
Total investments in and advances to unconsolidated
affiliates.................................................. $1,607 $1,649
====== ======
Advances to unconsolidated affiliates also includes management fees
pursuant to an agreement with an affiliate, which is 50% owned and
controlled by an officer and a stockholder. Under the terms of the
agreement, this affiliate is obligated to pay a monthly management fee of
5% of gross operating revenue. The management fee was 11% of gross
operating revenue for 1996. During 1997 and 1996, the management fees,
included in other revenue, were $78,000 and $195,000, respectively.
The Company was retained by certain of its affiliates as the general
contractor for the construction of residences for which the Company
received a fee for construction services. The Company earned $803,000 in
construction management fees related to this arrangement in 1995, which
is included in other revenue.
Notes receivable at December 31, 1996 included $200,000 due from an
officer and a stockholder of the Company, which accrued interest at 6%
and was payable in full on December 30, 1999. The note was repaid during
1997.
(6) OTHER ASSETS
Other assets are comprised of the following at December 31 (in
thousands):
1997 1996
------- ------
Deferred financing costs, net........ $ 9,123 $2,443
Organizational and other costs, net.. 1,087 1,982
Deposits and other................... 9,474 4,942
------- ------
Total other assets................... $19,684 $9,367
======= ======
(7) LONG-TERM DEBT, CAPITAL LEASES, AND FINANCING OBLIGATIONS
Long-term debt, capital leases, and financing obligations consist of the
following at December 31 (in thousands):
32
34
1997 1996
-------- --------
5.25% convertible subordinated debentures due December
15, 2002, callable by the Company on or after December
31, 2000.................................................... $125,000 $ --
7.00% convertible subordinated debentures due June 1,
2004, callable by the Company on or after June 15,
2000........................................................ 50,000 --
6.75% convertible subordinated debentures due June 30,
2006, callable by the Company on or after July 15, 1999..... 35,000 35,000
-------- --------
Total convertible debt................................. 210,000 35,000
-------- --------
Mortgages payable, due from 1999 through 2021;
weighted average interest rates of 9.0%..................... 66,564 18,571
Sale/leaseback financing obligation, variable interest
at the 11th District FHLB rate plus 2-3/4%, payable in
monthly installments, due 2000.............................. 4,503 4,779
Serial and term revenue bonds maturing serially from
1995 through 2013, interest ranging from 4.0% to 9.5%....... 9,185 4,710
Secured construction loan financing at 10% interest
funded in advance of anticipated sale/leaseback
transactions................................................ 29,364 --
Sale/leaseback financing obligation, fixed interest
rates of 8% to 10.9%........................................ -- 5,954
Other....................................................... 1,130 596
-------- -------
Total long-term obligations............................. 320,746 69,610
Less current installments................................... 2,677 985
-------- -------
Total long-term obligations, less current installments.. $318,069 $68,625
======== =======
The mortgages payable are secured through security agreement and
guarantees by the Company. In addition, certain security agreements
require the Company to maintain collateral and debt reserve funds. These
funds, which are recorded as long-term investments, consist of
certificates of deposit required to be maintained from 1998 through 2002.
At December 31, 1997, the Company has outstanding $17.2 million of
mortgage notes payable and $4.7 million of serial and term revenue bonds
that were assumed in conjunction with noncash acquisition activities in
1997.
Principal payments on long-term debt, capital leases, and financing
obligations for the next five years and thereafter are as follows (in
thousands):
1998.............................................. $ 2,677
1999.............................................. 9,877
2000.............................................. 28,345
2001.............................................. 4,750
2002.............................................. 131,515
Thereafter........................................ 143,582
--------
Total long-term debt, capital leases, and financing obligations $320,746
========
(8) ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31 (in
thousands):
33
35
1997 1996
-------- ------
Accrued salaries and wages.. $ 5,879 $2,995
Accrued merger costs........ 6,672 809
Other....................... 9,052 3,775
------- ------
Total accrued expenses...... $21,603 $7,579
======== ======
(9) STOCKHOLDERS' EQUITY
The Company completed a private equity placement on May 26, 1995,
resulting in net proceeds of $19.0 million related to the sale of
4,302,994 shares of its common stock. Simultaneously, the Company issued
917,150 shares of its stock to Evergreen Healthcare Inc. as consideration
for $2.7 million of cash received during 1994, which is reflected as
common stock and additional paid-in capital in the accompanying
consolidated balance sheets. Subsequent to the issuance of stock in May
1995, the Company was no longer a majority-owned subsidiary of Evergreen.
In October 1995, the Company (through Sterling) completed a public
offering of 2,403,500 shares of common stock. Net proceeds to the
Company were approximately $22.0 million.
In August 1996, the Company completed a public offering of 6,000,000
shares of common stock, of which 3,443,206 shares were sold by the
Company and 2,556,794 shares were sold by existing stockholders. Net
proceeds to the Company were approximately $40.0 million.
In December 1997, the Company completed a secondary public offering of
2,800,000 shares of common stock. Net proceeds to the Company were
approximately $61.0 million.
The authorized capital stock of the Company consists of 30,000,000 shares
of common stock, $.01 par value, and 5,000,000 shares of $.01 par value
preferred stock. At December 31, 1997, there were 21,402,159 shares of
common stock issued, of which 21,390,520 were outstanding with 11,639
shares held in treasury. At December 31, 1996 there were 18,550,855
shares of common stock issued of which 18,539,216 were outstanding with
11,639 shares held in treasury. At December 31, 1997 and 1996, no shares
of preferred stock were issued and outstanding.
(10) STOCK OPTION PLAN
In 1995, the Company adopted a stock option plan (the "1995 Plan"),
pursuant to which the Company's Board of Directors may grant stock
options to officers and key employees. The 1995 Plan authorizes grants
of options to purchase up to 1,425,000 shares of authorized but unissued
common stock. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant. Generally, stock
options have 10-year terms, vest 25% per year, and become fully
exercisable after 4 years from the date of grant.
At December 31, 1997, 562,326 shares were available for grant under the
1995 Plan. The per share weighted-average fair value of stock options
granted during 1997 and 1996 was $7.25 and $3.49, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 - expected dividend yield
0.0%, risk free interest rate of 5.6%, and an expected life of 7 years;
1996 - expected dividend yield 0.0%, risk-free interest rate of 6.5%, and
an expected life of 7 years.
In conjunction with the Sterling Merger, Sterling stock options that were
outstanding were exchanged for options to purchase the Company's common
stock, adjusted for the Exchange Ratio. Under the terms of the Sterling
House Corporation 1995 Incentive Stock Option Plan, all options became
vested and immediately exercisable as a result of the Sterling Merger.
For financial reporting, the Company applies the intrinsic value method
of APB Opinion No. 25 in accounting for stock options and, accordingly,
compensation cost has been recognized only for stock options granted
below fair market value. Had the Company determined compensation cost
based on the fair value method prescribed by SFAS No. 123 for stock
options granted in 1997 and 1996, the
34
36
Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below, (in thousands, except per share
data):
NET LOSS NET LOSS PER SHARE
-------------------- --------------------
1997 1996 1997 1996
---------- -------- --------- ---------
As reported ....... $ (8,263) $(8,796) $(0.44) $(0.57)
Pro forma ......... $(10,267) $(9,391) $(0.55) $(0.61)
Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Balance at December 31, 1995.. 550,783 $5.13
Granted....................... 444,194 11.29
Exercised..................... (4,219) (0.09)
Forfeited..................... (9,545) (13.88)
Expired....................... -- --
--------- -------
Balance at December 31, 1996.. 981,213 $7.74
Granted....................... 300,132 15.10
Exercised..................... (52,000) (7.08)
Forfeited..................... (41,944) (11.71)
Expired....................... -- --
--------- -------
Balance at December 31, 1997.. 1,187,401 $9.43
========= =======
RANGE OF NUMBER AVERAGE WTD.-AVG. NUMBER WTD.-AVG.
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
---------- ------------ ---------------- -------- ------------ ---------
$0.09 30,088 7.8 years $ 0.09 30,088 $ 0.09
2.92 - 13.00 650,538 7.0 years 6.23 295,901 5.42
7.50 - 21.59 361,259 8.3 years 12.95 361,259 12.95
13.01 - 25.56 145,516 9.5 years 16.93 1,381 11.75
--------- --------- ------ ------- ------
Total 1,187,401 7.7 years $ 9.43 688,629 $ 9.15
========= ========= ====== ======= ======
(11) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 (in thousands) are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
Income tax expense (benefit):
Current:
Federal...................... $ 726 $ -- $ --
State........................ 200 -- --
------- ------- -------
Total current................ 926 -- --
Deferred:
Federal...................... (726) (141) (882)
State........................ (200) (18) (109)
------- ------- -------
Total deferred............... (926) (159) (991)
------- ------- -------
Total........................ $ -- $(159) $(991)
======= ======= =======
Deferred tax assets and liabilities consist of the following at December
31 (in thousands):
35
37
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards.................... $ 1,339 $ 2,397
Investment in unconsolidated affiliates............. -- 104
Deferred gain sale/leaseback........................ 4,856 2,887
Accrued expenses.................................... 2,844 619
Investment in consolidated affiliates............... 1,359 1,566
Other............................................... 39 303
------- -------
Total deferred tax assets................................ 10,437 7,876
------- -------
Less valuation allowance............................ (6,816) (4,879)
------- -------
Deferred tax assets, net of valuation allowance.......... $ 3,621 $ 2,997
======= =======
Deferred tax liabilities:
Acquisition basis................................... $ 1,736 $ 1,736
Depreciation........................................ 959 789
Deferred costs...................................... -- 472
------- -------
Deferred tax liabilities................................. $ 2,695 $ 2,997
======= =======
The valuation allowance for deferred tax assets as of December 31, 1997
and 1996 was $6.8 million and $4.9 million, respectively. During 1997,
the valuation allowance was increased by $1.9 million because the Company
was uncertain that such deferred tax assets in excess of the applicable
reversing deferred tax liabilities would be realized in future years. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. As a result of acquisitions during 1996,
subsequent recognition of $537,000 of tax benefits relating to the
valuation allowance for deferred tax assets will be allocated to
goodwill. The net deferred tax asset is included in other current assets
in the accompanying consolidated balance sheets.
The effective tax rate on income before income taxes varies from the
statutory Federal income tax rate as follows:
1997 1996 1995
------- ------- -------
Statutory rate.......... (34.0)% (34.0)% (34.0)%
State taxes, net........ (5.5) (5.5) (5.5)
Valuation allowance..... 39.5 38.4 2.9
Other.................. -- 2.8 1.6
----- ----- -----
Effective tax rate. 0.0% (1.7)% (35.0)%
===== ===== =====
The Company has approximately $3.4 million of tax net operating loss
carryforwards at December 31, 1997. Any unused net operating loss
carryforwards will expire commencing in the year 2001 through 2009. The
utilization of net operating loss carryforwards may be further limited as
to future use due to the change in control provisions in the Internal
Revenue Code.
(12) EXTRAORDINARY LOSS
During 1995, upon the completion of a public offering, the Company
terminated a certain loan commitment agreement with a REIT and paid an
aggregate termination fee of $1.5 million, of which $500,000 was paid in
cash and $988,000 by delivery of 87,823 shares of the Company's common
stock. The Company incurred an extraordinary pretax loss of $1.9 million
($1.2 million net of income taxes), which represents the termination cost
incurred by the Company related to the early extinguishment of the loan
commitment and the write-off of all unamortized financing costs as of the
completion of the public offering.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate that value:
36
38
Cash and cash equivalents:
The carrying amount approximates fair value because of the short maturity
of those instruments.
Short-term investments:
The carrying amount approximates fair value because of the short maturity
of those instruments.
Long-term investments:
The carrying amount approximates fair value because of the short maturity
of the underlying investments. Long-term investments are classified as
such because they are restricted as collateral for letters of credit and
debt service reserves.
Short-term notes payable, mortgage notes payable, convertible debentures
payable:
The carrying amount of short-term notes payable approximates fair value
because of the short maturity of those instruments.
The carrying amount of mortgage notes payable approximates fair value
because the stated interest rates approximate fair value.
The fair value of the Company's convertible debentures is estimated based
on quoted market prices. At December 31, 1997, the Company's convertible
debentures had a carrying value of $210 million. Based on the quoted
market prices at December 31, 1997, the fair value of those issues was
estimated to be $274.6 million.
(14) COMMITMENTS AND CONTINGENCIES
The Company has entered into sale/leaseback agreements with certain REITs
as a source of financing the development, construction, and to a lesser
extent, acquisitions of assisted living residences. Under such
agreements, the Company may enter into a series of sale/leaseback
transactions whereby each new residence is sold at its negotiated value
and the Company will enter into a lease agreement for such residence.
The initial terms of the leases vary from 10 to 15 years and include
aggregate renewal options ranging from 15 to 40 years. The Company is
responsible for all operating costs, including repairs, property taxes,
and insurance. All of these lease arrangements provide the Company with
a right of first refusal if the REIT were to seek to sell the property.
The annual minimum lease payments are based upon a percentage of the
negotiated sales value of each residence. The residences sold in the
sale/leaseback transactions are sold for an amount equal to or less than
their fair market value. The leases are accounted for as operating
leases with any applicable gain or loss realized in the initial sales
transaction being deferred and amortized into income in proportion to
rental expense over the initial term of the lease.
In addition to leased residences, the Company leases certain office space
and equipment under noncancelable operating leases from nonaffiliates
that expire at various times through 2017. Rental expense on all such
operating leases, including residences, for the years ended December 31,
1997, 1996, and 1995 was $25.5 million, $9.0 million, and $944,000,
respectively.
Future minimum lease payments for the next five years and thereafter
under noncancelable leases at December 31, 1997 are as follows (in
thousands):
37
39
CAPTIAL OPERATING
------- ---------
1998.............. $ 707 $ 41,569
1999.............. 718 41,624
2000.............. 4,354 41,680
2001.............. -- 41,127
2002................................................... -- 41,186
Thereafter............................................. -- 293,423
------ --------
Total minimum lease payments........................... 5,779 $500,609
========
Less amount representing interest...................... 1,276
------
Present value of net minimum capital lease payments.... 4,503
Less current portion................................... 137
------
Long-term capital lease obligations.................... $4,366
======
On November 11, 1997, the Company entered into a sale/leaseback agreement
with a health care REIT involving 24 residences. The total aggregate
amount financed for the 24 residences was approximately $62.4 million.
The transaction produced a gain of approximately $10.6 million, which
will be deferred and will be amortized over the lease period of 10 years.
During 1997, the Company entered into additional sale and leaseback
financing agreements with certain REITS for approximately $133 million
with financing terms similar to the arrangements described above. Any
gain or loss was deferred and will be amortized into income in proportion
to rental expense over the initial term of the lease.
The Company is required by certain REITs to obtain a letter of credit as
collateral for leased residences. Outstanding letters of credit at
December 31, 1997 and 1996 were $1.2 million for both years.
The Company is obligated under its joint venture arrangements to purchase
the equity interests of its joint venture partners based upon agreed upon
terms and conditions. Based on a number of assumptions, including
assumptions as to the number of residences to be developed with joint
venture partners, the timing of such development, the time at which such
options will be exercised and the fair market value of such residences at
the date such options are exercised, the Company estimates that it may
require approximately $25 million to $30 million to satisfy these
purchase obligations during 1998.
(15) SUBSEQUENT EVENTS
On January 2, 1998, the Company consummated the sale of an additional
$18.75 million aggregate principal amount of the 5.25% Debentures as a
result of the exercise by the underwriters of the over-allotment option
granted to them and, in connection therewith, the Company received net
proceeds (before deduction of expenses) of approximately $18.3 million.
On January 15, 1998, the Company consummated the sale of an
additional 420,000 shares of common stock as a result of the exercise by
the underwriters of the over-allotment option granted to them and, in
connection therewith, the Company received net proceeds (before deduction
of expenses) of approximately $9.2 million.
38
40
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL SUMMARY
(Unaudited)
(In thousands, except per share data)
QUARTER ENDED
--------------------------------------
12/31 9/31 6/30 3/31
-------- -------- -------- --------
1997
- --------------------------------------------
Operating revenues.......................... $41,640 $36,142 $29,262 $23,700
Operating loss.............................. (8,988) (271) (1,469) (1,705)
Net income (loss)........................... (8,342) 1,201 (127) (995)
Basic and diluted income (loss) per share... (0.44) 0.06 0.00 (0.06)
1996
- --------------------------------------------
Operating revenues.......................... $20,348 $17,262 $11,122 $ 6,905
Operating loss.............................. (1,180) (856) (2,029) (1,652)
Net loss.................................... (1,903) (2,207) (2,713) (1,973)
Basic and diluted loss per share............ (0.10) (0.13) (0.20) (0.15)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
39
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. The following documents are filed as part of the report:
(a) FINANCIAL STATEMENTS. The following financial statements of
the Registrant and the Report of Independent Public Accountants
therein are filed as part of this Report on Form 10-K:
Page
-----
Independent Auditor's Report................... 21
Consolidated Balance Sheets.................... 22
Consolidated Statements of Operations.......... 23
Consolidated Statements of Shareholders' Equity 24
Consolidated Statements of Cash Flows.......... 25
Notes to Consolidated Financial Statements..... 26-38
(b) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES. See Exhibit 11.1
of the Report.
(c) REPORTS ON FORM 8-K. The Registrant filed the following
reports with the Securities and Exchange Commission on Form 8-K
during the quarter ended December 31, 1997:
On November 6, 1997, the Company filed an amendment on Form
8-K/A to its Current Report on Form 8-K dated September 23,
1997 filed with the Commission on October 10, 1997, which
amendment reported under Item 2 thereof the consummation of
the Sterling Merger and reported under Item 5 thereof the
business and management of the Company as a result of such
consummation.
On December 2, 1997, the Company filed a Current Report on
Form 8-K dated November 21, 1997 reporting under Item 2
thereof the sale/leaseback transaction with respect to 24 of
the Company's facilities and reporting under Item 5 thereof
an estimate of the expenses expected to be incurred by the
Company in connection with the Sterling Merger. The report
included the following pro forma financial information:
(i) Alternative Living Services, Inc., Unaudited
Pro Forma Condensed Consolidated Balance Sheet
at September 30, 1997;
(ii) Alternative Living Services, Inc. Unaudited Pro
Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 1997;
(iii) Alternative Living Services, Inc. Unaudited Pro
Forma Condensed Combined Statement of
Operations for the year ended December 31,
1996; and
(iv) Unaudited Pro Forma Notes to Consolidated
Financial Statements.
(b) EXHIBITS. The following exhibits are filed as part of, or
incorporated by reference into this report on Form 10-K:
40
42
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-04595,
filed with the Commission on July 30, 1996 (the "Form S-1")).
3.2 Certificate of Merger, dated May 24, 1996 (incorporated herein by
reference to Exhibit 3.1 to the Registrant's Registration Statement
on Form S-3, Registration No. 333-37737, filed with the Commission
on October 14, 1997 (the "Form S-3")).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation, dated August 1, 1996 (incorporated herein by
reference to Exhibit 3.2 to the Form S-3).
3.4 Restated Bylaws of the Registrant (incorporated herein by reference
to Exhibit 3.4 to the Registrant's Registration Statement on Form
S-3, Registration No. 333-39705, filed with the Commission on
November 6, 1997 (the "November S-3")).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Form S-1).
4.2 See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven of the
Registrant's Restated Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.1 to the Form S-1) and the
Certificate of Amendment to the Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.2 to the Form
S-3).
4.3 See Articles 2, 3, 5, 7 and 8 of the Registrant's Restated Bylaws
(incorporated herein by reference to Exhibit 3.4 to the November
S-3).
4.4 Indenture dated as of May 23, 1996 by and between Sterling House
Corporation ("Sterling") and Fleet National Bank, as Trustee
(incorporated by reference to Exhibit 4.11 to Sterling's
Registration Statement on Form S-3 (Registration No. 333-15329 filed
on November 1, 1996 (the "Sterling S-3")).
4.5 Form of Registration Rights Agreement dated as of May 17, 1996 by
and between Sterling and the initial purchasers of the 6.75%
Convertible Subordinated Debentures due 2006 (incorporated herein by
reference to Exhibit 4.9 to the Sterling S-3).
4.6 First Supplemental Indenture dated as of October 23, 1997 among the
Registrant, Sterling and State Street Bank and Trust Company, as
successor Trustee (incorporated herein by reference to Exhibit 4.9
to the November S-3).
4.7 Indenture dated as of May 21, 1996 by and between Alternative Living
Services, Inc. and IBJ Schroder Bank & Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K filed on May 27, 1997 (the "Form 8-K")).
4.8 Form of Registration Rights Agreement dated as of May 21, 1997 by
and between Alternative Living Services, Inc. and the purchasers of
the 7% Convertible Subordinated Debentures due 2004 (incorporated by
reference to Exhibit 99.2 to the Form 8-K).
4.9 Indenture dated as of December 19, 1997 by and between Alternative
Living Services, Inc. and United States Trust Company of New York,
as Trustee (incorporated by reference to Exhibit 1.1 to Registrant's
Registration Statement on Form 8-A, relating to Registration file
number 333-39705, filed with the Commission on December 16, 1997
(the "Form 8-A")).
41
43
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
4.10 Form of First Supplemental Indenture dated as of December 19, 1997
by and between Alternative Living Services, Inc. and United States
Trust Company of New York, as Trustee, relating to the 5.25%
Convertible Subordinated Debentures due 2002 (incorporated by
reference to Exhibit 1.2 to the Form 8-A).
4.11 Form of Second Supplemental Indenture dated as of January 2, 1998 by
and between Alternative Living Services, Inc. and United States
Trust Company of New York, as Trustee, relating to the 5.25%
Convertible Subordinated Debenture due 2002 (incorporated by
reference to Exhibit 4.3 to the Registrant's Form 8-K filed on
January 26, 1998).
10.1 Services Agreement effective as of January 1, 1996 by and between
Petty, Kneen & Company, L.L.C. and the Company. (Incorporated by
reference to Exhibit 10.2 of the Form S-1.) Represents an executive
compensation plan or arrangement.
10.2 Purchase Agreement dated as of May 22, 1996 by and between Petty,
Kneen & Company, L.L.C. and the Company. (Incorporated by reference
to Exhibit 10.3 of the Form S-1.)
10.3 Services Agreement by and between Richard W. Boehlke and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit 10.7
of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.4 Employment Agreement by and between D. Lee Field and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit 10.8
of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.5 Employment Agreement by and between David M. Boitano and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit 10.9
of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.6 Amended and Restated Alternative Living Services, Inc. 1995
Incentive Compensation Plan. (Incorporated by reference to Exhibit
10.10 of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.7 Employment Agreement by and between G. Faye Godwin and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit
10.11 of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.8 Employment Arrangement dated as of December 30, 1996 by and between
William F. Lasky and the Company, as amended. (Incorporated by
reference to Exhibit 10.14 of the Company's Form 10-K, as Amended,
for the year ended December 31, 1996). Represents an executive
compensation plan or arrangement.
10.9 Employment Agreement dated as of July 30, 1997 by and between
Alternative Living Services, Inc. and Timothy J. Buchanan.
Represents an executive compensation plan or arrangement.
10.10 Employment Agreement dated as of July 30, 1997 by and between
Alternative Living Services, Inc. and Steven L. Vick. Represents an
executive compensation plan or arrangement.
10.11 Employment Agreement dated as of October 23, 1997 by and between
Alternative Living Services, Inc. and Mark W. Ohlendorf. Represents
an executive compensation plan or arrangement.
10.12 Employment Agreement dated as of October 23, 1997 by and between
Alternative Living Services, Inc. and Gary Anderson. Represents an
executive compensation plan or arrangement.
42
44
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
10.13 Loan Agreement by and between South Trust Bank of Alabama, National
Association and the Company dated as of June 19, 1995. (Incorporated
by reference to Exhibit 10.20 of the Form S-1.)
10.14 Joint Venture Agreement dated as of November 15, 1996 by and between
Days Development Company, LLC and the Company. (Incorporated by
reference to Exhibit 10.22 of the Form S-1.)
10.15 Member Interest Modification Agreement and Amendment to Joint
Venture Agreement dated as of January 17, 1997 between the Company
and Days Development Company, among others.
10.16 Acquisition Agreement dated as of September 20, 1994 by and between
CCCI/Northampton Limited Partnership, Continuing Care Concepts, Inc.
and the Company, as amended. (Incorporated by reference to Exhibit
10.23 of the Form S-1.)
10.17 Partner Interest Acquisition Agreement dated as of August 1, 1996
between the Company, CCCI/Northampton Limited Partnership and
Continuing Care Concepts, Inc.
10.18 First Amended Joint Venture Agreement dated as of April 30, 1997
between the Company and Assisted Living Equities, LLC.
10.19 Assisted Living Consultant and Management Services Agreement by and
between Alternative Living Services and the Company dated as of
December 14, 1993. (Incorporated by reference to Exhibit 10.32 of
the Form S-1.)
10.20 Purchase and Sale Agreement dated as of December 15, 1995 by and
between Nationwide Health Properties, Inc. and New Crossings
International Corporation. (Incorporated by reference to Exhibit
10.33 of the Form S-1.)
10.21 Schedule of Purchase and Sale Agreements substantially similar to
Exhibit 10.20. (Incorporated by reference to Exhibit 10.34 of the
Form S-1.)
10.22 Lease and Security Agreement by and between Nationwide Health
Properties, Inc. and New Crossings International Corporation dated
as of December 15, 1995 (the Atrium). (Incorporated by reference to
Exhibit 10.35 of the Form S-1.)
10.23 Schedule of Lease and Security Agreements by and between Nationwide
Health Properties, Inc. and New Crossings International Corporation
substantially similar to Exhibit 10.22. (Incorporated by reference
to Exhibit 10.36 of the Form S-1.)
10.24 Assumption Agreement dated December 18, 1995 by and between
Crossings International Corporation, New Crossings International
Corporation, Oregon Housing Agency and National Health Properties,
Inc. (Albany Residential). (Incorporated by reference to Exhibit
10.53 of the Form S-1.)
10.25 Schedule of Assumption Agreements substantially similar to Exhibit
10.24. (Incorporated by reference to Exhibit 10.53 of the Form S-1.)
10.26 Lease Approval Agreement dated December 18, 1995 by and between
National Health Properties, Inc., New Crossings International
Corporation and Oregon Housing Agency (Albany Residential).
(Incorporated by reference to Exhibit 10.55 of the Form S-1.)
10.27 Schedule of Lease Approval Agreements substantially similar to
Exhibit 10.26. (Incorporated by reference to Exhibit 10.56 of the
Form S-1.)
43
45
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
10.28 Management Agreement dated August 30, 1990 by and between Housing
Division, State of Oregon and New Crossing International Corporation
(Albany Residential). (Incorporated by reference to Exhibit 10.59 of
the Form S-1.)
10.29 Employment Agreement by and between Thomas E. Komula and the Company
dated as of July 3, 1996. (Incorporated by reference to Exhibit
10.63 of the Form S-1). Represents an executive compensation plan or
arrangement.
10.30 Facility Lease dated as of December 30, 1996, between Meditrust
Acquisition Corporation III and ALS Leasing, Inc. ("Form of Facility
Lease"). (Incorporated by reference to Exhibit 99.1 of the Company's
Form 8-K dated January 14, 1997.)
10.31 Schedule of Additional Facility Leases which are substantially
similar to the Form of Facility Lease attached as Exhibit 10.30.
(Incorporated by reference to Exhibit 99.2 of the Company's Form 8-K
dated January 14, 1997.)
10.32 Guaranty by Alternative Living Services, Inc. to Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.3 of the Company's Form 8-K dated January 14, 1997.)
10.33 Affiliated Party Subordination Agreement dated December 30, 1996, by
and among ALS Leasing, Inc., the Company, the parties listed on
Schedule A thereto, all other Affiliates as defined therein and
Meditrust Acquisition Corporation III. (Incorporated by reference to
Exhibit 99.4 of the Company's Form 8-K dated January 14, 1997.)
10.34 Agreement Regarding Related Lease Transactions dated December 30,
1996, by and among ALS Leasing, Inc., the Company and Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.5 of the Company's Form 8-K dated January 14, 1997.)
10.35 Bridge Loan Agreement dated April 28, 1997, between Alternative
Living Services, Inc. and RDV Capital Management L.P. (Incorporated
by reference to Exhibit 10.1 of the Company's Form 10-Q for the
quarter ended March 31, 1997.)
10.36 Promissory Note dated April 28, 1997, between Alternative Living
Services, Inc. and RDV Capital Management L.P. (Incorporated by
reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter
ended March 31, 1997.)
10.37 Form of Facility Lease dated as of November 21, 1997, between
Meditrust Acquisition Corporation III and ALS Leasing, Inc. ("Form
of Facility Lease"). (Incorporated by reference to Exhibit 99.1 of
the Company's Form 8-K filed December 2, 1997.)
10.38 Schedule of Additional Facility Leases which are substantially
similar to the Form of Facility Lease referenced in Exhibit 10.37.
(Incorporated by reference to Exhibit 99.2 of the Company's Form 8-K
filed December 2, 1997.)
10.39 Guaranty by Alternative Living Services, Inc. to Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.3 of the Company's Form 8-K filed December 2, 1997.)
10.40 Affiliated Party Subordination Agreement dated November 21, 1997, by
and among ALS Leasing, Inc., the Company, the parties listed on
Schedule A thereto, all other Affiliates as defined therein and
Meditrust Acquisition Corporation III. (Incorporated by reference to
Exhibit 99.4 of the Company's Form 8-K filed December 2, 1997.)
44
46
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
10.41 Agreement Regarding Related Lease Transactions dated November 21,
1997, by and among ALS Leasing, Inc., the Company and Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.5 of the Company's Form 8-K filed December 2, 1997.)
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule (for SEC use only).
27.2 Financial Data Schedule (for SEC use only).
27.3 Financial Data Schedule (for SEC use only).
45
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin, on the 27th day of March, 1998.
ALTERNATIVE LIVING SERVICES, INC.
By: /s/ THOMAS E. KOMULA
--------------------------------------
Senior Vice President, Treasurer, Chief
Financial Officer and Secretary
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------- ------------------------------------- --------------
/S/ WILLIAM F. LASKY
- --------------------
William F. Lasky Chief Executive Officer and Director March 27, 1998
(Principal Executive Officer)
/S/ TIMOTHY J. BUCHANAN
- -----------------------
Timothy J. Buchanan President and Director March 27, 1998
/S/ THOMAS E. KOMULA
- --------------------
Thomas E. Komula Senior Vice President, Treasurer, March 27, 1998
Chief Financial Officer
/S/ JOHN D. PETERSON
- --------------------
John D. Peterson Vice President and Controller March 27, 1998
(Principal Accounting Officer)
/S/ WILLIAM G. PETTY, JR.
- -------------------------
William G. Petty , Jr. Chairman of the Board and Director March 27, 1998
/S/ RICHARD W. BOEHLKE
- ----------------------
Richard W. Boehlke Vice Chairman and Director March 27, 1998
/S/ GENE E. BURLESON
- --------------------
Gene E. Burleson Director March 27, 1998
/S/ ROBERT HAVEMAN
- ------------------
Robert Haveman Director March 27, 1998
/S/ RONALD G. KENNY
- -------------------
Ronald G. Kenny Director March 27, 1998
/S/ JERRY L. TUBERGEN
- ---------------------
Jerry L. Tubergen Director March 27, 1998
/s/ D. Ray Cook, M.D.
- -----------------------
D. Ray Cook, M.D. Director March 27, 1998
46
48
SIGNATURES TITLE DATE
--------------------- ---------------------- -----------------
/S/ STEVEN L. VICK
- ------------------
Steven L. Vick Chief Operating Officer and Director March 27, 1998
47