1
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
For the Fiscal Year Ended December 31, 1998
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
BROOKFIELD, WI 53005
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 641-5100
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)
OF THE AMERICAN STOCK EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
5.75% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2002 AMERICAN STOCK EXCHANGE
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS 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 was $282,215,480 as of March 5, 1999. The number of
outstanding shares of the Registrant's Common Stock was 22,018,458 shares as of
March 5, 1999.
-------------------------------
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 19, 1999.
2
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, those
set forth under "Item 1. Business". 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 350 assisted living residences with an
aggregate capacity of approximately 15,000 residents as of December 31, 1998. Of
these residences, the Company owns 77, leases 179, holds majority equity
interests in entities which own 22 and lease 6, holds minority equity interests
in entities which own 11 and lease 38, and manages 17 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 1998, 1997 and 1996. As
of December 31, 1998, 1997 and 1996, the Company operated or managed residences
with an aggregate capacity to accommodate approximately 15,000, 9,500 and 5,200
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, 1998, was constructing 63 residences
and developing an additional 136 residences. Of these residences, at least 80
with an aggregate capacity of approximately 3,600 residents are expected to open
during 1999.
On December 31, 1998, the Company entered into a strategic alliance with HCR
Manor Care. The alliance includes four principal arrangements:
- - The Company will purchase from HCR Manor Care up to 29 Alzheimer's/dementia
care and assisted living residences with a capacity for 2,611 residents
located throughout 12 states for $200 million in cash. The acquisitions of
these residences are expected to close in the second quarter of 1999.
- - HCR Manor Care and the Company will establish and capitalize a joint venture
to develop $500 million of ALS-branded Alzheimer's/dementia care and
assisted living residences in HCR's core markets over the next three to five
years. The Company expects to begin joint development under this arrangement
in the second quarter of 1999 and to continue joint development activities
over a three to five year period.
- - HCR Manor Care has agreed in principle to license from ALS the use of ALS'
Clare Bridge(R) service mark, to share various best practices, and to engage
in joint marketing activities relating to HCR's remaining
Alzheimer's/dementia care residences. The Company expects to finalize this
arrangement in the second quarter of 1999.
- - HCR Manor Care and ALS have agreed in principle to form a new company to
provide a variety of ancillary services to ALS' resident population,
including rehabilitation therapy and hospice care. The Company expects to
finalize this arrangement in the second quarter of 1999.
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
1
3
("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 acquisition transactions were
accounted for as purchases.
NEW CORPORATE BRAND NAME
The Company has announced its intent to change the name of the corporation to
Alterra Healthcare Corporation, subject to stockholder approval. In doing so the
Company will create a corporate brand name, Alterra, to provide better consumer
recognition of the Company's products and service offerings. The Company's
residences operate under several brand names, including Clare Bridge, the brand
name of the Company's primary free-standing, dementia care model, Wynwood, the
brand name of the Company's upper income, frail elderly model, Sterling House
and WovenHearts are the brand names of the Company's moderately priced frail
elderly models, and Crossings, the brand name of the Company's apartment-style,
frail elderly model. Through the Alterra brand name, the Company intends to
create a strong, corporate level brand identity across all of its residence
model and service level offerings. Management believes that corporate level
branding will leverage its national scale and will focus potential residents
and referral sources on the range of services offered by the Company rather
than those offered by a single residence model. In addition, management
believes that corporate level branding will provide an opportunity to reduce
long term marketing expenditures by eliminating certain duplication inherent in
marketing each product line and residence model separately.
ASSISTED LIVING SERVICES
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 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. 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.
FRAIL-ELDERLY SERVICES. The Company offers residents 24-hour assistance with
activities of daily living ("ADLs"), ongoing health assessments by a nurse,
organized social activities, three meals a day plus snacks, 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, in some
locations the Company offers its residents exercise programs and programs
designed to address issues associated with early stages of Alzheimer's and other
forms of dementia as more fully 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 planned 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. Pricing for advanced care is determined using a
proprietory assessment tool which determines additional services
provided above basic care. Charges are based on market rates and the
cost of additional care required, typically staffing. Rates charged
for these services are added to the rate charged for basic care, and
are generally up to $1,000 per month
2
4
depending upon the level and frequency of care required and staffing
needs. Residents requiring 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 various 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.
Care and supportive services are offered in different residence models
which incorporate the Company's philosophy of preserving resident's
privacy, encouraging choice and fostering independence in a home-like
setting.
- - 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., Common space is
dispersed throughout the building and 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. 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
3
5
the care needs of the residents. The Company customarily charges monthly
rates per resident ranging from $1,500 to $3,300.
- - WovenHearts. These residences are designed to meet the needs of frail
elderly individuals in smaller markets. WovenHearts residences range in
size from 7,000 to 12,000 square feet and, accommodate 20 to 40 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. 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.
ALZHEIMER'S DEMENTIA SERVICES. 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 and Clare Bridge Cottage
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.
The Company's specially designed, free-standing dementia residence models serve
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. Care and services offered in the Company's
dementia residence models are 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.
- - Clare Bridge Cottage. During 1998 the Company introduced dementia residence
models focused on smaller to medium sized markets where income levels would
not support a more upscale Clare Bridge model. These residences range from
20 to 40 residents and offer services similar to the Clare Bridge. These
buildings resemble the Sterling House architectural styles with enhancements
for wandering paths, security and other features associated with Clare
Bridge. The Company customarily charges monthly rates between $2,800 and
$3,500 for services provided in the Clare Bridge Cottage.
ACCESS TO SPECIALIZED MEDICAL SERVICES. In addition to its care and supportive
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 contracts or joint venture agreements with
other skilled providers. Commencing in early 1999 Crystal Health LLC, a joint
venture formed by the Company and
4
6
Omnicare, Inc. a national institutional pharmacy company, commenced providing
pharmaceutical care services and medications to the Company's residents and
other elderly customers.
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 and
financial 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 Pioneer Development Company. In 1996 the Company established
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, a 65% and 35%
equity interest, or an 80% and 20% equity interest, respectively, in such
project entities. Under certain circumstances, the development term for one or
more states in the ALS-Northwest Territory will be extended or shortened from
the original five-year term. 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. Any Losses from the operation of
residences jointly owned by ALS and Pioneer are allocated on a basis consistent
with the economic risk assumed by each of the partners, which results in losses
being disproportionately allocated to Pioneer to the extent of it's capital.
With respect to each ALS Northeast Territory residence, upon the first to occur
(i) of 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 Company Common Stock.
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. Any losses from the operation of
residences jointly owned by ALS and CCC are any allocated on a basis consistent
with the economic risk assumed by each of the partners, which results in losses
being disproportionately allocated to CCC to the extent of it's capital. 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 at fair market value (put option) and the Company shall have
an option to acquire CCC's interest in such residence at a purchase price based
upon an agreed upon return on investment (call option).
5
7
Franchise Arrangement with Eby Holdings. The Company has a franchise
relationship with Eby Holdings Inc. ("Eby"). Under the terms of this agreement,
Eby receives the right to build and operate residences using the Company
branding, designs and operating systems in designated geographic areas.
Currently, Eby operates 14 residences in the states of Iowa and Nebraska under
the Sterling House brand. In consideration for the franchise relationship, the
Company receives fees equal to $95,000 payable at opening of the franchised
residence. In addition, the Company receives fees equal to 3% of resident
service revenue generated by the franchised residences. The Company has options
to purchase certain of the franchised residences based on fixed valuation
criteria or actual prices per unit, which options are exercisable solely at the
Company's discretion.
Development Arrangement with Investor Group. In December 1998, the Company
entered into a series of transactions with a group of investors (the "Investor")
pursuant to which the Company agreed to develop for the investors eight assisted
living/dementia care residences in the Company's construction or development
pipeline. The Investors acquired the Company's development rights in these eight
projects for approximately $12 million. The Company has agreed to complete
construction of these residences on the Investor's behalf, and will be
reimbursed by the Investor for costs incurred in connection therewith (estimated
to be approximately $23 million). The Company also agreed to provide a $26
million bridge loan to the Investor to permit them to satisfy a portion of their
obligations until they can obtain third party mortgage financing for these
residences. The bridge loan matures on the earlier of September 30, 1999 and the
closing of any such third party financing of the residences. In addition, the
Company has agreed to loan the Investor up to $800,000 for working capital
purposes and to guarantee, subject to certain limitations, the Investors third
party mortgage financing of the residences.
The Company and the Investors also entered into a (i) development agreement
pursuant to which the Company is providing the development and management
services necessary to develop and construct the residences for a fee and (ii)
management agreement pursuant to which the Company will manage the completed
residences on terms generally consistent with the Company's other management
agreements. The Company has a right of first offer with respect to any proposed
sale of these residences by the Investors.
Other Development Partnerships. The Company is a party to various other joint
venture arrangements pursuant to which the Company and other third party
development partners are jointly developing, constructing and operating
ALS-branded assisted living residences. Generally, the Company and its joint
venture partner form and capitalize a limited partnership or a limited liability
company that either acquires a fee interest or a leasehold interest in an
assisted living residence under development by the Company. The Company's
percentage equity interests in these joint venture entities varies from joint
venture to joint venture, ranging from 10% minority interests up to 80% majority
interests. These joint venture entities typically retain the Company as manager
pursuant to a market rate management agreement. Pursuant to the operative
agreements, the Company has the right to acquire (call option) the joint venture
partner's equity interest in such joint venture entity at a price based upon an
agreed upon return on investment to the joint venture partner. Similarly, after
a specified waiting period, the joint venture partner has the right to require
the Company to purchase (put option) such partner's equity interest in the joint
venture entity at a price based upon the appraised fair market value of the
residence operated by the joint venture entity. Losses from the operation of
residences owned in such joint venture structures are generally allocated on a
basis consistent with the respective partner's interest in cash distributions
and the economic substance of the joint venture arrangement, which results in
losses being disproportionately allocated to the joint venture partners to the
extent of their respective 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 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, Kentucky and Illinois also require 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.
6
8
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 Kentucky, and is in the process of obtaining CONs for the
residences under development in Illinois.
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.
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. State anti remuneration laws
vary from state to state. 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) applicable state laws typically apply
regardless of whether Medicare or Medicaid payments are at issue and (ii), 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 products 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.
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.
7
9
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), WovenHearts(R), Wynwood(R), Clare Bridge(R),
and Clare Bridge Cottage(R) are registered service marks of the Company and the
Company claims service mark protection in the marks Alternative Living
Services(SM), Clare Bridge(SM), Crystal Health Services(SM) and Alterra(SM).
EMPLOYEES
At December 31, 1998, the Company employed approximately 6,629 full-time
employees and 3,569 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
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.
FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. In addition, the
following important factors, among others, could cause the Company's actual
results to differ materially from those expressed in the Company's
forward-looking statements in this report and presented elsewhere by management
from time to time. When used in this report, the words "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking
8
10
statements that may be made to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events. The
following discussion highlights some of these risks and others are discussed
elsewhere herein or in other documents filed by the Company with the Securities
and Exchange Commission.
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS. The Company had lease
expense of $44.2 million and $25.5 million for the years ended December 31, 1998
and 1997, respectively, and the Company's total indebtedness as of December 31,
1998 was $528.3 million, and its net interest expense was $11.0 million and $3.9
million for the years ended December 31, 1998 and 1997, respectively. Debt and
annual operating lease payment obligations will continue to increase
significantly as the Company pursues its growth strategy. In addition, the
Company anticipates that future development of residences may be financed with
construction loans and, therefore, there is a risk that, upon completion of
construction, permanent financing for newly developed residences may not be
available or may be available only on terms that are unfavorable or unacceptable
to the Company. Historically, the Company has not consistently had sufficient
earnings to cover fixed charges. Earnings of the Company were insufficient to
cover fixed charges by $13.9 million and $23.2 million for the years ended
December 31, 1998 and 1997. There can be no assurance that the Company will
generate sufficient cash flow to meet its future obligations. Any payment
default or other default with respect to such obligations could cause the lender
to foreclose upon the residences securing the indebtedness or, in the case of an
operating lease, to terminate the lease, with a consequent loss of income and
asset value to the Company. Moreover, because of cross-default and
cross-collateralization provisions in certain mortgages and debt instruments of
the Company and in most of its leases, a default by the Company on one of its
payment obligations could result in acceleration of other obligations and
adversely affect a significant number of its other residences. See "-- Need for
Additional Financing; Risk of Rising Interest Rates."
OPERATING LOSSES ASSOCIATED WITH NEW RESIDENCES. Newly opened assisted living
residences typically operate at a loss during the first six to 12 months of
operation, primarily due to the incurrence of certain fixed and variable
expenses in advance of the achievement of targeted rent and service fee revenues
from the lease-up of such residences. As of December 31, 1998, of the Company's
350 residences, 118 developed residences opened during 1998. In addition, the
development and construction of assisted living residences requires the
commitment of substantial capital over a typical six to 12 month construction
period, the consequence of which may be an adverse impact on the Company's
liquidity. As of December 31, 1998, the Company had 63 residences under
construction and an additional 136 residences under development. In the case of
acquired residences, resident turnover and increased marketing expenditures
which may be required to reposition such residences, together with the possible
disruption of operations resulting from the implementation of renovations, may
adversely impact the financial performance of such residences for a period of
time after their acquisition. In addition, occupancy levels and the rates which
the Company may be able to charge for its services may be adversely affected in
competitive market circumstances which would negatively impact the operating
results of affected residences. Accordingly, there can be no assurance that the
Company will not experience unforeseen expenses, difficulties, complications and
delays which could result in greater than anticipated operating losses or
otherwise materially adversely affect the Company's financial condition and
results of operations. See "-- Development and Construction Risks" and "--
Competition."
ABILITY TO CONTINUE GROWTH, TO MANAGE RAPID EXPANSION AND BUSINESS
DIVERSIFICATION. The Company has and expects to continue to pursue an aggressive
expansion strategy focused on developing, constructing and acquiring assisted
living residences. The Company is currently managing significant construction
and development activity. Accordingly, the Company's prospects are directly
affected by its ability to develop, construct and, to a lesser extent, acquire
additional residences. The Company's ability to continue to grow will depend in
large part on its ability to identify suitable and affordable development and
acquisition opportunities and successfully pursue such opportunities, identify
and obtain necessary financing commitments and effectively operate its assisted
living residences. There can be no assurance, however, that the Company will be
successful in developing, constructing or acquiring any additional residences or
that it will be able to continue to achieve or exceed its historical growth
rate. The Company's rapid expansion places significant demands on the Company's
management and operating personnel. The Company's ability to manage it's recent
and future growth effectively will require it to continue to improve its
operational, financial and management information systems and to continue to
attract, retain, train, motivate and manage key employees. If the Company is
unable to manage its growth effectively, its business, operating results and
financial condition will be adversely affected.
9
11
Management of the Company intends to review and, in appropriate circumstances,
pursue opportunities for development and expansion of new products and services,
such as home health care, rehabilitation and pharmacy services. Efforts to
achieve such business diversification, however, are subject to certain risks,
including management's relative unfamiliarity with such businesses, additional
uncertainties related to government regulation and possible difficulties in
integrating new products or businesses.
NEED FOR ADDITIONAL FINANCING, RISK OF RISING INTEREST RATES. To achieve its
growth strategy, the Company will need to obtain sufficient financing to fund
its continued development, construction and acquisition activities. Accordingly,
the Company's future growth will depend on its ability to obtain additional
financing on acceptable terms. The Company has executed non-binding letters of
intent with various healthcare REITs of which approximately $94 million is
available at December 31, 1998 and with conventional mortgage and bank lenders
for construction and long-term mortgage financing of which $332 million is
available at December 31, 1998. The Company's management believes financing
available pursuant to these arrangements, and pursuant to other sources of
financing, will be sufficient to fund its development and acquisition programs
for at least the next 12 months.
The Company will from time to time seek additional funding through public or
private financing, including equity or debt financing. If additional funds are
raised by issuing equity securities, the Company's stockholders may experience
dilution. In addition, the Company will require significant financial resources
to meet its operating and working capital needs, including contractual
obligations to purchase the equity interest of joint venture partners in
residences owned in joint ventures. See "-- Joint Ventures and Related Mandatory
Purchase Obligations." There can be no assurance that any newly constructed
residences will achieve a stabilized occupancy rate 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. 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.
Approximately $114.6 million, or 21.7%, of the Company's total indebtedness as
of December 31, 1998 was subject to floating interest rates. Although a majority
of the debt and lease payment obligations of the Company are not subject to
floating interest rates, indebtedness that the Company may incur in the future
may bear interest at a floating rate. In addition, future fixed rate
indebtedness and lease obligations will be based on interest rates prevailing at
the time such arrangements are obtained. Therefore, increases in prevailing
interest rates could increase the Company's interest or lease payment
obligations and could have an adverse effect on the Company's business,
financial condition and results of operations.
DEVELOPMENT AND CONSTRUCTION RISKS. The Company's growth strategy is dependent,
in part, on its ability to develop and construct a significant number of
additional residences. As of December 31, 1998, the Company had 63 residences
under construction and 136 residences under development. Development projects
generally are subject to various risks, including zoning, permitting, health
care licensing and construction delays, that may result in construction cost
overruns and longer development periods and, accordingly, higher than
anticipated start-up losses. Project management is subject to a number of
contingencies over which the Company will have little or no control and which
might adversely affect project costs and completion time. Such contingencies
include shortages of, or the inability to obtain, labor or materials, the
inability of the general contractor or subcontractors to perform under their
contracts, strikes, adverse weather conditions and changes in applicable laws or
regulations or in the method of applying such laws and regulations. As a result
of these various factors, there can be no assurance that the Company will not
experience construction delays, that it will be successful in developing and
constructing currently planned or additional residences or that any developed
residence will be economically successful. If the Company's planned development
is delayed, the Company's business, operating results and financial condition
could be adversely affected.
10
12
RISKS ASSOCIATED WITH ACQUISITIONS. The Company has acquired residences in the
past, is currently seeking to complete a major acquisition of up to 29
residences from HCR Manor Care and intends to continue to seek acquisition
opportunities in the future. However, no assurances can be given that the
Company will be successful in identifying any future acquisition opportunities
or completing any identified acquisitions. The acquisition of residences
involves a number of risks. Existing residences available for acquisition
frequently serve or target different market segments than those presently served
by the Company. It may be necessary in such cases to reposition and renovate
acquired residences or turn over the existing resident population to achieve a
resident acuity and income profile which is consistent with the Company's
current operations. In addition, the Company may also determine that staff and
operating management personnel changes are necessary to successfully integrate
such residences into the Company's existing operations. No assurances can be
made that management will be successful in repositioning any acquired residences
or in effecting any necessary operational or structural changes and improvements
on a timely basis. Any failure by the Company to make necessary operational or
structural changes or to successfully reposition acquired residences may
adversely impact the Company's business, operating results and financial
condition. In undertaking acquisitions of residences, the Company also may be
adversely impacted by unforeseen liabilities attributable to the prior operators
of such residences, against whom the Company may have little or no recourse.
JOINT VENTURES AND RELATED MANDATORY PURCHASE OBLIGATIONS. The Company has
entered into several joint ventures with regional real estate development
partners and others for the construction, development and ownership of assisted
living residences in targeted geographic areas. As of December 31, 1998, 77 of
the Company's operating residences were jointly owned, directly or indirectly,
with venture partners. Of the 199 residences which were either under
construction or development by the Company as of December 31, 1998, a
significant portion of such residences are being or will be constructed or
developed under joint venture agreements. The Company has agreed not to own or
operate competing assisted living residences during specified contractual
periods within specified geographic areas adjacent to residences developed
through certain of its joint ventures. While the Company typically receives a
fee for managing residences developed through joint ventures, it shares with its
joint venture partners any profits or losses realized from the operation or sale
of such residences. The Company is obligated under its joint venture
arrangements to purchase the equity interests of its joint venture partners upon
the election of such joint venture partners at a price based on the appraised
value of the residence owned by the applicable joint venture. These purchase
rights generally become exercisable during the period of six months to two years
following the opening of the residence owned by such joint venture. As a result
of these provisions, the Company might become obligated to acquire additional
interests in residences developed through joint ventures on terms or at times
that would otherwise not be acceptable to the Company, including times during
which the Company may not have adequate liquidity to fund such acquisitions.
RESIDENCE MANAGEMENT, STAFFING AND LABOR COSTS. The Company competes with other
providers of assisted living services and long-term care with respect to
attracting and retaining qualified and skilled personnel. The Company will be
dependent upon its ability to attract and retain management personnel
responsible for the day-to-day operations of each of the Company's residences.
Any inability of the Company to attract or retain qualified residence management
personnel could have a material adverse effect on the Company's financial
condition or results of operations. In addition, a possible shortage of nurses
or trained personnel may require the Company to enhance its wage and benefits
package in order to compete in the hiring and retention of such personnel. The
Company will also be dependent upon the available labor pool of semi-skilled and
unskilled employees in each of the markets in which it operates. No assurance
can be given that the Company's labor costs will not increase, or that, if they
do increase, they can be matched by corresponding increases in rates charged to
residents. Any significant failure by the Company to attract and retain
qualified management and staff personnel, to control its labor costs or to pass
on any increased labor costs to residents through rate increases would have a
material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION. The long-term care industry is highly competitive and, given the
relatively low barriers to entry and continuing health care cost 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 companies providing assisted living services as well as numerous other
companies providing similar service and care alternatives, such as home health
care agencies, congregate care facilities, retirement communities and skilled
nursing facilities. While the Company believes there is a need for additional
assisted living residences in the markets where the Company is constructing and
developing residences, the Company expects that, as assisted
11
13
living residences receive increased market awareness and the number of states
which include assisted living services in their Medicaid programs increases,
competition will increase from new market entrants, many of whom may have
substantially greater financial resources than the Company. No assurance can be
given that increased competition will not adversely affect the Company's ability
to attract or retain residents or maintain its existing rate structures.
Moreover, in implementing its growth strategy, the Company expects to face
competition for development and acquisition opportunities from local developers
and regional and national assisted living companies. Some of the Company's
present and potential competitors have, or may have access to, greater financial
resources than those of the Company. Consequently, there can be no assurance
that the Company will not encounter increased competition in the future which
could limit its ability to attract and retain residents, to maintain or increase
resident service fees or to expand its business and could have a material
adverse effect on the Company's financial condition, results of operations and
prospects. Management of the Company is not able to predict the effect that the
health care industry trend towards managed care will have on the assisted living
marketplace. Managed care, an arrangement whereby service and care providers
agree to sell specifically defined services to one or more public or private
payors (frequently not the end user or resident) subject to a predefined system
in an effort to achieve more efficiency with respect to utilization and cost, is
not currently a significant factor in the assisted living marketplace. However,
managed care plans sponsored by insurance companies or HMOs may in the future be
a factor in the assisted living marketplace. There can be no assurance that the
Company will not encounter increased competition or be subject to other
competitive pressures that could affect its business, results of operation or
financial condition as a result of managed care.
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. Changes in the laws or new interpretations of existing
laws may have a significant impact on the Company's methods and costs of doing
business. The Company is, and will be, subject to varying degrees of regulation
and licensing by health or social service agencies and other regulatory
authorities in the various states and localities where it operates or intends to
operate. The Company and its activities are subject to zoning, health and other
state and local government laws and regulations. Zoning variances or use permits
are often required for construction. Severely restrictive regulations could
impair the ability of the Company to open additional residences at desired
locations or could result in costly delays. Several of the Company's residences
have been financed by revenue bonds. In order to continue to qualify for
favorable tax treatment of the interest payable on certain of these bonds, the
financed residences must comply with certain federal income tax requirements,
principally pertaining to the maximum income level of a specified portion of the
residents. Failure to satisfy these requirements constitutes an event of default
under the bonds, thereby accelerating their maturity. The Company's success will
depend in part upon its ability to satisfy applicable regulations and
requirements and to procure and maintain required licenses in rapidly changing
regulatory environments. Any failure to satisfy applicable regulations or to
procure or maintain a required license could have a material adverse effect on
the Company's financial condition, results of operations and prospects.
The Company's operations could also be adversely affected by, among other
things, regulatory developments such as revisions in building code requirements
for assisted living residences, mandatory increases in the scope and quality of
care to be offered to residents and revisions in licensing and certification
standards. There can be no assurance that federal, state or local laws or
regulations will not be imposed or expanded based on evolving regulatory
interpretations or based on new statutory or regulatory provisions which
adversely impact the Company's business, financial condition, results of
operations or prospects. The Company's residence operations are also subject to
health and other state and local government regulations.
The Company has entered into franchise agreements with third parties pursuant to
which such third parties operate assisted living residences under registered
servicemarks of the Company utilizing systems and procedures prescribed by the
Company. The sale of franchises is regulated by the Federal Trade Commission and
by certain state agencies. Principally, these regulations require that certain
written disclosures be made prior to the sale of a franchise. In addition, some
states have relationship laws which prescribe the basis for terminating a
franchisee's rights and regulate both the franchisor's and its franchisees'
post-termination rights and obligations. There can be no assurance that changes
in such regulations will not have an adverse impact upon the ability of the
Company to continue its franchising activities.
12
14
The Company intends to review and, in appropriate circumstances, pursue
opportunities for development and expansion into new products and services.
These new products and services may include home health care, rehabilitation and
pharmacy services. The federal and state regulation of such additional products
and services may be more extensive than that related to the Company's assisted
living operations. The Company has not in the past engaged in significant
activities outside of its core assisted living business. As the Company expands
into new products and services, the Company will be subject to additional
federal, state and local laws and regulations. Non-compliance with such laws and
regulations could have a material adverse effect on the Company's business,
financial condition, results of operations or prospects.
LIABILITY AND INSURANCE. The provision of personal and health care services
entails an inherent risk of liability. In recent years, participants in the
long-term care industry have become subject to an increasing number of lawsuits
alleging malpractice or related legal theories, many of which involved large
claims and resulted in the incurrence of significant defense costs. In addition,
compared to more institutional long-term care facilities, assisted living
residences (especially dementia care residences) of the type operated by the
Company offer residents a greater degree of independence in their daily lives.
This increased level of independence, however, may subject the resident and the
Company to certain risks that would be reduced in more institutionalized
settings. The Company currently maintains liability insurance intended to cover
such claims which it believes is adequate based on the nature of the risks,
historical experience and industry standards. There can be no assurance,
however, that claims in excess of such insurance or claims not covered by
insurance, such as claims for punitive damages, will not arise. A successful
claim against the Company not covered by, or in excess of, its insurance could
have a material adverse effect upon the Company's financial condition and
results of operations. Claims against the Company, regardless of their merit or
eventual outcome, may also have a material adverse effect upon the Company's
ability to attract or retain residents or expand its business and may require
management to devote substantial time to matters unrelated to day-to-day
operations. In addition, insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance in
the future or that, if such insurance is available, it will be available on
acceptable economic terms.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY. The Company
currently relies, and for the foreseeable future, the Company expects to rely,
primarily on the ability of its residents to pay for services from their own and
their families' financial resources. Generally, only elderly adults with income
or assets meeting or exceeding the comparable median in the region where
assisted living residences of the Company are located can afford the fees for
such residences. Inflation or other circumstances which adversely affect the
ability of residents and potential residents to pay for assisted living services
could have an adverse effect on the Company. In the event that the Company
encounters difficulty in attracting seniors with adequate resources to pay for
the Company's services, the Company would be adversely affected.
ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY. Under various
Federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at such property, and may be held liable to a governmental entity or to
third parties for property damage and for investigation and cleanup costs
incurred by such parties in connection with the contamination. Such laws
typically impose clean up responsibility and liability without regard to whether
the owner knew of or caused the presence of contaminants, and liability under
such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation or responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
lease such property or to borrow using such property as collateral. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is owned or operated by such person. Finally, the owner of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. With the exception of four
Sterling House residences operated by the Company or its predecessors since
prior to 1995, the Company has conducted environmental assessments of all of its
operating residences and has conducted, or is in the process of conducting,
environmental assessments of all of its undeveloped sites and sites currently
under construction. These assessments have not revealed, and the Company is not
otherwise aware of, any
13
15
environmental liability that it believes would have a material adverse effect on
the Company's business, assets or results of operations. There can be no
assurance, however, that environmental assessments would detect all
environmental contamination which may give rise to material environmental
liabilities. The Company believes that its respective residences are in
compliance in all material respects with all applicable environmental laws. The
Company has not been notified by any governmental authority, or is otherwise
aware, of any material non-compliance, liability or claim relating to hazardous
toxic substances or petroleum products in connection with any of the residences
its currently operates.
ANTI-TAKEOVER PROVISIONS. The Company's Restated Certificate of Incorporation
authorizes the issuance of 5,000,000 shares of preferred stock and 100,000,000
shares of Common Stock. Subject to the rules of the American Stock Exchange
("AMEX") upon which the Common Stock is listed, the Board of Directors of the
Company has the power to issue any or all of the authorized and unissued shares
without stockholder approval, and the preferred shares can be issued with such
rights, preferences and limitations as may be determined by the Company's Board.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of any holders of preferred stock that may be
issued in the future. The Company presently has no commitments or contracts to
issue any additional shares of Common Stock (other than pursuant to the exercise
of outstanding stock options or the conversion of the Company's 6.75%
Convertible Subordinated Debentures due 2006, 7% Convertible Subordinated
Debentures due 2004 or 5.25% Convertible Subordinated Debentures due 2002) or
any shares of preferred stock. Authorized and unissued preferred stock and
common stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could delay, discourage, hinder or
preclude an unsolicited acquisition of the Company, could make it less likely
that stockholders receive a premium for their shares as a result of any such
attempt and could adversely affect the market price of and the voting and other
rights of the holders of outstanding shares of Common Stock. As a Delaware
corporation, the Company is subject to Section 203 of the Delaware General
Corporation Law (the "DGCL") which, in general, prevents an "interested
stockholder" (defined generally as a person owing 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) for three years following the date such
person became an interested stockholder unless certain conditions are satisfied.
On December 10, 1998, the Company entered into a Rights Agreement with American
Stock Transfer & Trust Company, as Rights Agent, pursuant to which the Company
declared and paid a dividend of one preferred share purchase right (a "Right")
for each outstanding share of Common Stock. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, $.01 par value per share (the "Preferred
Shares"), of the Company at a price of $130.00 per one one-hundredth of a
Preferred Share. The Rights have certain anti-takeover effects, and they will
cause substantial dilution to a person or group that attempts to acquire the
Company without conditioning the offer on redemption of the Rights or on
substantially all of the Rights also being acquired. The Rights should not
interfere with any merger or other business combination approved by the
Company's Board since the Rights may be redeemed by the Company in accordance
with the Rights Agreement.
POSSIBLE PRICE VOLATILITY OF THE COMMON STOCK. The market price of the Company's
Common Stock could be subject to significant fluctuations in response to various
factors and events, including variations in the Company's operating results, and
new statutes or regulations or changes in the interpretation of existing
statutes or regulations affecting the health care industry generally or the
assisted living industry in particular. In addition, the stock market in recent
years has experienced broad price and volume fluctuations that often have been
unrelated to the operating performance of particular companies. These market
fluctuations also may adversely affect the market price of the Common Stock.
14
16
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, 1998. 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 3 151 1 52 6 298 -- -- 10 501
CA 2 307 -- -- -- -- -- -- 2 307
CO 5 257 9 602 -- -- 1 50 15 909
DE -- -- -- -- 1 72 -- -- 1 72
FL 5 234 29 1,216 11 492 -- -- 45 1,942
ID 1 70 2 158 -- -- -- -- 3 228
IN 2 84 -- -- 5 210 -- -- 7 294
KS 12 399 11 357 -- -- 2 80 25 836
MA 1 72 -- -- -- -- -- -- 1 72
MI 18 514 9 390 3 188 -- -- 30 1,092
MN 8 266 8 259 3 156 -- -- 19 681
NC 4 230 4 204 1 46 5 210 14 690
ND -- -- 1 71 -- -- -- -- 1 71
NJ 4 152 -- -- -- -- -- -- 4 152
NV 1 54 2 154 -- -- -- -- 3 208
NY 9 632 1 80 -- -- -- -- 10 712
OH -- -- 16 648 5 210 -- -- 21 858
OK -- -- 26 906 -- -- -- -- 26 906
OR 1 56 8 650 -- -- -- -- 9 706
PA 7 304 4 281 2 64 -- -- 13 649
SC 3 126 3 118 2 84 3 128 11 456
TN -- -- -- -- 4 176 -- -- 4 176
TX -- -- 26 1,000 -- -- -- -- 26 1,000
WA -- -- 4 388 3 156 -- -- 7 544
WI 13 306 21 532 3 55 6 48 43 941
------- -------- ------ -------- ------- -------- -------- -------- -------- -------
TOTAL 99 4,214 185 8,066 49 2,207 17 516 350 15,003
======= ======== ====== ======== ======= ======== ======== ======== ======== =======
(1) Owned residences are those that are wholly or majority owned by the
Company.
(2) Leased residences are those that are operated by the Company and are
leased from a third party.
(3) Unconsolidated residences are those residences managed by the Company, but
operated by an entity in which ALS owns a minority equity interest.
(4) Managed residences are those residences that ALS manages under
management arrangements but in which ALS does not possess an ownership
interest. ALS has an option to purchase or lease eleven of these
residences.
82% of all operating residences are four years old or less and the remaining 18%
range from five to fourteen years old.
15
17
At December 31, 1998, the Company was in various stages of constructing 63
residences and developing 136 residences. Set forth below is certain information
with respect to residences in construction and residence sites in development on
December 31, 1998.
RESIDENCES UNDER CONSTRUCTION OR DEVELOPMENT
UNDER CONSTRUCTION UNDER DEVELOPMENT
------------------------------ ------------------------------
LOCATION RESIDENCES CAPACITY RESIDENCES CAPACITY
- --------------- -------------- ----------- -------------- ------------
AZ 2 76 3 169
CA 1 74 17 857
CO 3 140 3 118
CT -- -- 3 150
DE -- -- 2 130
FL 8 350 6 292
GA 1 36 7 280
IA -- -- 1 40
IL -- -- 2 86
IN 9 360 7 280
KS 1 40 2 78
KY -- -- 15 616
MA -- -- 1 52
MD 2 82 3 150
MI -- -- 2 82
MN 1 78 -- --
NJ 3 182 8 362
NV 1 52 2 131
NY 6 274 10 461
NC 4 156 7 258
OH 4 151 -- --
OK 2 74 2 88
OR 1 52 2 104
PA 1 52 1 38
SC 2 84 4 142
TN 6 250 8 314
TX 1 36 5 198
VA 1 40 6 240
WA 2 104 1 52
WI 1 102 4 218
WY -- -- 2 82
-------------- ----------- -------------- ------------
TOTAL 63 2,845 136 6,068
============== =========== ============== ============
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 commenced (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.
16
18
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings relating
to claims arising in the ordinary course of its business. Neither the Company
nor any of its subsidiaries is a party to any such legal proceeding, the outcome
of which, individually or in the aggregate, is expected to have a material
adverse affect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
fourth quarter of its fiscal year ended December 31, 1998.
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, 1999,
was approximately 6,012.
The following table sets forth, for the periods indicated, the high and low
closing prices for the Common Stock as reported on AMEX.
HIGH LOW
----------- ----------
1998:
First Quarter........................ 34-1/2 27
Second Quarter....................... 35 24-3/4
Third Quarter........................ 30-1/2 17-1/8
Fourth Quarter....................... 34-1/4 17-1/4
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
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, restrictive debt covenants and such other
factors as the Board of Directors deems relevant.
17
19
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, 1998 has been derived from
the Company's audited consolidated financial statements appearing elsewhere in
this report. 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 this report (in thousands, except per
share data).
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- --------- ----------
STATEMENTS OF OPERATIONS DATA :
Revenue:
Operating revenue.......................... $244,423 $ 130,744 $ 55,637 $ 15,061 $ 7,228
-------- --------- --------- -------- --------
Operating expenses:
Residence operations....................... 147,931 81,558 35,977 8,717 3,185
Lease expense.............................. 44,174 25,524 9,035 944 697
General and administrative................. 23,200 22,168 11,143 5,890 3,489
Depreciation and amortization.............. 19,730 9,271 4,223 1,275 346
Non-recurring charge....................... -- 4,656 976 -- --
-------- --------- --------- -------- --------
Total operating expenses............... 235,035 143,177 61,354 16,826 7,717
-------- --------- --------- -------- --------
Operating income (loss)...................... 9,388 (12,433) (5,717) (1,765) (489)
Other income (expense):
Interest expense, net...................... (11,024) (3,932) (3,231) (984) (397)
Lease income............................... 4,915 -- -- -- --
Equity in losses of unconsolidated affiliates (31) (226) (52) (716) (299)
Minority interest in losses of consolidated 20,610 8,440 76 160 48
subsidiaries
Other, net................................. (170) (112) (31) 479 --
-------- --------- --------- -------- --------
Total other income (expense), net.... 14,300 4,170 (3,238) (1,061) (648)
-------- --------- --------- -------- --------
Income (loss) before income taxes............ 23,688 (8,263) (8,955) (2,826) (1,137)
Income tax (expense) benefit................. (3,136) -- 159 991 --
-------- --------- --------- -------- --------
Income (loss) before extraordinary item...... 20,552 (8,263) (8,796) (1,835) (1,137)
Extraordinary item - loss from early retirement
of financing agreements.................. -- -- -- (1,176) --
-------- --------- --------- -------- --------
Net income (loss).................... $ 20,552 $ (8,263) $ (8,796) $ (3,011) $ (1,137)
======== ========= ========= ======== ========
Basic income (loss) per common share:
Income (loss) before extraordinary item (1) $ 0.94 $ (0.44) $ (0.57) $ (0.24) $ (0.26)
Extraordinary item (1)..................... -- -- -- (0.15) --
-------- --------- --------- -------- --------
Basic income (loss) per common share (1)..... $ 0.94 $ (0.44) $ (0.57) $ (0.39) $ (0.26)
======== ========= ========== ======== ========
Diluted income (loss) per common share:
Income (loss) before extraordinary item (1) $ 0.92 $ (0.44) $ (0.57) $ (0.24) $ (0.26)
Extraordinary item (1)..................... -- -- -- $ (0.15) --
-------- --------- --------- -------- --------
Diluted income (loss) per common share (1).. $ 0.92 $ (0.44) $ (0.57) $ (0.39) $ (0.26)
======== ========= ========= ======== ========
Weighted average common shares outstanding (1):
Basic...................................... 21,905 18,651 15,429 7,782 4,322
======== ========= ========= ======== ========
Diluted.................................... 24,145 18,651 15,429 7 ,782 4,322
======== ========= ========= ======== ========
(1) Basic and diluted share amounts are the same for 1994-1997 since potentially
issuable shares related to stock options and convertible debt would have had an
anti-dilutive effect.
18
20
1998 1997 1996 1995 1994
----------- ----------- ----------- --------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 49,934 $ 79,838 $ 39,455 $20,394 $ 896
Short-term investments...................... -- 90,000 -- -- --
Working capital (deficit)................... 28,305 129,528 20,532 10,425 (1,723)
Total assets................................ 777,810 553,552 204,353 82,450 18,160
Long-term obligations....................... 515,584 318,069 68,625 23,663 7,365
Stockholders' equity........................ $177,112 $143,897 $ 91,064 $45,466 $ 3,765
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 350 assisted
living residences with an aggregate capacity of approximately 15,000 residents
as of December 31, 1998. Of these residences, the Company owns 77, leases 179,
holds majority interests in entities which own 22 and lease 6, holds minority
interests in entities which own 11 and lease 38, and manages 17 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 1998, 1997 and 1996. As of December 31, 1998, 1997 and 1996, the Company
operated or managed residences with an aggregate capacity to accommodate
approximately 15,000, 9,500 and 5,200 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, 1998, was constructing 63 residences
and developing an additional 136 residences. Of these residences, at least 80
with an aggregate capacity of approximately 3,600 residents are expected to open
during 1999.
On December 31, 1998, the Company entered into a strategic alliance with HCR
Manor Care. The alliance includes four principal arrangements:
- - The Company will acquire from HCR Manor Care up to 29 Alzheimer's/dementia
care and assisted living residences with a capacity for 2,611 residents
located throughout 12 states for $200 million in cash. Acquisitions of these
residences are expected to close in the second quarter of 1999.
- - HCR Manor Care and the Company will establish and capitalize a joint venture
to develop $500 million of ALS-branded Alzheimer's/dementia care and
assisted living residences in HCR's core markets over the next three to five
years. The Company expects to begin joint development under this arrangement
in the second quarter of 1999 and to continue joint development activities
over a three to five year period.
- - HCR Manor Care has agreed in principle to license from ALS the use of ALS'
Clare Bridge(R) service mark, to share various best practices, and to engage
in joint marketing activities relating to HCR's remaining
Alzheimer's/dementia care residences. The Company expects to finalize this
arrangement in the second quarter of 1999.
- - HCR Manor Care and ALS have agreed in principle to form a new company to
provide a variety of ancillary services to ALS' resident population,
including rehabilitation therapy and hospice care. The Company expects to
finalize this arrangement in the second quarter of 1999.
In October 1997, the Company completed the Sterling Merger. At the time of the
merger Sterling 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
19
21
approximately 330 residents throughout Wisconsin. The Sterling Merger was
accounted for as a pooling-of-interest and both of the 1996 acquisition
transactions were accounted for as purchases.
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."
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Operating Revenue. Operating revenues for the year ended December 31, 1998 were
$244.4 million representing an increase of $113.7 million, or 87%, from the
$130.7 million for the comparable 1997 period. Substantially all of this
increase resulted from the addition of newly constructed residences and other
residences acquired by the Company. The Company operated or managed 350 and 223
residences at December 31, 1998 and 1997, respectively.
Other revenues for the year ended December 31, 1998 were $8.5 million, an
increase of $6.6 million over the $1.9 million of other revenue for the year
ended December 31, 1997. The increase is attributable to management fees
on an increased number of residences which were either managed for
third parties or held in minority joint venture structures in 1998 versus 1997.
As of December 31, 1998, the Company had 66 residences held in minority joint
ventures or managed for other owners as compared to 36 such residences on
December 31, 1997. The increase in other revenue was also impacted by 14 new
residences opened under franchise arrangements in 1998 and fees recognized from
a development arrangement in 1998.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1998 increased to $147.9 million from $81.6 million in the
comparable period in 1997 due to the increased number of residences operated
during the 1998 period. Operating expenses as a percentage of operating revenue
for the years ended December 31, 1998 and 1997 were 60.5% and 62.4%,
respectively.
Lease Expense. Lease expense for the year ended December 31, 1998 was $44.2
million, compared to $25.5 million in the comparable period in 1997. Such
increase was primarily attributable to the utilization of additional
sale/leaseback financing totaling $146 million during the twelve-month period
ended December 31, 1998.
General and Administrative Expense. General and administrative expenses for the
year ended December 31, 1998 were $23.2 million compared to $16.5 million,
before Sterling Merger related charges of $5.7 million, for the comparable 1997
period, representing a decline as a percentage of operating revenue to 9.5% in
1998 from 12.6% in 1997. The increase in expenses was primarily attributable to
salaries, related payroll taxes and employee benefits for additional corporate
personnel retained to support the Company's actual and anticipated growth. 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, 1998 was $19.7 million, representing an increase of $10.4 million,
or 113%, from the $9.3 million of depreciation and amortization for the
comparable period in 1997. This increase resulted primarily from depreciation of
fixed assets and amortization of pre-opening costs on the larger number of new
residences that were operated by the Company during the year ended December 31,
1998, versus the comparable period in 1997. The Company amortizes pre-opening
costs over a twelve-month period from the date the residence opens. Upon the
adoption of the AICPA Statement of Position No. 98-5 "Reporting on the Costs of
Start-up Activities," on January 1, 1999, the Company will expense pre-opening
costs, as defined, when they are incurred.
Interest Expense, Net. Interest expense, net of interest income, was $11.0
million for the year ended December 31, 1998, compared to $3.9 million for the
comparable period in 1997. Gross interest expense (before interest
capitalization and interest income) for the 1998 period was $29.8 million
compared to $13.4 million for the 1997 period, an increase of $16.4 million.
This increase is primarily attributable to the issuance in May 1997 of the 7%
Convertible Subordinated Debentures due 2004, (the "7% Debentures") the issuance
in December 1997 of the 5.25% Convertible Subordinated Debentures due 2002, (the
"5.25% Debentures") and an increase in the amount of
20
22
mortgage financing used in the 1998 period as compared to the 1997 period. The
Company capitalized $13.8 million of interest expense in the 1998 period
compared to $6.7 million in the comparable 1997 period due to increased
construction activity in 1998. The Company opened 116 newly constructed
residences during the year ended December 31, 1998 compared to 78 newly
constructed residences opened in the comparable period in 1997. Interest income
for the 1998 period was $5.0 million as compared to $2.8 million for the 1997
period. This increase was primarily due to the investment of proceeds received
from the December 1997 concurrent convertible debt and equity offering.
Lease Income. The Company recorded $4.9 million of lease income on residences
owned by the Company and leased to unconsolidated joint ventures in 1998. Under
this arrangement, the Company retains ownership in underlying assets in order to
allow the use of Company financing arrangements. Lease payment obligations of
the unconsolidated joint venture entities are generally equivalent to the debt
service payable by the Company on the leased residences, which thereby, offset
Company costs associated with retaining ownership in the fixed assets.
The Company had no such arrangements in 1997.
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the year ended December 31, 1998 was
$20.6 million, representing an increase of $12.2 million from $8.4 million for
the comparable period in 1997. The increase was primarily attributable to the
increase in the number of residences in various stages of lease-up that were
owned by the Company in joint venture arrangements. Throughout 1998, the Company
had an average of 46 residences held in these joint venture arrangements
compared to an average of 17 residences held in similar joint venture
arrangements during the year ended December 31, 1997.
Income Taxes. For the year ended December 31, 1998, the Company recorded a
current income tax provision of $9.6 million which was offset by the recognition
of $6.5 million of deferred tax assets resulting in a current income tax expense
of $3.1 million. The deferred tax asset recognition was generated primarily due
to the elimination of valuation allowances associated with net deferred tax
assets in 1997 and prior.
Net Income. As a result of the foregoing, the net income for the year ended
December 31, 1998 was $20.6 million compared to a net loss of $8.3 million for
the comparable period in 1997.
YEAR 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 of operating revenue 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.
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 years 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
21
23
Company's rapid growth. The $5.7 million of Sterling Merger costs represents
investment banking, legal, accounting and consulting costs related to the
transaction.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 1997 was $9.3 million, representing an increase of $5.1 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. For the year ended December 31, 1997, 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, Net. 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%
Debentures in May 1997, the issuance of the 6.75% Convertible Subordinated
Debentures due 2006 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 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 within consolidated,
majority owned joint venture arrangements. During 1997, the Company had an
average of 17 residences held in consolidated joint venture arrangements
compared to one residence held in a consolidated joint venture arrangements
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.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1998, 1997 and 1996, the Company experienced
cash flow deficits from operations of $1.1 million, $141,000 and $1.7 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. A significant number of these new
residences were owned in consolidated joint venture arrangements. Consistent
with the terms of these agreements, operating deficits included in cash flow
from operations of $20.6 million and $8.4 million for the years ended December
31, 1998 and 1997, respectively, were funded with capital contributions from the
minority partners. In 1998 and 1997, the cash flow deficit was also caused by
restructuring and transaction costs of approximately $5 million and $4 million
respectively, incurred in connection with the Sterling Merger and general
administrative expense necessary to support the Company's continued growth.
During the year ended December 31, 1998, the Company executed approximately
$340.4 million of new financing. Financing was provided through the sale of
5.25% Debentures pursuant to the exercise of an overallotment option and the
issuance of common stock in January 1998 which provided net proceeds of $18.3
million and $9.2 million, respectively, $145.7 million of sale/leaseback
financing, $198.4 million of secured mortgage financing, $5.0 million of
unsecured short-term financing, $26.7 million of minority partner contributions
and cash from operations. In addition, the Company assumed existing debt of
$13.3 million related to acquisitions completed in 1998.
This financing along with approximately $120 million in available cash and
investments was used to fund $366.9 million in construction and development
activity, $49.5 million in acquisition activity, $27.1 million in joint venture
buy-outs, and operating cash flow deficits.
22
24
In December 1998, the Company had working capital of $28.3 million compared to
working capital of $129.5 million at December 31, 1997. The decrease was due to
the utilization of $120 million in cash and investments to fund additional
construction and development activities during 1998.
The Company's earnings were inadequate to cover fixed charges by $13.9 million
and $23.2 million for the years ended December 31, 1998 and 1997.
To achieve its growth objectives, the Company will need to obtain sufficient
financing to fund its development, construction and acquisition activities. The
Company has plans to develop approximately $325 million of residences for the
12-month period ending December 31, 1999. Historically, the Company has financed
its development program and acquisitions 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
healthcare REITs and commitments from conventional lenders for financing. As of
December 31, 1998, the Company had $94 million and $332 million of remaining
financing commitments from these healthcare REITs and conventional lenders,
respectively. In addition, the Company will require approximately $200 million
to acquire the 29 properties it has agreed to purchase from HCR Manor Care. The
Company expects to finance this transaction through a separate credit facility.
In addition to financing construction and development costs, the Company will
require capital resources to meet its operating and working capital needs
incurred primarily in connection with the start-up and lease-up phases of new
residences. The Company believes that its cash on hand, financing under these
commitments, 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 12 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 at fair market value upon the
election of such partners. 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, or earlier, 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 may 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 $30 million to $35 million to satisfy these purchase
obligations during the 12 month period ended December 31, 1999.
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.
23
25
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 certain system failures or miscalculations causing disruptions to the
operations or business activities of the Company.
The Company began evaluating its compliance with year 2000 issues in 1997. An
assessment of existing systems indicated that all of its principal systems, such
as general ledger, accounts payable, billing, property management, and all
desktop applications such as word processing, e-mail and spreadsheet
applications were compliant. To address the significant growth of the Company,
a new corporate telecommunications system was installed in 1998 and the Company
implemented a new Human Resources and Payroll system on January 1, 1999. While
preliminary indications suggest that there are no systems in the residences that
will be affected (call systems, elevators, phones, etc.), the Company will be
completing its evaluation of compliance of these systems during the second
quarter of 1999. While the Company does not believe that it has any significant
exposure from lack of compliance by third party vendors, it will also be
completing its evaluation of those vendor systems by the second quarter of 1999,
thus allowing for the remainder of 1999 to develop any contingency plans that
might be required.
Because the Company's hardware and software has been determined to be Year 2000
compliant, and third party vendor arrangements are not anticipated to have a
significant effect on operations, the Company does not expect that issues
associated with Year 2000 compliance will have any material adverse effect on
its consolidated financial position or results of operations. There can be no
assurance, however, that the computer systems of other businesses on which the
Company's operations rely, such as utilities, transportation, communications,
banking and government, will be timely modified, or that a failure to modify
such systems by such businesses, or modifications that are incompatible with the
Company's systems, would not have a material adverse effect on the Company.
Because the remaining focus around Year 2000 compliance issues relates primarily
to identifying third party problems or issues and contingency plans, if
necessary, the Company believes that the associated costs related to Year 2000
compliance will be immaterial.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. Changes in these factors cause fluctuations in
the Company's earnings and cash flows.
The Company performed a sensitivity analysis which presents the hypothetical
change in fair value of those financial instruments held by the Company at
December 31, 1998 which are sensitive to changes in interest rates. Market risk
is estimated as the potential change in fair value resulting from an immediate
hypothetical one percentage point parallel shift in the yield curve. The fair
value of the debt included in the analysis is $114.6 million. Although not
expected, a one percentage point change in the interest rates would have
caused the Company's annual interest expense to change by approximately $1.1
million. Accordingly, a significant increase in LIBOR could have a material
adverse effect on the Company's earnings.
Although a majority of the debt and lease payment obligations of the Company as
of, or during the twelve months ended, December 31, 1998 are not subject to
floating interest rates, indebtedness that the Company may incur in the future
may bear interest at a floating rate. Debt and annual operating lease payment
obligations will continue to increase significantly as the Company pursues its
growth strategy.
24
26
The Company does not presently use financial derivative instruments to manage
its interest costs. The Company does not use foreign currency exchange rate
forward contracts or commodity contracts and does not have foreign currency
exposure as of December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-------
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES:
Independent Auditors' Report.................................................................. 26
Consolidated Balance Sheets, as of December 31, 1998 and 1997................................. 27
Consolidated Statements of Operations for Years Ended December 31, 1998, 1997 and 1996........ 28
Consolidated Statements of Changes in Stockholders' Equity for Years Ended December 31,
1998, 1997 and 1996....................................................................... 29
Consolidated Statements of Cash Flows for Years Ended December 31, 1998, 1997 and 1996........ 20
Notes to Consolidated Financial Statements.................................................... 31-45
25
27
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, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and it's cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
February 22, 1999
26
28
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 49,934 $ 79,838
Short-term investments........................................ -- 90,000
Accounts receivable........................................... 4,045 1,832
Pre-opening costs, net of amortization........................ 7,856 5,785
Note receivable............................................... 10,986 --
Other current assets.......................................... 18,031 21,378
-------- ---------
Total current assets...................................... 90,852 198,833
-------- ---------
Property and equipment, net....................................... 640,211 323,613
Long-term investments............................................. 4,504 4,435
Investments in and advances to unconsolidated affiliates.......... -- 1,607
Goodwill, net..................................................... 5,243 5,380
Other assets...................................................... 37,000 19,684
======== =========
Total assets.............................................. $777,810 $ 553,552
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations............... $ 4,376 $ 2,677
Short-term notes payable...................................... 8,363 18,900
Accounts payable.............................................. 28,666 20,645
Accrued expenses.............................................. 15,723 21,603
Deferred rent and refundable deposits......................... 5,419 5,480
-------- ---------
Total current liabilities.............................. 62,547 69,305
-------- ---------
Long-term obligations, less current installments.................. 286,984 108,069
Convertible debt.................................................. 228,600 210,000
Deferred gain on sale and other................................... 18,347 12,421
Minority interest................................................. 4,220 9,860
Stockholders' equity:
Common stock.................................................. 219 214
Additional paid-in capital.................................... 177,864 165,206
Accumulated deficit........................................... (971) (21,523)
-------- ---------
Total stockholders' equity................................ 177,112 143,897
======== =========
Total liabilities and stockholders' equity................ $777,810 $ 553,552
======== =========
See accompanying notes to consolidated financial statements.
27
29
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
--------- --------- ---------
Revenue:
Resident service fees................................. $ 235,909 $ 128,856 $ 54,210
Other................................................. 8,514 1,888 1,427
--------- --------- ---------
Operating revenue......................................... 244,423 130,744 55,637
Operating expenses:
Residence operations.................................. 147,931 81,558 35,977
Lease expense......................................... 44,174 25,524 9,035
General and administrative............................ 23,200 22,168 11,143
Depreciation and amortization......................... 19,730 9,271 4,223
Non-recurring charge.................................. -- 4,656 976
--------- --------- ---------
Total operating expenses.......................... 235,035 143,177 61,354
--------- --------- ---------
Operating income (loss)................................... 9,388 (12,433) (5,717)
Other income (expense):
Interest expense, net................................. (11,024) (3,932) (3,231)
Lease income ......................................... 4,915 -- --
(Loss) gain on sale of assets......................... -- (29) --
Equity in losses of unconsolidated affiliates......... (31) (226) (52)
Other (expense) income................................ (170) (83) (31)
Minority interest in losses of consolidated
subsidiaries........................................ 20,610 8,440 76
--------- --------- ---------
Total other income (expense), net................. 14,300 4,170 (3,238)
--------- --------- ---------
Income (loss) before income taxes......................... 23,688 (8,263) (8,955)
Income tax (expense) benefit.............................. (3,136) -- 159
--------- --------- ---------
Net income (loss)......................................... $ 20,552 $ (8,263) $ (8,796)
========= ========= =========
Net income (loss) per share:
Basic................................................. $ 0.94 $ (0.44) $ (0.57)
========= ========= =========
Diluted............................................... $ 0.92 $ (0.44) $ (0.57)
========= ========= =========
Weighted average common shares outstanding:
Basic................................................. 21,905 18,651 15,429
========= ========= =========
Diluted............................................... 24,145 18,651 15,429
========= ========= =========
See accompanying notes to consolidated financial statements.
28
30
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL
-------------------------
ACCUMULATED
SHARES AMOUNTS DEFICIT TOTAL
--------- ----------- ------------- --------
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
========= ========= ======== ========
Proceeds from issuance of common stock......... 427 9,331 -- 9,331
Shares issued - options exercised.............. 201 3,332 -- 3,332
Net income..................................... -- -- 20,552 20,552
--------- --------- -------- --------
BALANCES AT DECEMBER 31, 1998.................. 22,019 $ 178,083 $ (971) $177,112
========= ========== ======== ========
See accompanying notes to consolidated financial statements.
29
31
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
----------- ---------- ---------
Cash flows from operating activities:
Net income (loss)............................................................ $ 20,552 $ (8,263) $ (8,796)
Adjustment to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................................ 19,730 9,271 4,223
Loss on sale of assets...................................................... -- 29 --
Deferred income taxes........................................................ (6,468) -- (159)
Equity in net loss from investments in unconsolidated affiliates............. 31 226 52
Minority interest in losses of consolidated subsidiaries..................... (20,610) (8,440) (76)
Tax effect of stock options exercised........................................ 1,709 -- --
Increase in net resident receivable.......................................... (2,213) (4,333) (1,293)
Increase in pre-opening costs................................................ (11,965) (3,097) (2,688)
Decrease (increase)in other current assets................................... 3,347 (7,899) (782)
Increase (decrease) in accounts payable...................................... 8,021 7,486 (344)
Increase in accrued expenses................................................. (729) 8,583 4,397
(Decrease) Increase in accrued merger charges................................ (5,151) 5,863 --
Changes in other assets and liabilities, net................................. (7,378) 433 3,777
--------- -------- --------
Net cash used in operating activities.......................................... (1,124) (141) (1,689)
--------- -------- --------
Cash flows from investing activities:
Payments for property, equipment and project development costs .............. (366,920) (294,153) (115,711)
Construction receivable due from REIT........................................ -- -- (3,848)
Net proceeds from sale of property and equipment............................. -- 2,188 --
Increase in notes receivable................................................. (10,986) -- --
Acquisitions of facilities, net of cash...................................... (49,509) (23,189) (9,998)
Changes in investments in and advances to unconsolidated affiliates.......... (4,682) (1,148) (252)
Purchase of limited partnership interests.................................... (27,053) (5,590) --
Increase in long-term investments............................................ (69) (1,600) (1,663)
Decrease (Increase) in short-term investments................................ 90,000 (90,000) --
--------- -------- --------
Net cash used in investing activities.......................................... (369,219) (413,492) (131,472)
--------- -------- --------
Cash flows from financing activities:
Repayments of short term borrowings.......................................... (15,537) (34,335) (13,844)
Repayments of long-term obligations.......................................... (53,089) (53,887) (39,626)
Proceeds from issuance of debt............................................... 216,286 145,943 39,612
Proceeds from issuance of convertible debt................................... 18,600 175,000 35,000
Payments for financing costs................................................. (8,932) (7,131) (1,602)
Proceeds from sale/leaseback transactions.................................... 145,669 160,748 91,034
Issuance of common stock and other capital contributions..................... 10,710 61,285 41,648
Contributions by minority partners and minority stockholders to fund losses.. 26,732 6,393 --
--------- -------- --------
Net cash provided by financing activities...................................... 340,439 454,016 152,222
--------- -------- --------
Net (decrease)increase in cash and cash equivalents............................ (29,904) 40,383 19,061
--------- -------- --------
Cash and cash equivalents:
Beginning of year............................................................ 79,838 39,455 20,394
--------- -------- --------
End of year.................................................................. $ 49,934 $ 79,838 $ 39,455
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized........................ $ 27,631 $ 11,660 $ 6,086
========= ======== ========
Cash paid during year for income taxes....................................... $ 5,219 $ 94 $ --
========= ======== ========
See accompanying notes to consolidated financial statements.
30
32
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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, 1998, the Company operated and managed 350 residences with
approximate capacity to accommodate 15,000 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.
Included in the consolidated financial statements are the
accounts of certain wholly owned subsidiaries that have been
formed as "special purpose entities" (SPEs) in accordance with
the requirements of certain of the Company's lenders. Mortgage
lenders imposing SPE requirements typically require that, in
connection with providing mortgage financing with respect to a
pool of residences, the residences actually be owned by one or
more SPEs, which become the borrower or borrowers under the
mortgage financing arrangement. Although lender requirements
with respect to such SPEs vary, an SPE typically is required
to, maintain separate corporation records and books of
account, not commingle its assets with those of the parent
company, have a separate board of directors from the parent
company (including at least one individual board member who
is independent of the parent company), maintain arm's length
relationships with the parent company, not guarantee or
become obligated for the debts of any other entity, including
the parent company, or to hold its credit as being available
to satisfy the obligations of others and not pledge its
assets for the benefit of any other entity, including the
parent company. Given the separate corporate existence of
these SPEs and the fact that the assets of each SPE are
subject to the prior claims of the individual creditors of
such SPE, neither the creditors nor stockholders of the
Company (or of any other of the Company's subsidiaries) shall
have any right to the assets of such SPEs except indirectly
by virtue of the Company's (or such subsidiary's) equity
interest in such SPEs. SPEs included in the consolidated
financial statements include ALS Venture I, Inc. (which owns
18 residences and holds a mortgage interest in 1 residence),
ALS Venture II, Inc. (which owns 36 residences), ALS
Financing, Inc. (which owns 5 residences) and ALS Financing
II, Inc. (which owns 7 residences and holds a leasehold
interest in 1 residence and an equitable interest in 1
residence pursuant to an installment sale contract).
(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
31
33
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 April 1998, the AICPA issued Statement of Position No. 98-5
"Reporting on the Costs of Start-up Activities." This
statement provides guidance on the financial reporting of
start-up activities and organization costs. It requires that
costs of start-up activities and organization costs be
expensed when incurred. Adoption of this statement is required
for fiscal years beginning after December 15, 1998, and the
Company plans to adopt the statement effective January 1,
1999, and report the impact as a cumulative effect of a change
in accounting principle. As of December 31, 1998, the effect
of adoption of this statement would result in an after tax
charge to earnings of approximately $5.0 million, or $0.16 per
diluted share.
In September of 1998 the Financial Accounting Standards Board
issued SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities," which will be effective for the Company's
fiscal year 1999. This statement establishes accounting and
reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded
in other contracts, be recorded in the balance sheet as either
an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge
accounting criteria are met. The Company currently does not
participate in any hedging activities. However, the Company
will assess the impact of this new statement on any future
hedging transactions.
(E) CASH EQUIVALENTS
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.
(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 undiscounted cash flows in relation
to the net capital investment in the entity. Accumulated
amortization of goodwill was $449,649 and $314,264 as of
December 31, 1998 and 1997, respectively.
32
34
(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 of the
following components (in thousands):
1998 1997
---------- ----------
Management fees............................. $5,676 $1,583
Franchise fees.............................. 1,545 305
Development fees........................... 1,293 --
------ ------
Total other revenue....................... $8,514 $1,888
====== ======
Management fees are recognized based on the terms of the
management agreements in place for managed residences owned by
third parties and those operated under unconsolidated joint
venture arrangements. Fees are generally recognized based on a
percentage of stabilized revenues incurred during the start-up
period which include costs to hire and train staff, licensing
and other activities.
Franchise fees are recognized based on the applicable
franchise agreements which charge fees for the right to use
Company brand names and operating systems. Fees are recognized
based on a fixed fee when franchised residences open and a
percentage of revenue once in operation.
Development fees are recognized based on the applicable
agreements whereby the Company receives fees for construction
of Company model buildings for the benefit of third parties.
These fees are recorded during the construction period based
on achievement of certain milestones as defined in the
development agreement.
(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 INCOME (LOSS) PER COMMON SHARE
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
33
35
reflects the potential dilution that could occur if common
stock equivalents were exercised and then shared in the
earnings of the Company. Common stock equivalents were
anti-dilutive in 1997 and 1996, accordingly, basic and
diluted loss per share amounts were the same.
(L) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996
financial statements to conform with the 1998 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
1.1 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):
1996
---------
Operating revenue:
Alternative Living Services, Inc........ $ 39,599
Sterling House Corporation.............. 16,038
========
Combined............................ $ 55,637
========
Extraordinary loss:
Alternative Living Services, Inc........ $ --
Sterling House Corporation.............. --
--------
Combined............................ $ --
========
Net loss:
Alternative Living Services, Inc........ $ (7,811)
Sterling House Corporation.............. (726)
Effect of restated income (taxes)....... (259)
--------
Combined............................ $ (8,796)
========
Basic and diluted loss per share:
Alternative Living Services, Inc........ $ (0.79)
Sterling House Corporation.............. (0.14)
--------
Combined............................ $ (0.57)
========
There were no transactions between the Company and Sterling prior to
the Sterling Merger.
34
36
In addition to the Sterling Merger, the Company completed the following
acquisitions in 1997 and 1998:
- 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;
- 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 acquired from a franchisee of the Company;
- An assisted living residence located in Southern California in
March 1998;
- Seven assisted living residences located in Kansas in September
1998 acquired from a franchisee of the Company;
- Two assisted living residences located in Wisconsin, one of
which was still under construction effective in September 1998;
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.
The aggregate purchase price for all 1998 acquisitions totaled $62.8
million, $49.5 million of which was paid in cash and the remainder was
debt assumed by the Company. All 1998 acquisitions have been accounted
for using the purchase method.
35
37
(3) SHORT-TERM AND LONG-TERM INVESTMENTS
A summary of short-term and long-term investments at December 31,
follows (in thousands):
1998 1997
---- ----
MARKET MARKET
COST VALUE COST VALUE
----------- ----------- ---------- ------------
Short-term investments:
Commercial paper, maturing
9/30/98, 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..................... $ 4,504 $4,504 $ 4,435 $ 4,435
=========== =========== ========== ============
(4) OTHER CURRENT ASSETS
Other current assets are comprised of the following at December 31 (in
thousands):
1998 1997
-------- --------
Supply inventory ...................................... $ 7,511 $ 3,891
Prepaid expenses ...................................... 4,648 3,320
Other current assets .................................. 5,872 14,167
-------- --------
Total other current assets ............................ $18,031 $21,378
======== ========
(5) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, follows (in
thousands):
1998 1997
-------- --------
Land and improvements............................. $ 55,037 $ 34,143
Buildings and leasehold improvements.............. 407,631 160,991
Vehicles, furniture, fixtures, and equipment...... 55,655 23,702
Construction in progress.......................... 142,433 114,277
-------- --------
Total property and equipment...................... 660,756 333,113
Less accumulated depreciation..................... (20,545) (9,500)
-------- --------
Property and equipment, net................... $640,211 $323,613
======== ========
At December 31, 1998, property and equipment includes $9.0 million of
buildings and improvements and $368,051 of fixtures and equipment held
under capital leases. Combined related accumulated amortization totaled
$1.6 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 1998, 1997 and 1996 was
approximately $13.8 million, $6.7 million and $1.9 million,
respectively.
Construction in progress at December 31, 1998 and 1997 consisted
principally of costs related to the construction of assisted living
residences with outstanding construction commitments totaling
approximately $93.9 million and $196.9 million, respectively.
36
38
(6) UNCONSOLIDATED AFFILIATES AND MANAGED RESIDENCES
The Company manages residences primarily in the start-up or lease-up
phases of operations in which it either has no ownership or a minority
ownership position, typically less than 10%. Historically, the Company
has subsequently elected to purchase or acquire the remaining ownership
interest in a majority of these residences at which point the
residences are included in consolidated operating results. As of
December 31, 1998, the Company owned minority equity interests in 49
residences and managed 17 other residences. As of December 31, 1997,
the Company owned minority equity interests in 20 residences and
managed 16 other residences. Included in other assets and liabilities
of the Company are net advances (from) to the affiliates of $(2.0)
million and $1.6 million as of December 31, 1998 and 1997,
respectively.
For the year ended December 31, 1998, the residences described above
generated operating revenues of $20.7 million and net losses before
taxes of $15.2 million. For the year ended December 31, 1997, operating
revenues were $7.4 million and net losses before taxes were $7.7
million.
Included in the results above are six residences managed pursuant to an
agreement with an affiliate under which the Company provides payroll
processing and financial statement preparation services for a
partnership that is 50% owned by an officer and a stockholder. Under
the terms of this agreement, the Company charged an annual fee of
$10,000 in 1998 and $78,000 in 1997 for provision of such management
services.
(7) OTHER ASSETS
Other assets are comprised of the following at December 31 (in
thousands):
1998 1997
------- -------
Deferred financing costs, net............ $18,290 $ 9,123
Organizational and other costs, net...... 2,631 1,087
Deposits and other....................... 16,079 9,474
======= =======
Total other assets....................... $37,000 $19,684
======= =======
37
39
(8) 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):
1998 1997
--------- --------
5.25% convertible subordinated debentures due December 15, 2002,
callable by the Company on or after December 31, 2000...................... $143,750 $125,000
7.00% convertible subordinated debentures due June 1, 2004,
callable by the Company on or after June 15, 2000.......................... 50,000 50,000
6.75% convertible subordinated debentures due June 30, 2006,
callable by the Company on or after July 15, 1999.......................... 34,850 35,000
-------- --------
Total convertible debt............................................. $228,600 $210,000
-------- --------
Mortgages payable, due from 1999 through 2021; weighted average
interest rates of 7.91%.................................................... $280,219 $ 66,564
Sale/leaseback financing obligation, variable interest at the 11th
District FHLB rate plus 2-3/4%, payable in monthly installments, due 2000 4,227 4,503
Serial and term revenue bonds maturing serially from 1995 through 2013,
interest ranging from 4.0% to 9.5%........................................ 6,761 9,185
Secured construction loan financing at 10% interest funded in advance of
anticipated sale/leaseback transactions................................... -- 29,364
Other..................................................................... 153 1,130
-------- --------
Total long-term obligations......................................... 519,960 320,746
Less current installments................................................. 4,376 2,677
======== ========
Total long-term obligations, less current installments............ $515,584 $318,069
======== ========
The mortgages payable are secured through security agreements 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 1999 through
2002.
At December 31, 1998, the Company has outstanding $13.3 million of
mortgage notes payable that were assumed in conjunction with non-cash
acquisition activities in 1998.
Principal payments on long-term debt, capital leases, and financing
obligations for the next five years and thereafter are as follows (in
thousands):
1999.............................................................. $ 4,376
2000.............................................................. 7,173
2001.............................................................. 34,069
2002.............................................................. 158,900
2003.............................................................. 8,890
Thereafter........................................................ 306,552
--------
Total long-term debt, capital leases, and financing obligations... $519,960
========
38
40
(9) ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31 (in
thousands):
1998 1997
-------- -------
Accrued salaries and wages.......... $ 4,780 $5,879
Accrued merger costs................ 356 6,672
Other............................... 10,587 9,052
------- -------
Total accrued expenses.......... $15,723 $21,603
======= =======
(10) STOCKHOLDERS' EQUITY
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 100,000,000
shares of common stock, $.01 par value, and 5,000,000 shares of $.01
par value preferred stock. At December 31, 1998, there were 22,030,097
shares of common stock issued, of which 22,018,458 were outstanding
with 11,639 shares held in treasury. 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, 1998
and 1997, no shares of preferred stock were issued and outstanding.
On December 10, 1998, the Company entered into a Rights Agreement with
American Stock Transfer & Trust Company, as Rights Agent, pursuant to
which the Company declared and paid a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock.
Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Junior Participating Preferred
Stock. $.01 par value per share (the "Preferred Shares"), of the
Company at a price of $130.00 per one one-hundredth of a Preferred
Share.
(11) 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 2,500,000 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 four years from the date of grant.
At December 31, 1998, 896,499 shares were available for grant under the
1995 Plan. The per share weighted-average fair value of stock options
granted during 1998 and 1997 was $10.44 and $7.25, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1998 - expected dividend yield
0.0%, risk free interest rate of 5.0%, expected volatility of 43% and
an expected life of 7 years; 1997 - expected dividend yield 0.0%,
risk-free interest rate of 5.6%, expected volatility of 42% 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.
39
41
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 1998 and 1997, the Company's net income (loss) and
net income (loss) per share would have been (decreased)/increased to
the pro forma amounts indicated below, (in thousands, except per share
data):
NET INCOME (LOSS) NET INCOME (LOSS) PER
SHARE
------------------------------------ --------------------------------------
1998 1997 1996 1998 1997 1996
--------- ---------- --------- ---------- ----------- ---------
As reported........... $20,552 $ (8,263) $(8,796) $0.92 $(0.44) $(0.57)
Pro forma............. $18,821 $(10,267) $(9,391) $0.78 $(0.55) $(0.61)
Stock option activity during the periods indicated is as follows:
WTD.-AVG.
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
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
Granted...................... 893,801 19.77
Exercised.................... (200,579) (8.15)
Forfeited.................... (42,997) (17.49)
Expired...................... -- --
--------- ---------
BALANCE AT DECEMBER 31, 1998..... 1,837,626 $ 14.41
========= =========
AVERAGE
RANGE OF NUMBER REMAINING WTD.-AVG. NUMBER WTD.-AVG.
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- -------------------- -------------- --------------- ----------- ------------- ------------
$0.09 12,415 6.8 years $0.09 12,415 $0.09
2.92 - 8.69 496,515 6.7 years 5.70 339,313 5.24
7.50 - 17.50 283,530 7.8 years 13.18 283,530 13.18
11.13 - 17.94 120,491 8.0 years 13.44 20,793 13.47
18.50 - 20.81 810,789 9.7 years 18.55 4,961 20.57
25.56 - 29.56 113,886 9.1 years 28.56 6,588 25.56
-------------- --------------- ----------- ------------- ------------
Total 1,837,626 8.4 years $14.41 667,600 $9.09
============== =============== =========== ============= ============
40
42
(12) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 are as follows (in thousands):
1998 1997 1996
---------- ---------- -----------
Income tax expense (benefit):
Current:
Federal............... $ 8,577 $ 726 $ --
State................. 1,027 200 --
---------- ---------- -----------
Total current.............. 9,604 926 --
Deferred:
Federal............... (5,795) (726) (141)
State................. (673) (200) (18)
---------- ---------- -----------
Total deferred............ (6,468) (926) (159)
---------- ---------- -----------
Total..................... $ 3,136 $ -- $ (159)
========== ========== ===========
Deferred tax assets and liabilities consist of the following at
December 31 (in thousands):
1998 1997
----------- --------------
Deferred tax assets:
Net operating loss carryforwards............. $ 1,154 $ 1,339
Deferred gain sale/leaseback................. 5,392 4,856
Accrued expenses............................. 2,140 2,844
Investment in consolidated affiliates........ 1,194 1,359
Other........................................ -- 39
----------- --------------
Total deferred tax assets........................ 9,880 10,437
----------- --------------
Less valuation allowance..................... -- (6,816)
Deferred tax assets, net of valuation allowance.. 9,880 3,621
Deferred tax liabilities:
Acquisition basis............................ 1,715 1,736
Depreciation................................. 771 959
----------- ---------------
Deferred tax liabilities......................... $ 2,486 $ 2,695
=========== ==============
The valuation allowance for deferred tax assets as of December 31, 1997
was $6.8 million, respectively. During 1998, the valuation allowance
decreased to zero because the Company was reasonably certain 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.
The effective tax rate on income before income taxes varies from the
statutory Federal income tax rate as follows:
1998 1997 1996
----------- ------------ ------------
Statutory rate............. 35.0% (34.0)% (34.0)%
State taxes, net........... 4.0 (5.5) (5.5)
Valuation allowance........ (28.7) 39.5 38.4
Other...................... 2.9 -- 2.8
----------- ------------ ------------
Effective tax rate......... 13.2% 0.0% 1.7%
=========== ============ ============
41
43
The Company has approximately $2.9 million of tax net operating loss
carryforwards at December 31, 1998. 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.
(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:
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, 1998, the Company's
convertible debentures had a book value of $229 million. Based on
quoted market prices at December 31, 1998, the fair value of those
convertible securities was estimated to be $310 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 30 years. The Company is
responsible for all operating costs, including repairs, property taxes,
and insurance. 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.
42
44
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, 1998, 1997, and 1996 was $44.2 million, $25.5 million and
$9.0 million, respectively.
Future minimum lease payments for the next five years and thereafter
under noncancelable leases at December 31, 1998 are as follows (in
thousands):
CAPITAL OPERATING
----------- -------------
1999..................................................... $ 718 $ 53,442
2000..................................................... 4,354 53,331
2001..................................................... -- 52,583
2002..................................................... -- 52,680
2003..................................................... -- 52,780
Thereafter............................................... -- 316,292
-----------
=============
Total minimum lease payments............................. $5,072 $581,108
=============
Less amount representing interest........................ 851
-----------
Present value of net minimum capital lease payments...... 4,221
Less current portion..................................... 293
===========
Long-term capital lease obligations...................... $3,928
===========
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.
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.
During 1998, the Company entered into sale and leaseback financing
arrangements with certain REITS for approximately $148 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, 1998 and 1997 were $4.3 million and $1.2 million,
respectively.
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 $30 million to $35 million
to satisfy these purchase obligations during 1999.
43
45
(15) EARNINGS PER COMMON SHARE
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 was designed to simplify the standards
for computing earnings per share and increase the comparability of
earnings per share data on an international basis. SFAS 128 replaces
the presentation of primary earnings per share with a presentation of
basic earnings per share and requires dual presentation of basic and
diluted earnings per share on the face of the statement of income of
all entities with complex capital structures. The Company adopted SFAS
128 during the first quarter of fiscal 1998 and, accordingly, earnings
per share for all prior periods presented have been restated to conform
to the requirements of this new standard. The following table sets
forth the computation of basic and diluted earnings per share (in
thousands, except per share data):
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ --------------- ------------
Numerator:
Numerator for basic earnings per share -- Net income (loss).... $20,552 $ ( 8,263) $ (8,796)
Convertible debt interest add-back............................. 1,563 -- --
------------ --------------- ------------
Numerator for diluted earnings per share -- Net income (loss).. $22,115 $ (8,263) $ (8,796)
============ =============== ============
Denominator:
Denominator for basic earnings per share -- weighted
average shares................................................ 21,905 18,651 15,429
Effect of dilutive securities--stock options.................. 523 -- --
Effect of dilutive securities--convertible debt............... 1,717 -- --
------------ --------------- ------------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions.............. 24,145 18,651 15,429
============ =============== ============
Basic earnings (loss) per common share........................... $0.94 $ (0.44) $ (0.57)
Diluted earnings (loss) per common share......................... $0.92 $ (0.44) $ (0.57)
(16) SUBSEQUENT EVENTS
On December 31, 1998, the Company entered into a strategic alliance
with HCR Manor Care. The alliance includes four principal arrangements:
- The Company will purchase from HCR Manor Care up to 29
Alzheimer's/dementia care and assisted living residences with a
capacity for 2,611 residents located throughout 12 states for $200
million in cash. Acquisitions of these residences are expected to
close in the second quarter of 1999.
- HCR Manor Care and the Company will establish and capitalize a
joint venture to develop $500 million of ALS-branded
Alzheimer's/dementia care and assisted living residences in HCR's
core markets over the next three to five years. The Company
expects to begin joint development under this arrangement in the
second quarter of 1999 and to continue joint development
activities over a three to five year period.
- HCR Manor Care has agreed in principle to license from ALS the use
of ALS' Clare Bridge(R) service mark, to share various best
practices, and to engage in joint marketing activities relating to
HCR's remaining Alzheimer's/dementia care residences. The Company
expects to finalize this arrangement in the second quarter of
1999.
44
46
- HCR Manor Care and ALS have agreed in principle to form a new
company to provide a variety of ancillary services to ALS'
resident population, including rehabilitation therapy and hospice
care.
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY FINANCIAL SUMMARY
(Unaudited)
(In thousands, except per share data)
QUARTER ENDED
---------------------------------------------------------
12/31 9/31 6/30 3/31
----------- ---------- ----------- -----------
1998
- -------------------------------------------------
Operating revenues.......................... $ 76,454 $66,286 $55,199 $46,484
Operating income (loss)..................... 5,906 2,052 1,578 (148)
Net income.................................. 6,273 5,821 4,875 3,583
Basic income per share...................... 0.29 0.27 0.22 0.16
Diluted income per share.................... $ 0.27 $ 0.26 $ 0.22 $ 0.16
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 $ (0.01) $ (0.05)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required under this item with respect to the Company's
Directors and Executive Officers and compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is incorporated herein by reference
to the Alternative Living Services, Inc. definitive proxy statement (the "1999
Proxy Statement") to be filed with the Securities and Exchange Commission in
connection with the 1999 Annual Meeting of Stockholders.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated by reference to
the 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to
the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference to
the 1999 Proxy Statement.
45
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference to
the 1999 Proxy Statement.
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........................ 26
Consolidated Balance Sheets......................... 27
Consolidated Statements of Operations............... 28
Consolidated Statements of Shareholders' Equity..... 29
Consolidated Statements of Cash Flows............... 30
Notes to Consolidated Financial Statements.......... 31-45
(b) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES. All schedules
are omitted as the required information either is not
applicable or is included in the Consolidated Financial
Statements or related notes.
(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, 1998:
The Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 4, 1999
reported, under Item 5, the formation of a strategic business
alliance with HCR Manor Care, Inc.
(d) EXHIBITS. The following exhibits are filed as part of, or
incorporated by reference into this report on Form 10-K:
NO. EXHIBIT
DESCRIPTION
- ----- -----------------------------------------------------------------------
2.1 Agreement of Purchase and Sale (Operating Residences) dated as of
December 31, 1998 by HCR Manor Care, Inc. and Alternative Living
Services, Inc.
2.2 Agreement of Purchase and Sale (Construction Residences) dated as of
December 31, 1998 by HCR Manor Care, Inc. and Alternative Living
Services, Inc.
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")).
46
48
NO. EXHIBIT
DESCRIPTION
- ----- -----------------------------------------------------------------------
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 Certificate of Amendment to Restated Certificate of Incorporation
effective May 26, 1998 (incorporated herein by reference to Exhibit 3.1
to the Company's Form 10-Q for period ending June 30, 1998).
3.5 Certificate of Designation of Series A Junior Participating Preferred
Stock, dated December 10, 1998 (incorporated by reference to Exhibit A
to Exhibit 4.1 to the Registrant's Registration Statement on Form 8-A,
filed December 17, 1998).
3.6 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")).
3.7 Amendment to Restated Bylaws dated August 3, 1998.
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 two, three, five, seven, and eight 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 StreetBank 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")).
47
49
NO. EXHIBIT
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).
4.12 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.
4.13 Certificate of Amendment to the Company's 1995 Amended and Restated
Incentive Compensation Plan (incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q for period ending September 30, 1998).
Represents an executive compensation plan or arrangement.
4.14 Rights Agreement dated as of December 10, 1998 between Alternative
Living Services, Inc. and American Stock Transfer & Trust Company,
including the form of Certificate of Designations of Series A Junior
Participating Preferred Stock of Alternative Living Services, Inc.
(Exhibit A), Form of Rights Certificate (Exhibit B), and Form of
Summary of Rights to Purchase Preferred Shares (Exhibit C)
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A, filed with the Commission on
December 17, 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 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 Employment Agreement dated as of July 30, 1997 by and between
Alternative Living Services, Inc. and Timothy J. Buchanan (incorporated
by reference to Exhibit 10.9 of the Company's Form 10-K for the year
ended Dec. 31, 1997). Represents an executive compensation plan or
arrangement.
10.8 Employment Agreement dated as of July 30, 1997 by and between
Alternative Living Services, Inc. and Steven L. Vick. (incorporated by
reference to Exhibit 10.10 of the Company's Form 10-K for the year
ended Dec. 31, 1997). Represents an executive compensation plan or
arrangement.
10.9 Employment Agreement dated as of October 23, 1997 by and between
Alternative Living Services, Inc. and Mark W. Ohlendorf (incorporated
by reference to Exhibit 10.11 of the Company's Form 10-K for the year
ended Dec. 31, 1997). Represents an executive compensation plan or
arrangement.
48
50
NO. EXHIBIT
DESCRIPTION
- ----- -----------------------------------------------------------------------
10.10 Employment Agreement dated as of October 23, 1997 by and between
Alternative Living Services, Inc. and Gary Anderson (incorporated by
reference to Exhibit 10.12 of the Company's Form 10-K for the year
ended Dec. 31, 1997). Represents an executive compensation plan or
arrangement.
10.11 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.
10.12 Loan Agreement by and between South Trust Bank of Alabama, National
Association and the Company Dated as of June 19, 1996 (incorporated by
reference to Exhibit 10.20 of the Form S-1).
10.13 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).
10.14 Partner Interest Acquisition Agreement dated as of August 1, 1996
between the Company, CCCI/Northampton Limited Partnership and
Continuing Care Concepts, Inc. (incorporated by reference to Exhibit
10.17 of the Form S-1).
10.15 First Amended Joint Venture Agreement dated as of April 30, 1997
between the Company and Assisted Living Equities, LLC. (incorporated by
reference to Exhibit 10.18 of the Form S-1).
10.16 Amendment No. 1 to First Amended Joint Venture Agreement dated as of
January 1, 1999 between Alternative Living Services, Inc. and Assisted
Living Equities
10.17 Second Amended Joint Venture Agreement dated as of January 1, 1999
between the Company and Assisted Living Equities, LLC.
10.18 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.)
10.19 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).
10.20 Schedule of Purchase and Sale Agreements substantially similar to
Exhibit 10.19 (incorporated by reference to Exhibit 10.34 of the Form
S-1).
10.21 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).
10.22 Schedule of Lease and Security Agreements by and between Nationwide
Health Properties, Inc. and New Crossings International Corporation
substantially similar to Exhibit 10.21 (incorporated by reference to
Exhibit 10.36 of the Form S-1).
10.23 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).
10.24 Schedule of Assumption Agreements substantially similar to Exhibit
10.23 (incorporated by reference to Exhibit 10.53 of the Form S-1).
49
51
NO. EXHIBIT
DESCRIPTION
- ----- -----------------------------------------------------------------------
10.25 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).
10.26 Schedule of Lease Approval Agreements substantially similar to Exhibit
10.25 (incorporated by reference to Exhibit 10.56 of the Form S-1).
10.27 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).
10.28 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 99.28 of the Company's
Form 8-K dated January 14, 1997).
10.29 Schedule of Additional Facility Leases which are substantially similar
to the Form of Facility Lease Attached as Exhibit 10.28 (incorporated
by reference to Exhibit 99.2 of the Company's Form 8-K dated January
14, 1997).
10.30 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).
10.31 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).
10.32 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).
10.33 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).
10.34 Schedule of Additional Facility Leases which are substantially similar
to the Form of Facility Lease Referenced in Exhibit 10.33 (incorporated
by reference to Exhibit 99.2 of the Company's Form 8-K filed December
2, 1997).
10.35 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).
10.36 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).
10.37 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).
10.38 Guaranty and Suretyship Agreement by Alternative Living Services, Inc.
in favor of Nomura Asset Capital Corporation dated March 31, 1998
(incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q
for period ending March 31, 1998).
10.39 Loan Agreement dated March 31, 1998 by and between ALS-Venture I, Inc.
and Nomura Asset Capital Corporation (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for period ending March 31,
1998).
50
52
NO. EXHIBIT
DESCRIPTION
- ----- -----------------------------------------------------------------------
10.40 Guaranty and Suretyship Agreement by Alternative Living Services, Inc.
in favor of Nomura Asset Capital Corporation dated May 26, 1998
(incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q
for period ending June 30, 1998).
10.41 Loan Agreement dated May 26, 1998, by and between ALS-Venture II, Inc.
and Nomura Asset Capital Corporation (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for period ending June 30,
1998).
10.42 Loan Agreement dated July 30, 1998, by and between ALS Financing, Inc.
and GMAC Commercial Mortgage Corporation (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for period ending September 30,
1998).
10.43 First Amendment to Loan Agreement and Reaffirmation Agreement dated
July 30, 1998, by and between The Capital Company of America LLC and
ALS Venture II, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for period ending September 30, 1998).
10.44 First Amendment to Loan Agreement and Reaffirmation Agreement dated
August 28, 1998, by and between Nomura Asset Capital Company and ALS
Venture I, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for period ending September 30, 1998).
10.45 Guaranty of Payment Agreement dated September 28, 1998, by Alternative
Livings Services, Inc., for the benefit of Bank United (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for period ending
September 30, 1998).
10.46 Financing and Security Agreement dated September 28, 1998, by and
between ALS Holdings, Inc. and Bank United (incorporated by reference
to Exhibit 10.1 to the Company's Form 10-Q for period ending September
30, 1998).
10.47 Second Amendment to Loan Agreement, First Amendment to Guaranty and
Suretyship Agreement, and Reaffirmation Agreement dated September 30,
1998, by and between The Capital Company of America LLC and ALS-Venture
II, Inc. (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for period ending September 30, 1998).
10.48 Form of Facility Lease dated as of September 4,1998, between Meditrust
Acquisition Corporation III and ALS Leasing, Inc. ("Form of Facility
Lease") (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for period ending September 30, 1998).
10.49 Schedule of Additional Facility Leases which are substantially similar
to the Form of Facility attached as Exhibit 10.48 (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for period ending
September 30, 1998).
10.50 Sixth Amendment to Amended and Restated Agreement Regarding Related
Lease Transactions, Amended and Restated Environmental Indemnity
Agreement and Amended and Restated Affiliated Party Subordination
Agreement dated September 4, 1998, by and among ALS Leasing, Inc., the
Company and Meditrust Acquisition Corporation III (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for period ending
September 30, 1998).
10.51 Seventh Amendment to Amended and Restated Agreement Regarding Related
Lease Transactions, dated September 4, 1998 by and among ALS Leasing,
Inc., the Company and Meditrust Acquisition Corporation III
(incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q
for period ending September 30, 1998).
10.52 Eleventh Amendment to Amended and Restated Agreement Regarding Related
Lease Transactions, dated September 4, 1998, by and among Assisted
Living Properties, Inc., Meditrust Company, LLC Meditrust Of Texas,
Inc., Meditrust of Kansas, Inc., Meditrust of Ohio, Inc. and MOC Health
Care Company (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for period ending September 30, 1998).
10.53 Form of Mortgage, Assignment and Security Agreement between ALS
Holdings, Inc., the Company and Bank United made as of November 18,
1998.
51
53
NO. EXHIBIT
DESCRIPTION
- ----- -----------------------------------------------------------------------
10.54 Schedule of Additional Mortgage, Assignment and Security Agreements
("Mortgage") which are substantially similar to the Form of Mortgage
attached as Exhibit 10.53.
10.55 Additional Borrower Joinder Supplement by and among ALS Holdings, Inc.,
ALS Wisconsin Holdings, Inc., the Company and Bank United, dated
December 10, 1998.
10.56 Master Purchase Agreement between the Company and National Health
Investors, Inc. dated December 22, 1998.
10.57 Form of Lease between National Health Investors, Inc. and the Company,
dated as of December 22, 1998.
10.58 Schedule of Additional Leases which are substantially similar to the
Form of Lease attached as Exhibit 10.57.
10.59 Credit Agreement between the Company and Deutsche Bank AG dated October
6, 1998.
10.60 Master Construction Line of Credit Agreement between the Company, Key
Corporate Capital, Inc., and the lending institutions named therein,
dated October 6, 1998.
10.61 Development Joint Venture Agreement between the Company and HCR Manor
Care, Inc. dated December 31, 1998.
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule (for SEC use only).
52
54
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 26th day of March, 1999.
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 President, Chief Executive Officer and March 29, 1999
Director (Principal Executive Officer)
/S/ STEVEN L. VICK
- -------------------------------------
Steven L. Vick Chief Operating Officer and Director March 29, 1999
/S/ THOMAS E. KOMULA
- -------------------------------------
Thomas E. Komula Senior Vice President, Secretary, Treasurer, March 29, 1999
Chief Financial Officer
/S/ JOHN D. PETERSON
- -------------------------------------
John D. Peterson Vice President, Controller and Assistant March 29, 1999
Secretary (Principal Accounting Officer)
/S/ WILLIAM G. PETTY, JR.
- -------------------------------------
William G. Petty, Jr. Chairman of the Board and Director March 29, 1999
/S/ TIMOTHY J. BUCHANAN
- -------------------------------------
Timothy J. Buchanan Vice Chairman and Director March 29, 1999
/S/ RICHARD W. BOEHLKE
- -------------------------------------
Richard W. Boehlke Director March 29, 1999
/S/ GENE E. BURLESON
- -------------------------------------
Gene E. Burleson Director March 29, 1999
/S/ ROBERT HAVEMAN
- -------------------------------------
Robert Haveman Director March 29, 1999
/S/ RONALD G. KENNY
- -------------------------------------
Ronald G. Kenny Director March 29, 1999
/S/ JERRY L. TUBERGEN
- -------------------------------------
Jerry L. Tubergen Director March 29, 1999
53