exv99w1
Exhibit 99.1
Assisted
Living Concepts, Inc.
111 West Michigan Avenue
Milwaukee, Wisconsin 53203
,
2006
Dear Assisted Living Concepts, Inc. Shareholder:
It is my pleasure to welcome you as a shareholder of
Class A common stock of Assisted Living Concepts, Inc.
(“ALC”). As a separate, publicly traded company, ALC
is comprised of 206 assisted living facilities, making it one of
the five largest publicly traded assisted living companies in
the United States. Our business is to provide senior housing and
assisted living services to the local markets we serve in
17 states.
As an independent company, we believe we can more effectively
focus on our objectives and satisfy the capital needs of our
company than we could as a subsidiary of Extendicare. Our
business objectives include increasing our occupancy rates,
growing our property portfolio through selective acquisitions of
quality properties and expanding existing properties with new
units, and leveraging our existing management and systems.
We believe our competitive strength will be in providing an
aesthetically pleasing environment where seniors will enjoy life
enrichment through wellness education, socialization and
customer service. Our main goal is to be recognized as a
superior provider of quality services and value to our clients.
We intend to have ALC’s Class A common stock listed on
the New York Stock Exchange under the symbol “ALC”. We
expect the separation will be completed and that your new stock
will begin trading in the third quarter of 2006.
I invite you to learn more about ALC by reviewing the enclosed
Information Statement. We look forward to our future as a
separate publicly traded company and to your support as a holder
of Class A common stock of ALC.
Sincerely,
Chief Executive Officer
SUBJECT
TO COMPLETION, DATED JULY 20, 2006
INFORMATION STATEMENT
Assisted Living Concepts, Inc.
Class A Common Stock
(Par Value $0.01 per share)
This Information Statement is being furnished in connection with
the initial listing of our Class A common stock on the New
York Stock Exchange. The listing of our Class A common
stock will coincide with the delivery of shares of our
Class A common stock to holders of Extendicare Inc.
(“Extendicare”) Subordinate Voting Shares pursuant to
the exchange described below.
Shares of our Class A common stock will be exchanged for
shares of Extendicare Subordinate Voting Shares in connection
with a Plan of Arrangement that has been approved by
Extendicare’s Board of Directors. As part of the Plan of
Arrangement, Extendicare will convert to Extendicare Real Estate
Investment Trust, an unincorporated open-ended investment trust
established under the laws of Ontario, which we refer to as
Extendicare REIT. Holders of Extendicare Subordinate Voting
Shares at the effective time of the Plan of Arrangement (the
“Effective Time”), other than any holders that validly
exercise dissent rights, will receive (i) one Extendicare
Common Share and (ii) one share of Class A common
stock of ALC from Extendicare for each Extendicare Subordinate
Voting Share held. In addition, holders of Extendicare Multiple
Voting Shares at the Effective Time of the Plan of Arrangement,
other than any holders that validly exercise dissent rights,
will receive (i) 1.075 Extendicare Common Shares and
(ii) one share of Class B common stock of ALC from
Extendicare for each Extendicare Multiple Voting Share held.
Holders of Class B common stock of ALC will be entitled to
convert their Class B common stock into Class A common
stock of ALC on the basis of 1.075 shares of Class A
common stock for each share of Class B common stock. Each
Extendicare Common Share received in such exchanges will then
immediately be exchanged for one unit of Extendicare REIT or, at
the election of holders that are taxable Canadian residents, for
one limited partnership unit of Extendicare Holding Partnership,
which will be freely exchangeable for Extendicare REIT units.
Approval of the Plan of Arrangement is being sought from the
holders of Extendicare Subordinate and Multiple Voting Shares
pursuant to a separate management proxy circular, which we refer
to as the Circular, being distributed by Extendicare to all
holders of its Subordinate and Multiple Voting Shares. As a
result, we are not asking you for a proxy and you are requested
not to send us a proxy in connection with this Information
Statement. Together with the Circular, Extendicare has sent
to each holder of its Subordinate and Multiple Voting Shares a
letter of transmittal that contains instructions for the
surrender of Extendicare share certificates in connection with
the exchange. There is currently no trading market for our
Class A common stock. However, we expect that a limited
market, commonly known as a “when-issued” trading
market, for our Class A common stock will develop on or
shortly before the completion of the Plan of Arrangement, and we
expect “regular way” trading of our Class A
common stock will begin the first trading day after the
completion of the Plan of Arrangement. We intend to have
ALC’s Class A common stock listed on the New York
Stock Exchange under the symbol “ALC.”
In reviewing this Information Statement, you should carefully
consider the matters described under the caption “Risk
Factors” beginning on page 11.
Neither the Securities and Exchange Commission nor any state
or provincial securities commission has approved or disapproved
these securities or determined if this Information Statement is
truthful or complete. Any representation to the contrary is a
criminal offense.
This Information Statement is not an offer to sell, or a
solicitation of an offer to buy, any securities.
The date of this Information Statement
is ,
2006.
Extendicare Inc. first mailed this document to its shareholders
on ,
2006.
TABLE OF
CONTENTS
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INDUSTRY
DATA
This Information Statement includes industry data, forecasts and
information that we have prepared based, in part, upon industry
data, forecasts and information obtained from independent
industry publications and surveys and other information
available to us. Some data are also based on our good faith
estimates, which are derived from management’s knowledge of
the industry and independent sources. We have not independently
verified any of the data from third-party sources nor have we
ascertained the underlying economic assumptions relied upon
therein. Similarly, we believe our internal research is
reliable, but it has not been verified by any independent
sources.
SUMMARY
This summary highlights information contained elsewhere in
this Information Statement and provides an overview of our
company and the material aspects of our separation from
Extendicare. You should read this entire Information Statement
carefully, especially the risk factors beginning on page 11
and the financial statements and notes to those statements
appearing elsewhere in this Information Statement.
We describe in this Information Statement the businesses and
assets that we will own and operate immediately following our
separation from Extendicare. We have acquired certain of these
assets and businesses at different times over the past several
years and will acquire certain of these assets when they are
transferred to us by Extendicare prior to our separation. On
January 31, 2005, Extendicare acquired all of the
outstanding capital stock of Assisted Living Concepts, Inc., a
Nevada corporation, which at the time operated 177 assisted
living facilities located in 14 states. Although we will
continue as the same legal entity organized under the laws of
the State of Nevada, the assets and liabilities that comprise
our business are different from those that were acquired by
Extendicare on January 31, 2005. Therefore, references in
this Information Statement to (i) “Assisted Living
Concepts,” “ALC,” “we,” “our”
and “us” refer to Assisted Living Concepts, Inc. and
its consolidated subsidiaries, as constituted after the
separation, (ii) “Historic ALC” refers to
Assisted Living Concepts, Inc. and its consolidated
subsidiaries, as constituted upon its acquisition by Extendicare
on January 31, 2005, and (iii) “Extendicare”
refers to Extendicare Inc. and its consolidated subsidiaries
(other than us) prior to the separation and conversion, and to
Extendicare REIT and its consolidated subsidiaries after the
separation, unless the context otherwise requires.
Following the exchange, we will be a separate publicly-traded
company, and Extendicare will have no continuing stock ownership
in us, except to the extent that Extendicare continues to own
stock that would have been distributed to holders of Extendicare
shares had they not validly dissented to the Plan of
Arrangement. The historical financial results that are contained
herein may not reflect our financial results in the future as an
independent company or what our financial results would have
been had we been operated as a separate publicly-traded company
during the periods presented.
Assisted
Living Concepts, Inc.
Our
Business
We are one of the five largest publicly traded operators of
assisted living facilities in the United States, based on total
capacity, with 206 assisted living facilities totaling
8,251 units. Our assisted living facilities, or residences,
typically consist of 35 to 50 units and offer residents a
supportive, home-like setting and assistance with the activities
of daily living. Our facilities are purpose-built to meet the
special needs of seniors and are located in targeted,
middle-market suburban bedroom communities that are selected on
the basis of a number of factors, including the size of our
target resident pool in the community. We own 151 of our
facilities, and the remaining are under long-term leases, giving
us significant operational flexibility with respect to our
properties. For the three months ended March 31, 2006, the
average occupancy rate for our facilities was approximately
84.3% (with mature facilities, defined as facilities with all
units open for at least a year, having an occupancy rate of
85.6%), the average combined monthly rate for rent and services
was $2,656 per unit and the percentage of our revenue
generated from private pay sources, which we define as payment
coming from individual residents or their families (as opposed
to government programs, including Medicaid), was 78.7%.
We believe we are well positioned to take advantage of the
growing demand for senior living facilities. This growing demand
is the result of a number of demographic and macro-economic
factors, including:
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An Aging Population. The population of
Americans over the age of 65 is projected to steadily and
significantly increase over the next 20 years —
both in absolute numbers and as a percentage of the overall
population.
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Cost Containment Pressures. As life
expectancies increase and the size of the elderly population
grows, the cost of caring for the elderly also increases.
Federal and state governments, as well as private insurers, are
increasingly turning to lower cost alternatives to acute care
facilities to help contain the increase in these costs.
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Changing Family Dynamics and Economics. We
believe that an increasing number of families are unwilling or
incapable of providing the
day-to-day
care that the elderly require. However, we believe these
families are capable of assisting with the financial support for
the elderly to receive the care they need in nursing homes or
assisted living facilities.
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As a result of these trends, we believe the demand for senior
living facilities will continue to increase. Within the senior
living industry, we believe that most seniors prefer the
home-like setting and lifestyle of assisted living facilities to
the institutional setting of nursing facilities and will
therefore choose to live in assisted living facilities over
nursing facilities for so long as their health and physical
condition permit them to do so.
Our
Competitive Strengths
Our
major competitive strengths are:
Leading Provider of Long-term Care
Services. We are one of the five largest publicly
traded operators of assisted living facilities in the United
States. We operate 206 assisted living facilities, totaling
8,251 units, in 17 states, 151 of which are owned and
the remaining 55 of which are leased under long-term leases. The
size and breadth of our portfolio, as well as the depth of our
experience in the senior living industry, allow us to achieve
operating efficiencies that many of our competitors in the
highly fragmented senior living industry cannot.
Significant Ownership of Purpose-Built, Attractive and
Efficient Facilities. We own 151 assisted living
facilities, or 73% of the total number of facilities we operate.
We believe that owning properties, rather than leasing,
increases our operating flexibility.
Focus on Wellness, Quality of Care and Customer
Service. The staffing model of our facilities
emphasizes the importance we place on delivering high quality
care to our residents, with a particular emphasis on
preventative care and wellness.
Facility Portfolio in Targeted Locations. Most
of our facilities are located in middle-market, suburban bedroom
communities with populations typically ranging from 10,000 to
40,000. We have targeted these communities based on their
demographic profile, the average wealth of the population and
the cost of operating in the community.
Experienced Executive and Senior Management
Team. Our corporate executive and senior
divisional management team is highly experienced, with an
average of 20 years of experience in the senior living
industry.
Our
Strategy
The
principal elements of our business strategy are
to:
Build the Company Brand. We believe our
success will be determined by the quality of services we provide
and our reputation in the communities we serve, and we will
strive to establish ourselves as the provider of choice in these
communities for residents who value wellness, quality of care
and customer service.
Increase Private Census within our Assisted Living
Facilities. For the three months ended
March 31, 2006, approximately 70.7% of our residents were
private pay, generating 78.7% of our revenues. Our strategy is
to increase the number of residents in our facilities that are
private pay, both by filling existing vacancies at our
facilities with private pay residents and by gradually
decreasing the number of units in our facilities that are
available for residents that rely on Medicaid.
Expand Our Asset Portfolio. We expect to grow
our portfolio of assisted living facilities primarily through
selective acquisitions in markets with favorable private pay
demographics and, to a lesser extent, by expanding existing
properties to meet any additional private pay demand in markets
where we currently operate.
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Our
Relationship with Extendicare
For a further discussion of the separation and our relationship
with Extendicare REIT after the separation, and the related
risks, see “Our Separation from and Relationship with
Extendicare After the Exchange” and “Risk
Factors — Risks Relating to Our Relationship with
Extendicare.”
After our separation from Extendicare, Extendicare will consist
of its North American nursing home operations (approximately
25,400 beds), a small number of assisted living units
(approximately 900 units), and related contracted services
and purchasing operations. In addition, in the United States,
Extendicare will continue to offer medical specialty services,
and in Canada it will continue to offer home health care
services. Extendicare also will retain a one third interest in
Crown Life Insurance Company.
Our
History
Upon our separation from Extendicare, our business will be
primarily composed of the following assets:
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29 assisted living facilities that were formerly owned and
operated by Extendicare Health Services, Inc.
(“EHSI”), a wholly-owned subsidiary of
Extendicare; and
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177 assisted living facilities that have been directly owned or
leased from third parties by ALC since Extendicare’s
acquisition of Historic ALC on January 31, 2005.
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In addition, we will own 100% of the capital stock of Pearson
Indemnity Company, Ltd. (“Pearson”), a Bermuda based
captive insurance company that we expect to be capitalized with
$10.0 million and that will provide our self-insured
general and professional liability coverages. We will also own
minority interests in Omnicare, Inc. (“Omnicare”), a
U.S. publicly-traded corporation, BNN Investments Ltd.
(“BNN”), a Canadian publicly-traded corporation, and
MedX Health Corporation (“MedX”), a Canadian
corporation. These interests will have an aggregate market value
of approximately $4.4 million. We expect to dispose of the
Omnicare and BNN investments, using the cash for future growth
opportunities, while retaining the interest in MedX. In
addition, we expect to purchase an office building in Milwaukee,
Wisconsin that will serve as our headquarters beginning in 2007
from an unrelated party for an estimated purchase price of
$5.0 million.
Since January 1, 2003, Extendicare has operated between 29
and 36 assisted living facilities through EHSI, primarily in the
states of Wisconsin and Washington. As of December 31,
2005, 2004 and 2003, EHSI operated 29, 32 and 34 assisted
living facilities, respectively, all of which were owned except
for one leased facility. On January 31, 2005, EHSI
completed the acquisition of Historic ALC, a Nevada corporation
headquartered in Dallas, Texas, which at the time operated a
portfolio of 177 assisted living facilities, representing
6,838 units, located in 14 states. During 2005, EHSI
completed construction of two new assisted living facilities,
which were opened and operated by ALC, and expanded one facility
by 16 units.
Since the acquisition of Historic ALC, Extendicare has
consolidated its assisted living operations by moving ALC’s
headquarters to Milwaukee, Wisconsin, installing a new
management team and by reorganizing its internal reporting
structure and operations. Since December 31, 2005, EHSI has
closed two of its assisted living facilities (105 units)
and terminated the lease and operations at the only leased
facility (63 units). Since March 31, 2006, subject to
state regulatory approval, EHSI transferred to ALC the licenses
to operate its 29 assisted living facilities. In addition, since
March 31, 2006, ALC has completed the purchase of 14 of
EHSI’s 29 facilities, and it is currently seeking local
planning commission approval to subdivide the land associated
with the remaining 15 properties between the assisted living
facilities and skilled nursing facilities that make up those
properties. We expect ALC to complete the transfer of
EHSI’s remaining 15 facilities upon receipt of approval and
have provided for a lease of the properties in the interim. In
the event that local planning commission approval is withheld or
delayed, EHSI will transfer the buildings associated with any
such facility to ALC and ALC will enter into long-term land
leases, which will not require local planning commission
approval.
Historic ALC was incorporated in the State of Nevada on
July 19, 1994 as Assisted Living Concepts, Inc. From its
founding until January 31, 2005, Historic ALC was operated
as an independent company, separate from Extendicare and, prior
to October 2001, was listed on the American Stock Exchange. In
October 2001, Historic ALC voluntarily filed for bankruptcy as a
result of its inability to make payments on its indebtedness. In
January
3
2002, it emerged from bankruptcy pursuant to a prenegotiated
plan of reorganization and was listed on the over the counter,
or OTC, bulletin boards until it was acquired by EHSI in January
2005.
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Assisted Living Concepts, Inc. is a Nevada corporation. Our
principal executive offices are located at 111 West
Michigan Street, Milwaukee, Wisconsin 53203, and our telephone
number is
(414) 908-8800.
Summary
of the Transactions
The following is a brief summary of the terms of the exchange
and other concurrent transactions:
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The Exchange |
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Pursuant to the Plan of Arrangement, and subject to the rights
of holders to dissent from the transaction, holders of
Extendicare Subordinate and Multiple Voting shares will receive
units of Extendicare REIT and shares of ALC in exchange for
their Extendicare shares (the “Exchange”).
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• Holders of Extendicare Subordinate Voting Shares
will receive (i) one Extendicare Common Share and
(ii) one share of Class A common stock of ALC from
Extendicare for each Extendicare Subordinate Voting Share that
they hold as of the Effective Time;
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• Holders of Extendicare Multiple Voting Shares will
receive (i) 1.075 Extendicare Common Shares and
(ii) one share of Class B common stock of ALC from
Extendicare for each Extendicare Multiple Voting Share that they
hold as of the Effective Time; and
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• Each Extendicare Common Share received in the
transactions described above will immediately be exchanged by
the holder thereof for units of Extendicare REIT on a 1:1 basis,
or, at the election of holders that are taxable Canadian
residents, for units of Extendicare Holding Partnership on a 1:1
basis. The option of taxable Canadian holders to receive
Extendicare Holding Partnership units affords such holders an
opportunity to defer certain Canadian taxes. Other than the tax
deferral, receipt of Extendicare Holding Partnership units will
be economically equivalent to receiving Extendicare REIT units.
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After the Exchange, Extendicare will not own any shares of our
capital stock, except to the extent that it continues to hold
shares that would have been distributed to holders of
Extendicare Subordinate and Multiple Voting Shares had they not
validly dissented to the Plan of Arrangement. |
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Separated Company |
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Assisted Living Concepts, Inc. is currently a wholly-owned
subsidiary of Extendicare. After the separation, ALC will be a
separate publicly-traded company. |
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ALC Securities to be received in the Exchange |
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In addition to the units of Extendicare REIT or Extendicare
Holding Partnership received in the Exchange, holders of
Extendicare Subordinate Voting Shares will receive one share of
Class A common stock of ALC for each Extendicare
Subordinate Voting Share in the Exchange and holders of
Extendicare Multiple Voting Shares will receive one share of
Class B common stock of ALC for each Extendicare Multiple
Voting Share in the Exchange. |
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The Class A and Class B common stock of ALC will
constitute all of our outstanding common stock immediately after
the Exchange. Holders of our Class B common stock will be
entitled to convert their Class B common stock into shares
of our Class A common stock on the basis of
1.075 shares of Class A common stock for each share of
Class B common stock. We intend to list ALC’s
Class A common stock on the New York Stock Exchange under
the symbol “ALC.” See “Description of Our Capital
Stock” for a more complete description of the rights and
privileges of our common stock. |
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Approval |
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The Plan of Arrangement, including the Exchange, requires the
approval of two-thirds of the vote of the holders of
Extendicare’s Subordinate Voting Shares and Multiple Voting
Shares voting separately as a class in person or by proxy, as
well as the approval of the Ontario Superior Court of Justice
(Commercial List). Approval is being sought pursuant to the
Circular. |
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Exchange Date |
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If approved, we expect the Exchange to occur within two weeks
following the special meeting of holders of Extendicare’s
Subordinate and Multiple Voting Shares called to approve the
Plan of Arrangement. |
Reason
for Furnishing this Information Statement
This Information Statement is being furnished solely to provide
information to Extendicare shareholders who will receive shares
of our common stock in the Exchange. It is not and is not to be
construed as an inducement or encouragement to buy, hold or sell
any of our securities. We believe that the information contained
in this Information Statement is accurate as of the date set
forth on the cover. Changes may occur after that date and
neither Extendicare nor we undertake any obligation to update
the information except in the normal course of our respective
public disclosure obligations.
Questions
and Answers about ALC and the Exchange
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Why is Extendicare separating ALC and distributing its
stock? |
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The Board of Directors of Extendicare has determined that the
separation of ALC from Extendicare is in the best interests of
Extendicare and its holders of Subordinate and Multiple Voting
Shares, by providing opportunities and benefits to each of
Extendicare and ALC, including: |
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• The separation will allow the independent management
of each of Extendicare and us to focus its attention and its
company’s financial resources on its respective distinct
business and challenges and to lead each independent company to
adopt strategies and pursue objectives that are appropriate to
its respective business.
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• As a U.S. based company listed on the NYSE, ALC
will have the opportunity to attract more U.S. investors, which
should lead to greater investor awareness and a more liquid
market for ALC’s Class A common stock. Extendicare
shares are currently primarily traded on the Toronto Stock
Exchange, and may not have attracted a significant number of
U.S. investors due to its lack of visibility in the United
States and foreign exchange risk associated with Canadian
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• Through the split of Extendicare’s skilled
nursing and assisted living businesses, investors should be in a
better position to value the two independent companies and to
better evaluate the performance of each company against their
industry peers. |
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• ALC should have access to lower cost capital to fund
acquisitions and growth. |
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How will the separation and Exchange work? |
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The separation and the Exchange will be accomplished through a
Plan of Arrangement that has been approved by Extendicare’s
Board of Directors and is subject to approval by holders of
Extendicare Subordinate and Multiple Voting Shares pursuant to
separate class votes and the Ontario Superior Court of Justice
(Commercial List). Shareholder approval is being solicited
separately through the Circular and related proxy materials
described below. If approved, subject to the satisfaction or
waiver of all of the conditions to the completion of the Plan of
Arrangement, a series of transactions will occur that will
result in the separation of ALC from Extendicare and the
simultaneous conversion of Extendicare Inc. into Extendicare
REIT, an unincorporated open-ended real estate investment trust
established under the laws of Ontario: |
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• Prior to the completion of the Plan of Arrangement: |
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• Extendicare will contribute to ALC
certain assets not already owned by ALC; and
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• Extendicare and ALC will enter into a
separation agreement, a tax allocation agreement and a number of
transitional services agreements, each of which allocates
certain liabilities and sets forth the responsibilities of each
party.
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• On the date that the Plan of Arrangement is
completed:
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• Holders of Extendicare Subordinate
Voting Shares, other than holders who validly exercise dissent
rights, will receive (i) one Extendicare Common Share and
(ii) one share of Class A common stock of ALC from
Extendicare for each Extendicare Subordinate Voting Share that
they hold as of the Effective Time;
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• Holders of Extendicare Multiple Voting
Shares, other than holders who validly exercise dissent rights,
will receive (i) 1.075 Extendicare Common Shares and
(ii) one share of Class B common stock of ALC from
Extendicare for each Extendicare Multiple Voting Share that they
hold as of the Effective Time; and
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• Each Extendicare Common Share received
in the transactions described above will immediately be
exchanged by the holder thereof for one unit of Extendicare REIT
or, at the election of holders that are taxable Canadian
residents, for one limited partnership unit of Extendicare
Holding Partnership.
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What do shareholders need to do to participate in the
Exchange? |
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In connection with the Plan of Arrangement, you will receive the
Circular, which will explain the Plan of Arrangement in more
detail. The Circular will be accompanied by proxy solicitation
materials that will instruct you on how to vote on the overall
Plan of Arrangement. If |
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the Plan of Arrangement is approved by the requisite votes of
Extendicare’s Subordinate and Multiple Voting Shares, no
further shareholder approval of the Exchange will be required or
sought, although we urge you to read this entire document
carefully. |
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Does ALC plan to pay dividends? |
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We presently do not intend to pay any dividends. |
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What will the relationship between Extendicare and ALC be
following the Exchange? |
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After the Exchange, we do not expect to have any material
relationships with Extendicare other than the following
relationships: |
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• Following the Separation, Extendicare, through its
subsidiaries, will provide certain transitional services to us
related to information technology, payroll and benefits
processing and reimbursement functions. For a more detailed
description of these services and their related costs, please
see the sections of this Information Statement entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and “Our
Separation from and Relationship with Extendicare After the
Exchange.”
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• One of our directors will also serve on Extendicare
REIT’s board of trustees. See “Management.”
|
| |
|
What if I want to sell my ALC common stock? |
|
You should consult with your own financial advisors, such as
your stockbroker, bank or tax advisor. Neither we nor
Extendicare make any recommendations on the purchase, retention
or sale of shares of ALC common stock to be delivered in the
Exchange. |
| |
|
Where will I be able to trade shares of ALC Class A
common stock? |
|
There is not currently a public market for our Class A
common stock. We intend to have ALC’s Class A common
stock listed on the New York Stock Exchange under the
symbol “ALC.” We anticipate that trading in shares of
our Class A common stock will begin trading on a
“when-issued” basis on or shortly before the
completion of the Plan of Arrangement, and “regular
way” trading will begin on the first trading day following
its completion. If trading does begin on a
“when-issued” basis, you may purchase or sell our
Class A common stock after that time, but your transaction
will not settle until after the completion of the Exchange. On
the first trading day following the completion of the Plan of
Arrangement, when-issued trading in respect of our Class A
common stock will end and regular way trading will begin. We
cannot predict the trading prices for our Class A common
stock before or after the completion of the Plan of Arrangement. |
| |
|
Will the number of Extendicare shares I own change as a
result of the Exchange? |
|
Yes. Pursuant to the Plan of Arrangement you will no longer own
shares of Extendicare upon the completion of the transactions
contemplated thereby. Instead you will own units of Extendicare
REIT, or, at the election of holders that are taxable Canadian
residents, units of Extendicare Holding Partnership, or, if you
validly exercise dissent rights, you will receive cash. If you
own Extendicare Subordinate Voting Shares, you will receive an
equal number of Extendicare Common Shares, which will be
exchanged for units of Extendicare |
7
|
|
|
|
|
|
REIT (or Extendicare Holding Partnership) on a 1:1 basis. If you
own Extendicare Multiple Voting Shares, you will receive 1.075
Extendicare Common Shares for each Multiple Voting Share you
own, which will be exchanged for a corresponding number of units
of Extendicare REIT (or Extendicare Holding Partnership),
meaning that you will receive 1.075 units for each
Extendicare Multiple Voting Share that you hold. |
| |
|
What will happen to the listing of Extendicare shares? |
|
Extendicare Subordinate Voting Shares that are outstanding as of
the date that the Plan of Arrangement is completed will be
cancelled pursuant to the Plan of Arrangement and will be
delisted from the New York Stock Exchange and the Toronto Stock
Exchange. Extendicare Multiple Voting Shares also will be
cancelled and delisted from the Toronto Stock Exchange. Units of
Extendicare REIT are expected to be listed on the Toronto Stock
Exchange only. Units of Extendicare Holding Partnership are not
expected to be listed. |
| |
|
Are there risks to owning ALC Class A common stock? |
|
Yes. Our business is subject both to general and specific
business risks relating to our leverage, our business, our
relationship with Extendicare and our being a separate
publicly-traded company, as well as risks related to the nature
of the separation transaction itself. These risks are described
in the “Risk Factors” section of this Information
Statement beginning on page 11. We encourage you to read
that section carefully. |
| |
|
Where can holders of Extendicare Subordinate and Multiple
Voting shares get more information? |
|
If you have any questions relating to the Exchange, you should
contact:
|
| |
|
|
|
Assisted Living Concepts, Inc.
111 West Michigan Street
Milwaukee, Wisconsin 53203
Tel:
(414) 908-8800
Fax:
(414) 908-8481 |
| |
|
Who will be the Exchange agent, transfer agent and registrar
for our common stock? |
|
Computershare Trust Company, Inc.
350 Indiana Street Suite 800
Golden, Colorado 80401 |
For a more detailed description of the Exchange, please see
the section of this Information Statement entitled “The
Exchange.”
8
Summary
Combined Financial and Other Data
The table below presents the historical summary combined
financial and other data of ALC. The historical combined
financial and other data have been prepared to include all of
Extendicare’s assisted living business in the United States
and are a combination of (i) assisted living facilities
operated by EHSI prior to and after its acquisition of Historic
ALC, which ranged from 36 facilities as of January 1, 2003
to 29 facilities as of March 31, 2006, (ii) 177
assisted living facilities operated by ALC since Extendicare
completed the acquisition of Historic ALC on January 31,
2005 and (iii) two assisted living facilities that were
constructed by EHSI during 2005 but were opened and operated by
ALC. The historical summary combined financial statements and
other operating data do not contain data related to certain
assets that will be transferred to us in connection with our
separation from Extendicare. In addition, the historical summary
combined financial and other operating data include certain
assets and operations that will not be transferred to us in
connection with our separation from Extendicare. Please see our
unaudited pro forma condensed combined financial statements and
the notes thereto for a more detailed description of these
transactions.
The historical summary combined financial data should be read in
conjunction with, and are qualified by reference to,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the historical
audited and interim unaudited financial statements and the
accompanying notes thereto included elsewhere in this
Information Statement. The combined statements of operations
data for each of the three years in the three year period ended
December 31, 2005, and the combined balance sheet data as
of December 31, 2004 and 2005, are derived from the audited
combined financial statements of ALC included elsewhere in this
Information Statement, and should be read in conjunction with
those combined financial statements and the accompanying notes.
The combined statement of operations data for the three months
ended March 31, 2005 and 2006, and the consolidated balance
sheet data as of March 31, 2006, are derived from the
unaudited combined financial statements of ALC included
elsewhere in this Information Statement. The combined balance
sheet data as of December 31, 2003 and March 31, 2005
are derived from the unaudited combined financial statements of
ALC, which are not included in this Information Statement. In
management’s opinion, these unaudited combined financial
statements have been prepared on substantially the same basis as
the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial data for the periods
presented. The results of operations for the interim period are
not necessarily indicative of the operating results for the
entire year or any future period.
The financial information presented below may not reflect what
our results of operations, financial position and cash flows
would have been had we operated as a separate, stand-alone
entity during the periods presented or what our results of
operations, financial position and cash flows will be in the
future.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars, except operating data)
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
56,776
|
|
|
$
|
37,665
|
|
|
$
|
204,949
|
|
|
$
|
33,076
|
|
|
$
|
31,177
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
37,214
|
|
|
|
25,605
|
|
|
|
138,126
|
|
|
|
23,837
|
|
|
|
22,163
|
|
|
General and administrative
|
|
|
3,454
|
|
|
|
2,226
|
|
|
|
6,789
|
|
|
|
506
|
|
|
|
503
|
|
|
Lease costs
|
|
|
3,488
|
|
|
|
2,348
|
|
|
|
12,852
|
|
|
|
66
|
|
|
|
73
|
|
|
Depreciation and amortization
|
|
|
4,123
|
|
|
|
2,390
|
|
|
|
14,750
|
|
|
|
3,281
|
|
|
|
3,032
|
|
|
Interest expense, net
|
|
|
2,830
|
|
|
|
2,452
|
|
|
|
11,603
|
|
|
|
1,738
|
|
|
|
2,698
|
|
|
Loss on early retirement of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
647
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,109
|
|
|
|
35,021
|
|
|
|
184,120
|
|
|
|
30,075
|
|
|
|
28,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
5,667
|
|
|
|
2,644
|
|
|
|
20,829
|
|
|
|
3,001
|
|
|
|
2,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,310
|
|
|
$
|
1,526
|
|
|
$
|
12,342
|
|
|
$
|
1,635
|
|
|
$
|
1,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data
(Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities at end of
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned (Note 2)
|
|
|
153
|
|
|
|
152
|
|
|
|
155
|
|
|
|
31
|
|
|
|
33
|
|
|
Capital leases
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
Operating leases
|
|
|
50
|
|
|
|
51
|
|
|
|
51
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned and leased
|
|
|
208
|
|
|
|
208
|
|
|
|
211
|
|
|
|
32
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available units at end of period
|
|
|
8,538
|
|
|
|
8,263
|
|
|
|
8,505
|
|
|
|
1,424
|
|
|
|
1,338
|
|
9
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars, unless otherwise noted)
|
|
|
|
|
Average resident census (units
occupied)
|
|
|
7,164
|
|
|
|
5,258
|
|
|
|
6,817
|
|
|
|
1,193
|
|
|
|
1,184
|
|
|
Average occupancy rate
|
|
|
84.3
|
%
|
|
|
88.9
|
%
|
|
|
87.9
|
%
|
|
|
85.3
|
%
|
|
|
88.4
|
%
|
|
Percent of payor source of total
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private pay
|
|
|
78.7
|
%
|
|
|
78.9
|
%
|
|
|
78.2
|
%
|
|
|
92.7
|
%
|
|
|
94.1
|
%
|
|
Medicaid
|
|
|
21.3
|
%
|
|
|
21.1
|
%
|
|
|
21.8
|
%
|
|
|
7.3
|
%
|
|
|
5.9
|
%
|
|
Balance Sheet Data (end of
period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,343
|
|
|
$
|
4,604
|
|
|
$
|
6,439
|
|
|
$
|
119
|
|
|
$
|
225
|
|
|
Property and equipment
|
|
|
373,563
|
|
|
|
380,909
|
|
|
|
378,362
|
|
|
|
73,390
|
|
|
|
66,070
|
|
|
Total assets
|
|
|
420,109
|
|
|
|
411,085
|
|
|
|
420,697
|
|
|
|
84,622
|
|
|
|
77,574
|
|
|
Total debt
|
|
|
130,906
|
|
|
|
212,842
|
|
|
|
131,526
|
|
|
|
—
|
|
|
|
—
|
|
|
Parent’s investment
|
|
|
205,844
|
|
|
|
164,673
|
|
|
|
203,443
|
|
|
|
79,372
|
|
|
|
71,392
|
|
Notes:
|
|
|
|
(1) |
|
All of the operating data, except for the number of facilities
at the end of the period, are for continuing operations. Please
see “Management Discussion and Analysis of Financial
Condition and Results of Operations” for a description of
continuing operations. |
| |
|
(2) |
|
Owned facilities includes 15 facilities that EHSI has agreed to
sell to ALC and ALC has agreed to purchase, subject only to the
receipt from local planning commissions of approval to subdivide
the facilities. We have leased these facilities from EHSI in the
interim. |
10
RISK
FACTORS
You should carefully consider each of the following risks and
all of the other information set forth in this Information
Statement. The following risks relate principally to our
business, our relationship with Extendicare and our being a
separate publicly-traded company, as well as risks related to
the nature of the separation transaction itself. The risks and
uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known
to us or that we currently believe to be immaterial may also
adversely affect our business. If any of the following risks and
uncertainties develop into actual events, this could have a
material adverse effect on our business, financial condition or
results of operations. In that case, the trading price of our
Class A common stock could decline.
Risk
Relating to Our Business
The risk factors and uncertainties facing our industry and us
include:
We
face national, regional and local competition, and, if we are
unable to compete successfully, we could lose market share and
revenue.
The assisted living business is highly competitive, particularly
with respect to private pay residents. Our assisted living
facilities compete on a local and regional basis with other
long-term care providers, including other assisted living
providers, independent living providers, congregate care
providers, home healthcare providers, nursing facilities and
continuing care retirement centers, including both for-profit
and
not-for-profit
entities. We compete based on price, the type of services
provided, quality of care, reputation, age and appearance of
facilities. Because there are relatively few barriers to entry
in the assisted living industry, competitors could enter our
communities with new facilities or upgrade existing facilities.
Such facilities could offer residents more modern facilities
with more amenities than ours at a lower cost. The entrance of
additional competitors in the communities where we are located
could negatively affect our ability to attract and retain
residents, to maintain or increase resident service fees or to
expand our business. In addition, we may be required to expand
existing facilities to respond to competitive threats, which
could negatively impact our operating margins. The availability
and quality of competing facilities in the communities in which
we operate significantly influences the occupancy levels in our
assisted living facilities, and the entrance of any additional
competitors, or the expansion of existing competing facilities,
could result in our loss of market share and revenue. For
example, in 2005, if our occupancy percentage had decreased by
one percentage point proportionately across all payor sources,
our revenue would have decreased by approximately
$2.5 million.
We may
not be able to compete effectively in those markets where
overbuilding exists and future overbuilding in other markets
where we operate our residences may adversely affect our
operations.
Overbuilding in the late 1990s in the senior living industry
reduced the occupancy rates of assisted living facilities and,
in some cases, reduced the monthly rate that assisted living
facilities were able to obtain for their services. This resulted
in lower revenues for assisted living facilities during that
time, which, combined with unsustainable levels of indebtedness,
forced several assisted living facility operators into
bankruptcy, including Historic ALC, which at the time was owned
and operated by entities unrelated to Extendicare and our
management. While we believe that overbuilt markets have
stabilized, the effects of this period of overbuilding could
affect our occupancy rates and resident fee rate levels in the
future. In addition, another period of overbuilding could occur
in the future.
If we
fail to cultivate new or maintain existing relationships with
physicians and others in the communities in which we operate,
our occupancy rates may decrease.
Our ability to increase our overall occupancy rates, as well as
the number of private pay residents in our communities, depends
on our reputation in the communities we serve and our ability to
successfully market to our target residents. A large part of our
marketing and sales efforts is directed towards cultivating and
maintaining relationships with key community organizations who
work with seniors, physicians and other healthcare providers in
the communities we serve, whose referral practices significantly
affect the choices seniors make with respect to
11
their long-term care needs. Community organizations, physicians
and other healthcare providers referring residents to our
facilities are not our employees and are free to refer to other
providers. If we are unable to successfully cultivate and
maintain strong relationships with these community
organizations, physicians and other healthcare providers, our
occupancy rates and revenue could decline, which could adversely
affect our financial condition and results of operations.
Due to
the dependency of our revenues on private pay sources, events
which adversely affect the ability of seniors to afford our
monthly resident fees could cause our occupancy rates, revenues
and results of operations to decline.
Costs to seniors associated with independent and assisted living
services are not generally reimbursable under government
reimbursement programs such as Medicare and Medicaid.
Accordingly, in 2005 approximately 78.2% of our total revenues
were derived from private pay sources consisting of income or
assets of residents or their family members. Only seniors with
income or assets meeting or exceeding the comparable median in
the regions where our facilities are located typically can
afford to pay our monthly resident fees. Economic downturns,
changes in demographics or changes in social security payment
levels could limit the ability of seniors to afford our resident
fees. In addition, downturns in the housing markets could limit
the ability of seniors to afford our resident fees as our
customers frequently use the proceeds from the sale of their
homes to cover the cost of our fees. If we are unable to retain
or attract seniors with sufficient income, assets or other
resources required to pay the fees associated with independent
and assisted living services, our occupancy rates and revenues
could decline, which could adversely affect our financial
condition and results of operations.
Changes
in the percentage of our residents that are private residents
and, where applicable, Medicaid rates may significantly affect
our profitability.
The sources and amounts of our assisted living facility resident
revenues will be determined by a number of factors, including
the mix of private versus Medicaid funded residents and, where
applicable, Medicaid rates. Where residents pay privately, the
income and assets of our residents and their family members can
impact our private pay revenues. Economic downturns or changes
in demographics could limit the ability of seniors to afford our
daily resident fees. If we are unable to attract seniors with
sufficient income, assets or other resources, our resident
revenues and results of operations could decline. The
differential in the Medicaid rate to market rate varies by state
and by community; however, on average, for ALC, the differential
was approximately $27 per day for the year ended
December 31, 2005. Our goal is to minimize the number of
our residents that rely on Medicaid to make payments to us, and,
as part of our marketing strategy, we will at times maintain a
unit’s availability for private pay residents. Our ability
to maintain a unit’s availability for private pay residents
only is, in some cases, restricted by applicable state laws and
regulatory requirements imposed by agreements related to some of
our facilities that were financed with tax exempt bonds. In such
a case, if private pay demand is inadequate at such a facility,
our occupancy rate and revenue at that facility would decrease.
Furthermore, if changes in law were to require us to have a
minimum percentage of Medicaid residents within our facilities
above our current levels, our revenue and results of operations
could be materially and adversely affected, especially in states
with reimbursement levels below the cost of providing care and
other services.
Changes
or reductions in Medicaid rates may decrease our
revenues.
Medicaid is an essential part of the health coverage in every
state and is jointly financed by federal and state governments.
Medicaid outlays are projected to approximate
$322.0 billion in calendar year 2006 and account for nearly
16% of total national healthcare expenditures, and Medicaid is
available in each of the states in which we operate to pay for
the purchase of assisted living facility services. Although we
aim to decrease the number of our residents that rely on
Medicaid, in 2005, Medicaid payments comprised approximately
$45 million, or 21.8%, of our total revenue and, as of
December 31, 2005, Medicaid residents comprised
approximately 29.2% of our entire resident population. Financial
pressures on state budgets will directly impact the level of
available Medicaid funding and hence the level of available
funding for inflationary increases. A majority of states
continue to face financial budgetary constraints as a result of
rapidly increasing demand and therefore spending, offset by slow
state revenue growth. Medicaid programs are often the first to
be cut as they represent a significant portion of state
12
budgets. In addition, the proposed 2006 federal budget included
reforms of the Medicaid program to cut a total of
$60.0 billion in projected Medicaid expenditure growth over
10 years. Congress scaled back the proposed reduction in
the final version of the budget and the final enactment is a
compromise establishing a Medicaid Commission authorized to make
specific policy recommendations, while agreeing to defer
Medicaid cuts during fiscal year 2006, and providing
reconciliations instructions to Congress to make
$10.0 billion in Medicaid reductions during fiscal years
2007 to 2011. If adopted at either the federal or the state
level, legislative proposals to reduce the federal and state
budget deficits by limiting Medicaid reimbursement in general
could result in a decline in our revenue, which could adversely
affect our financial condition and results of operations. For
example, in 2005, a hypothetical one percent decrease in
our average Medicaid rate could have resulted in a
$0.5 million decrease in our revenues.
Termination
of our resident agreements and vacancies in the living spaces we
lease could adversely affect our revenues, earnings and
occupancy levels.
State regulations governing assisted living facilities require
written resident agreements with each resident. Several of these
regulations also require that each resident have the right to
terminate the resident agreement for any reason on reasonable
notice. Consistent with these regulations, several of our
assisted living resident agreements allow residents to terminate
their agreements upon 0 to 30 days’ notice. Unlike
typical apartment leasing or independent living arrangements
that involve lease agreements with specified leasing periods of
up to a year or longer, in many instances we cannot contract
with our assisted living residents to stay in those living
spaces for longer periods of time. If multiple residents
terminate their resident agreements at or around the same time,
our revenues and occupancy rates could decrease, which could
adversely affect our financial condition and results of
operations. In addition, because of the demographics of our
typical residents, including age and health, resident turnover
rates in our facilities are difficult to predict. As a result,
the living spaces we lease may be unoccupied for a period of
time, which could result in a decrease in our revenues.
Labor
costs comprise a substantial portion of our operating expenses.
An increase in wages, as a result of a shortage of qualified
personnel or otherwise, could substantially increase our
operating costs.
We compete for residence directors and nurses with other
healthcare providers and with various industries for healthcare
assistants and other employees. A national shortage of nurses
and other trained personnel, a shortage of workers in some of
the communities we serve, and general inflationary pressures
have forced us to enhance our wage and benefits packages in
order to compete for qualified personnel. According to a survey
by the American Healthcare Association, or AHCA, issued in
February 2003, there were over 96,000 vacant positions in the
long-term care sector, of which 39,000 were professional nursing
staff and the remainder certified nursing assistants, or CNAs,
for skilled nursing facilities, and personal service assistants,
or PSAs, for assisted living facilities. The survey reported
that average turnover within the industry was 50% with a 36%
turnover rate for professional staff and 71% turnover rate for
CNAs. However, the report cited that these turnover and vacancy
levels varied by state and location of the facility.
Furthermore, the U.S. Labor Department reports that there
will be a 1.0 million shortfall of professional nurses by
2010. In addition, a report by the North Carolina Medical
Journal in March/April 2002, reported that between 2000 and 2010
there will be 874,000 more nursing workers needed in the senior
living industry.
We attempt to limit the use of temporary help from staffing
agencies to maintain a higher quality of care and to reduce
costs. However, in order to supplement staffing levels, we
periodically may be forced to utilize costly temporary help from
staffing agencies, which results in premiums of 25% to 60%. For
2005, our temporary staffing usage was less than $50,000. In
addition, we have been subject to additional costs associated
with the increasing levels of reference checks and criminal
background checks that we have performed on our hired staff to
ensure that they are suitable for the functions they will
perform within our facilities. Because labor costs represent
such a substantial portion of our operating expenses, increases
in wage rates could have a material adverse effect on our future
operating results. A 3% increase in salaries and wages
would increase operating expenses by approximately
$2 million.
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We
operate in an industry that has an inherent risk of personal
injury claims. If one or more claims are successfully made
against us, our financial condition and results of operations
could be materially and adversely affected.
The senior living industry has an inherent risk of liability and
has experienced an increasing trend in the number and severity
of personal injury claims and punitive settlements. Personal
injury claims and lawsuits can result in significant legal
defense costs, settlement amounts and awards. According to a
report issued by AON Risk Consultants in March 2005 on long-term
care operators, which primarily includes skilled nursing
facilities but also includes assisted living facilities, general
liability and professional liability costs were three times
higher in 2004 as compared to 1996. This trend is a result of
the increasing number of large judgments, including large
punitive damage awards, against providers in recent years
resulting in an increased awareness by plaintiff’s lawyers
of potentially large recoveries. The states of Florida, Arkansas
and Mississippi are the states where the largest general and
professional liability costs are being incurred; however, the
states of Texas, Arizona, California, Georgia and Alabama are
showing similar signs. The AON Risk Consultants report the
average cost of a claim in Florida in 2004 was approximately
three times higher than most of the rest of the United States.
In addition, Florida healthcare providers experienced
approximately three times the number of claims that were
experienced by providers in most other states. In some states,
state law may prohibit or limit insurance coverage for the risk
of punitive damages arising from professional liability and
general liability or litigation. As a result, we may be liable
for punitive damage awards in these states that either are not
covered or are in excess of our insurance policy limits. Our
expense related to such claims in 2005 was approximately
$750,000 but this may not be indicative of future or unasserted
claims.
We insure against general and professional liability risks with
affiliated and unaffiliated insurance companies with levels of
coverage and self-insured retention levels that we believe are
adequate based on the nature and risk of our business,
historical experience and industry standards. We are responsible
for the costs of claims up to a self-insured limit determined by
individual policies and subject to aggregate limits. We accrue
based upon an actuarial projection of future self-insured
liabilities, and have an independent actuary review our claims
experience and attest to the adequacy of our accrual on an
annual basis. As of December 31, 2005, we had provided for
$1.3 million in accruals for known or potential general and
professional liability claims. We may need to increase our
accruals as a result of future actuarial reviews and claims that
may develop. Claims in excess of our insurance may, however, be
asserted and claims against us may not be covered by our
insurance policies. If a lawsuit or claim arises that ultimately
results in an uninsured loss or a loss in excess of insured
limits, our financial condition and results of operation could
be materially and adversely affected. Furthermore, claims
against us, regardless of their merit or eventual outcome, could
have a negative affect on our reputation and our ability to
attract residents and our management could be required to devote
time to matters unrelated to the
day-to-day
operation of our business.
We
self-insure a portion of our workers compensation, health and
dental and certain other risks.
We primarily insure against workers compensation risks with
third-party insurers with levels of coverage and self-insured
retention levels that we believe are adequate based upon the
nature and risk of the business, historical experience and
industry standards. We are therefore responsible for the costs
of claims up to the self-insured limits determined by the
policy. Our workers compensation self insurance program expense
was $3.7 million in 2005.
In addition, for the majority of our employees, we self-insure
our health and dental coverage. Our costs related to our
self-insurance are a direct result of claims incurred, some of
which are not within our control and, although we employ risk
management personnel to maintain safe workplaces and to manage
workers compensation claims, and we use a third-party provider
to manage our health claims, any materially adverse claim
experience could have an adverse affect on our business. Our
health and dental self insurance program expense was
$4.1 million in 2005.
Certain of our facilities are located in areas that may be
subject to flooding or susceptible to hurricanes and tornadoes.
Although we retain property and business interruption insurance,
in certain locations, our facilities are not fully insured for
flood damage and we may not fully recover all losses sustained
in the case of flooding, hurricanes, tornadoes or other
incidents. In 2005, we incurred approximately $0.5 million
in property damages and business interruption losses at three
locations as a result of hurricane Rita, and are seeking partial
compensation for
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this incident. If we were to incur significant losses as a
result of flooding, hurricanes, tornadoes, or other natural
disasters or incidents, our financial condition and results of
operations could be adversely affected.
We
conduct our assisted living business in a regulated industry and
our failure to comply with laws and government regulation could
lead to fines and penalties.
Our assisted living facilities are generally subject to
regulation and laws by federal, state and local health and
social service agencies, and other regulatory bodies. Although
less burdensome and punitive than the federal survey process
conducted for nursing facilities, we are heavily regulated by
state-specific regulations. The regulatory requirements for
assisted living facility licensure and participation in Medicaid
generally prescribe standards relating to the provision of
services, resident rights, qualification and level of staffing,
employee training, administration and supervision of medication
needs for the residents, and the physical environment and
administration. The regulatory environment surrounding the
senior living industry continues to evolve and intensify in the
amount and type of laws and regulations affecting it, many of
which vary from state to state.
In several of the states in which we operate or may operate, we
are prohibited from providing certain higher levels of senior
care services without first obtaining the appropriate licenses.
Furthermore, federal, state and local officials are increasingly
focusing their efforts on enforcement of these laws,
particularly with respect to large for-profit, multi-facility
providers like us. These requirements, and the increased
enforcement thereof, could affect our ability to expand into new
markets, to expand our services and facilities in existing
markets and, if any of our presently licensed facilities were to
operate outside of its licensing authority, may subject us to
penalties including closure of the facility. Future regulatory
developments as well as mandatory increases in the scope and
severity of deficiencies determined by survey or inspection
officials could cause our operations to suffer. If regulatory
requirements increase, whether through enactment of new laws or
regulations or changes in the enforcement of existing rules, our
earnings and operations could be adversely affected.
Assisted living facilities are subject to periodic unannounced
surveys by state and other local government agencies to assess
and assure compliance with the respective regulatory
requirements. Surveys can also occur following a state’s
receipt of a complaint regarding a facility. If our assisted
living facilities were cited for alleged deficiencies by the
respective state or other agencies, we would be required to
implement a plan of correction within a prescribed timeframe.
Upon notification or receipt of a deficiency report, our
regional and corporate teams assist the assisted living facility
to develop, implement and submit an appropriate corrective
action plan. Most state citations and deficiencies are resolved
through the submission of a plan of correction which is reviewed
and approved by the state agency. In some instances, the survey
team will conduct a re-visit to validate substantial compliance
with the state rules and regulations.
If we do not comply with applicable laws and regulations, then
we could be subject to liabilities, including criminal and civil
penalties and exclusion of one or more of our facilities from
participation in Medicaid and state healthcare programs. If one
of our facilities were to lose its certification under the
Medicaid program, it would have to cease future admissions and
displace residents funded by the programs from the facility. In
order to become re-certified, a facility must rectify all
identified deficiencies and, over a specified period of time,
pass a survey conducted by representatives of the respective
program through demonstrated care and operations for residents
in the facility. Until the appropriate agency has verified
through the “reasonable assurance” process that the
facility can achieve and maintain substantial compliance with
all applicable participation requirements, the facility will not
be admitted back into Medicaid programs. Re-certification
requires considerable staff resources. Like other assisted
living facilities, we have received notices of deficiencies from
time to time in the ordinary course of business. However, none
of the facilities in our portfolio have been de-certified since
they were acquired by Extendicare or, to our knowledge, prior to
such time.
Compliance
with the Americans with Disabilities Act, Fair Housing Act and
fire, safety and other regulations may require us to make
unanticipated expenditures which could increase our costs and
therefore adversely affect our earnings and financial
condition.
All of our facilities are required to comply with the Americans
with Disabilities Act, or ADA. The ADA has separate compliance
requirements for “public accommodations” and
“commercial properties,” but generally
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requires that buildings be made accessible to people with
disabilities. Compliance with ADA requirements could require
removal of access barriers and non-compliance could result in
imposition of government fines or an award of damages to private
litigants.
We must also comply with the Fair Housing Act, which prohibits
us from discriminating against individuals on certain bases in
any of our practices if it would cause such individuals to face
barriers in gaining residency in any of our facilities.
Additionally, the Fair Housing Act and other state laws require
that we advertise our services in such a way that we promote
diversity. We may be required, among other things, to change our
marketing techniques to comply with these requirements.
In addition, we are required to operate our facilities in
compliance with applicable fire and safety regulations, building
codes and other land use regulations and food licensing or
certification requirements as they may be adopted by
governmental agencies and bodies from time to time. Like other
healthcare facilities, senior living facilities are subject to
periodic survey or inspection by governmental authorities to
assess and assure compliance with regulatory requirements.
Surveys occur on a regular (often annual or biannual) schedule,
and special surveys may result from a specific complaint filed
by a resident, a family member or one of our competitors. We may
be required to make substantial capital expenditures to comply
with those requirements.
We
face periodic reviews, audits and investigations under our
contracts with federal and state government agencies, and these
audits could have adverse findings that may negatively impact
our business.
As a result of our participation in the Medicaid programs, we
are subject to various governmental reviews, audits and
investigations to verify our compliance with these programs and
applicable laws and regulations. Private pay sources also
reserve the right to conduct audits. An adverse review, audit or
investigation could result in:
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refunding amounts we have been paid pursuant to the Medicaid
programs or from private payors;
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state or federal agencies imposing fines, penalties and other
sanctions on us;
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loss of our right to participate in the Medicaid programs or one
or more private payor networks; or
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damages to our reputation in various markets.
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Both federal and state government agencies have heightened and
coordinated civil and criminal enforcement efforts as part of
numerous ongoing investigations of healthcare companies. The
focus of these investigations includes:
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cost reporting and billing practices;
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quality of care;
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financial relationships with referral sources; and
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medical necessity of services provided.
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We also are subject to potential lawsuits under a federal
whistleblower statute designed to combat fraud and abuse in the
healthcare industry. These lawsuits can involve significant
monetary and award bounties to private plaintiffs who
successfully bring these suits.
Failure
to comply with environmental laws, including laws regarding the
management of infectious medical waste, could materially and
adversely affect our financial condition and results of
operations.
Our operations are subject to regulation under various federal,
state and local environmental laws, including those relating to:
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the handling, storage, transportation, treatment and disposal of
medical waste products generated at our facilities;
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identification and warning of the presence of
asbestos-containing materials in buildings, as well as removal
of such materials;
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the presence of other substances in the indoor
environment; and
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protection of the environment and natural resources in
connection with development or construction of our properties.
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Some of our facilities generate infectious or other hazardous
medical waste due to the illness or physical condition of the
residents. Each of our facilities has an agreement with a waste
management company for the proper disposal of all infectious
medical waste, but the use of such waste management companies
does not immunize us from alleged violations of such laws, nor
does it immunize us from third-party claims for the cost to
cleanup disposal sites at which such wastes have been disposed.
Federal regulations require building owners and those exercising
control over a building’s management to identify and warn
their employees and certain other employers operating in the
building of potential hazards posed by workplace exposure to
installed asbestos-containing materials and potential
asbestos-containing materials in their buildings. Significant
fines can be assessed for violation of these regulations.
Building owners and those exercising control over a
building’s management may be subject to an increased risk
of personal injury lawsuits. Federal, state and local laws and
regulations also govern the removal, encapsulation, disturbance,
handling and disposal of asbestos-containing materials and
potential asbestos-containing materials when such materials are
in poor condition or in the event of construction, remodeling,
renovation or demolition of a building. These laws may impose
liability for improper handling or a release to the environment
of asbestos-containing materials and potential
asbestos-containing materials and may provide for fines to, and
for third parties to seek recovery from, owners or operators of
real properties for personal injury or improper work exposure
associated with asbestos-containing materials and potential
asbestos-containing materials.
The presence of mold, lead based paint, contaminants in drinking
water, radon or other substances at any of the facilities we own
or may acquire may lead to the incurrence of costs for
remediation, mitigation or the implementation of an operations
and maintenance plan and may result in third-party litigation
for personal injury or property damage. Furthermore, in some
circumstances, areas affected by mold may be unusable for
periods of time for repairs, and even after successful
remediation, the known prior presence of extensive mold could
adversely affect the ability of a facility to retain or attract
residents and could adversely affect a facility’s market
value.
If we fail to comply with environmental laws, we would face
increased expenditures both in terms of fines and remediation of
the underlying problems, potential litigation relating to
exposure to these materials, and potential decrease in value to
our business.
Changes in the environmental regulatory framework also could
have a material adverse effect on our business. In addition,
because environmental laws vary from state to state, expansion
of our operations to states where we do not currently operate
may subject us to additional restrictions on the manner in which
we operate our facilities.
Failure
to comply with laws governing the transmission and privacy of
health information could materially and adversely affect our
financial condition and results of operations.
We are subject to state laws to protect the confidentiality of
our resident’s health information. In addition, we are
subject to the Health Insurance Portability and Accountability
Act of 1996, or HIPAA, in 70 of our facilities in five states
where we electronically invoice the state’s Medicaid
program. HIPAA requires us to comply with standards relating to
the privacy of protected health information, the exchange of
health information within our company and with third parties and
to protect the confidentiality and security of protected
electronic health information. Our ability to comply with the
transaction and security standards of HIPAA is, in part,
dependent upon third parties, such as the state that provides us
the software to electronically invoice and other fiscal
intermediaries and state program payors. If we do not comply
with the HIPAA standards or state laws, we could be subject to
civil sanctions, which could materially and adversely affect our
financial condition and results of operations.
State
efforts to regulate the construction or expansion of healthcare
providers could impair our ability to expand through
construction and redevelopment.
Most of the states in which we currently operate have adopted
laws to regulate the expansion of nursing facilities, although
currently the restrictions on assisted living facilities are
significantly less. Certificate of need
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laws applicable to skilled nursing facilities generally require
that a state agency approve certain acquisitions or physical
plant changes and determine that a need exists prior to the
addition of beds or services, the implementation of the physical
plant changes or the incurrence of capital expenditures
exceeding a prescribed amount. Some states also prohibit,
restrict or delay the issuance of certificates of need.
Several states have established similar certificate of need
processes to regulate the expansion of assisted living
facilities. If states implement certificate of need or other
similar requirements for assisted living facilities, our failure
or inability to obtain the necessary approvals, changes in the
standards applicable to such approvals and possible delays and
expenses associated with obtaining such approvals could
adversely affect our ability to expand and, accordingly, to
increase our revenues and earnings.
We may
make acquisitions that could subject us to a number of operating
risks.
Our future growth depends in part on our selective acquisition
of additional assisted living facilities and the expansion of
existing facilities. We may be unable to identify suitable
targets for acquisition or expansion or make acquisitions or
expansions at favorable prices or on favorable terms. If we
identify a suitable acquisition candidate, our ability to
successfully implement the acquisition would depend on a variety
of factors, including our ability to obtain financing on
acceptable terms and requisite government approvals.
Furthermore, acquisitions involve risks, including those
associated with:
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integrating the operations, financial reporting, technologies
and personnel of acquired facilities;
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managing geographically dispersed operations;
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the diversion of management’s attention from other business
concerns;
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the inherent risks in entering markets in which we have either
limited or no direct experience; and
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the potential loss of key employees of acquired facilities.
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We may not be able to successfully integrate any facilities that
we acquire in the future and may not be able to achieve
anticipated revenue and cost benefits. Acquisitions and
expansions may be expensive, time consuming and may strain our
resources. Acquisitions and expansions may not be accretive to
our earnings and may negatively impact our results of operations
as a result of, among other things, the incurrence of debt,
one-time write-offs of goodwill and amortization expenses of
other intangible assets. In addition, future acquisitions that
we may pursue could result in dilutive issuances of equity
securities.
Competition
for the acquisition of strategic assets from buyers with lower
costs of capital than us or that have lower return expectations
than we do could limit our ability to compete for strategic
acquisitions and therefore to grow our business
effectively.
Several real estate investment trusts, or REITs, have similar
asset acquisition objectives as we do, as well as greater
financial resources and lower costs of capital than we are able
to obtain. This may increase competition for acquisitions that
would be suitable to us, making it more difficult for us to
compete and successfully implement our growth strategy. There is
significant competition among potential acquirers in the senior
living industry, including REITs, and we may not be able to
successfully implement our growth strategy or complete
acquisitions as a result of competition from REITs, which could
limit our ability to grow our business effectively.
Certain
members of our senior management team are new to their current
positions, and they may not be able to operate our business
effectively.
In connection with our separation from Extendicare, Laurie A.
Bebo, who previously served as our President and Chief
Operations Officer, will be appointed our new President and
Chief Executive Officer. Our success depends, in part, upon the
contributions of our senior management and key employees.
Therefore, losing the services of one or more members of our
senior management or our key employees could adversely affect
our operations. If our management team is not able to develop
and implement an effective business strategy to optimize and
grow our current business, our operations and results of
operations could be adversely affected.
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Costs
associated with capital improvements could adversely affect our
profitability.
Growth or maintenance of our existing revenues depends in part
on consistent investment in our assisted living facilities, and
we expect to continue to make substantial capital improvements
in our assisted living facilities. Numerous factors, many of
which are beyond our control, may influence the ultimate costs
and timing of various capital improvements, including:
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availability of financing on favorable terms;
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increases in the cost of construction materials and labor;
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additional land acquisition costs;
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litigation, accidents or natural disasters affecting
construction;
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national or regional economic changes;
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environmental or hazardous conditions; and
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undetected soil or land conditions.
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The amount of capital expenditures can vary significantly from
year to year. In addition, actual costs could vary materially
from our estimates if the factors listed above and our
assumptions about the quality of materials or workmanship
required or the cost of financing such construction were to
change. Construction also is subject to governmental permitting
processes which, if changed, could materially affect the
ultimate cost. We generally plan to spend $750 to
$1,000 per unit on capital improvements each year.
Risk
Relating to Our Indebtedness and Lease Arrangements
Our
new credit facilities and existing mortgage loans contain
covenants that restrict our operations and any default under
such facilities or loans could result in the acceleration of
indebtedness or
cross-defaults,
any of which would negatively impact our liquidity and inhibit
our ability to grow our business and increase
revenues.
Immediately after our separation from Extendicare, we expect to
have approximately $92.6 million of outstanding
indebtedness bearing interest at a weighted average rate of
6.3%. Over the next five years, based upon our current debt, we
expect our annual debt service requirements to be approximately
$8.8 million in 2006, $8.8 million in 2007,
$31.6 million in 2008, $23.8 million in 2009 and
$23.1 million in 2010. We plan to arrange a new line of
credit that may restrict our overall leverage, require
compliance with financial operating ratios such as EBITDA and
EBITDAR to debt service, and contain cross-default provisions.
These restrictions may interfere with our ability to obtain
financing or to engage in other business activities, which may
inhibit our ability to grow our business and increase revenues.
If we fail to comply with any of these requirements, then the
related indebtedness could become immediately due and payable.
We may not be able to pay this debt if it became due, which
could result in a default on our indebtedness.
Furthermore, in some cases, indebtedness is secured by both a
mortgage on a facility (or facilities) and a guaranty by us. In
the event of a default under one of these scenarios, the lender
could avoid judicial procedures required to foreclose on real
property by declaring all amounts outstanding under the guaranty
immediately due and payable, and requiring us to fulfill our
obligations to make such payments. The realization of any of
these scenarios would have an adverse effect on our financial
condition and capital structure. Additionally, a foreclosure on
any of our properties could cause us to recognize taxable
income, even if we did not receive any cash proceeds in
connection with such foreclosure. For tax purposes, a
foreclosure of any of our properties would be treated as a sale
of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding
balance of the debt secured by the mortgage exceeds our tax
basis in the property, we would recognize taxable income on
foreclosure, but would not receive any cash proceeds, which
could negatively impact our earnings. Further, because our
mortgages and leases generally contain cross-default and
cross-collateralization provisions, a default by us related to
one facility could affect a significant number of facilities and
their corresponding financing arrangements and leases.
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If we
do not comply with the requirements prescribed within our leases
or debt agreements pertaining to Revenue Bonds, we would be
subject to financial penalties.
In connection with the construction or lease of some of our
facilities, we or our landlord issued federal income tax exempt
revenue bonds guaranteed by the states in which they were
issued. Under the terms of the debt agreements relating to these
bonds, we are required, among other things, to lease at least
20% of the units of the projects to low or moderate income
persons as defined in Section 142(d) of the Internal
Revenue Code. This condition is required in order to preserve
the federal income tax exempt status of the bonds during the
term they are held by the bondholders. There are additional
requirements as to the age and physical condition of the
residents with which we must also comply. Non-compliance with
these restrictions may result in an event of default and cause
fines and other financial costs to us. For revenue bonds issued
pursuant to our lease agreements, an event of default would
result in a default of the terms of the lease. Any default under
a revenue bond could adversely affect our financial condition
and results of operations.
If we
do not comply with terms of the leases related to certain of our
assisted living facilities, or if we fail to maintain the
facilities, we could be faced with financial penalties
and/or the
termination of the lease related to the facility.
Exclusive of the 15 assisted living facilities that we lease on
an interim basis from EHSI, we currently lease 55 assisted
living facilities from several landlords, and we have annual
operating lease commitments that range from approximately
$13.2 million to $13.6 million between 2006 and 2010.
Certain of our leases require us to maintain a standard of
property appearance and maintenance, operating performance and
insurance requirements. Certain of the leases require us to
provide the landlord with our financial records and grant the
landlord the right to inspect the facilities. Failure to meet
the conditions of any particular lease could result in a default
under such lease, which could lead to the loss of the right to
operate on the premises, and financial and other costs.
Our
indebtedness and long-term leases could adversely affect our
liquidity and our ability to operate our business and our
ability to execute our growth strategy.
Immediately after our separation from Extendicare, we expect to
have approximately $92.6 million of outstanding
indebtedness bearing interest at a weighted-average rate of
6.3%. Over the next five years, based upon our current debt, we
expect our annual debt service requirements to be approximately
$8.8 million in 2006, $8.8 million in 2007,
$31.6 million in 2008, $23.8 million in 2009 and
$23.1 million in 2010. Based upon our current lease
arrangements, we expect our annual operating lease commitments
to range from approximately $13.2 million to
$13.6 million between 2006 and 2010. Our level of
indebtedness and our long-term leases could adversely affect our
future operations or impact our stockholders for several
reasons, including, without limitation:
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we may have little or no cash flow apart from cash flow that is
dedicated to the payment of any interest, principal or
amortization required with respect to outstanding indebtedness
and lease payments with respect to our long-term leases;
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increases in our outstanding indebtedness, leverage and
long-term leases will increase our vulnerability to adverse
changes in general economic and industry conditions, as well as
to competitive pressure;
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increases in our outstanding indebtedness may limit our ability
to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate and other
purposes; and
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our ability to satisfy our obligations with respect to holders
of our capital stock may be limited.
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Our ability to make payments of principal and interest on our
indebtedness and to make lease payments on our leases depends
upon our future performance, which will be subject to general
economic conditions, industry cycles and financial, business and
other factors affecting our operations, many of which are beyond
our control. Our business might not continue to generate cash
flow at or above current levels. If we are unable to generate
sufficient cash flow from operations in the future to service
our debt or to make lease payments on our leases, we may be
required, among other things, to seek additional financing in
the debt or equity markets, refinance or restructure all or a
portion of our indebtedness, sell selected assets, reduce or
delay planned capital expenditures or delay or abandon desirable
acquisitions. Such measures might not be sufficient to enable us
to service our debt or to make
20
lease payments on our leases. The failure to make required
payments on our debt or leases or the delay or abandonment of
our planned growth strategy could result in an adverse effect on
our future ability to generate revenues and sustain
profitability. In addition, any such financing, refinancing or
sale of assets might not be available on economically favorable
terms to us.
Increases
in market interest rates could significantly increase the costs
of our unhedged debt and lease obligations, which could
adversely affect our liquidity and earnings.
Prior to our separation from Extendicare, we plan to arrange a
line of credit that will be subject to variable interest rates.
Any unhedged floating-rate debt incurred in the future, exposes
us to interest rate risk. Therefore, increases in prevailing
interest rates could increase our payment obligations which
would negatively impact our liquidity and earnings.
Risk
Relating to Our Relationship with Extendicare
Conflicts
of interest may arise between us and Extendicare that could be
resolved in a manner unfavorable to us.
Questions relating to conflicts of interest may arise between us
and Extendicare in a number of areas relating to our past and
ongoing relationships. Areas in which conflicts of interest
between us and Extendicare could arise include, but are not
limited to, the following:
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identification and segregation of corporate records and
documents; and
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segregation, coordination and transfer of work assignments
within certain corporate functions that conducted duties for
both the assisted living and other Extendicare operations.
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Stock ownership of our directors. Ownership
interests of our directors in Extendicare could create, or
appear to create, conflicts of interest when directors are faced
with decisions that could have different implications for us and
Extendicare. None of our directors will own (or be associated
with) more than % of the outstanding Extendicare REIT
units, other than Mr. Hennigar, who is a member of the
Jodrey family. In addition, one of our director nominees,
Mr. Rhinelander, the current chief executive officer of
Extendicare Inc., will serve as both a director of us and a
trustee of Extendicare REIT following the separation. For
example, these decisions could relate to:
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the nature, quality and cost of transitional services rendered
to us by Extendicare;
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competition for potential acquisition or other business
opportunities; or
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employee retention or recruiting.
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Our intercompany agreements were negotiated when we were a
subsidiary of Extendicare. Prior to our
separation from Extendicare, we will enter into a number of
agreements pursuant to which Extendicare will provide to us
certain services, including payroll and benefits processing for
all of our employees, hosting services for certain of our
software applications and purchasing services, for which we will
reimburse Extendicare at the rates set forth in those
agreements, which are intended to reflect market rates. We will
also enter into a separation agreement with Extendicare, which
will cover other matters such as the allocation of
responsibility for certain liabilities pre-existing our
separation from Extendicare. In addition, we will enter into a
tax allocation agreement that covers the allocation of taxes
related to the exchange and other matters. The terms of these
agreements were established while we were a wholly owned
subsidiary of Extendicare and, therefore, may not reflect
arms’ length negotiations. In addition, conflicts could
arise in the interpretation or any extension or renegotiation of
the foregoing agreements after the separation.
Intercompany transactions. From time to time,
Extendicare or its affiliates may enter into transactions with
us or our subsidiaries or other affiliates. Although the terms
of any such transactions will be established based upon
negotiations between employees of the transacting entities and,
when appropriate, subject to the approval of the independent
directors on our Board or a committee of disinterested
directors, the terms of any such transactions may
21
not be as favorable to us or our subsidiaries or affiliates as
would be the case where the parties were completely at
arms’ length.
If
Extendicare engages in the same type of business we conduct or
takes advantage of business opportunities that might be
attractive to us, our ability to successfully operate and expand
our business may be hampered.
Extendicare will not be prohibited from entering the assisted
living business in the United States pursuant to any of the
agreements between us and Extendicare, nor will there exist any
corporate mechanism to address potential business opportunities
between Extendicare and us. If Extendicare were to enter the
assisted living business in the United States, it could use the
knowledge that it has gained through its ownership of us to its
advantage, which could negatively affect our ability to compete.
Risks
Related to Our Class A Common Stock and the
Exchange
There
is no existing market for our Class A common stock and a
trading market that will provide you with adequate liquidity may
not develop for the Class A common stock, and you could
lose all or part of your investment.
Prior to the Exchange, there has been no public market for our
Class A common stock. However, we intend to have ALC’s
Class A common stock listed on the New York Stock Exchange
under the symbol “ALC.” We anticipate that trading
will commence on a when-issued basis on or shortly before the
Exchange date, which will occur on the same day as the
completion of the Plan of Arrangement. On the first trading day
following the Exchange date, when-issued trading in respect of
the Class A common stock will end and regular way trading
will begin. We cannot predict the extent to which investor
interest will lead to the development of an active and liquid
trading market in our Class A common stock on the NYSE or
otherwise. If an active trading market does not develop, you may
have difficulty selling any of your shares of Class A
common stock or receiving a price when you sell your shares of
Class A common stock that will be favorable.
We
cannot predict the prices at which our Class A common stock
may trade after the separation.
The market price of our Class A common stock may decline
below the initial price on the Exchange date. The market price
of our Class A common stock may fluctuate significantly due
to a number of factors, some of which may be beyond our control,
including:
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our business profile and market capitalization may not fit the
investment objectives of Extendicare’s shareholders,
causing them to sell our shares after the separation;
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our quarterly or annual earnings, or those of other companies in
our industry;
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actual or anticipated fluctuations in our operating results;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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the failure of securities analysts to cover our Class A
common stock after the Exchange or changes in financial
estimates by analysts;
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changes in earnings estimates by securities analysts or our
ability to meet those estimates;
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the operating and stock price performance of other comparable
companies;
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overall market fluctuations; and
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general economic conditions.
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In particular, the realization of any of the risks described in
these “Risk Factors” could have a significant and
adverse impact on the market price of our Class A common
stock. In addition, the stock market in general has experienced
extreme price and volume volatility that has often been
unrelated to the operating performance of particular companies.
This volatility has had a significant impact on the market price
of securities issued by many companies, including companies in
our industry. The changes frequently appear to occur without
regard to the
22
operating performance of these companies. The price of our
Class A common stock could fluctuate based upon factors
that have little or nothing to do with our company, and these
fluctuations could materially reduce our stock price.
Substantial
sales of our Class A common stock following the Exchange
may have an adverse impact on the trading price of our
Class A common stock.
Extendicare expects that under the United States federal
securities laws and Canadian provincial securities laws, all of
our shares of Class A common stock may be resold
immediately in the public market, except for any shares held by
our affiliates or control persons.
Some of the holders of Extendicare Subordinate Voting Shares who
receive our shares of Class A common stock may decide that
their investment objectives do not include ownership of shares
in a U.S. assisted living facility company, and may sell
their shares of Class A common stock following the
Exchange. In addition, holders of our Class B common stock
may convert those shares into shares of our Class A common
stock, on the basis of 1.075 shares of Class A common
stock for each share of Class B common stock, which would
increase the number of shares of Class A common stock
available to be sold on the open market. We cannot predict
whether shareholders will resell large numbers of our shares of
Class A common stock in the public market following the
Exchange or how quickly they may resell these shares. If our
shareholders sell large numbers of our shares of Class A
common stock over a short period of time, or if investors
anticipate large sales of our shares of Class A common
stock over a short period of time, this could adversely affect
the trading price of our shares of Class A common stock.
Our
corporate governance documents may delay or prevent an
acquisition of us that stockholders may consider favorable,
which could decrease the value of your shares.
Our amended and restated articles of incorporation and bylaws
include a number of provisions that may deter or impede hostile
takeovers or changes of control or management. These provisions
include the following:
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the authority of our Board of Directors to issue shares of
preferred stock and to determine the price, rights, preferences,
and privileges of these shares, without stockholder approval;
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all stockholder actions must be effected at a duly called
meeting of stockholders or by the unanimous written consent of
stockholders, unless such action or proposal is first approved
by our Board of Directors;
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special meetings of the stockholders may be called only by our
Board of Directors;
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stockholders are required to give advance notice of business to
be proposed at a meeting of stockholders; and
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cumulative voting is not allowed in the election of our
directors.
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These provisions of our amended and restated articles of
incorporation and bylaws could prohibit or delay mergers or
other takeover or change of control of our company and may
discourage attempts by other companies to acquire us, even if
such a transaction would be beneficial to our stockholders. See
“Description of our Capital Stock” for a more detailed
description of the rights and privileges of our common stock.
A
significant stockholder will control the direction of our
business. The concentrated ownership of our common stock after
the Exchange will make it difficult for holders of our
Class A common stock to influence significant corporate
decisions.
Based on information known to Extendicare regarding the
ownership of its Subordinate and Multiple Voting Shares through
May 31, 2006, following the completion of the Exchange,
Scotia Investments Limited, which is owned directly or
indirectly by members of the Jodrey family, will own
approximately 64.5% of the outstanding shares of our
Class B common stock (which represents approximately 43.3%
of the total voting power of our common stock). Accordingly,
Scotia Investments Limited generally will have the ability to
strongly influence or effectively control all matters requiring
stockholder approval, including the nomination and election of
directors, the determination, without the consent of our other
stockholders, of the outcome of any corporate transaction or
other matter submitted to our stockholders for approval,
including potential mergers or acquisitions, asset sales and
other significant corporate transactions. Our chairman nominee,
Mr. Hennigar, is a member of the Jodrey family. In
23
addition, the disproportionate voting rights of the Class B
common stock relative to the Class A common stock may make
us a less attractive takeover target. See “Security
Ownership of Certain Beneficial Owners and Management” for
a description of certain of our expected shareholders.
We are
required to comply with Section 404 of the Sarbanes Oxley
Act of 2002, or SOX, which involves an in-depth evaluation of
our internal controls and compliance with the reporting
requirements mandated for non-accelerated filers by
December 31, 2007.
To comply with Section 404, we are required to conduct a
thorough assessment of the effectiveness of our internal control
structure and procedures for financial reporting to ascertain
whether those controls are sufficient to prevent a material
misstatement of our financial statements. The requirements of
SOX are extensive and will involve considerable internal
resources and the use of external consultants. We have a
combination of newer self-developed and legacy accounting
systems requiring additional internal resources to ensure proper
controls are in place. Certain of our financial systems are also
reaching capacity limitations that may limit our ability to
grow, and will require implementation of new systems within the
next 12 to 18 months. Furthermore, following our separation
from Extendicare, subsidiaries of Extendicare will provide
certain transitional services to us, including services related
to information technology, payroll and benefits processing and
reimbursement functions, which means that we will be reliant on
the adequacy of Extendicare’s internal controls with
respect to those functions. When we undertake responsibility to
process payroll and benefits for ourselves, or host our hardware
and software internally, such undertaking will require
additional resources and be implemented and tested to meet
proper internal controls standards. Although we are on schedule
with our SOX assessment, we may uncover material internal
control weaknesses that will require disclosure in our SEC
filings or additional resources to rectify the deficiencies
identified. The existence of one or more material weaknesses,
management’s conclusion that its internal controls over
financial reporting are not effective, or the inability of our
auditors to express an opinion or attest that our
management’s report is fairly stated, could result in a
loss of investor confidence in our financial reports, adversely
affect our stock price or subject us to sanctions or
investigations by regulatory authorities.
We
have not operated as a separate publicly-traded company and our
historical financial information is not necessarily
representative of the results we would have achieved as a
separate publicly-traded company and may not be a reliable
indicator of our future results.
We are being separated from Extendicare, our parent company, and
we have not operated as a separate publicly-traded company under
our current management and therefore an evaluation of our
prospects is difficult to make. Our prospects must be considered
in light of the risks, expenses and difficulties encountered by
companies in the early stages of independent business
operations. Furthermore, our assets and liabilities are
different from the assets and liabilities that are reflected in
our historical combined financial statements. Therefore, the
historical combined financial information included in this
Information Statement do not reflect the financial condition,
results of operations or cash flows we would have achieved as a
separate publicly-traded company during the periods presented or
those we will achieve in the future.
We
could be liable for taxes imposed on Extendicare with respect to
the distribution of our common stock.
Extendicare will be subject to U.S. Federal income tax on
the disposition of our common stock. The amount of tax will
depend on the fair market value of our common stock, which we
expect to be determined by reference to the trading price of our
Class A common stock after the separation. We cannot
predict the price at which our Class A common stock will
trade after the separation and also cannot predict the amount of
tax that will be imposed on Extendicare with respect to the
disposition of our common stock. Under U.S. Federal income
tax law, we will be jointly and severally liable for any taxes
imposed on Extendicare for the periods during which we were a
member of its consolidated group, including any taxes imposed
with respect to the disposition of our common stock. Under the
Tax Allocation Agreement, Extendicare has agreed to indemnify us
if we are held liable for any taxes imposed in connection with
the disposition of common stock. Extendicare may not have
sufficient assets, however, to satisfy any such liability, and
we may not successfully recover from Extendicare any amounts for
which we are held liable. Our liability for any taxes imposed on
Extendicare could materially reduce the price of our common
stock.
24
THE
EXCHANGE
Reasons
for the Separation
The Board of Directors of Extendicare regularly reviews the
various businesses it conducts to ensure that resources are
deployed and activities are pursued in the best interests of its
shareholders. On February 22, 2006, Extendicare announced
that its Board of Directors had appointed a special committee of
independent members of its Board of Directors to consider
various structures and options that would provide value to
shareholders, including a sale or reorganization of all or part
of the Extendicare businesses. On May 31, 2006 Extendicare
announced that its special committee had recommended, and the
Board of Directors had authorized, the separation of ALC from
Extendicare and the simultaneous conversion of Extendicare into
an unincorporated open-ended real estate investment trust
established under the laws of Ontario, pursuant to a plan of
arrangement (the “Plan of Arrangement”). The Board of
Directors of Extendicare has determined that the separation of
ALC from Extendicare and the conversion of Extendicare into an
unincorporated open-ended real estate investment trust is in the
best interests of Extendicare and its holders of Subordinate and
Multiple Voting Shares, by providing opportunities and benefits
to each company, including:
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The separation will allow the independent management of each of
Extendicare and us to focus its attention and its company’s
financial resources on its respective distinct business and
challenges and to lead each independent company to adopt
strategies and pursue objectives that are appropriate to its
respective business. In addition, the separation will result in
two organizations with strong balance sheets that should enable
the growth of each company.
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As a U.S. based company listed on the NYSE, ALC will have
the opportunity to attract more U.S. investors, which
should lead to greater investor awareness and a more liquid
market for its Class A common stock. Extendicare Shares are
currently primarily traded on the Toronto Stock Exchange, and
may not have attracted a significant number of
U.S. investors due to its lack of visibility in the United
States and foreign exchange risk associated with Canadian
operations.
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Through the split of Extendicare’s skilled nursing and
assisted living businesses, investors should be in a better
position to value the two independent companies and to better
evaluate the performance of each company against their industry
peers.
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ALC should have access to lower cost capital to fund
acquisitions and growth.
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The Plan of Arrangement, which is subject to the approval of the
holders of Extendicare’s Subordinate and Multiple Voting
Shares and by the Ontario Superior Court of Justice (Commercial
List), is described below.
Arrangement
Agreement
Overview
The Arrangement Agreement will set forth the arrangement
regarding the conversion of Extendicare Inc. into an
unincorporated open-ended real estate investment trust
established under the laws of Ontario and our separation from
Extendicare. The Arrangement Agreement includes a Plan of
Arrangement, which sets forth the steps to be taken by the
parties to the Arrangement Agreement to complete the Exchange.
Pursuant to the Arrangement Agreement, Extendicare will be
obligated to apply to the Ontario Superior Court of Justice
(Commercial List) for an Interim Order providing for a meeting
of Extendicare’s shareholders so that the holders of
Extendicare Subordinate and Multiple Voting Shares may vote on
whether to approve the Plan of Arrangement and any other matters
set forth in the Circular. The Plan of Arrangement requires the
approval of two-thirds of the vote of holders of
Extendicare’s Subordinate Voting Shares and Multiple Voting
Shares, voting separately as a class in person or by proxy.
Extendicare is soliciting such proxies pursuant to the Circular
and other proxy materials that it is distributing to its holders
of Subordinate and Multiple Voting Shares (and not pursuant to
this Information Statement). If the approval of the Plan of
Arrangement is obtained from holders of Extendicare’s
Subordinate and Multiple Voting Shares, and all other approvals
required by the Interim Order are obtained, Extendicare will
apply to the Ontario Superior Court
25
of Justice (Commercial List) for a Final Order approving the
Plan of Arrangement. Once the Final Order is obtained, and
provided that all of the conditions referred to below have been
satisfied or waived, Extendicare will file Articles of
Arrangement, and such other documents as may be required under
the Canadian Business Corporations Act (the “CBCA”),
with the Director appointed under the CBCA to give effect to the
Plan of Arrangement.
Plan
of Arrangement
The Plan of Arrangement gives effect to the Exchange by
providing for:
(1) the amendment of the articles of Extendicare to create
an unlimited number of Extendicare Common Shares;
(2) the exchange of each Extendicare Subordinate Voting
Share outstanding at the Effective Time (other than any such
share in respect of which the registered holder has exercised
dissent rights) by the holder thereof with Extendicare for
(i) one Extendicare Common Share and (ii) one share of
Class A common stock of ALC;
(3) the exchange of each Extendicare Multiple Voting Share
outstanding at the Effective Time (other than any such share in
respect of which the registered holder has exercised dissent
rights) by the holder thereof with Extendicare for
(i) 1.075 Extendicare Common Shares and (ii) one share
of Class B common stock of ALC;
(4) the cancellation of all outstanding Extendicare
Subordinate Voting Shares and Multiple Voting Shares; and
(5) the exchange of each Extendicare Common Share received
pursuant to items (2) and (3) above for, ultimately,
one unit of Extendicare REIT or, at the election of holders that
are taxable Canadian residents, for one limited partnership unit
of Extendicare Holding Partnership (which units of Extendicare
Holding Partnership are exchangeable, subject to adjustment on
the occurrence of certain specified events, at any time for
units of Extendicare REIT on a 1:1 basis).
For purposes of this Information Statement, “taxable
Canadian residents” means holders of Extendicare Common
Shares that are not Excluded Shareholders. Excluded
Shareholders, as more fully defined in the Circular, includes
each of the following holders: (i) non-residents of Canada
for purposes of the Canadian Income Tax Act, (ii) tax
exempt shareholders, (iii) partnerships, (iv) holders
that would acquire limited partnership units of Extendicare
Holding Partnership as a tax shelter investment or
(v) holders in which an interest itself is a tax shelter
investment.
Shareholders that validly exercise dissent rights in connection
with the transactions described above will be entitled to
receive the fair value of their Extendicare Shares and will not
receive any shares of ALC pursuant to the Plan of Arrangement.
After the completion of the Plan of Arrangement, Extendicare
will not own any shares of our capital stock, except to the
extent that Extendicare shareholders validly dissent to the Plan
of Arrangement, and shares of ALC common stock that would have
been exchanged with them will be owned by Extendicare after the
completion of the Exchange.
After the completion of the Plan of Arrangement, Extendicare
Subordinate Voting Shares will be delisted from the New York
Stock Exchange and the Toronto Stock Exchange, and Extendicare
Multiple Voting Shares will be delisted from the Toronto Stock
Exchange. Units of Extendicare REIT are expected to be listed on
the Toronto Stock Exchange only.
Conditions
and Termination
In addition to the requirement for shareholder approval, court
approval and other conditions customary for a transaction of
this nature, completion of the Plan of Arrangement will be
conditional on:
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all required consents and approvals being obtained and
continuing in force without conditions or undertakings deemed
unsatisfactory any party to the Arrangement Agreement;
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no orders being in force enjoining consummation of the
transactions;
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no law being enacted which interferes or is inconsistent with
the completion of the Arrangement;
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holders of Subordinate Voting Shares and Multiple Voting shares
holding more than % of the issued and outstanding
shares not having validly exercised dissent rights;
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holders of Subordinate Voting Shares and Multiple Voting Shares
who immediately prior to the Effective Time are non-residents of
Canada and who are to receive Extendicare REIT units not owning,
immediately following closing of the Arrangement, in excess of
40% of all then outstanding units;
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the Registration Statement (of which this Information Statement
Forms a part) being declared effective by the SEC;
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our obtaining conditional approval to list our Class A
common stock on the NYSE and Extendicare REIT obtaining
conditional approval to list its units on the Toronto Stock
Exchange; and
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our entering into the separation agreement and tax allocation
agreement.
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Each of the conditions can be waived at any time prior to the
Effective Time by the applicable party in whose favor the
condition exists.
By its terms, the Arrangement Agreement may be amended by the
parties thereto or terminated without the approval of
shareholders at any time prior to the Plan of Arrangement
becoming effective pursuant to the provisions of the CBCA. In
addition, the Arrangement Agreement will terminate if the
transactions contemplated thereby have not occurred on or
before ,
2006.
Manner
of Effecting the Exchange
In order to effect the Exchange, Extendicare will deposit with
such Exchange Agent all of the issued and outstanding capital
stock of ALC. Prior to such deposit, we will reclassify our
common stock as required to effect the Exchange. The Circular
will contain more detailed instructions for the surrender of
Extendicare Subordinate and Multiple Voting Shares and other
procedures related to the Exchange.
Dissent
Rights
Registered holders of Extendicare Subordinate or Multiple Voting
Shares that validly exercise dissent rights in connection with
the transactions described above will be entitled to receive the
fair value of their Extendicare Shares and will not receive any
shares of ALC pursuant to the Plan of Arrangement. After the
Plan of Arrangement is completed, each holder of Extendicare
Subordinate or Multiple Voting Shares exercising his or her
dissent rights will no longer have any rights as a shareholder
of Extendicare with respect to his or her shares, except for the
right to receive payment of the judicially-determined fair value
of his or her shares pursuant to Canadian law, if the
shareholder has validly perfected and not withdrawn such right.
Results
of the Separation and Exchange
We are currently a wholly owned subsidiary of Extendicare. After
the completion of the Plan of Arrangement, we will be a separate
publicly-traded company. Immediately following the completion of
the Plan of Arrangement, we expect to have approximately
56.2 million shares of our Class A common stock
outstanding and approximately 11.8 million shares of our
Class B common stock outstanding, based on the number of
Subordinate and Multiple Voting Shares of Extendicare
outstanding as of June 30, 2006 (excluding Subordinate
Voting Shares of Extendicare that underlie approximately
1.6 million outstanding options). The actual number of ALC
shares to be distributed in the Exchange will be determined on
the completion date of the Plan of Arrangement and will reflect
the exercise of any Extendicare options between the date the
Arrangement Agreement is signed and its completion.
We and Extendicare will be parties to a number of agreements
that will govern our separation from Extendicare and our future
relationship. For a more detailed description of these
agreements, see “Our Separation from and Relationship with
Extendicare After the Exchange.”
27
SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Information
Statement, including the sections entitled “Summary,”
“Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and “Business,” that are based on our
management’s beliefs and assumptions and on information
currently available to our management. Forward-looking
statements include, but are not limited to, the information
concerning our possible or assumed future results of operations,
business strategies, financing plans, competitive position,
potential growth opportunities, potential operating performance
improvements, benefits resulting from our separation from
Extendicare, the effects of competition and the effects of
future legislation or regulations. Forward-looking statements
include all statements that are not historical facts and can be
identified by the use of forward-looking terminology such as the
words “believe,” “expect,” “plan,”
“intend,” “anticipate,”
“estimate,” “predict,”
“potential,” “continue,” “may,”
“will,” “should” or the negative of these
terms or similar expressions.
Forward-looking statements involve risks, uncertainties and
assumptions. Actual results may differ materially from those
expressed in these forward-looking statements. The risk factors
discussed in “Risk Factors” beginning on page 14
set forth many of the risks and uncertainties that may cause
actual results to differ from those expressed in the forward
looking statements. There may be other risks and uncertainties
that could have a similar impact. Therefore, you should not put
undue reliance on any forward-looking statements. We do not have
any intention or obligation to update forward-looking statements
after we distribute this Information Statement.
DIVIDEND
POLICY
We presently do not intend to pay any dividends. Payment of
future cash dividends, if any, will be at the discretion of our
Board of Directors in accordance with applicable law after
taking into account various factors, including our financial
condition, operating results, current and anticipated cash
needs, plans for expansion and contractual restrictions with
respect to the payment of dividends.
28
CAPITALIZATION
The following table sets forth our capitalization (i) on an
actual basis as of March 31, 2006 and (ii) on a pro
forma basis as of March 31, 2006 as adjusted to give effect
to:
|
|
|
| |
•
|
the Exchange; and
|
| |
| |
•
|
the pro forma adjustments described in our unaudited pro forma
condensed combined financial statements and the notes thereto,
including the contribution to capital of debt due to Extendicare.
|
This table should be read in conjunction with “Selected
Combined Financial Data,” “Unaudited Pro Forma
Condensed Combined Financial Statements,” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our historical
financial statements and the notes to our historical financial
statements included elsewhere in this Information Statement.
| |
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash and cash equivalent
|
|
$
|
9,343
|
|
|
$
|
19,729
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
127,934
|
|
|
$
|
89,968
|
|
|
Due to shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
Interest-bearing advances
|
|
|
40,718
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
168,652
|
|
|
|
89,968
|
|
|
Total parent’s investment
|
|
|
205,844
|
|
|
|
—
|
|
|
Total shareholders’ equity(1)
|
|
|
—
|
|
|
|
309,503
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
374,496
|
|
|
$
|
399,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total shareholders’ equity assumes that the number of
shares of our Class A and Class B common stock
outstanding is equal to the number of Extendicare Subordinate
and Multiple Voting Shares outstanding as of June 30, 2006,
respectively. As of June 30, 2006, the number of
Extendicare shares outstanding were as follows: |
| |
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Shares
|
|
|
|
|
Outstanding
|
|
|
|
|
Subordinate Voting Shares(*)
|
|
|
56,177,520
|
|
|
Multiple Voting Shares
|
|
|
11,778,433
|
|
|
|
|
|
(*) |
|
Excludes 1,643,875 outstanding options to purchase Extendicare
Subordinate Voting Shares as of June 30, 2006. |
29
SELECTED
COMBINED FINANCIAL DATA
The historical selected combined financial and other data have
been prepared to include all of Extendicare’s assisted
living business in the United States and are a combination of
(i) assisted living facilities operated by EHSI prior to
and after its acquisition of Historic ALC, which ranged from 36
facilities as of January 1, 2003 to 29 facilities as
of March 31, 2006, (ii) 177 assisted living facilities
operated by ALC since Extendicare completed the acquisition of
Historic ALC on January 31, 2005 and (iii) two
assisted living facilities that were constructed by EHSI during
2005 but were opened and operated by ALC. The historical
selected combined financial and other operating data do not
contain data related to certain assets that will be transferred
to us in connection with our separation from Extendicare. In
addition, the historical selected combined financial statements
and other operating data include certain assets and operations
that will not be transferred to us in connection with our
separation from Extendicare. Please see our unaudited pro forma
condensed combined financial statements and the notes thereto
for a more detailed description of these transactions.
The historical selected combined financial data should be read
in conjunction with, and are qualified by reference to,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the historical
audited and interim unaudited financial statements and the
accompanying notes thereto included elsewhere in this
Information Statement. The combined statements of operations
data for each of the three years in the three year period ended
December 31, 2005, and the combined balance sheet data as
of December 31, 2004 and 2005, are derived from the audited
combined financial statements of ALC included elsewhere in this
Information Statement, and should be read in conjunction with
those combined financial statements and the accompanying notes.
The combined statement of operations data set forth below for
the three months ended March 31, 2005 and 2006, and the
consolidated balance sheet data as of March 31, 2006, are
derived from the unaudited combined financial statements of ALC
included elsewhere in this Information Statement. The combined
statements of operations for each of the two years in the period
ended December 31, 2002, and the combined balance sheet
data as of December 31, 2001, 2002 and 2003 and
March 31, 2005 are derived from the unaudited combined
financial statements of ALC, which are not included in this
Information Statement. In management’s opinion, these
unaudited combined financial statements have been prepared on
substantially the same basis as the audited financial statements
and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial
data for the periods presented. The results of operations for
the interim period are not necessarily indicative of the
operating results for the entire year or any future period.
The financial information presented below may not reflect what
our results of operations, financial position and cash flows
would have been had we operated as a separate, stand-alone
entity during the periods presented or what our results of
operations, financial position and cash flows will be in the
future.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars, except operating data)
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
56,776
|
|
|
$
|
37,665
|
|
|
$
|
204,949
|
|
|
$
|
33,076
|
|
|
$
|
31,177
|
|
|
$
|
28,596
|
|
|
$
|
26,813
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
37,214
|
|
|
|
25,605
|
|
|
|
138,126
|
|
|
|
23,837
|
|
|
|
22,163
|
|
|
|
21,400
|
|
|
|
19,312
|
|
|
General and administrative
|
|
|
3,454
|
|
|
|
2,226
|
|
|
|
6,789
|
|
|
|
506
|
|
|
|
503
|
|
|
|
503
|
|
|
|
607
|
|
|
Lease costs
|
|
|
3,488
|
|
|
|
2,348
|
|
|
|
12,852
|
|
|
|
66
|
|
|
|
73
|
|
|
|
76
|
|
|
|
88
|
|
|
Depreciation and amortization
|
|
|
4,123
|
|
|
|
2,390
|
|
|
|
14,750
|
|
|
|
3,281
|
|
|
|
3,032
|
|
|
|
2,995
|
|
|
|
3,387
|
|
|
Interest expense, net
|
|
|
2,830
|
|
|
|
2,452
|
|
|
|
11,603
|
|
|
|
1,738
|
|
|
|
2,698
|
|
|
|
2,514
|
|
|
|
3,846
|
|
|
Loss on early retirement of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
647
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,109
|
|
|
|
35,021
|
|
|
|
184,120
|
|
|
|
30,075
|
|
|
|
28,469
|
|
|
|
27,488
|
|
|
|
27,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
5,667
|
|
|
|
2,644
|
|
|
|
20,829
|
|
|
|
3,001
|
|
|
|
2,708
|
|
|
|
1,108
|
|
|
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,310
|
|
|
$
|
1,526
|
|
|
$
|
12,342
|
|
|
$
|
1,635
|
|
|
$
|
1,067
|
|
|
$
|
430
|
|
|
$
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data
(Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities at end of
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned (Note 2)
|
|
|
153
|
|
|
|
152
|
|
|
|
155
|
|
|
|
31
|
|
|
|
33
|
|
|
|
35
|
|
|
|
35
|
|
|
Capital leases
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Operating leases
|
|
|
50
|
|
|
|
51
|
|
|
|
51
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned and leased
|
|
|
208
|
|
|
|
208
|
|
|
|
211
|
|
|
|
32
|
|
|
|
34
|
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
(Thousands of dollars unless otherwise noted)
|
|
|
|
|
Available units at end of period
|
|
|
8,538
|
|
|
|
8,263
|
|
|
|
8,505
|
|
|
|
1,424
|
|
|
|
1,338
|
|
|
|
1,340
|
|
|
|
1,340
|
|
|
Average resident census (units
occupied)
|
|
|
7,164
|
|
|
|
5,258
|
|
|
|
6,817
|
|
|
|
1,193
|
|
|
|
1,184
|
|
|
|
1,137
|
|
|
|
1,109
|
|
|
Average occupancy rate
|
|
|
84.3
|
%
|
|
|
88.9
|
%
|
|
|
87.9
|
%
|
|
|
85.3
|
%
|
|
|
88.4
|
%
|
|
|
84.8
|
%
|
|
|
82.5
|
%
|
|
Percent of payor source of total
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private pay
|
|
|
78.7
|
%
|
|
|
78.9
|
%
|
|
|
78.2
|
%
|
|
|
92.7
|
%
|
|
|
94.1
|
%
|
|
|
94.0
|
%
|
|
|
94.6
|
%
|
|
Medicaid
|
|
|
21.3
|
%
|
|
|
21.1
|
%
|
|
|
21.8
|
%
|
|
|
7.3
|
%
|
|
|
5.9
|
%
|
|
|
6.0
|
%
|
|
|
5.4
|
%
|
|
Balance Sheet Data (end of
period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,343
|
|
|
$
|
4,604
|
|
|
$
|
6,439
|
|
|
$
|
119
|
|
|
$
|
225
|
|
|
$
|
863
|
|
|
$
|
3,144
|
|
|
Property and equipment
|
|
|
373,563
|
|
|
|
380,909
|
|
|
|
378,362
|
|
|
|
73,390
|
|
|
|
66,070
|
|
|
|
66,027
|
|
|
|
67,880
|
|
|
Total assets
|
|
|
420,109
|
|
|
|
411,085
|
|
|
|
420,697
|
|
|
|
84,622
|
|
|
|
77,574
|
|
|
|
78,127
|
|
|
|
81,996
|
|
|
Total debt
|
|
|
130,906
|
|
|
|
212,842
|
|
|
|
131,526
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Parent’s investment
|
|
|
205,844
|
|
|
|
164,673
|
|
|
|
203,443
|
|
|
|
79,372
|
|
|
|
71,392
|
|
|
|
67,230
|
|
|
|
76,847
|
|
Notes:
|
|
|
|
(1) |
|
All of the operating data, except for the number of facilities
at the end of the period, are for continuing operations only.
Please see “Management Discussion and Analysis of Financial
Condition and Results of Operations” for a description of
continuing operations. |
| |
|
(2) |
|
Owned facilities includes 15 facilities that EHSI has agreed to
sell to ALC and ALC agreed to purchase, subject only to the
receipt of approval from local planning commission to the
subdivision of the underlying property. We have leased these
facilities from EHSI in the interim. |
31
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined statements
of income of ALC for the year ended December 31, 2005 and
the three months ended March 31, 2006 assume the separation
from Extendicare was effective as of January 1, 2005. The
following unaudited pro forma condensed combined balance sheets
of ALC as of March 31, 2006 assume the separation from
Extendicare was effective as of such date. The pro forma
adjustments are based on available information and upon
assumptions that our management believes are reasonable in order
to reflect, on a pro forma basis, the impact of the acquisition
of Historic ALC and the separation transactions on the
historical financial information of ALC. The adjustments are
described in the notes to the unaudited pro forma condensed
combined statements of income and the unaudited pro forma
condensed combined balance sheets, and principally include the
results of our separation from Extendicare (which are described
in more detail in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations”). The significant adjustments made to the
historical combined financial statements are:
|
|
|
| |
•
|
the acquisition of Historic ALC by EHSI;
|
| |
| |
•
|
adjustments to remove data related to assets and liabilities
that will not be transferred to us in connection with our
separation from Extendicare, including (i) three assisted
living facilities (168 units) that were closed in the three
months ended March 31, 2006 and (ii) two free-standing
assisted living facilities (141 units) and another 129
assisted living units that are contained in skilled nursing
facilities that will be retained by EHSI;
|
| |
| |
•
|
the following capital contributions made by Extendicare or EHSI
and related items:
|
|
|
|
| |
•
|
a capital contribution in the amount of approximately
$40.7 million by EHSI as settlement of the outstanding debt
owed by ALC to EHSI and an additional $10.3 million cash
contribution by EHSI;
|
| |
| |
•
|
a capital contribution in the amount of $10.0 million to
our captive insurance subsidiary;
|
| |
| |
•
|
a capital contribution in the amount of approximately
$4.2 million related to share investments in unrelated
companies that are classified as short term investments, and an
additional $0.2 million of share investments that are
classified as long-term investments; and
|
| |
| |
•
|
a capital contribution in the amount of approximately
$5.0 million to fund the purchase of an office building in
Milwaukee, Wisconsin that will become our headquarters in
2007; and
|
|
|
|
| |
•
|
the new employment contracts for corporate officers and the
provision of certain contractual transitional services from
Extendicare to us following the separation.
|
The unaudited pro forma combined financial statements reported
below should be read in conjunction with our
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” the combined
financial statements and the corresponding notes, and the
unaudited interim combined financial statements and the
corresponding notes included elsewhere in this information
statement.
The pro forma combined financial information is included for
informational purposes only and does not purport to reflect the
results of operations or financial position of ALC that would
have occurred had it operated as a separate, independent company
during the periods presented. Actual results might have differed
from pro forma results if ALC had operated independently. The
pro forma combined financial information should not be relied
upon as being indicative of ALC’s results of operations or
financial condition had the transactions contemplated in
connection with the acquisition of Historic ALC or the
separation been completed on the dates assumed. The pro forma
combined financial information also does not project the results
of operations or financial position for any future period or
date.
The pro forma combined financial statements do not reflect the
additional costs of being a publicly listed company. Annual
listing fees, audit fees, shareholder relations, board and other
costs associated with being a publicly listed company are
estimated at $1.0 million. In addition, there are other
incremental general and administrative costs associated with the
separation that cannot be defined and have not been reflected in
the pro forma combined financial statements.
32
Assisted
Living Concepts, Inc.
Pro Forma Condensed Combined Statement of Income
Year Ended December 31, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Living
|
|
|
|
|
Assisted
|
|
|
|
|
|
|
|
|
Concepts, Inc.
|
|
|
|
|
Living
|
|
|
Pro Forma
|
|
|
|
|
|
(Pro Forma,
|
|
|
|
|
Concepts, Inc.
|
|
|
Adjustments
|
|
|
Notes
|
|
|
As Adjusted)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
REVENUES
|
|
$
|
204,949
|
|
|
$
|
15,102
|
|
|
|
|
(A)
|
|
$
|
214,344
|
|
|
|
|
|
|
|
|
|
(5,707
|
)
|
|
|
|
(B)
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
138,126
|
|
|
|
11,078
|
|
|
|
|
(A)
|
|
|
144,633
|
|
|
|
|
|
|
|
|
|
(4,571
|
)
|
|
|
|
(B)
|
|
|
|
|
|
General and administrative
|
|
|
6,789
|
|
|
|
1,163
|
|
|
|
|
(A)
|
|
|
9,247
|
|
|
|
|
|
|
|
|
|
1,295
|
|
|
|
|
(I)
|
|
|
|
|
|
Lease costs
|
|
|
12,852
|
|
|
|
1,365
|
|
|
|
|
(A)
|
|
|
14,214
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
(B)
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,750
|
|
|
|
945
|
|
|
|
|
(A)
|
|
|
14,927
|
|
|
|
|
|
|
|
|
|
(768
|
)
|
|
|
|
(B)
|
|
|
|
|
|
Interest expense, net
|
|
|
11,603
|
|
|
|
820
|
|
|
|
|
(A)
|
|
|
8,143
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,213
|
)
|
|
|
|
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
(911
|
)
|
|
|
|
(F)
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,066
|
)
|
|
|
|
(K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,120
|
|
|
|
7,044
|
|
|
|
|
|
|
|
191,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
20,829
|
|
|
|
2,351
|
|
|
|
|
|
|
|
23,180
|
|
|
Income tax expense
|
|
|
8,119
|
|
|
|
718
|
|
|
|
|
(D)
|
|
|
8,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing
operations
|
|
|
12,710
|
|
|
|
1,633
|
|
|
|
|
|
|
|
14,343
|
|
|
Loss from discontinued operations
before income taxes
|
|
|
(692
|
)
|
|
|
692
|
|
|
|
|
(B)
|
|
|
—
|
|
|
Income tax benefit on discontinued
operations
|
|
|
(324
|
)
|
|
|
324
|
|
|
|
|
(D)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
|
(368
|
)
|
|
|
368
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
12,342
|
|
|
$
|
2,001
|
|
|
|
|
|
|
$
|
14,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
(J)
|
|
|
69,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
(J)
|
|
|
70,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
33
Assisted
Living Concepts, Inc.
Pro Forma Condensed Combined Statement of Income
Three Months Ended March 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Living
|
|
|
|
|
Assisted
|
|
|
|
|
|
|
|
|
Concepts, Inc.
|
|
|
|
|
Living
|
|
|
Pro Forma
|
|
|
|
|
|
(Pro Forma,
|
|
|
|
|
Concepts, Inc.
|
|
|
Adjustments
|
|
|
Notes
|
|
|
As Adjusted)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
REVENUES
|
|
$
|
56,776
|
|
|
$
|
(1,422
|
)
|
|
|
|
(B)
|
|
$
|
55,354
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
37,214
|
|
|
|
(1,146
|
)
|
|
|
|
(B)
|
|
|
36,068
|
|
|
General and administrative
|
|
|
3,454
|
|
|
|
214
|
|
|
|
|
(I)
|
|
|
3,668
|
|
|
Lease costs
|
|
|
3,488
|
|
|
|
(1
|
)
|
|
|
|
(B)
|
|
|
3,487
|
|
|
Depreciation and amortization
|
|
|
4,123
|
|
|
|
(189
|
)
|
|
|
|
(B)
|
|
|
3,934
|
|
|
Interest expense, net
|
|
|
2,830
|
|
|
|
(10
|
)
|
|
|
|
(B)
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
|
(F)
|
|
|
|
|
|
|
|
|
|
|
|
|
(637
|
)
|
|
|
|
(K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,109
|
|
|
|
(2,541
|
)
|
|
|
|
|
|
|
48,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
5,667
|
|
|
|
1,119
|
|
|
|
|
|
|
|
6,786
|
|
|
Income tax expense
|
|
|
2,189
|
|
|
|
442
|
|
|
|
|
(D)
|
|
|
2,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing
operations
|
|
|
3,478
|
|
|
|
677
|
|
|
|
|
|
|
|
4,155
|
|
|
Loss from discontinued operations
before income taxes
|
|
|
(1,927
|
)
|
|
|
1,927
|
|
|
|
|
(B)
|
|
|
—
|
|
|
Income tax benefit on discontinued
operations
|
|
|
(759
|
)
|
|
|
759
|
|
|
|
|
(D)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
|
(1,168
|
)
|
|
|
1,168
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
2,310
|
|
|
$
|
1,845
|
|
|
|
|
|
|
$
|
4,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
(J)
|
|
|
69,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
(J)
|
|
|
70,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
34
Assisted
Living Concepts, Inc.
Pro Forma Condensed Combined Balance Sheet
As of March 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Living
|
|
|
|
|
Assisted
|
|
|
|
|
|
|
|
|
Concepts, Inc.
|
|
|
|
|
Living
|
|
|
Pro Forma
|
|
|
|
|
|
(Pro Forma,
|
|
|
|
|
Concepts, Inc.
|
|
|
Adjustments
|
|
|
Notes
|
|
|
As Adjusted)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,343
|
|
|
$
|
88
|
|
|
|
|
(B)
|
|
$
|
19,729
|
|
|
|
|
|
|
|
|
|
10,298
|
|
|
|
|
(F)
|
|
|
|
|
|
Accounts receivable, less allowances
|
|
|
4,545
|
|
|
|
(224
|
)
|
|
|
|
(B)
|
|
|
4,321
|
|
|
Supplies, prepaid expenses and
other current assets
|
|
|
5,075
|
|
|
|
(87
|
)
|
|
|
|
(B)
|
|
|
4,988
|
|
|
Deferred state income taxes
|
|
|
436
|
|
|
|
—
|
|
|
|
|
|
|
|
436
|
|
|
Short-term investments
|
|
|
—
|
|
|
|
4,197
|
|
|
|
|
(G)
|
|
|
4,197
|
|
|
Due from shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
9
|
|
|
|
—
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,408
|
|
|
|
14,272
|
|
|
|
|
|
|
|
33,680
|
|
|
Property and equipment, net
|
|
|
373,563
|
|
|
|
(3,028
|
)
|
|
|
|
(B)
|
|
|
375,535
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
(L)
|
|
|
|
|
|
Goodwill and other intangible
assets, net
|
|
|
19,423
|
|
|
|
(275
|
)
|
|
|
|
(M)
|
|
|
19,148
|
|
|
Other assets
|
|
|
7,715
|
|
|
|
10,000
|
|
|
|
|
(E)
|
|
|
15,835
|
|
|
|
|
|
|
|
|
|
(2,038
|
)
|
|
|
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
158
|
|
|
|
|
(H)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
420,109
|
|
|
$
|
24,089
|
|
|
|
|
|
|
$
|
444,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARENT’S
INVESTMENT (SHAREHOLDERS’ EQUITY)
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,111
|
|
|
$
|
(116
|
)
|
|
|
|
(B)
|
|
$
|
3,995
|
|
|
Accrued liabilities
|
|
|
20,438
|
|
|
|
(212
|
)
|
|
|
|
(B)
|
|
|
20,226
|
|
|
Accrued state income taxes
|
|
|
632
|
|
|
|
—
|
|
|
|
|
|
|
|
632
|
|
|
Current maturities of long-term debt
|
|
|
2,972
|
|
|
|
(386
|
)
|
|
|
|
(K)
|
|
|
2,586
|
|
|
Due from shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued federal income taxes
|
|
|
998
|
|
|
|
—
|
|
|
|
|
|
|
|
998
|
|
|
Other
|
|
|
3,527
|
|
|
|
—
|
|
|
|
|
|
|
|
3,527
|
|
|
Current portion of accrual for
self-insured liabilities
|
|
|
300
|
|
|
|
—
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
32,978
|
|
|
|
(714
|
)
|
|
|
|
|
|
|
32,264
|
|
|
Accrual for self-insured liabilities
|
|
|
1,086
|
|
|
|
—
|
|
|
|
|
|
|
|
1,086
|
|
|
Long-term debt
|
|
|
127,934
|
|
|
|
(37,966
|
)
|
|
|
|
(K)
|
|
|
89,968
|
|
|
Deferred state income taxes
|
|
|
857
|
|
|
|
—
|
|
|
|
|
|
|
|
857
|
|
|
Other long-term liabilities
|
|
|
7,468
|
|
|
|
(172
|
)
|
|
|
|
(B)
|
|
|
7,296
|
|
|
Due to shareholder and affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
3,224
|
|
|
|
—
|
|
|
|
|
|
|
|
3,224
|
|
|
Interest-bearing advances
|
|
|
40,718
|
|
|
|
(40,718
|
)
|
|
|
|
(F)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
214,265
|
|
|
|
(79,570
|
)
|
|
|
|
|
|
|
134,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent’s investment
|
|
|
205,844
|
|
|
|
(4,789
|
)
|
|
|
|
(B)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
40,718
|
|
|
|
|
(F)
|
|
|
|
|
|
|
|
|
|
|
|
|
4,197
|
|
|
|
|
(G)
|
|
|
|
|
|
|
|
|
|
|
|
|
158
|
|
|
|
|
(H)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
(L)
|
|
|
|
|
|
|
|
|
|
|
|
|
38,352
|
|
|
|
|
(K)
|
|
|
|
|
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
(M)
|
|
|
|
|
|
|
|
|
|
|
|
|
10,298
|
|
|
|
|
(F)
|
|
|
|
|
|
|
|
|
|
|
|
|
(309,503
|
)
|
|
|
|
(N)
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
309,503
|
|
|
|
|
(N)
|
|
|
309,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Parent’s
Investment (Shareholders’ Equity)
|
|
$
|
420,109
|
|
|
$
|
24,089
|
|
|
|
|
|
|
$
|
444,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Combined Financial
Information.
35
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION ASSISTED LIVING CONCEPTS, INC.
|
|
|
Note 1 —
|
Pro Forma
Adjustments
|
The pro forma adjustments included in the unaudited pro forma
condensed combined financial information are as follows:
(A) To add the results of operations of ALC for the month
of January 2005, including pro forma amortization of purchase
accounting adjustments. The historical statement of income for
the year ended December 31, 2005 includes operations of ALC
beginning February 1, 2005, the day after Historic ALC was
acquired by Extendicare Health Services, Inc. (“EHSI”).
(B) To remove operations, assets and liabilities of three
discontinued assisted living facilities (168 units) and two
free-standing EHSI assisted living facilities (141 units)
and another 129 assisted living units contained within skilled
nursing facilities that are not being transferred to ALC. These
assets and operations are included in the historical statements
of income for the year ended December 31, 2005 and the
three months ended March 31, 2006. The assets and
liabilities are included in the historical balance sheet as of
March 31, 2006.
(C) To remove interest expense allocated from EHSI to ALC
relating to debt instruments recorded on the balance sheet of
EHSI. EHSI’s debt obligations are not included in the
historical balance sheets of ALC. The allocation of interest
expense to ALC was based on the estimated use of proceeds of
EHSI’s debt. Pursuant to the separation agreement, ALC will
not assume or otherwise be obligated on any of EHSI’s debt.
(D) To reflect the income tax effect of the other pro forma
adjustments at applicable income tax rates.
(E) To reflect estimated capital contribution of
$10.0 million to establish, at a date to be determined in
2006, Pearson Indemnity Company, Ltd. (“Pearson”),
ALC’s Bermuda based wholly-owned captive insurance
subsidiary. Pearson will provide general and professional
liability insurance to ALC subsequent to the separation
transaction.
(F) To reflect the contribution of capital by EHSI through
conversion of the outstanding balance of the advance to ALC
($40.7 million as of March 31, 2006) to equity
and an additional $10.3 million cash contribution to
equity. The $40.7 million and the $10.3 million cash
contribution represent the original $51.0 million interest
bearing advance to ALC. Therefore, the advance to EHSI is
reclassified from liabilities to the parent’s investment.
These amounts were advanced to ALC by EHSI and the interest was
charged at 6%. This adjustment includes the removal of interest
expense for purposes of the pro forma income statements.
(G) To record parent’s contribution of capital to ALC
consisting of the following securities available for sale stated
at market value:
| |
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
|
|
Omnicare, Inc. common stock,
50,000 shares at $54.99 per share at March 31,
2006
|
|
$
|
2,749
|
|
|
BNN Investments, Ltd. common
stock, 12,100 shares at Cdn $139.75
(U.S. $119.65) per share at March 31, 2006
|
|
|
1,448
|
|
|
|
|
|
|
|
|
|
|
$
|
4,197
|
|
|
|
|
|
|
|
(H) To record parent’s contribution of capital to ALC
of $158,000, consisting of 500,622 shares of MedX Health
Corp. common stock stated at cost of Canadian $0.37 per
share (US$0.32) as of March 31, 2006. The investment is
carried at cost because the market value is not readily
determinable.
(I) To record estimated incremental costs relating to
certain employment contracts and transitional services
agreements for payroll and benefits processing and reimbursement
services with EHSI, information technology support with Virtual
Care Provider, Inc., a subsidiary of Extendicare, and other
newly appointed executive staff.
(J) The basic weighted average shares of common stock was
determined by reviewing the number of outstanding Subordinate
Voting Shares of Extendicare Inc. for the applicable periods
(including options for such shares), which would have
approximated the number of outstanding shares of Class A
common stock, and the number of outstanding Multiple Voting
Shares of Extendicare Inc. for the applicable periods, which
would
36
have approximated the number of outstanding shares of
Class B common stock. For purposes of determining the
diluted weighted average shares, the Multiple Voting Shares were
deemed to have been converted into Subordinate Voting Shares at
the 1 to 1.075 conversion ratio applicable to the
Class B common stock. This conversion feature resulted in
an additional 0.9 million shares included in the diluted
weighted average shares outstanding.
(K) To reflect the reclassification of a loan within the
EHSI credit facility and the interest allocated from this loan
to ALC. The loan was incurred as a direct result of the
acquisition of Historic ALC. Therefore, the loan is reclassified
from long-term debt to parent’s investment
($38.4 million as of March 31, 2006). The loan will
not be converted into equity of ALC. Pursuant to the separation
agreement, ALC will not assume or otherwise be obligated on any
of EHSI’s debt. EHSI will continue to be liable for the
loans under the EHSI credit facility and be responsible for
releasing the assisted living facilities held as security under
the line of credit in connection with the refinancing of the
EHSI credit facility.
(L) To reflect the purchase of a new building to replace
leased office space. The purchase of the office building will be
through cash contribution by EHSI into ALC. The estimated
purchase price of the new building is $5.0 million and the
purchase is expected to close during the three month period
ending September 30, 2006.
(M) To reflect goodwill pertaining to assisted living
facilities returned to EHSI.
(N) To reflect the change in capitalization from
parent’s investment to shareholders’ equity. The
number of shares of ALC Class A and Class B common
stock outstanding is assumed to be equal to the number of
Extendicare Subordinate and Multiple Voting Shares outstanding
as of June 30, 2006, as follows (excluding Subordinate
Voting Shares that underlie approximately 1.6 million
outstanding options):
| |
|
|
|
|
|
Subordinate Voting Shares
|
|
|
56,177,520
|
|
|
Multiple Voting Shares
|
|
|
11,778,433
|
|
Note 2 — Pro
Forma Net Income Per Common Share
Basic earnings per share (EPS) is calculated using net income
attributable to common shares divided by the weighted average
number of common shares outstanding for the period. Diluted EPS
is calculated using income attributable to common shares divided
by the weighted average number of common shares and dilutive
potential common shares outstanding for the period.
The following table summarizes the basic and diluted net income
per common share amounts presented in the accompanying Pro Forma
Condensed Combined Statements of Operations (in thousands,
except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended
|
|
|
One Year Ended
|
|
|
|
|
March 31, 2006
|
|
|
December 31, 2005
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per
share:
|
|
|
|
|
|
|
|
|
|
Net income to common shareholders
|
|
$
|
4,155
|
|
|
$
|
14,343
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
per share:
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares
outstanding
|
|
|
69,600
|
|
|
|
69,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.06
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income
per share:
|
|
|
|
|
|
|
|
|
|
Net income to common shareholders
|
|
$
|
4,155
|
|
|
$
|
14,343
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
per share:
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares
outstanding
|
|
|
69,600
|
|
|
|
69,600
|
|
|
Assumed conversion of Class B
shares
|
|
|
883
|
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,483
|
|
|
|
70,483
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.06
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
37
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations together with the audited
and unaudited combined financial statements, the notes to our
audited combined financial statements, our unaudited pro forma
combined financial statements and the notes to our unaudited pro
forma combined financial statements included elsewhere in this
Information Statement. This discussion contains forward-looking
statements that involve risks and uncertainties. The
forward-looking statements are not historical facts, but rather
are based on current expectations, estimates, assumptions and
projections about our industry, business and future financial
results. Our actual results could differ materially from the
results contemplated by these forward-looking statements due to
a number of factors, including those discussed in the sections
of this Information Statement entitled “Risk Factors,”
“Special Note About Forward-Looking Statements”
and other sections in this Information Statement.
Executive
Overview
We are one of the five largest publicly traded operators of
assisted living facilities in the United States, based on total
capacity, and we currently operate 206 assisted living
facilities with 8,251 units in 17 states. We own 151
of our facilities, and the remaining are under long-term leases,
giving us significant operational flexibility with respect to
our properties. For the three months ended March 31, 2006,
the average occupancy rate for all of our facilities was 84.3%
(with mature facilities, defined as facilities with all units
open for at least one year, having an occupancy rate of 85.6%),
the average combined monthly rate for rent and services was
$2,656 per unit and the percentage of our revenue generated
from private pay sources was 78.7%. For the eleven month period
after the acquisition of Historic ALC on January 31, 2005,
including the 177 assisted living facilities of Historic ALC,
the average occupancy rates for all facilities was 88.3% (for
mature facilities — 87.3%), the average combined
monthly rate for rent and services was $2,475 per unit and
the percentage of our revenue generated from private pay sources
was 78.2%.
We are currently a wholly-owned subsidiary of Extendicare. On
May 31, 2006, the Board of Directors of Extendicare
approved the separation of all of Extendicare’s assisted
living operations from Extendicare in connection with the
simultaneous conversion of Extendicare into an unincorporated
open-ended real estate investment trust established under the
laws of Ontario. If approved by the holders of
Extendicare’s Subordinate and Multiple Voting shares and
the Ontario Superior Court of Justice (Commercial List), we
expect the separation to occur within two weeks following the
special meeting of holders of Extendicare’s Subordinate and
Multiple Voting shares called to approve the transactions. In
connection with our separation, Extendicare will transfer to us
certain assets, we will assume certain liabilities and enter
into agreements with Extendicare that are described more fully
in “Our Separation from and Relationship with Extendicare
After the Exchange.”
In addition to our core business, we also will hold
(i) share investments in Omnicare, Inc., or Omnicare, a
publicly traded corporation in the United States, BNN
Investments Ltd., or BNN, a Canadian publicly traded company,
and MedX Health Corporation, or MedX, a Canadian corporation,
(ii) cash or other investments from the contribution of
$10.0 million into Pearson Indemnity Company, Ltd., or
Pearson, our wholly owned Bermuda based captive insurance
company that has been formed to provide our self insurance
general liability coverage, and (iii) an office building in
Milwaukee, Wisconsin for our future headquarters that we expect
to purchase for approximately $5.0 million from an
unrelated party and use as our headquarters in 2007.
We plan to grow our revenue and operating income by:
|
|
|
| |
•
|
increasing the overall size of our portfolio through both
acquisitions and building additional capacity to existing
facilities;
|
| |
| |
•
|
increasing our occupancy rate and the percentage of revenue
derived from private pay sources; and
|
| |
| |
•
|
capitalizing on the efficiencies that larger organizations can
achieve in the highly fragmented senior living facility industry.
|
We plan to grow our portfolio by making selective acquisitions
in markets with favorable private pay demographics and, to a
lesser extent, by expanding existing properties to meet any
additional private pay demand in markets we currently serve.
With regard to general and administrative costs associated with
our future acquisition
38
plans, we are in the process of recruiting a vice president of
acquisitions to coordinate these activities. Additional
regional, divisional and corporate costs associated with our
growth are anticipated to be proportionate to current operating
levels. In addition, we plan to increase demand for our services
among private pay residents through a focused sales and
marketing effort intended to establish ALC as the provider of
choice for residents who value wellness and quality of care.
Because of the size of our operations and the depth of our
experience in the senior living industry, we believe we are able
to effectively identify and maximize cost efficiencies and to
expand our portfolio by investing in attractive assets in our
target communities. Our business strategy and competitive
strengths are outlined in detail in “Summary” and
“Business” sections of this Information Statement.
In the three months ended March 31, 2006, we completed our
first full year of operating ALC since its acquisition by
Extendicare.
The remainder of Management’s Discussion and Analysis of
Financial Condition and Results of Operations is organized as
follows:
|
|
|
| |
•
|
Basis of Presentation of Historical Combined Financial
Statements. This section provides an overview of
our historical assisted living operations and the basis of
presentation for our historical combined financial statements.
|
| |
| |
•
|
Business Overview. This section provides a
general financial description of our business. More
specifically, this section describes the sources and composition
of our revenues and operating expenses. In addition, the section
outlines the key performance indicators that we use to monitor
and manage our business and anticipate future trends.
|
| |
| |
•
|
Combined Results of Operations. This section
provides an analysis of our results of operations for the three
months ended March 31, 2006 compared to the three months
ended March 31, 2005; and the analysis of our results for
the years ended December 31, 2005, 2004 and 2003.
|
| |
| |
•
|
Liquidity and Capital Resources. This section
provides a discussion of our liquidity and capital resources as
of March 31, 2006 and December 31, 2005 and our future
cash needs.
|
| |
| |
•
|
Critical Accounting Policies. This section
discusses accounting policies important to an analysis of our
combined financial statements and an understanding of our
discussion of our combined results of operation. Our critical
accounting policies are those that require significant judgment
and estimates on the part of management in their application. In
addition, a full description of our significant accounting
policies are included in Note 3 to our combined financial
statements, which are included elsewhere in this Information
Statement.
|
Basis of
Presentation of Historical Combined Financial
Statements
The combined historical financial statements consist of the
assisted living operations of Extendicare in the United States.
As of December 31, 2005, Extendicare assisted living
operations consisted of 211 assisted living facilities
(8,673 units), and on March 31, 2006, Extendicare
assisted living operations consisted of 208 assisted living
facilities (8,521 units). We acquired the majority of these
facilities when EHSI acquired all of the outstanding capital
stock of Historic ALC on January 31, 2005, which at the
time of its acquisition owned or leased 177 facilities
(6,838 units). The remainder of our assisted living
facilities have been either owned and operated by EHSI or, in
the case of two facilities, owned by EHSI and opened and
operated by ALC.
Our historical combined financial statements have been prepared
to include all of Extendicare’s assisted living business in
the United States and are a combination of: (i) the
assisted living facilities operated by EHSI prior to and after
its acquisition of Historic ALC, which ranged from 36 facilities
as of January 1, 2003 to 29 facilities as of
December 31, 2005; (ii) 177 assisted living facilities
operated by ALC since Extendicare completed the acquisition of
Historic ALC on January 31, 2005; (iii) the assisted
living facilities that were constructed by EHSI during 2005 but
were opened and operated by ALC. Our historical audited combined
financial statements include results from several assets and
operations that will not be part of our business following the
separation transactions. These assets consist of (i) two
assisted living facilities that will be retained by EHSI and
another 129 assisted living units that are
39
contained within skilled nursing facilities and (ii) three
assisted living facilities formerly operated by EHSI where
operations were discontinued in the three months ended
March 31, 2006.
Below is a description of the significant events that have
occurred to Extendicare’s assisted living business since
January 2003 and how these events affected the basis of
presentation:
|
|
|
| |
•
|
As of January 1, 2003, EHSI operated 36 assisted living
facilities (1,756 units) in nine states, with 25 of these
facilities located in Wisconsin and Washington.
|
| |
| |
•
|
During 2003 and 2004, EHSI completed construction projects that
resulted in increased capacity to two assisted living facilities
(46 units), opened one newly constructed assisted living
facility (40 units) in Wisconsin and closed two assisted
living facilities (53 units). In addition, EHSI sold three
of its assisted living facilities (181 units) located in
Arkansas. As a result, as of December 31, 2004, EHSI
operated 32 assisted living facilities (1,604 units)
in nine states, 31 of which were owned and 1 of which was leased.
|
| |
| |
•
|
On January 31, 2005, EHSI acquired all of the outstanding
capital stock of Historic ALC, which had a portfolio of 177
assisted living facilities (6,838 units) in 14 states
at the time, 122 of which were owned and 55 of which were leased.
|
| |
| |
•
|
During 2005, EHSI completed construction projects that resulted
in increased capacity at five assisted living facilities
(96 units), opened a newly constructed assisted living
facility in Wisconsin (60 units) and closed one assisted
living facility in Washington (12 units). In addition, EHSI
completed construction on two new assisted living facilities
(90 units) in Ohio and Indiana that were opened and
operated by ALC. As a result, as of December 31, 2005, EHSI
operated 32 facilities and ALC operated 179 facilities, for a
combined operation of 211 facilities (8,673 units) in
17 states.
|
| |
| |
•
|
Between January 1, 2006 and March 31, 2006, EHSI
closed an assisted living facility (60 units) in Texas and
commenced actions to dispose of the property. It also closed an
assisted living facility in Oregon (45 units) and
discontinued operations at an assisted living facility
(63 units) in Washington for which the underlying lease had
expired. EHSI also completed construction projects that
increased capacity (37 units) at two assisted living
facilities. As a result, as of March 31, 2006, EHSI
operated 29 facilities and ALC operated 179 facilities, for a
combined operation of 208 facilities (8,521 units) in
17 states.
|
| |
| |
•
|
Since March 31, 2006, in order to consolidate all of
Extendicare’s assisted living operations within ALC, EHSI
transferred to ALC, subject to state regulatory approval, the
licenses to operate its 29 assisted living facilities. In
addition ALC purchased 14 of the 29 facilities from EHSI at an
aggregate fair market value of $49.6 million. EHSI is
currently seeking local planning commission approval to
subdivide the remaining 15 properties between the assisted
living facilities and skilled nursing facilities that make up
those properties. We expect to complete the purchase of
EHSI’s remaining 15 facilities upon receipt of approval,
and have provided for a lease of the land component of the
properties and the assisted living facilities in the interim.
The aggregate fair market value of the remaining 15 facilities
is $44.9 million. If EHSI does not obtain approval to
subdivide any of the properties immediately prior to the
separation, we will purchase all but the land component of the
applicable property, which in aggregate totals
$42.3 million, and EHSI will make a capital contribution to
us in an amount equal to the purchase price of the land
component of the property, which in aggregate totals
$2.6 million, which we would subsequently loan back to EHSI
in exchange for a note. In addition, for any property awaiting
local planning approval, the applicable lease agreement with
EHSI will be adjusted to become only a land lease of such
property. We will lease the land component for any properties
awaiting planning permission for an initial term of five years,
with two successive renewal periods of five years each,
exercisable at our option. Should all of the properties await
local planning approval, the initial aggregate lease payments
due under these leases will be $0.3 million. The lease
amounts will increase annually based upon the Consumer Price
Index. In addition, at the end of each lease period, the lease
rates will be reassessed and reset to reflect fair market value
rates. Upon receipt of approval, the land leases will be
terminated, EHSI will repay the amount due on the note and we
will pay EHSI for the land. The note will bear interest at 6.0%
and will mature at the earliest of the date that planning
commission approval is received or the date that the
corresponding lease matures. The historical combined
|
40
|
|
|
| |
|
financial statement reflects the transfer of all 29 properties
to ALC as an equity contribution at the aggregate net book value
of $60.8 million.
|
For periods prior to the acquisition of Historic ALC, during
which EHSI’s assisted living operations had a small
corporate management staff, EHSI’s assisted living
operations were allocated charges based upon estimated
incremental cost to support the assisted living operations for
accounting, human resources, information technology and other
administrative services. Interest expense was allocated to the
assisted living facilities based upon the assisted living
facilities’ historic cost and the average borrowing rates
of EHSI for those periods. For the years ended 2003 and 2004,
all other assets and liabilities associated with EHSI’s
assisted living operations and its corporate staff have been
reflected in the historical audited combined financial
statements.
Prior to March 2005, Historic ALC’s head office was
headquartered in Dallas, Texas. As part of the consolidation of
Historic ALC and EHSI, the headquarters for the combined
assisted living facility business was moved to Milwaukee,
Wisconsin. The Dallas office provided all administrative
functions, information technology, accounting, human resources,
clinical, risk management and corporate operational oversight
for the Historic ALC operations. Since moving to Milwaukee,
through both internal and externally recruited personnel, ALC
established a new management team to oversee clinical,
marketing, risk management and corporate operational functions
of the combined operation, and ALC purchased from EHSI services
for accounting, human resources and information technology. For
periods subsequent to March 31, 2005, charges related to
the combined EHSI and ALC operations for accounting, human
resources, information technology and certain other
administrative services have been allocated based upon estimated
incremental cost to support the combined operations. Stock
options of Extendicare shares granted to ALC senior management
have been charged to general and administrative expenses, based
upon the number of options granted and the share price for the
periods reflected. Interest charges have been allocated based
upon: (i) any Historic ALC specific facility-based debt
instruments in place with the applicable interest charges;
(ii) interest incurred by EHSI on the replacement of
Historic ALC debt; (iii) for the facilities owned by EHSI,
based upon the assisted living facilities’ historic cost
and average borrowing rates of EHSI for those periods; or
(iv) for the debt incurred under EHSI’s line of credit
in connection with the acquisition of Historic ALC, the interest
incurred on the average balance of the line of credit and
EHSI’s average interest rate on the line of credit.
In addition, all assets and liabilities associated with the
assisted living operations of Historic ALC since
January 31, 2005 have been reflected in the historical
audited combined financial statements.
For purposes of the audited combined financial statements,
facilities that were sold or closed have been reported as
discontinued operations and are summarized in Note 18 of
the financial statements.
The audited combined financial statements include two assisted
living facilities (141 units) that are owned and operated
by EHSI and an additional 129 assisted living units that are
contained within skilled nursing facilities that will not be
transferred to ALC as part of the separation. The audited
combined financial statements do not reflect (i) the
transfer of share investments in Omnicare, BNN, or MedX,
(ii) a capital contribution of $10.0 million into
Pearson by Extendicare, (iii) a capital contribution of
approximately $40.7 million by EHSI as settlement of the
outstanding debt owed by ALC to EHSI and an additional
$10.3 million cash contribution to equity by EHSI or
(iv) the purchase of the Milwaukee headquarters building by
ALC for approximately $5.0 million. For a discussion of the
adjustments made to our historical audited combined financial
statements to reflect these transactions, please see the
“Unaudited Pro Forma Condensed Combined Financial
Statements” located elsewhere in this Information Statement.
Business
Overview
Revenues
We generate revenue from private and Medicaid sources. For the
three months ended March 31, 2006, approximately 78.7% of
our revenue was generated from private sources, which consists
of direct payments from residents or their families or indirect
payments from their insurers or other third-party providers.
Residents are charged a fee that is based on the type of
accommodation they occupy and a services fee that is based upon
their assessed level of care. The accommodation fee is based on
prevailing market rates of similar assisted living
accommodations. The assessed level of care service fee is based
upon a periodic assessment, which includes input
41
of the resident, their physician and family, and establishes the
additional hours of care and service provided to the resident.
We offer various levels of care for assisted living residents
who require less or more frequent and intensive care or
supervision. Approximately 80% and 20% of our private revenue is
derived from the accommodation fee and the level of care
services fee, respectively. Both the accommodation and level of
care service fee are charged on a daily basis.
Medicaid rates are generally lower than rates earned from
private, commercial insurance and other sources. Therefore, we
consider our non-Medicaid census, which we refer to as our
Quality Mix or private pay, an important performance measurement
indicator. We define our Quality Mix to be our revenues or
census earned from payor sources other than from Medicaid
programs.
We have elected in 9 of our 17 states to provide assisted
living services and to retain Medicaid funded residents in our
assisted living facilities. The Medicaid program in each state
determines the revenue rate for accommodation and level of care.
The basis of the Medicaid rate varies by state and in certain
states is subject to negotiation. Unlike nursing facilities,
Medicaid rates are not determined on a cost-based or price-based
system, and cost reports are not completed each year to the
state, with the exception of Texas. We normally receive our new
annual Medicaid rates in January of each year.
The level of private rates exceeds those offered through state
Medicaid programs. Therefore, our goal is to increase the
percentage of private residents in our assisted living
facilities. Below is an overview of the difference between the
private and Medicaid rates achieved by us in the states where we
participate in the Medicaid waiver program, along with our
average Medicaid census during 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
2005 Average Rates per Day
|
|
|
Medicaid
|
|
|
State
|
|
Private
|
|
|
Medicaid
|
|
|
Difference
|
|
|
ADC(1)
|
|
|
|
|
Arizona
|
|
$
|
100.32
|
|
|
$
|
56.28
|
|
|
$
|
44.04
|
|
|
|
209
|
|
|
Idaho
|
|
$
|
94.55
|
|
|
$
|
48.99
|
|
|
$
|
45.56
|
|
|
|
184
|
|
|
Iowa
|
|
$
|
84.03
|
|
|
$
|
59.56
|
|
|
$
|
24.47
|
|
|
|
20
|
|
|
Indiana
|
|
$
|
76.77
|
|
|
$
|
56.66
|
|
|
$
|
20.11
|
|
|
|
34
|
|
|
Nebraska
|
|
$
|
94.56
|
|
|
$
|
65.99
|
|
|
$
|
28.57
|
|
|
|
73
|
|
|
New Jersey
|
|
$
|
116.05
|
|
|
$
|
78.50
|
|
|
$
|
37.55
|
|
|
|
135
|
|
|
Oregon
|
|
$
|
99.35
|
|
|
$
|
67.37
|
|
|
$
|
31.98
|
|
|
|
295
|
|
|
Texas
|
|
$
|
87.66
|
|
|
$
|
62.21
|
|
|
$
|
25.45
|
|
|
|
514
|
|
|
Washington
|
|
$
|
90.48
|
|
|
$
|
62.03
|
|
|
$
|
28.45
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
$
|
89.25
|
|
|
$
|
62.21
|
|
|
$
|
27.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
ADC is Average Daily Census, which is defined under Key
Performance Indicators below. |
The following table sets forth our Medicaid and private pay
sources of revenue for all of our assisted living facilities by
percentage of total revenue.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Assisted Living Revenues
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
Months Ended
|
|
|
Year Ended
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Private
|
|
|
78.7
|
%
|
|
|
78.9
|
%
|
|
|
78.2
|
%
|
|
|
92.7
|
%
|
|
|
94.1
|
%
|
|
Medicaid
|
|
|
21.3
|
%
|
|
|
21.1
|
%
|
|
|
21.8
|
%
|
|
|
7.3
|
%
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the acquisition of Historic ALC, approximately 8% of
our assisted living facilities revenues were from Medicaid
programs, compared to approximately 26% after the acquisition.
After the acquisition of Historic ALC, our private percentage
averaged 21.8% for the 2005. The mix of revenues resulted in
relatively consistent percentages between the three months ended
March 31, 2006 and March 31, 2005 and 2006 quarters.
42
Operating
Expenses
The largest component of our operating expenses consist of wages
and benefits, utility and property related costs, and variable
operating costs related to the provision of services to our
residents. As a percentage of total expenses, wages and
benefits, utility and property related costs, and variable
operating costs historically have been approximately 65%, 20%
and 15%, respectively. A significant portion of our wages and
benefits are fixed and do not vary based upon occupancy, as we
must employ a minimum number of employees to properly maintain
our facilities and provide care and services to our residents.
However, a smaller portion of our wages and benefits vary
because they are contingent upon occupancy, as we offer bonus
programs to all levels of staff including facility staff to
promote common corporate objectives including high quality of
services and occupancy levels. Other than these contingent
costs, directly variable costs pertain only to food, supplies,
and certain administrative expenses. As a result, it is
important that we manage our expenses.
Operating
Margins
Due to the high percentage of fixed costs, we generally need to
sustain occupancy levels in excess of 50% to 60%, depending on
the percentage of and rates of private residents, to achieve a
breakeven operating margin, exclusive of financing and capital
replacement costs. We generally target margins in our facilities
at levels in excess of 35% to 40%, when occupancy levels are in
excess of 90%.
General
and Administrative Costs
After completion of the Plan of Arrangement, we will operate
independently of Extendicare, and therefore will require
services and will incur additional costs associated with being
a public company. We anticipate additional annual public
company costs relating to:
• board of director fees;
• Sarbanes-Oxley compliance;
• corporate secretary;
• stock registration and listing fees;
• quarterly and annual filings; and
• stock transfer fees and other public relations.
In addition to the additional costs of being public, certain
other general and administrative costs that had been synergized
by Extendicare through its acquisition of Historic ALC will be
required to be re-established after completion of the Plan of
Arrangement. We anticipate additional annual general and
administrative costs associated with the following:
• Chief Financial Officer;
• Vice President of acquisitions;
• annual audit fees; and
• other general and administrative costs anticipated
for reporting and compliance.
Subsequent to Extendicare’s acquisition of Historic ALC,
certain general and administrative services were provided to us
by Extendicare. Extendicare’s incremental costs, and, in
the case of information technologies, the price that
Extendicare’s related company, Virtual Care Provider Inc.
(VCPI), sold services to external clients, was charged to us.
Some of these services previously provided through Extendicare
will be provided directly to us, such as those services outlined
above. Pursuant to transitional services agreements with
subsidiaries of Extendicare, certain services will continue to
be provided to us on a transitional basis pursuant to an
arrangement with Extendicare. These services
43
include information technology, payroll and employee benefits
processing and reimbursement services (Medicaid cost reporting).
The costs associated with these services on an annual basis will
be approximately $1.5 million.
Key
Performance Indicators
We manage our business by monitoring certain key performance
indicators. We believe our most important key performance
indicators are:
Census
Census is defined as the number of units that are occupied at a
given time.
Average
Daily Census
Average Daily Census, or ADC, is the sum of occupied units for
each day over a period of time, divided by the number of days in
that period.
Occupancy
Percentage or Occupancy Rate
Occupancy is measured as the percentage of average daily census
relative to the total available units. Total operational
resident capacity is the number of units available for occupancy
in the period.
Private
Mix
Private Mix is the measure of the percentage of private or
non-Medicaid census. We focus on increasing the level of private
and non-Medicaid funded units.
Average
Revenue Rate by Payor Source
The average revenue rate by each payor source represents the
average daily revenues earned from accommodation and level of
care services provided to private and Medicaid residents. The
daily revenue is calculated by the aggregate revenues earned by
payor type, divided by the total ADC in the corresponding period.
EBITDA
and EBITDAR
EBITDA is defined as net income from continuing operations
before income taxes, interest expense net of interest income,
depreciation and amortization, and non-cash, non-recurring gains
and losses, including disposal of assets and impairment of
long-lived assets and loss on refinancing and retirement of
debt. EBITDAR is defined as EBITDA before rent expenses incurred
for leased assisted living properties. EBITDA and EBITDAR are
not measures of performance under accounting principles
generally accepted in the United States of America, or GAAP. We
use EBITDA and EBITDAR as key performance indicators and EBITDA
and EBITDAR expressed as a percentage of total revenues as a
measurement of margin.
We understand that EBITDA and EBITDAR, or derivatives thereof,
are customarily used by lenders, financial and credit analysts,
and many investors as a performance measure in evaluating a
company’s ability to service debt and meet other payment
obligations or as a common valuation measurement in the
long-term care industry. Moreover, substantially all of
EHSI’s financing agreements contain covenants in which
EBITDA was used as a measure of compliance, and we anticipate
EBITDA and EBITDAR will be used in covenants as a measure of
compliance with the new credit facility and financing
arrangements that we will establish. Thus, we expect to use
EBITDA and EBITDAR to monitor our compliance with these
financing agreements. We believe EBITDA and EBITDAR provide
meaningful supplemental information regarding our core results
because these measures exclude the effects of non-operating
factors related to our capital assets, such as the historical
cost of the assets.
We report specific line items separately, and exclude them from
EBITDA and EBITDAR because such items are transitional in
nature, and would otherwise distort historical trends. In
addition, we use EBITDA and EBITDAR to assess our operating
performance and in making financing decisions. In particular, we
use EBITDA and EBITDAR in analyzing potential acquisitions and
internal expansion possibilities. EBITDA and EBITDAR performance
also will be used in determining compensation levels for our
senior executives. EBITDA and EBITDAR should not be considered
in isolation or as a substitute for net income, cash flows from
operating activities and other income or cash flow statement
data prepared in accordance with GAAP, or as a measure of
profitability or liquidity. We present EBITDA and EBITDAR on a
consistent basis from period to period, thereby allowing for
comparability of operating performance.
44
Review
of Key Performance Indicators
In order to compare our performance between periods, we assess
the key performance indicators for all of our continuing
facilities. All “continuing operations” or
“continuing facilities” are defined as all facilities
excluding (i) three facilities in Arkansas sold in August
2004, (ii) one assisted living facility in Washington that,
in the three months ended December 31, 2005, we decided to
convert to nursing beds and combine with an existing nursing
facilities, (iii) one assisted living facility in Oregon
that we decided to convert to a skilled nursing facility during
the three months ended March 31, 2006, (iv) a leased
assisted living facility in Washington that we decided to
terminate operations at in the three months ended March 31,
2006, and (v) an assisted living facility in Texas that we
decided to close during the three months ended March 31,
2006.
In addition, we assess the key performance indicators for
facilities that we operated in all reported periods, or
“same facility” operations. Given the significance of
the 177 assisted living facilities acquired when EHSI acquired
Historic ALC, we have included these facilities in our same
facility key performance indicators for the periods after the
acquisition. Same facility operations are defined as all
continuing operations excluding the four newly-constructed
assisted living facilities (190 units).
We have classified the two assisted living facilities owned by
EHSI, but opened during 2005 and operated by ALC, as EHSI
facilities. This allows us to consistently analyze the key
performance statistics for the facilities obtained in the
acquisition of Historic ALC for all reported periods.
ADC
All
Continuing Facilities
The following table sets forth our average daily census for the
past five quarters and for full years 2003 through 2005 for both
private payors and Medicaid for all of the continuing facilities
whose results are reflected in our audited combined financial
statements:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Census
|
|
|
|
|
First
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Full Year
|
|
|
Full Year
|
|
|
Full Year
|
|
|
|
|
2006
|
|
|
2005(2)
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005(1,2)
|
|
|
2004(1)
|
|
|
2003(1)
|
|
|
|
|
EHSI facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
|
1,117
|
|
|
|
1,079
|
|
|
|
1,113
|
|
|
|
1,129
|
|
|
|
1,135
|
|
|
|
1,114
|
|
|
|
1,073
|
|
|
|
1,073
|
|
|
Medicaid
|
|
|
175
|
|
|
|
132
|
|
|
|
126
|
|
|
|
133
|
|
|
|
145
|
|
|
|
134
|
|
|
|
120
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADC
|
|
|
1,292
|
|
|
|
1,211
|
|
|
|
1,239
|
|
|
|
1,262
|
|
|
|
1,280
|
|
|
|
1,248
|
|
|
|
1,193
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALC facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
|
3,948
|
|
|
|
4,225
|
|
|
|
4,108
|
|
|
|
4,049
|
|
|
|
3,994
|
|
|
|
4,081
|
|
|
|
—
|
|
|
|
—
|
|
|
Medicaid
|
|
|
1,924
|
|
|
|
1,949
|
|
|
|
2,004
|
|
|
|
2,040
|
|
|
|
2,004
|
|
|
|
2,004
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADC
|
|
|
5,872
|
|
|
|
6,174
|
|
|
|
6,112
|
|
|
|
6,089
|
|
|
|
5,998
|
|
|
|
6,085
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
|
5,065
|
|
|
|
5,304
|
|
|
|
5,221
|
|
|
|
5,178
|
|
|
|
5,129
|
|
|
|
5,195
|
|
|
|
1,073
|
|
|
|
1,073
|
|
|
Medicaid
|
|
|
2,099
|
|
|
|
2,081
|
|
|
|
2,130
|
|
|
|
2,173
|
|
|
|
2,149
|
|
|
|
2,138
|
|
|
|
120
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADC
|
|
|
7,164
|
|
|
|
7,385
|
|
|
|
7,351
|
|
|
|
7,351
|
|
|
|
7,278
|
|
|
|
7,333
|
|
|
|
1,193
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay Percentage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EHSI
|
|
|
86.5
|
%
|
|
|
89.1
|
%
|
|
|
89.8
|
%
|
|
|
89.5
|
%
|
|
|
88.7
|
%
|
|
|
89.3
|
%
|
|
|
89.9
|
%
|
|
|
90.6
|
%
|
|
ALC
|
|
|
67.2
|
%
|
|
|
68.4
|
%
|
|
|
67.2
|
%
|
|
|
66.5
|
%
|
|
|
66.6
|
%
|
|
|
67.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Facilities
|
|
|
70.7
|
%
|
|
|
71.8
|
%
|
|
|
71.0
|
%
|
|
|
70.4
|
%
|
|
|
70.5
|
%
|
|
|
70.8
|
%
|
|
|
89.9
|
%
|
|
|
90.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Comparability to periods in 2005 is limited because data for
2003 and 2004 does not include the 177 assisted living
facilities acquired upon the acquisition of Historic ALC on
January 31, 2005. |
45
|
|
|
|
(2) |
|
The data for ALC for the two month period ended March 31,
2005 has been reflected in the above table as if it were for the
three month period. The two month period ALC facilities figures
above, adjusted by averaging two months of occupancy over the
entire three month period, would have been: Private
pay — 2,770 and Total ADC — 4,048. |
From the fourth quarter of 2005 to the first quarter of 2006,
total ADC declined 1.6% and private ADC declined 1.3%, however
there was an increase in the private mix percentage from 70.5%
to 70.7%. In the first quarter of 2006, we implemented a focused
marketing strategy to increase our private census and residents
with lower care needs, and established facility limits on our
Medicaid population. Our strategy is to increase the number of
residents in our facilities that are private pay, both by
filling existing vacancies at our facilities with private pay
residents and by gradually decreasing the number of units in our
facilities that are available for residents that rely on
Medicaid.
During 2005, we saw a decline of ADC from the first quarter of
2005 to the fourth quarter of 2005 of 1.5% in total and 3.4% in
private census along with a decline in the private pay
percentage from 71.8% to 70.5%. The decline in census during
2005 occurred primarily in our ALC portfolio and was due to a
focused effort to increase the percentage of private rates
closer to market for both existing and new residents. In
addition, with the acquisition of Historic ALC and changes as
part of the consolidation of our operations, we experienced
change in both senior management and other facility-based
personnel. Our EHSI portfolio census increased on a consistent
basis, due in part to newly constructed facilities and
additional capacity at those facilities with additions.
During 2003 through 2005, we saw an overall increase in our EHSI
private and total census, despite fluctuations that occurred
between quarters during this period of time.
Same
Facility Basis
The following table is presented on a same facility basis, and
therefore removes the impact of the four newly constructed
facilities described above. The table sets forth our average
daily census for the past five quarters and for full years 2003
through 2005 for both private payors and Medicaid for all of the
assisted living facilities on a same facility basis. Since ALC
would report the same figures, only the EHSI facilities and
total facilities along with the private pay percentages are
summarized below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Census
|
|
|
|
|
First
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Full Year
|
|
|
Full Year
|
|
|
Full Year
|
|
|
|
|
2006
|
|
|
2005(2)
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005(1,2)
|
|
|
2004(1)
|
|
|
2003(1)
|
|
|
|
|
EHSI facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
|
1,070
|
|
|
|
1,079
|
|
|
|
1,113
|
|
|
|
1,123
|
|
|
|
1,105
|
|
|
|
1,105
|
|
|
|
1,073
|
|
|
|
1,073
|
|
|
Medicaid
|
|
|
175
|
|
|
|
132
|
|
|
|
126
|
|
|
|
133
|
|
|
|
145
|
|
|
|
134
|
|
|
|
120
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADC
|
|
|
1,245
|
|
|
|
1,211
|
|
|
|
1,239
|
|
|
|
1,256
|
|
|
|
1,250
|
|
|
|
1,239
|
|
|
|
1,193
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
|
5,018
|
|
|
|
5,304
|
|
|
|
5,221
|
|
|
|
5,172
|
|
|
|
5,099
|
|
|
|
5,186
|
|
|
|
1,073
|
|
|
|
1,073
|
|
|
Medicaid
|
|
|
2,099
|
|
|
|
2,081
|
|
|
|
2,130
|
|
|
|
2,173
|
|
|
|
2,149
|
|
|
|
2,138
|
|
|
|
120
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADC
|
|
|
7,117
|
|
|
|
7,385
|
|
|
|
7,351
|
|
|
|
7,345
|
|
|
|
7,248
|
|
|
|
7,324
|
|
|
|
1,193
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay Percentage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EHSI
|
|
|
85.9
|
%
|
|
|
89.1
|
%
|
|
|
89.8
|
%
|
|
|
89.4
|
%
|
|
|
88.4
|
%
|
|
|
89.2
|
%
|
|
|
89.9
|
%
|
|
|
90.6
|
%
|
|
ALC
|
|
|
67.2
|
%
|
|
|
68.4
|
%
|
|
|
67.2
|
%
|
|
|
66.5
|
%
|
|
|
66.6
|
%
|
|
|
67.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Facilities
|
|
|
70.5
|
%
|
|
|
71.8
|
%
|
|
|
71.0
|
%
|
|
|
70.4
|
%
|
|
|
70.4
|
%
|
|
|
70.8
|
%
|
|
|
89.9
|
%
|
|
|
90.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Comparability to periods in 2005 is limited because data for
2003 and 2004 does not include the 177 assisted living
facilities acquired upon the acquisition of Historic ALC on
January 31, 2005. |
| |
|
(2) |
|
The data for ALC for the two month period ended March 31,
2005 has been reflected in the above table as if it were for the
three month period. |
46
From the fourth quarter of 2005 to the first quarter of 2006,
total ADC declined 1.8% and private ADC declined 1.6%, however
an increase in the private mix percentage from 70.4% to 70.5%.
During 2005, we saw a decline from the first quarter to the
fourth quarter of 1.9% in total and 3.9% in private census along
with a decline in the private pay percentage from 71.8% to
70.4%. During 2003 through 2005, we saw an increase in our EHSI
private and total census. The comments noted from the all
facilities performance indicators apply to these statistics.
Occupancy
Percentage
Occupancy percentages can be impacted by our completion and
opening of new assisted living facilities and additions to
existing assisted living facilities. As total capacity of a
newly completed addition or a new facility increases, occupancy
percentages are impacted as the assisted living facility is
filling the additional units. We generally plan for additional
units to take anywhere from several months to one and a half
years to reach optimum occupancy levels (defined by us as at
least 90%).
Due to the significant impact on occupancy rates that
developmental facilities have, we have split occupancy
information between mature and developmental facilities. In
general, developmental facilities are defined as a facility that
has undergone an expansion or a new facility that has opened. An
assisted living facility identified as developmental is
classified as such for a period of no longer than
12 months. However, for purposes of the tables below,
developmental facilities have been classified as such for all
reporting periods. Between January 1, 2003 and
March 31, 2006 we completed the following projects that
increased our operational capacity: (1) 2004 —
one new facility (40 units) and two additions
(46 units), (2) 2005 — three new facilities
(150 units) and five additions (96 units),
(3) 2006 — one addition (16 units). As a
result, these facilities constitute the
“developmental” facilities in the tables below. All
facilities that are not developmental are considered mature
facilities, including all of the 177 facilities that we acquired
in connection with the acquisition of Historic ALC.
All
Continuing Facilities
The following table sets forth our occupancy percentages for the
past five quarters and for full years 2003 through 2005 for all
mature and developmental continuing facilities whose results are
reflected in our audited combined financial statements:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Percentage
|
|
|
|
|
First
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Full Year
|
|
|
Full Year
|
|
|
Full Year
|
|
|
|
|
2006
|
|
|
2005(2)
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005(1,2)
|
|
|
2004(1)
|
|
|
2003(1)
|
|
|
|
|
EHSI Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mature
|
|
|
84.1
|
%
|
|
|
83.8
|
%
|
|
|
85.4
|
%
|
|
|
85.5
|
%
|
|
|
84.7
|
%
|
|
|
84.9
|
%
|
|
|
83.9
|
%
|
|
|
87.0
|
%
|
|
Developmental
|
|
|
60.4
|
%
|
|
|
92.3
|
%
|
|
|
67.6
|
%
|
|
|
61.3
|
%
|
|
|
57.5
|
%
|
|
|
66.2
|
%
|
|
|
94.0
|
%
|
|
|
96.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EHSI
|
|
|
77.8
|
%
|
|
|
85.0
|
%
|
|
|
82.0
|
%
|
|
|
80.0
|
%
|
|
|
77.7
|
%
|
|
|
81.0
|
%
|
|
|
85.3
|
%
|
|
|
88.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALC Facilities
|
|
|
85.9
|
%
|
|
|
90.1
|
%
|
|
|
89.2
|
%
|
|
|
88.8
|
%
|
|
|
87.7
|
%
|
|
|
88.9
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mature
|
|
|
85.6
|
%
|
|
|
88.8
|
%
|
|
|
88.7
|
%
|
|
|
88.3
|
%
|
|
|
87.3
|
%
|
|
|
88.3
|
%
|
|
|
83.9
|
%
|
|
|
87.0
|
%
|
|
Developmental
|
|
|
60.4
|
%
|
|
|
92.3
|
%
|
|
|
67.6
|
%
|
|
|
61.3
|
%
|
|
|
57.5
|
%
|
|
|
66.2
|
%
|
|
|
94.0
|
%
|
|
|
96.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
84.3
|
%
|
|
|
88.9
|
%
|
|
|
87.9
|
%
|
|
|
87.2
|
%
|
|
|
85.8
|
%
|
|
|
87.3
|
%
|
|
|
85.3
|
%
|
|
|
88.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Comparability to periods in 2005 is limited because data for
2003 and 2004 does not include the 177 assisted living
facilities acquired upon the acquisition of Historic ALC on
January 31, 2005. |
| |
|
(2) |
|
The data for ALC for the two month period ended March 31,
2005 has been reflected in the above table as if it were for the
three month period. The percentage would not change if presented
for the two month period. |
From the fourth quarter of 2005 to the first quarter of 2006,
mature total occupancy decreased from 87.3% to 85.6%, primarily
due to occupancy declines in our ALC portfolio. Occupancy
percentages for all mature and
47
developmental facilities decreased from 85.8% in the fourth
quarter of 2005 to 84.3% for the first quarter of 2006. This
decrease was the result of our strategy to increase our
percentage of private mix and residents with lower care needs
and establish a lower Medicaid census. However, occupancy in our
developmental facilities increased from 57.5% to 60.4% from the
fourth quarter of 2005 to the first quarter of 2005.
During 2005, we saw a decline from the first quarter of 2005 to
the fourth quarter of 2005 in our occupancy for mature
facilities from 88.8% to 87.3%. The decline in our occupancy
percentage during 2005 occurred primarily in our ALC portfolio
where occupancy decreased from 90.1% to 87.7% and was due to a
focused effort to increase private rates closer to market for
both existing and new residents. Occupancy declined from 92.3%
to 57.5% for EHSI’s developmental facilities, as a result
of the opening of new facilities during the year.
Occupancy percentages were lower generally in 2005 and 2006 as a
result of our not having a residential care license in our
Historic ALC facilities in the state of Indiana, which impeded
us from attracting and maintaining residents. Although the
Residential Care license for the state was obtained during the
fourth quarter of 2005, in certain facilities, we are still
implementing the balance of staffing and procedures in order to
offer full services under the Residential Care license.
Occupancy in the state of Indiana was 69% for the first quarter
of 2006 compared to 88% in our facilities outside of the state
of Indiana. Below is a summary of the licensure change we made
in Indiana.
Historic ALC owned and operated 20 assisted living facilities in
Indiana. When constructed, these properties did not meet certain
building requirements that would have allowed the facilities to
operate under State of Indiana Residential Care license. Due to
the building deficiencies, the facilities initially operated
under the State of Indiana Independent Care license, or Care
license. The primary differences between the Residential Care
and Care license are restrictions on resident medication
assistance and management. Under Residential Care license, the
provider is allowed to manage, assist, secure, and distribute
prescription medications to the resident, whereas under the Care
license, the provider is only allowed to “assist” the
resident with their self — medication needs. In the
State of Indiana, “assist” means reading labels and
opening pharmaceutical containers, but does not include pharmacy
management, including the passing of medications to the
resident. As a result, Historic ALC found itself unable to admit
residents who were in need of pharmacy management as part of
their plan of care. In addition, a resident who was admitted as
independent for self medication purposes, but later developed
medication assistance needs during their stay with Historic ALC,
was required to be discharged to an appropriately licensed
provider. In addition, due to the pharmacy management
restrictions, the Care license does not qualify a provider to
accept residents whose payment source is under the Indiana
Medicaid Waiver program. As a result, the Care license created a
census challenge in a state where the average occupancy for
assisted living facilities was 70.2% in 2005.
In 2003, Historic ALC commenced an initiative to receive a
Residential Care license in each of its Indiana assisted living
facilities that required us to make numerous building
modifications, including the adding of fire walls in attic
spaces. We completed those modifications during 2004 and 2005
and by May 2005, seven of the facilities obtained a Residential
Care license. In the three months ended December 31 2005,
the remaining 13 facilities were granted a Residential Care
license. We have also obtained Medicaid Waiver licensure status
in four of the assisted living facilities. We continue to
evaluate whether to seek Medicaid licensure in the remainder of
the properties based upon market and other factors.
48
Same
Facility Basis
The following table sets forth the occupancy percentages
outlined above on a same facility basis.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Percentage
|
|
|
|
|
First
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Full Year
|
|
|
Full Year
|
|
|
Full Year
|
|
|
|
|
2006
|
|
|
2005(2)
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005(1,2)
|
|
|
2004(1)
|
|
|
2003(1)
|
|
|
|
|
EHSI Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mature
|
|
|
84.1
|
%
|
|
|
83.8
|
%
|
|
|
85.4
|
%
|
|
|
85.5
|
%
|
|
|
84.7
|
%
|
|
|
84.9
|
%
|
|
|
83.9
|
%
|
|
|
87.0
|
%
|
|
Developmental
|
|
|
75.3
|
%
|
|
|
92.3
|
%
|
|
|
75.9
|
%
|
|
|
76.9
|
%
|
|
|
78.1
|
%
|
|
|
80.0
|
%
|
|
|
94.0
|
%
|
|
|
96.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EHSI
|
|
|
82.4
|
%
|
|
|
85.0
|
%
|
|
|
83.8
|
%
|
|
|
83.9
|
%
|
|
|
83.5
|
%
|
|
|
84.0
|
%
|
|
|
85.3
|
%
|
|
|
88.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALC Facilities
|
|
|
85.9
|
%
|
|
|
90.1
|
%
|
|
|
89.2
|
%
|
|
|
88.8
|
%
|
|
|
87.7
|
%
|
|
|
88.9
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mature
|
|
|
85.6
|
%
|
|
|
88.8
|
%
|
|
|
88.7
|
%
|
|
|
88.3
|
%
|
|
|
87.3
|
%
|
|
|
88.25
|
%
|
|
|
83.9
|
%
|
|
|
87.0
|
%
|
|
Developmental
|
|
|
75.3
|
%
|
|
|
92.3
|
%
|
|
|
75.9
|
%
|
|
|
76.9
|
%
|
|
|
78.1
|
%
|
|
|
80.0
|
%
|
|
|
94.0
|
%
|
|
|
96.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
85.2
|
%
|
|
|
88.9
|
%
|
|
|
88.3
|
%
|
|
|
87.9
|
%
|
|
|
87.0
|
%
|
|
|
87.9
|
%
|
|
|
85.3
|
%
|
|
|
88.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Comparability to periods in 2005 is limited because data for
2003 and 2004 does not include the 177 assisted living
facilities acquired upon the acquisition of Historic ALC on
January 31, 2005. |
| |
|
(2) |
|
The data for ALC for the two month period ended March 31,
2005 has been reflected in the above table as if it was for the
three month period. The percentage would not change if presented
for the two month period. |
From the fourth quarter of 2005 to the first quarter of 2006,
mature total occupancy decreased from 87.3% to 85.6%, primarily
due to occupancy declines in our ALC portfolio. Occupancy
percentages for all mature and developmental facilities
decreased from 87.0% in the fourth quarter of 2005 to 85.2% in
the first quarter of 2006. This decrease, as outlined above, was
the result of a strategy to increase our private mix and
residents with lower care needs and establish a lower Medicaid
census. Occupancy in our facilities with additions also
decreased from 78.1% in the fourth quarter of 2005 to 75.3% in
the first quarter of 2006.
During 2005, we saw a decline in our occupancy rates for mature
facilities from 88.8% in the first quarter of 2005 to 87.3% in
the fourth quarter of 2006. The decline in census during 2005
occurred primarily in our ALC portfolio where occupancy
decreased from 90.1% to 87.7% and was attributed to our focused
effort to increase the level of private rates closer to market
for both existing and new resident. Occupancy declined from
92.3% to 78.1% for facilities with added capacity as a result of
the completed additions during the year.
49
Average
Revenue Rate by Payor Source
All
Continuing Facilities
The following table sets forth our average daily revenue rate
for the past five quarters and for full years 2003 through 2005
for both private and Medicaid payors for all of the continuing
facilities whose results are reflected in our historical audited
combined financial statements:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Revenue
Rate
|
|
|
|
|
First
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Full Year
|
|
|
Full Year
|
|
|
Full Year
|
|
|
|
|
2006
|
|
|
2005(2)
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005(1,2)
|
|
|
2004(1)
|
|
|
2003(1)
|
|
|
|
|
EHSI facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
$
|
86.96
|
|
|
$
|
81.72
|
|
|
$
|
81.43
|
|
|
$
|
82.35
|
|
|
$
|
82.07
|
|
|
$
|
81.90
|
|
|
$
|
78.12
|
|
|
$
|
74.95
|
|
|
Medicaid
|
|
|
61.15
|
|
|
|
55.18
|
|
|
|
55.10
|
|
|
|
55.21
|
|
|
|
56.08
|
|
|
|
55.41
|
|
|
|
54.81
|
|
|
|
45.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83.45
|
|
|
|
78.82
|
|
|
|
78.74
|
|
|
|
79.49
|
|
|
|
79.12
|
|
|
|
79.05
|
|
|
|
75.77
|
|
|
|
72.16
|
|
|
ALC facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
|
99.80
|
|
|
|
87.35
|
|
|
|
91.30
|
|
|
|
92.39
|
|
|
|
92.93
|
|
|
|
91.32
|
|
|
|
—
|
|
|
|
—
|
|
|
Medicaid
|
|
|
64.29
|
|
|
|
63.50
|
|
|
|
62.04
|
|
|
|
62.32
|
|
|
|
63.27
|
|
|
|
62.71
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
88.17
|
|
|
|
79.82
|
|
|
|
81.71
|
|
|
|
82.32
|
|
|
|
83.02
|
|
|
|
81.89
|
|
|
|
—
|
|
|
|
—
|
|
|
Total facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay
|
|
|
96.97
|
|
|
|
85.77
|
|
|
|
89.20
|
|
|
|
90.20
|
|
|
|
90.53
|
|
|
|
89.15
|
|
|
|
78.12
|
|
|
|
74.95
|
|
|
Medicaid
|
|
|
64.03
|
|
|
|
62.72
|
|
|
|
61.62
|
|
|
|
61.88
|
|
|
|
62.79
|
|
|
|
62.21
|
|
|
|
54.81
|
|
|
|
45.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87.32
|
|
|
$
|
79.59
|
|
|
$
|
81.21
|
|
|
$
|
81.83
|
|
|
$
|
82.34
|
|
|
$
|
81.37
|
|
|
$
|
75.77
|
|
|
$
|
72.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Comparability to periods in 2005 is limited because data for
2003 and 2004 does not include the 177 assisted living
facilities acquired upon the acquisition of Historic ALC on
January 31, 2005. |
| |
|
(2) |
|
Includes data for Historic ALC for only two months, as data from
the Historic ALC’s 177 assisted living facilities is
included beginning February 1, 2005. The figures would not
change if presented for the two month period. |
The private pay revenue rate increased 7.1% in the first quarter
2006 compared to the fourth quarter 2005 primarily as a result
of annual rate increases that occur on January 1st for
all private residents. Our Medicaid rates also increased 2% due
to rate increases received from the majority of our states. The
private pay revenue rate increased 13.1% in the first quarter
2006 compared to the first quarter 2005, due to 15.8% rate
increases achieved in the ALC portfolio. Historic ALC had
offered discounts for accommodation and levels of care fees to
residents to increase occupancy levels. However, since we
acquired Historical ALC, we have identified opportunities to
increase our accommodation and levels of care fees to market
rates in the communities that ALC serves and made concerted
efforts to move existing residents to those market rates and
only admit residents at those market rates. However, as noted
above, this effort also contributed to the lower ADC and
occupancy rates. Nonetheless, our overall revenues increased as
a result of this strategy.
During 2005, we increased our total revenue rate 4.7% primarily
through private rate increases of 7.2%, the majority of which
was in our ALC portfolio. Prior to 2005, EHSI experienced 5.6%,
4.3% and 5.0% total revenue rate increases when comparing the
three months ended March 31, 2006 to the three months ended
March 31, 2005, the 2005 to the 2004 year and the 2004
to the 2003 year, respectively.
50
Number of
Facilities Under Operation
The following table sets forth the number of facilities under
operation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Owned (Note 1)
|
|
|
151
|
|
|
|
155
|
|
|
|
31
|
|
|
|
33
|
|
|
Under capital lease
|
|
|
5
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
Under operating leases
|
|
|
50
|
|
|
|
51
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total under operation
|
|
|
206
|
|
|
|
211
|
|
|
|
32
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
73.3
|
%
|
|
|
73.4
|
%
|
|
|
96.9
|
%
|
|
|
97.1
|
%
|
|
Under capital leases
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
Under operating leases
|
|
|
24.3
|
%
|
|
|
24.2
|
%
|
|
|
3.1
|
%
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 29 assisted living properties that EHSI owned as of
March 31, 2006. Of the 29 assisted living facilities, 14
have been transferred between March 31, 2006 and June 2006.
EHSI has agreed to sell the remaining facilities to ALC, subject
only to the receipt from local planning commissions of approval
to subdivide the facilities. We have leased these facilities
from EHSI in the interim. |
EBITDA
and EBITDAR
The following table sets forth a reconciliation of income from
continuing operations before income taxes and cumulative effect
of changes in accounting principle and EBITDA and EBITDAR.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
5,667
|
|
|
$
|
2,644
|
|
|
$
|
20,829
|
|
|
$
|
3,001
|
|
|
$
|
2,708
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,123
|
|
|
|
2,390
|
|
|
|
14,750
|
|
|
|
3,281
|
|
|
|
3,032
|
|
|
Interest expense, net
|
|
|
2,830
|
|
|
|
2,452
|
|
|
|
11,603
|
|
|
|
1,738
|
|
|
|
2,698
|
|
|
Loss on early retirement of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
647
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
12,620
|
|
|
|
7,486
|
|
|
|
47,182
|
|
|
|
8,667
|
|
|
|
8,438
|
|
|
Add: Lease expense
|
|
|
3,488
|
|
|
|
2,348
|
|
|
|
12,852
|
|
|
|
66
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDAR
|
|
$
|
16,108
|
|
|
$
|
9,834
|
|
|
$
|
60,034
|
|
|
$
|
8,733
|
|
|
$
|
8,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the calculations of EBITDA and
EBITDAR percentages:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Revenues
|
|
$
|
56,776
|
|
|
$
|
37,665
|
|
|
$
|
204,949
|
|
|
$
|
33,076
|
|
|
$
|
31,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
12,620
|
|
|
$
|
7,486
|
|
|
$
|
47,182
|
|
|
$
|
8,667
|
|
|
$
|
8,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDAR
|
|
$
|
16,108
|
|
|
$
|
9,834
|
|
|
$
|
60,034
|
|
|
$
|
8,733
|
|
|
$
|
8,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA as percent of total revenue
|
|
|
22.2
|
%
|
|
|
19.9
|
%
|
|
|
23.0
|
%
|
|
|
26.2
|
%
|
|
|
27.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDAR as percent of total revenue
|
|
|
28.4
|
%
|
|
|
26.1
|
%
|
|
|
29.3
|
%
|
|
|
26.4
|
%
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
EBITDA, as a percentage of total revenues, decreased to 23.0% in
2005 from 26.2% in 2004 and 27.1%. This decrease in EBITDA was
primarily attributable to lease costs. ALC leased 50 of its
assisted living facilities, whereas EHSI had only one leased
assisted living facility, resulting in lease expense increasing
from 0.2% to 6.3% of total revenues between 2004 and 2005. Both
general and administrative expenses and operating expenses, as a
percentage of revenues, decreased as a result of the ALC
acquisition. Between the March 2005 and March 2006 quarters,
EBITDA and the EBITDA percentage, increased from
$7.5 million and 19.9%, to $12.6 million and 22.2%
percentage, respectively.
EBITDAR, as a percentage of total revenues increased from 26.4%
in 2004 to 29.3% in 2005 as a result of the synergies resulting
from the consolidation of EHSI and Historic ALC operations. In
addition, EBITDAR increased from 26.1% in the three months ended
March 31, 2005 to 28.4% in the three months ended
March 31, 2006. Lower EBITDAR in the three months ended
March 31, 2006 compared to full year 2005 was attributable
in part to higher energy costs due to the winter period and a
decline in private and total census.
Please see “— Business Overview — Key
Performance Indicators — EBITDA and EBITDAR”
above for a discussion of our use of EBITDA and EBITDAR and a
description of the limitations of such use.
Results
from Operations:
Three
Months Ended March 31, 2006 Compared with the Three Months
Ended March 31, 2005
The following table sets forth details of our revenues and
income as a percentage of total revenues:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Operating costs
|
|
|
65.5
|
|
|
|
68.0
|
|
|
General and administrative costs
|
|
|
6.1
|
|
|
|
5.9
|
|
|
Lease, depreciation and
amortization
|
|
|
13.4
|
|
|
|
12.6
|
|
|
Interest expense, net
|
|
|
5.0
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
10.0
|
|
|
|
7.0
|
|
|
Income tax expense
|
|
|
3.9
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing
operations before income taxes
|
|
|
6.1
|
|
|
|
4.3
|
|
|
Loss from discontinued operations
before income taxes
|
|
|
(3.4
|
)
|
|
|
(0.5
|
)
|
|
Income tax benefit on discontinued
operations
|
|
|
(1.4
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
|
(2.0
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.1
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues in the three months ended March 31, 2006 increased
$19.1 million, or 50.7%, to $56.8 million from
$37.7 million in the three months ended March 31,
2005. Revenues increased $18.0 million as a result of the
acquisition of Historic ALC. Revenues from other facilities
increased $1.1 million, or 13.0%, due to an average rate
increase of 9.7% and an increase in ADC in the period related to
the opening during 2005 of three newly-constructed facilities
(150 units) and the opening during 2005 and 2006 of 112
newly-constructed units at four existing facilities.
Operating
Costs
Operating costs increased $11.6 million, or 45.3%, in the
three months ended March 31, 2006 compared to the three
months ended March 31, 2005. Operating costs increased
$11.3 million as a result of the acquisition of Historic
ALC. Operating costs at other facilities increased
$0.3 million, or 5.1%.
52
General
and Administrative Costs
General and administrative costs increased $1.2 million, or
55.1%, in the three months ended March 31, 2006 compared to
the three months ended March 31, 2005. The increase was
primarily due to the acquisition of Historic ALC.
Lease
Costs, Depreciation and Amortization
Lease costs increased $1.1 million to $3.5 million in
the three months ended March 31, 2006 compared to the three
months ended March 31, 2005 as a result of the acquisition
of Historic ALC, which added 55 leased facilities. Depreciation
and amortization increased $1.7 million to
$4.1 million in the three months ended March 31, 2006
compared to $2.4 million in the three months ended
March 31, 2005. This increase was primarily due to the
acquisition of Historic ALC, and includes the amortization of
customer relationship intangibles, totaling $0.5 million.
Interest
Expense, Net
Interest expense, net of interest income, increased
$0.4 million to $2.8 million in the three months ended
March 31, 2006 compared to the three months ended
March 31, 2005 due to the acquisition of Historic ALC.
Net
Income from Continuing Operations before Income Taxes
Net income from continuing operations before income taxes for
the three months ended March 31, 2006 was $5.7 million
compared to $2.6 million for the three months ended
March 31, 2005 due to the reasons described above.
Income
Taxes
Income tax expense for the three months ended March 31,
2006 was $2.2 million compared to $1.0 million for the
three months ended March 31, 2005. Our effective tax rate
was 38.6% for the three months ended March 31, 2006
compared to 38.1% for the three months ended March 31, 2005.
Net
Income from Continuing Operations
Net income from continuing operations for the three months ended
March 31, 2006 was $3.5 million compared to
$1.6 million for the three months ended March 31, 2005
due to the reasons described above.
Loss from
Discontinued Operations
The loss from discontinued operations before income taxes was
$1.9 million in the three months ended March 31, 2006
compared to $0.2 million in the three months ended
March 31, 2005. The increase was due to a $1.7 million
loss from impairment of long-lived assets relating to a facility
in Texas that we decided in March 2006 to close and sell.
Discontinued operations also included operations of two
facilities in Washington and one facility in Oregon. All these
facilities were discontinued due to poor financial performance.
Net
Income
Net income for the three months ended March 31, 2006 was
$2.3 million compared to $1.5 million for the three
months ended March 31, 2006 due to the reasons described
above.
53
Three
Year Financial Comparative Analysis
The following table sets forth details of our revenues and
income as a percentage of total revenues:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Operating costs
|
|
|
67.4
|
|
|
|
72.1
|
|
|
|
71.1
|
|
|
General and administrative costs
|
|
|
3.3
|
|
|
|
1.5
|
|
|
|
1.6
|
|
|
Lease, depreciation and
amortization
|
|
|
13.5
|
|
|
|
10.1
|
|
|
|
10.0
|
|
|
Interest expense, net
|
|
|
5.6
|
|
|
|
5.2
|
|
|
|
8.6
|
|
|
Loss on retirement of debt
|
|
|
—
|
|
|
|
2.0
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
10.2
|
|
|
|
9.1
|
|
|
|
8.7
|
|
|
Income tax expense
|
|
|
4.0
|
|
|
|
3.5
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing
operations
|
|
|
6.2
|
|
|
|
5.6
|
|
|
|
5.4
|
|
|
Loss from discontinued operations,
net of tax
|
|
|
(0.2
|
)
|
|
|
(0.7
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6.0
|
%
|
|
|
4.9
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005 Compared with Years Ended
December 31, 2004 and 2003
Revenues
Revenues increased $171.9 million in 2005 to
$204.9 million from $33.1 million in 2004. Revenue
increased by $169.1 million due to the acquisition of
Historic ALC on January 31, 2005. Revenues from other
assisted living facilities increased $2.8 million, or 8.4%.
Revenues increased $1.9 million, or 6.1%, in 2004 to
$33.1 million from $31.2 million in 2003 due primarily
to annual rate increases and an increase in census.
Operating
Costs
Operating costs increased $114.4 million in 2005 to
$138.1 million from $23.8 million in 2004 due
primarily to the acquisition of Historic ALC. Operating costs
increased by $112.6 million due to the acquisition of
Historic ALC. Operating costs for other assisted living
facilities increased $1.8 million, or 7.4%. Operating costs
increased $1.6 million, or 7.2% in 2004 to
$23.8 million from $22.2 million in 2003 due primarily
to an increase in census.
General
and Administrative Costs
General and administrative costs increased $6.3 million in
2005 to $6.8 million from $0.5 million in 2004 due
primarily to the acquisition of Historic ALC. General and
administrative costs were $0.5 million both in 2004 and
2003.
Lease
Costs, Depreciation and Amortization
Lease costs increased $12.8 million in 2005 to
$12.9 million as a result of the acquisition of Historic
ALC that as a result we acquired 55 leased facilities.
Depreciation and amortization increased $11.5 million in
2005 to $14.8 million primarily due to the acquisition of
Historic ALC, and includes the amortization of $1.9 million
for ALC customer relationships. Lease costs were
$0.1 million in both 2004 and 2003. Depreciation and
amortization increased $0.3 million in 2004 compared to
2003.
Interest
Expense, Net
Interest expense, net of interest income, increased
$9.9 million in 2005 to $11.6 million due to the
acquisition of ALC. Interest expense, net of interest income,
decreased $1.0 million in 2004 compared to 2003. The
indebtedness and the associated interest was less in 2004 due to
EHSI’s lower debt balances.
54
Loss on
Refinancing and Retirement of Debt
There was no loss in 2005 or 2003, but a $0.6 million loss
was allocated in 2004 relating to the early retirement of EHSI
debt.
Net
Income from Continuing Operations before Income Taxes
Net income from continuing operations for 2005 was
$20.8 million compared to $3.0 million in 2004 and
$2.7 million in 2003 due to the reasons described above.
Income
Taxes
Income tax expense for 2005 was $8.1 million compared to
$1.1 million in 2004 and $1.0 million in 2003. Our
effective tax rate was 39.0% in 2005 compared to 37.9% in 2004
and 37.4% in 2003.
Net
Income from Continuing Operations
Net income from continuing operations for 2005 was
$12.7 million compared to $1.9 million in 2004 and
$1.7 million in 2003 due to the reasons described above.
Loss from
Discontinued Operations
The loss from discontinued operations before income taxes was
$0.7 million in 2005 compared to $0.4 million in 2004
and $1.0 million in 2003. The 2005 loss included operations
from two facilities in Washington, one facility in Oregon and
one facility in Texas. The 2004 loss included the same
facilities as for 2005 plus operations from three facilities in
Arkansas and one facility in Ohio. These facilities were
discontinued due to poor financial performance.
Net
Income
Net income for 2005 was $12.3 million compared to
$1.6 million for 2004 to $1.1 million for 2003. The
increase in net income was due to the reasons described above.
Related
Party Transactions
Transactions
with Shareholder and Affiliates
Prior to our separation from Extendicare, we insured certain
risks with Laurier Indemnity Company, Ltd. an affiliated
insurance subsidiary of Extendicare and third party insurers.
The combined statements of income for 2005, 2004 and 2003
include intercompany insurance premium expenses of $704,000,
$58,000 and $41,000, respectively. The combined statements of
income for the three months ended March 31, 2006 and 2005
include intercompany insurance premium expenses of $153,000 and
$72,000, respectively.
Prior to our separation from Extendicare, we purchased computer
hardware and software support services from Virtual Care
Provider, Inc., a subsidiary of Extendicare. The annual cost of
services was based on agreed upon rates that, we believe,
approximated market rates, and was $985,000, $267,000 and
$272,000 for 2005, 2004 and 2003, respectively. In addition, we
purchased payroll and benefits, financial management and
reporting, legal, human resources and reimbursement services
from EHSI. The annual cost was based upon actual incremental
costs of the services provided and was $670,000, $238,000,
$231,000 in 2005, 2004 and 2003, respectively. The combined
statements of income for the three months ended March 31,
2006 and 2005 include intercompany information technology,
accounting and administrative support charges of $685,000,
$242,000, respectively.
Prior to our separation from Extendicare, EHSI’s
U.S. parent company, Extendicare Holdings Inc., or EHI, was
responsible for all U.S. federal tax return filings and
therefore we incurred charges (payments) from (to) EHI for
income taxes. Accordingly, we had balances due to EHSI, who in
turn had balances due to EHI, in each of the three years 2005,
2004 and 2003. Advances made and outstanding in respect of
federal tax payments and other sundry working capital advances
were non-interest bearing.
55
EHSI’s has also borrowed under its line of credit to fund
the purchase of Historic ALC and for other reasons related to
our assisted living facilities. Please see
“— Liquidity and Capital Resources —
Debt Instruments” below for a description of the EHSI
credit facility and related transactions.
Balances
Due to Shareholder and Affiliates
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
Affiliate
|
|
Purpose
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Receivable (payable)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extendicare Holdings, Inc.
|
|
|
Deferred federal income taxes
|
|
|
$
|
9
|
|
|
$
|
350
|
|
|
$
|
352
|
|
|
Extendicare Health Services, Inc.
|
|
|
Working capital advances
|
|
|
|
—
|
|
|
|
76
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
426
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extendicare Holdings, Inc.
|
|
|
Federal income taxes
|
|
|
$
|
(998
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Extendicare Health Services,
Inc.
|
|
|
Working capital advances
|
|
|
|
(3,527
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,525
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extendicare Holdings, Inc.
|
|
|
Deferred federal income taxes
|
|
|
|
(3,224
|
)
|
|
|
(3,324
|
)
|
|
|
(1,137
|
)
|
|
Extendicare Health Services, Inc.
|
|
|
Interest-bearing advances
|
|
|
|
(40,718
|
)
|
|
|
(47,218
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,942
|
)
|
|
|
(50,542
|
)
|
|
|
(1,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(48,458
|
)
|
|
$
|
(50,116
|
)
|
|
$
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Three
Months Ended March 31, 2006 Compared with Three Months
Ended March 31, 2005
Sources
and Uses of Cash
We had cash and cash equivalents of $9.3 million at
March 31, 2006 compared to $6.4 million at
December 31, 2005. The table below sets forth a summary of
the significant sources and uses of cash:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
11,983
|
|
|
$
|
8,279
|
|
|
Cash used in investing activities
|
|
|
(2,260
|
)
|
|
|
(144,120
|
)
|
|
Cash provided by (used in)
financing activities
|
|
|
(6,819
|
)
|
|
|
140,326
|
|
|
Increase in cash and cash
equivalents
|
|
|
2,904
|
|
|
|
4,485
|
|
Cash flow from operating activities was $12.0 million in
the three months ended March 31, 2006 compared to
$8.3 million in the three months ended March 31, 2005.
The increase of $3.7 million was primarily a result of the
acquisition of Historic ALC, since cash flow from Historic ALC
is only for the two months of the three month period ended
March 31, 2005.
Our working capital decreased $1.0 million in the three
months ended March 31, 2006 compared to December 31,
2005, primarily relating to a $6.5 million repayment of the
interest-bearing advance due to EHSI, partially offset by an
increase in cash and cash equivalents.
It is not unusual for us to operate in the position of a working
capital deficit because our revenues are collected more quickly,
often in advance, than our obligations are required to be paid.
This can result in a low level of current
56
assets to the extent cash has been deployed in business
development opportunities or used to pay off longer term
liabilities. As discussed below, we plan to have a line of
credit in place following our separation from Extendicare.
Property and equipment decreased $4.8 million in the three
months ended March 31, 2006 compared to December 31,
2005. Property and equipment decreased by
(i) $3.5 million from depreciation expense,
(ii) $1.7 million resulting from a provision for
impairment of long-lived assets, and
(iii) $1.8 million as a result of the reclassification
of assets held for sale. These decreases were partially offset
by increases of (i) $1.4 million due to normal capital
expenditures, and (ii) $0.8 million from new
construction projects.
Total long-term debt, including both current and long-term
maturities of debt, was $130.9 million as of March 31,
2006 compared to $131.5 million at December 31, 2005.
In addition, as of March 31, 2006, we owed EHSI
$40.7 million compared to $47.2 million as of
December 31, 2005. The decrease was due to a prepayment of
$6.5 million. This bears interest at 6% and is due in
January 2010, but can be prepaid at any time. We expect that
this loan will be converted into equity at the time of our
separation from Extendicare.
Cash used in investing activities was $2.3 million for the
three months ended March 31, 2006 compared to
$144.1 million in the three months ended March 31,
2005. The three months ended March 31, 2005 included a net
payment of $137.7 million for the acquisition of ALC and
there was no similar payment in the three months ended
March 31, 2006. Payments for new construction projects were
$0.8 million for the three months ended March 31, 2006
compared to $5.2 million for the three months ended
March 31, 2005.
Cash used in financing activities was $6.8 million for the
three months ended March 31, 2006 compared to cash provided
by financing activities of $140.3 million in the three
months ended March 31, 2005. A capital contribution of
$80.0 million was received from EHSI and debt proceeds of
$60.0 million were also received in the three months ended
March 31, 2005 to finance the ALC acquisition. In the three
months ended March 31, 2006, a $6.5 million prepayment
was made to EHSI to reduce the balance of debt owed to it.
Three
Year Financial Comparative Analysis
Sources
and Uses of Cash
We had cash and cash equivalents of $6.4 million at
December 31, 2005 compared to $0.1 million at
December 31, 2004 and $0.2 million as of
December 31, 2003. The table below sets forth a summary of
the significant sources and uses of cash:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
28,762
|
|
|
$
|
4,818
|
|
|
$
|
5,224
|
|
|
Cash used in investing activities
|
|
|
(158,966
|
)
|
|
|
(10,471
|
)
|
|
|
(3,690
|
)
|
|
Cash provided by (used in)
financing activities
|
|
|
136,524
|
|
|
|
5,547
|
|
|
|
(2,172
|
)
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
6,320
|
|
|
|
(106
|
)
|
|
|
(638
|
)
|
Cash flow from operating activities was $28.8 million in
2005 compared to $4.8 million in 2004 and $5.2 million
in 2003. Comparing 2005 with 2004, the increase of
$24.0 million was primarily a result of the acquisition of
Historic ALC.
Our working capital decreased by $9.9 million,
$0.1 million and $0.7 million for 2005, 2004 and 2003,
respectively. The 2005 decrease related primarily to the
acquisition of Historic ALC. The decreases for 2004 and 2003
related primarily to the use of cash for new construction
projects.
Property and equipment increased by $305.0 million in 2005.
Property and equipment increased by (i) $283.7 million
from the acquisition of Historic ALC,
(ii) $12.8 million due to a capital lease recorded
pursuant to the modification of our lease with Assisted Living
Facilities, Inc., or ALF, an unrelated party,
(iii) $15.2 million from new construction projects,
and (iv) $5.8 million due to normal capital
expenditures. These decreases were partially offset by
depreciation expense of $12.4 million and other items of
$0.1 million.
57
Total long-term debt, including current and long-term
maturities, increased by $131.5 million during 2005. This
increase included $143.6 million of debt assumed in the
acquisition of ALC, a capital lease obligation of
$12.8 million recorded pursuant to the modification of our
lease with ALF and $60.0 million of debt from borrowings
under EHSI’s credit facility. These increases were
partially offset by decreases of (i) $34.0 million due
to termination and repayment of the ALC GE Capital term loan,
(ii) $22.0 million due to prepayment of variable rate
revenue bonds, (iii) $21.6 million due to payments of
borrowings under the EHSI credit facility, and
(iv) $7.3 million in other debt payments and other
items. The ALC GE Capital term loan of $34.0 million and
$22.0 million in variable rate revenue bonds were repaid
using cash of $5.0 million and advances of
$51.0 million from EHSI. In December 2005, we repaid
$3.8 million of this advance to reduce the balance due to
EHSI to $47.2 million at December 31, 2005. The
advance to EHSI bears interest at 6% and is due in January 2010,
but can be prepaid at any time. Upon our separation from
Extendicare, the loan to EHSI will be converted into equity.
Cash used in investing activities was $159.0 million,
$10.5 million and $3.7 million for 2005, 2004 and 2003
respectively. The increase of $148.5 million in investing
activities between 2004 and 2005 was due to(i) the acquisition
of Historic ALC which resulted in a net payment of
$138.1 million, (ii) increased capital expenditures
for construction projects of $2.5 million,
(iii) increased normal capital expenditures of
$4.3 million resulting from the greater number of
facilities after the acquisition of Historic ALC, (iv) an
increase of $3.7 million relating to proceeds received in
2004 from the sale of three Arkansas facilities, and
(v) other decreases of $0.1 million. The increase in
investing activities between 2003 and 2004 of $6.8 million
was the result of increased capital expenditures for new
construction projects of $9.7 million, other increases of
$0.8 million, and a decrease of $3.7 million relating
to proceeds received in 2004 from the sale of three Arkansas
facilities.
Cash provided by financing activities was $136.5 million
for 2005 and $5.5 million for 2004 compared to cash used by
financing activities of $2.2 million in 2003. For 2005,
cash provided by financing activities included: (i) a
capital contribution of $101.6 million received from EHSI
to finance the acquisition of Historic ALC, (ii) debt
proceed of $60.0 million to finance the acquisition of
Historic ALC, (iii) an interest-bearing advance of
$51.0 million received from EHSI to enable us to repay debt
as mentioned above, (iv) other capital contributions of
$9.5 million from EHSI primarily to finance new
construction projections, and (v) other items of
$2.6 million. These amounts were partially offset by
payments of long-term debt of $84.4 million and repayment
of
interest-bearing
advance of $3.8 million. The only financing activities for
2004 and 2003 were capital contributions from EHSI and capital
distributions to EHSI.
Debt
Instruments
Summary
of Long-Term Debt
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
Rate(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
6.24% Red Mortgage Capital Note
due 2014
|
|
|
6.51%
|
|
|
$
|
36,367
|
|
|
$
|
36,533
|
|
|
$
|
—
|
|
|
DMG Mortgage notes payable,
interest rates ranging from 7.58% to 8.65%, due 2008
|
|
|
6.01%
|
|
|
|
26,981
|
|
|
|
27,263
|
|
|
|
—
|
|
|
Capital lease obligations,
interest rates ranging from 2.84% to 13.54%, maturing through
2009
|
|
|
6.36%
|
|
|
|
12,126
|
|
|
|
12,222
|
|
|
|
—
|
|
|
Oregon Trust Deed Notes,
interest rates ranging from 0.25% to 10.90%, maturing from 2020
through 2026
|
|
|
6.75%
|
|
|
|
9,425
|
|
|
|
9,483
|
|
|
|
—
|
|
|
HUD Insured Mortgages, interest
rates ranging from 7.40% to 7.55%, due 2036
|
|
|
6.89%
|
|
|
|
7,655
|
|
|
|
7,673
|
|
|
|
—
|
|
|
Term Loan due 2010 under EHSI
Credit Facility, at variable interest rates
|
|
|
6.02%
|
|
|
|
38,352
|
|
|
|
38,352
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt before current
maturities
|
|
|
|
|
|
|
130,906
|
|
|
|
131,526
|
|
|
|
—
|
|
|
Less current maturities
|
|
|
|
|
|
|
2,972
|
|
|
|
2,925
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
$
|
127,934
|
|
|
$
|
128,601
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
(1) |
|
Interest rate is effective interest rate as of December 31,
2005. Interest rates were the same at March 31, 2006 as at
December 31, 2005, except that the interest rate on the
Term Loan due 2010 was 6.31% at March 31, 2006. The above
summary of long-term debt excludes the loan due to EHSI of
$47.2 million as of December 31, 2005. The effective
interest rate is determined as the cost of interest to the
recorded fair value of the debt instrument. |
6.24% Red
Mortgage Capital Note due 2014
The Red Mortgage Capital Note has a fixed interest rate of
6.24%, with a
25-year
principal amortization, and is secured by 24 assisted living
facilities. The Red Mortgage Capital Note was entered into by
subsidiaries of Historic ALC and is subject to a limited
guaranty by ALC. The Red Mortgage Capital Note will remain in
place post separation.
DMG
Mortgage Notes Payable due 2008
DMG Mortgage Notes Payable (“DMG Notes”) includes
three fixed rate notes that are secured by 13 assisted living
facilities located in Texas, Oregon and New Jersey. The DMG
Notes were entered into by subsidiaries of Historic ALC and are
subject to a limited guaranty by ALC. These notes collectively
require monthly principal and interest payments of
$0.2 million, with balloon payments of $11.8 million,
$5.3 million and $7.2 million due at maturity in May,
August and September 2008, respectively. These loans bear
interest at fixed rates ranging from 7.58% to 8.65%. The DMG
Notes will remain in place post separation.
Capital
Lease Obligations
In March 2005, we amended lease agreements with ALF, relating to
five assisted living facilities located in Oregon. The amended
lease agreements provide us with an option to purchase the
facilities in 2009 at a fixed price. The option to purchase was
determined to be a bargain purchase price, requiring that the
classification of these leases be changed from operating to
capital. As a result, a capital lease obligation of
$12.8 million was recorded, which represents the estimated
market value of the properties as of the lease amendment date
and also approximates the present value of future payments due
under the lease agreements, including the purchase option
payment. The option to purchase must be exercised prior to
July 1, 2009 with closing on or about December 31,
2009.
Oregon
Trust Deed Notes
The Oregon Trust Deed Notes (“Oregon Revenue
Bonds”) are secured by buildings, land, furniture and
fixtures of six Oregon assisted living facilities of Historic
ALC. The notes are payable in monthly installments including
interest at effective rates ranging from 0.25% to 10.9%.
Under debt agreements relating to the Oregon Revenue Bonds, we
are required to comply with the terms of certain regulatory
agreements until the scheduled maturity dates of the Oregon
Revenue Bonds. Please see “— Revenue Bond
Commitments” below for details of the regulatory
agreements. The Oregon Revenue Bonds will remain in place post
separation.
HUD
Insured Mortgages due 2036
The HUD insured mortgages include three separate loan agreements
entered into in 2001. The mortgages are each secured by a
separate assisted living facility located in Texas. These loans
mature between July 1, 2036 and August 1, 2036
and collectively require principal and interest payments of
$50,000 per month. The loans bear interest at fixed rates
ranging from 7.40% to 7.55% and will remain in place post
separation.
Line of
Credit
We have access to utilize, subject to certain restrictions, the
EHSI’s line of credit. As at December 31, 2005 and
March 31, 2006 we had not accessed the EHSI’s line of
credit. Prior our separation from Extendicare, we plan to
arrange a separate line of credit. We expect that EHSI’s
debt will be refinanced in connection with our separation from
Extendicare, and that security interests on our assets
associated with the EHSI line of credit will be released.
59
Term
Loan Due 2010 under EHSI Credit Facility
EHSI has periodically borrowed under its previous line of credit
for reasons related to our assisted living facilities. In
January 2005, EHSI borrowed $60.0 million under its credit
facility to finance the acquisition of Historic ALC. An
allocated portion of these borrowings have been reflected on our
historic combined balance sheet as long-term debt. As of
December 31, 2005, and March 31, 2006, ALC’s
allocated share of the term loan under the EHSI credit facility
was $38.4 million and is included in ALC’s long-term
debt. Interest paid to EHSI during 2005 relating to the EHSI
term loan was $2.1 million.
Upon our separation from Extendicare, this term loan will not be
converted into equity and EHSI will continue to be liable for
all of the outstanding amounts under the loan. Although some of
our assisted living facilities currently secure EHSI’s
credit facility, we expect EHSI to obtain a release of these
security interests in connection with the refinancing of its
credit facility. In addition, neither we nor any of our
subsidiaries will guarantee any amounts under the credit
facility.
EHSI Long
Term Debt
EHSI has two private placements, consisting of Senior and
Subordinated Notes, that are secured in part by certain of our
assisted living facilities. Upon completion of our separation
from Extendicare, we expect that the Senior and Subordinated
Notes will be repaid in full, the associated swap and cap
agreements will be terminated, and alternative financing
arranged by EHSI. We expect that all costs associated with the
repayment of the Senior and Subordinated Notes will be borne by
EHSI. The cost associated with such repayments is not reflected
in our historical combined financial statements or in our
unaudited pro forma condensed combined financial statements.
EHSI 6%
Advance to ALC
As of December 31, 2005 and March 31, 2006, EHSI had
advanced to ALC $47.2 million and $40.7 million,
respectively. The EHSI advance is reported on the combined
balance sheet as “Due to Shareholders and Affiliates,”
and separate from long-term debt. On August 4, 2005, EHSI
entered into a new credit facility and borrowed the full
$86.0 million term loan portion of the facility and also
borrowed $13.9 million of the $114.0 million revolving
credit portion of the facility. It used the proceeds to repay in
full the $64.0 million balance under its former credit
facility (including the $60.0 million borrowed for the ALC
acquisition) and advanced $34.0 million to ALC to repay
ALC’s GE Capital term loan that Historic ALC had entered
into; the remainder was paid in fees and expenses. In December
2005, EHSI advanced $17.0 million to ALC to repay
$21.1 million of indebtedness that Historic ALC had
incurred under certain revenue bonds. As a result of these
transactions, ALC incurred indebtedness of $51.0 million to
EHSI that was subsequently reduced to $47.2 million at
December 31, 2005 and further reduced to $40.7 million
at March 31, 2006 through prepayments. The advance from
EHSI bears interest at 6% and ALC paid interest of
$0.9 million to EHSI in 2005 on this advance. Upon the
separation transaction, this advance will be converted into
equity of ALC.
Principal
Repayment Schedule
Principal payments on long-term debt, net of discount and
excluding intercompany debt, due within the next five years and
thereafter are as follows (dollars in thousands):
| |
|
|
|
|
|
2006
|
|
$
|
2,925
|
|
|
2007
|
|
|
3,115
|
|
|
2008
|
|
|
26,897
|
|
|
2009
|
|
|
30,691
|
|
|
2010
|
|
|
19,889
|
|
|
After 2010
|
|
|
48,009
|
|
|
|
|
|
|
|
|
|
|
$
|
131,526
|
|
|
|
|
|
|
|
60
Letters
of Credit
As of December 31, 2005, we had issued $0.8 million in
letters of credit secured by cash held as collateral for
landlords of certain leased facilities. In addition, we had
issued $2.9 million of letters of credit, secured by cash
held as collateral for workers compensation claims. The letters
of credit are renewed annually and have maturity dates ranging
from January 2007 to February 2007.
Off
Balance Sheet Arrangements
We have no off balance sheet arrangements.
Cash
Management
As of December 31, 2005, we held cash and cash equivalents
of $6.4 million. We forecast on a regular monthly basis
cash flows to determine the investment periods, if any, of
certificates of deposit and monitor daily the incoming and
outgoing expenditures to ensure available cash is invested on a
daily basis.
Future
Liquidity and Capital Resources
We believe that our cash from operations, together with other
available sources of liquidity, including borrowings available
under the credit facility that we plan to enter prior to the
separation, will be sufficient for the next 12 months and
beyond to fund operations, anticipated capital expenditures and
required payments of principal and interest on our debt post
separation. We expect that our credit facility will provide to
us the ability to finance acquisition and construction projects
to increase our overall capacity and to provide working capital
as required for our operations.
Capital
Commitments
During 2005, we completed eight construction projects for a
total cost of $25.5 million. We have four additional
construction projects in progress that will increase operational
capacity at four assisted living facilities by 77 units.
Total costs incurred through December 31, 2005 on these
projects were approximately $2.2 million and purchase
commitments of $0.5 million are outstanding. The total
estimated cost of the uncompleted projects is approximately
$12.5 million.
Accrual
for Self-Insured Liabilities
At December 31, 2005, we had an accrued liability for
settlement of self-insured liabilities of $1.3 million in
respect of general and professional liability claims. Claim
payments were $0.3 million in 2005. There was no liability
or payments prior to 2005. The accrual for self-insured
liabilities includes estimates of the cost of both reported
claims and claims incurred but not yet reported. We estimate
that $0.3 million of the total $1.3 million liability
will be paid within the next twelve months. The timing of
payments is not directly within our control, and, therefore,
estimates are subject to change in the future. We believe we
have provided sufficient provisions for incurred general and
professional liability claims as of December 31, 2005.
Revenue
Bonds Commitments
We have six ALC assisted living facilities in Oregon that are
financed by revenue bonds that mature between 2020 through 2026.
Under the terms and conditions of the debt agreements, we are
required to comply with the terms of the regulatory agreement
until the original scheduled maturity dates for the revenue
bonds outlined below. In addition, we financed 15 assisted
living facilities located in the States of Washington, Idaho and
Ohio with revenue bonds that were prepaid in full in December
2005. The aggregate amount of the revenue bonds upon repayment
was $21.1 million. Despite the prepayment of the revenue
bonds, under the terms and conditions of the debt agreements, we
are required to continue to comply with the terms of the
regulatory agreements described below until the original
scheduled maturity dates for the revenue bonds. The original
scheduled maturity dates were 2018 for the Washington revenue
bonds, 2017 for the Idaho revenue bonds, and 2018 for the Ohio
revenue bonds.
61
Under the terms of the debt agreements relating to the Revenue
bonds, we are required, among other things, to lease at least
20% of the units of the facilities to low or moderate income
persons as defined in Section 142(d) of the Internal
Revenue Code. This condition is required in order to preserve
the federal income tax exempt status of the Oregon Revenue Bonds
during the term they are held by the bondholders. There are
additional requirements as to the age and physical condition of
the residents with which we must also comply. We must also
comply with the terms of the conditions of the underlying trust
deed relating to the debt agreement and report on a periodic
basis to the State of Oregon, Housing and Community Services
Department, (“OHCS”), for the Oregon revenue bonds,
the Washington State Housing Finance Commission,
(“WSHFC”), for the Washington revenue bonds, the Ohio
Housing Finance Commission, (“OHFC”), for the Ohio
revenue bonds, and the Idaho Housing & Community
Services, (“IHCS”), for the Idaho revenue bonds.
Non-compliance with these restrictions may result in an event of
default and cause fines and other financial costs.
In addition, we lease five properties from Assisted Living
Facilities, Inc., or ALF, an unrelated party, in Oregon and five
properties from LTC Properties, Inc., or LTC, in Washington that
were financed through the sale of revenue bonds. We must comply
with the terms and conditions contained in related debt
agreements and failure to adhere to those terms and conditions
may result in an event of default to the lessor and termination
of the lease. The leases requires, among other things, that in
order to preserve the federal income tax exempt status of the
bonds, we are required to lease at least 20% of the units of the
facilities to low or moderate income persons as defined in
Section 142(d) of the Internal Revenue Code. There are
additional requirements as to the age and physical condition of
the residents with which we must also comply. Pursuant to the
lease agreements with ALF and LTC, we must comply with the terms
and conditions of the underlying trust deed relating to the debt
agreement and report on a periodic basis to the OHCS, for the
ALF leases, and the WSHFC, for the LTC leases.
Contractual
Obligations
Set forth below is a table showing the estimated timing of
payments under our contractual obligations as of
December 31, 2005. There was no material change from
December 31, 2005 to March 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Long-term debt(1)
|
|
$
|
119,304
|
|
|
$
|
2,535
|
|
|
$
|
2,670
|
|
|
$
|
26,392
|
|
|
$
|
19,809
|
|
|
$
|
19,889
|
|
|
$
|
48,009
|
|
|
Interest payments
|
|
|
44,516
|
|
|
|
6,309
|
|
|
|
6,156
|
|
|
|
5,226
|
|
|
|
3,946
|
|
|
|
3,187
|
|
|
|
19,692
|
|
|
Operating lease commitments
|
|
|
115,616
|
|
|
|
13,203
|
|
|
|
13,066
|
|
|
|
13,362
|
|
|
|
13,472
|
|
|
|
13,643
|
|
|
|
48,870
|
|
|
Capital lease commitments
|
|
|
12,222
|
|
|
|
390
|
|
|
|
445
|
|
|
|
505
|
|
|
|
10,882
|
|
|
|
—
|
|
|
|
—
|
|
|
New construction purchase
commitments
|
|
|
500
|
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other capital expenditure purchase
commitments
|
|
|
1,400
|
|
|
|
1,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,558
|
|
|
$
|
24,337
|
|
|
$
|
22,337
|
|
|
$
|
45,485
|
|
|
$
|
48,109
|
|
|
$
|
36,719
|
|
|
$
|
116,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes intercompany debt of $40.7 million that will be
converted to equity at the time of our separation from
Extendicare. |
| |
|
(2) |
|
Excludes leases with Extendicare for as many as 15 properties
that will be leased until planning approval for subdivision of
the property is received and ALC purchases the property. |
Critical
Accounting Policies
Our combined financial statements have been prepared in
conformity with U.S. generally accepted accounting
principles (“GAAP”). For a full discussion of our
accounting policies as required by GAAP, refer to the
accompanying notes to the combined financial statements. We
consider the accounting policies discussed below
62
to be critical to an understanding of our combined financial
statements because their application requires significant
judgment and reliance on estimations of matters that are
inherently uncertain. Specific risks related to these critical
accounting policies are described below.
Revenue
Recognition and Accounts Receivable
We derive our revenues primarily from providing assisted living
accommodation and healthcare services. In 2005, approximately
78% of our revenues were derived from our residents and their
families or third party insurers. The remaining revenues are
derived from state Medicaid programs whose rates are established
for the facility or facilities in the state.
We record accounts receivable at the net realizable value we
expect to receive from individual residents and state Medicaid
programs. We continually monitor and adjust our allowances
associated with these receivables. We evaluate the adequacy of
our allowance for doubtful accounts by conducting a specific
account review of amounts in excess of predefined target amounts
and aging thresholds, which vary by payor type. Provisions are
considered based upon the evaluation of the circumstances for
each of these specific accounts. In addition, we have
established internally-determined percentages for allowance for
doubtful accounts that are based upon historical collection
trends for each payor type and age of these receivables.
Accounts receivable that we estimate to be uncollectible, based
upon the above process, are fully reserved for in the allowance
for doubtful accounts until they are written off or collected.
If circumstances change, for instance due to economic downturn,
resulting in higher than expected defaults or denials, our
estimates of the recoverability of our receivables could be
reduced by a material amount. Our allowance for doubtful
accounts for current accounts receivable totaled
$0.9 million and $0.1 million at December 31,
2005 and 2004, respectively. Our allowance for doubtful accounts
for accounts receivable totaled $0.7 million as at
March 31, 2006.
Measurement
of Acquired Assets and Liabilities in Business
Combinations
We account for acquisitions in accordance with
SFAS No. 141, “Business Combinations” and
have adopted the guidelines in Emerging Issues Task Force, or
EITF, 02-17 for the identification of and accounting for
acquired customers, which for us represents resident
relationships. In an acquisition, we assess the fair value of
acquired assets which include land, building, furniture and
equipment, licenses, resident relationships and other intangible
assets, and acquired leases and liabilities. In respect of the
valuation of the real estate acquired, we calculate the fair
value of the land and buildings, or properties, using an
“as if vacant” approach. The fair value of furniture
and equipment is estimated on a depreciated replacement cost
basis. The value of resident relationships and below
(or above) market resident contracts are determined based
upon the valuation methodology outlined below. We allocate the
purchase price of the acquisition based upon these assessments
with, if applicable, the residual value purchase price being
recorded as goodwill. Goodwill recorded on acquisitions is not a
deductible expense for tax purposes. These estimates are based
upon historical, financial and market information. Imprecision
of these estimates can affect the allocation of the purchase
price paid on the acquisition of facilities between intangible
assets and liabilities and the properties and goodwill values
determined, and the related depreciation and amortization.
Resident relationships represent the assets acquired by virtue
of acquiring a facility with existing residents and thus
avoiding the cost of obtaining new residents, plus the value of
lost net resident revenue over the estimated
lease-up
period of the property. In order to effect such purchase price
allocation, management is required to make estimates of the
average facility
lease-up
period, the average
lease-up
costs and the deficiency in operating profits relative to the
facility’s performance when fully occupied. Resident
relationships are amortized on a straight-line basis over the
estimated average resident stay at the facility.
Below (or above) market resident contracts represent the value
of the difference between amounts to be paid pursuant to the
in-place resident contracts and management’s estimate of
the fair market value rate, measured over a period of either the
average resident stay in the facility, or the period under which
we can change the current contract rates to market. The
amortization period for the ALC acquisition is 24 months.
Amortization of below (or above) market resident contracts are
included in revenues in the consolidated statement of income.
63
Valuation
of Assets and Asset Impairment
We record property and equipment at cost less accumulated
depreciation and amortization. We depreciate and amortize these
assets using a straight-line method for book purposes based upon
the estimated lives of the assets. Goodwill represents the cost
of the acquired net assets in excess of their fair market
values. Pursuant to SFAS No. 142 we do not amortize
goodwill and intangible assets with indefinite useful lives.
Instead we test for impairment at least annually. Other
intangible assets, consisting of the cost of leasehold rights,
are deferred and amortized over the term of the lease including
renewal options and resident relationships over the estimated
average length of stay at the facility. We periodically assess
the recoverability of long-lived assets, including property and
equipment, goodwill and other intangibles, when there are
indications of potential impairment based upon the estimates of
undiscounted future cash flows. The amount of any impairment is
calculated by comparing the estimated fair market value with the
carrying value of the related asset. We consider such factors as
current results, trends and future prospects, current estimated
market value and other economic and regulatory factors in
performing these analyses.
A substantial change in the estimated future cash flows for
these assets could materially change the estimated fair values
of these assets, possibly resulting in an additional impairment.
Changes which may impact future cash flows include, but are not
limited to, competition in the marketplace, changes in private
and Medicaid rates, increases in wages or other operating costs,
increased litigation and insurance costs, and increased
operational costs resulting from changes in legislation and
regulatory scrutiny and changes in interest rates.
Self-insured
Liabilities
Insurance coverage for resident care liability and other risks
has become difficult to obtain from independent insurance
carriers. We insure certain risks with affiliated insurance
subsidiaries of Extendicare and third-party insurers. The
insurance policies cover comprehensive general and professional
liability, workers’ compensation and employer’s
liability insurance in amounts and with such coverage and
deductibles as we deem appropriate, based on the nature and
risks of our business, historical experiences, availability and
industry standards. We self-insure for health and dental claims,
in certain states for workers’ compensation and
employer’s liability for general and professional liability
claims up to deductible amounts as defined in our insurance
policies.
We accrue our self-insured liabilities based upon past trends
and information received from an independent actuary. We
regularly evaluate the appropriateness of the carrying value of
the self-insured liabilities through an independent actuarial
review. Our estimate of the accrual for general and professional
liability costs is significantly influenced by assumptions,
which are limited by the uncertainty of predicting future
events, and assessments regarding expectations of several
factors. Such factors include, but are not limited to: the
frequency and severity of claims, which can differ materially by
jurisdiction; coverage limits of third-party reinsurance; the
effectiveness of the claims management process; and the outcome
of litigation.
Changes in our level of retained risk, and other significant
assumptions that underlie our estimate of self-insured
liabilities, could have a material effect on the future carrying
value of the self-insured liabilities. Our accrual for
self-insured liabilities totaled $1.3 million as of
December 31, 2005. We had no accrued liability balance as
of December 31, 2004. Our accrual for self-insured
liabilities totaled $1.4 million as of March 31, 2006.
Conditional
Asset Retirement Obligation
We recognize future asset retirement obligations in accordance
with FIN No. 47. Conditional asset retirement
obligations refer to a legal obligation to perform an asset
retirement activity in which the timing or method of settlement
are conditional on a future event that may or may not be in
control of the entity. FIN No. 47 requires that either
a liability be recognized for the fair value of a legal
obligation to perform asset-retirement activities that are
conditional on a future event if the amount can be reasonably
estimated, or where it can not, that disclosure of the liability
exists, but has not been recognized and the reasons why a
reasonable estimate can not be made. FIN No. 47 became
effective for us as of December 31, 2005 and we recorded in
operating expenses in the financial statements for the year
ended December 31, 2005 approximately $0.2 million for
future asset retirement obligations.
We have determined that a conditional asset retirement
obligation exists for asbestos remediation. Though asbestos is
not currently a health hazard in our facilities, upon
renovation, we may be required to take the appropriate
remediation procedures in compliance with state law to remove
the asbestos. The removal of asbestos-containing materials
includes primarily floor and ceiling tiles from our
pre-1980
assisted living facilities. The fair
64
value of the conditional asset retirement obligation was
determined as the present value of the estimated future cost of
remediation based on an estimated expected date of remediation.
This computation is based on a number of assumptions which may
change in the future based on the availability of new
information, technology changes, changes in costs of
remediation, and other factors.
The determination of the asset retirement obligation is based
upon a number of assumptions that incorporate our knowledge of
the facilities, the asset life of the floor and ceiling tiles,
the estimated timeframes for periodic renovations which would
involve floor and ceiling tiles, the current cost for
remediation of asbestos and the current technology at hand to
accomplish the remediation work. These assumptions to determine
the asset retirement obligation may be imprecise or be subject
to changes in the future. Any change in the assumptions can
impact the value of the determined liability and impact our
future earnings.
Deferred
Tax Assets
Our results of operations are included in the consolidated
federal tax return of our U.S. parent company, EHI. Federal
current and deferred income taxes payable (or receivable) are
determined as if we filed our own income tax returns. Deferred
tax assets and liabilities are recognized to reflect the
expected future tax consequences attributed to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. We measure deferred
tax assets and liabilities using enacted tax rates expected to
apply to taxable income in the years in which we expect those
temporary differences to be recovered or settled. We establish a
valuation allowance if we determine that it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets
depends upon us generating future taxable income during the
periods in which those temporary differences become deductible.
We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in
making this assessment. There was no valuation allowance for net
state deferred tax assets at December 31, 2005 or 2004.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative
Disclosures
At December 31, 2005, our long-term debt consisted of
fixed-rate debt of $93.2 million and variable-rate debt of
$38.4 million. Assuming that the balance of the
variable-rate debt remained constant, each one percentage point
increase in the six-month LIBOR would result in an annual
increase in interest expense, and a corresponding decrease in
cash flows, of approximately $0.4 million. Conversely, each
one percentage point decrease in the
six-month
LIBOR would result in an annual decrease in interest expense,
and a corresponding increase in cash flows, of approximately
$0.4 million.
As of December 31, 2005, we had no derivative instruments.
We do not speculate using derivative instruments and do not
engage in trading activity of any kind.
Quantitative
Disclosures
The table below presents principal, or notional, amounts and
related weighted average interest rates by year of maturity for
our debt obligations as of December 31, 2005 (dollars in
thousands). There were no significant changes in this
information from December 31, 2005 to March 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
Liability
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
Total
|
|
|
(Asset)
|
|
|
|
|
LONG-TERM DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
$
|
2,538
|
|
|
$
|
2,732
|
|
|
$
|
26,515
|
|
|
$
|
12,090
|
|
|
$
|
1,290
|
|
|
$
|
48,009
|
|
|
$
|
93,174
|
|
|
$
|
93,775
|
|
|
Average Interest Rate
|
|
|
6.34
|
%
|
|
|
6.36
|
%
|
|
|
6.05
|
%
|
|
|
6.38
|
%
|
|
|
6.58
|
%
|
|
|
6.60
|
%
|
|
|
6.40
|
%
|
|
|
|
|
|
Variable Rate
|
|
$
|
387
|
|
|
$
|
383
|
|
|
$
|
382
|
|
|
$
|
18,601
|
|
|
$
|
18,599
|
|
|
|
—
|
|
|
$
|
38,352
|
|
|
$
|
38,352
|
|
|
Average Interest Rate
|
|
|
6.02
|
%
|
|
|
6.02
|
%
|
|
|
6.02
|
%
|
|
|
6.02
|
%
|
|
|
6.02
|
%
|
|
|
—
|
|
|
|
6.02
|
%
|
|
|
|
|
The above table incorporates only those exposures that existed
as of December 31, 2005, and does not consider those
exposures or positions which could arise after that date or
future interest rate movements.
65
BUSINESS
Our
Business
We are one of the five largest publicly traded operators of
assisted living facilities in the United States, based on total
capacity, with 206 assisted living facilities totaling
8,251 units. Our assisted living facilities, or residences,
typically consist of 35 to 50 units and offer residents a
supportive, home-like setting and assistance with the activities
of daily living. Our facilities are purpose-built to meet the
special needs of seniors and are located in targeted,
middle-market suburban bedroom communities that are selected on
the basis of a number of factors, including the size of our
target resident pool in the community. We own 151 of our
facilities, and the remaining are under long-term leases, giving
us significant operational flexibility with respect to our
properties. For the three months ended March 31, 2006, the
average occupancy rate for our facilities was approximately
84.3% (with mature facilities, defined as facilities with all
units open for at least a year, having an occupancy rate of
85.6%), the average combined monthly rate for rent and services
was $2,656 per unit and the percentage of our revenue
generated from private pay sources was 78.7%.
We plan to grow our revenue and operating income by:
|
|
|
| |
•
|
increasing the overall size of our property portfolio;
|
| |
| |
•
|
increasing our occupancy rate and the percentage of revenue
derived from private pay sources; and
|
| |
| |
•
|
capitalizing on the efficiencies that larger organizations can
achieve in the highly fragmented senior living facility industry.
|
We plan to grow our property portfolio by making selective
acquisitions in markets with favorable private pay demographics
and, to a lesser extent, by expanding existing properties to
meet any additional private pay demand in markets we currently
serve. In addition, we plan to increase demand for our services
among private pay residents through a focused sales and
marketing effort intended to establish ALC as the provider of
choice for residents who value wellness, quality of care and
customer service. Because of the size of our operations and the
depth of our experience in the senior living industry, we
believe we are able to effectively identify and maximize cost
efficiencies and to expand our portfolio by investing in
attractive assets in our target communities.
We believe we are well positioned to take advantage of the
growing demand for senior living facilities. This growing demand
is the result of a number of demographic and macro-economic
factors, including:
|
|
|
| |
•
|
An Aging Population. The population of
Americans over the age of 65 is projected to steadily and
significantly increase over the next 20 years —
both in absolute numbers and as a percentage of the overall
population.
|
| |
| |
•
|
Cost Containment Pressures. As life
expectancies increase and the size of the elderly population
grows, the cost of caring for the elderly also increases.
Federal and state governments, as well as private insurers, are
increasingly turning to lower cost alternatives to acute care
facilities to help contain the increase in these costs.
|
| |
| |
•
|
Changing Family Dynamics and Economics. We
believe that an increasing number of families are unwilling or
incapable of providing the
day-to-day
care that the elderly require. However, we believe these
families are capable of assisting with the financial support for
the elderly to receive the care they need in nursing homes or
assisted living facilities.
|
As a result of these trends, we believe the demand for senior
living facilities will continue to increase. Within the senior
living industry, we believe that most seniors prefer the
home-like setting and lifestyle of assisted living facilities to
the institutional setting of nursing facilities and will
therefore choose to live in assisted living facilities over
nursing facilities for so long as their health and physical
condition permit them to do so.
66
Our
Competitive Strengths
Our major competitive strengths are:
Leading Provider of Long-term Care
Services. We are one of the five largest publicly
traded operators of assisted living facilities in the United
States. We operate 206 assisted living facilities, totaling
8,251 units, in 17 states, 151 of which are owned and
the remaining 55 of which are leased under long-term leases. The
size and breadth of our portfolio, as well as the depth of our
experience in the senior living industry, allow us to achieve
operating efficiencies that many of our competitors in the
highly fragmented senior living industry cannot.
Significant Ownership of Purpose-Built, Attractive and
Efficient Facilities. We own 151 assisted living
facilities, or 73% of the total number of facilities we operate.
We also have the option to purchase another five assisted living
facilities from an unrelated landlord in 2009. We believe that
owning properties, rather than leasing, increases our operating
flexibility by allowing us to:
|
|
|
| |
•
|
refurbish facilities to meet changing consumer demands;
|
| |
| |
•
|
expand facilities without having to obtain landlord
consent; and
|
| |
| |
•
|
divest facilities and exit markets at our discretion.
|
In addition, our facilities, which have an average age of
approximately nine years, have been specifically built for the
needs of senior residents and include features designed to
appeal to the senior living community and their decision makers.
The majority of our facilities are approximately
40-unit,
single story, square shaped buildings with an enclosed
courtyard, a mix of studio and one-bedroom apartments and wide
hallways to accommodate our residents who use walkers and
wheelchairs. The relatively small number of units and the design
of our buildings enhances our ability to provide effective
security and quality care, while also appealing to seniors who
generally prefer easy access to their living quarters, pleasing
aesthetics and simplicity of design. Our moderate sized
facilities are primarily on a single level and appeal to seniors
for mobility and safety reasons and provide them with easy
access to common areas and exterior gardens.
Focus on Wellness, Quality of Care and Customer
Service. The staffing model of our facilities
emphasizes the importance we place on delivering high quality
care to our residents, with a particular emphasis on
preventative care and wellness. Each of our facilities staffs a
full-time registered nurse who supervises the clinical plans and
health services for our residents. At each facility, we organize
and oversee a variety of social and recreational activities that
promote wellness and education regarding preventative healthcare
measures. Furthermore, at almost all of our facilities, we
employ a minimum of two staff members at all times to ensure
that we meet the healthcare and security needs of our residents.
Facility Portfolio in Targeted Locations. Most
of our facilities are located in middle-market, suburban bedroom
communities with populations typically ranging from 10,000 to
40,000. We have targeted these communities based on their
demographic profile, the average wealth of the population and
the cost of operating in the community. Focusing on smaller,
middle-market suburban communities permits us to quickly build
the relationships necessary to establish our reputation and
effectively market to our target residents, whom we define as
people having a net worth between $100,000 and $500,000. In
addition, smaller middle-market communities tend to have lower
real estate related costs, lower labor costs and less employee
turnover than urban and larger suburban markets, which allows us
to operate more efficiently and to provide more consistent
services.
Experienced Executive and Senior Management
Team. Our corporate executive and senior
divisional management team is highly experienced, with an
average of 20 years of experience in the senior living
industry. Their experience spans the senior healthcare industry
and includes experience in both the assisted living and post-
acute care industries, which will assist us in identifying the
clinical needs of seniors and delivering high quality care to
our residents.
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Our
Strategy
The principal elements of our business strategy are to:
Build the Company Brand. We believe our
success will be determined by the quality of services we provide
and our reputation in the communities we serve, and we will
strive to establish ourselves as the provider of choice in these
communities for residents who value wellness, quality of care
and customer service. To support the provision of high quality
services to our residents, we have instituted a number of
corporate, regional and facility level programs and implemented
staffing models at our facilities that we believe will allow us
to monitor and continually improve the level of service we
provide in a cost effective manner. We believe that there are
few, if any, recognized brands in the assisted living industry
and that, if we can establish ourselves as the provider of
choice for wellness, quality of care and customer service,
demand for our services among the private pay population will
grow. To implement our brand awareness strategy, we have
recently launched a marketing campaign targeted at referral
sources for residents, including physicians, other healthcare
providers and community organizations. In addition, to further
improve the level of care provided to our residents, we are
exploring relationships with third-party providers that would
involve the provision of ancillary healthcare or life enrichment
services to our residents on our premises.
Increase Private Census within our Assisted Living
Facilities. For the three months ended
March 31, 2006, approximately 70.7% of our residents were
private pay, generating 78.7% of our revenues. Our strategy is
to increase the number of residents in our facilities that are
private pay, both by filling existing vacancies at our
facilities with private pay residents and by gradually
decreasing the number of units in our facilities that are
available for residents that rely on Medicaid. We believe that
demand among the private pay population for senior living
services, including assisted living facilities, will continue to
increase. We are positioning ourselves to take advantage of this
expected increase in demand, both by building the company brand
as described above, and, in some cases, by holding vacancies
open rather than filling them with residents that rely on
Medicaid. In addition to increasing awareness of our brand among
referral sources and the senior population, we are seeking to
increase our private pay census through our focused sales and
marketing effort, which emphasizes relationship building between
all levels of employees and referral sources.
Expand Our Asset Portfolio. We expect to grow
our portfolio of assisted living facilities primarily through
selective acquisitions in markets with favorable private pay
demographics and, to a lesser extent, by expanding existing
properties to meet any additional private pay demand in markets
where we currently operate. We believe our management team has
the requisite experience and knowledge to successfully evaluate
and integrate potential acquisitions. We expect to finance any
acquisitions or add-ons primarily by a combination of fixed and
variable rate debt.
The
Senior Living Industry
We operate assisted living facilities within the senior living
industry, which consists of a broad variety of living options
for seniors. In general, the type of facility that is
appropriate for a senior depends on his or her particular life
circumstances, especially health and physical condition and the
corresponding level of care that he or she requires.
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Assisted living facilities fall in the middle of the spectrum of
care and service provided to seniors in connection with their
living arrangements. The various health services/living options
in the senior living industry are described in more detail below:
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Senior Apartments. Senior apartments are
multifamily residential properties for persons
age 55 years or older. Senior apartments do not have
central dining facilities and generally do not provide meals to
residents, but many offer community rooms, social activities and
other amenities associated with apartment living, such as a
pool, wellness center and security/emergency response systems.
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Independent Living. Independent living
communities are age-restricted multifamily properties that may
have central dining facilities that provide residents as part of
their monthly fee with access to meals and other services such
as housekeeping, linen service, transportation, and social and
recreational activities. Independent living is designed for
seniors who choose to live in an environment surrounded by their
peers, but are generally not reliant on assistance with
activities of daily life, such as bathing, eating, toileting,
transferring and dressing; some residents, however, may contract
with outside providers for those services. Independent living
residents tend to move into a facility by choice, oftentimes to
be in a metropolitan area that is closer to their adult children.
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Congregate Care. Congregate care is similar to
independent living, but features a community environment, with
one or more meals per day prepared and served in a community
dining room. Many other services and amenities may be provided,
such as transportation, pools, a convenience store, bank, a
barber/beauty shop, resident laundry, housekeeping, and security.
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Home Healthcare. Home healthcare is a
desirable option for older people who wish to remain in their
own homes, but require some form of health services due to
frailty or disability. Home healthcare is provided in an
individual’s home by outside providers and aims to keep the
individual functioning at the highest possible level. Home
healthcare services range from basic assistance with household
chores to skilled nursing services. This includes home health
agencies that provide nursing, skilled care, attendant care and
hospice services; medical equipment companies; and infusion
service companies. Non-medical components of the industry
include those that provide such services as emergency alarm
device monitoring and security surveillance, non-Medicare
covered home attendant care, homemaker services, and
Meals-on-Wheels.
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Assisted Living. Assisted living is designed
for seniors who seek housing with supportive care and services,
including assistance with activities of daily living, memory
care and other services (for example, housekeeping, meals and
activities). Assisted living residents can move into a facility
by choice or by necessity.
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Continuing Care Retirement
Communities. Continuing care retirement
communities, or CCRCs, offer a variety of living arrangements
and services to accommodate residents of varying levels of
physical ability and health. The goal of a CCRC is to
accommodate changing lifestyle preferences and healthcare needs.
Generally, CCRCs make independent living, assisted living and
skilled nursing available all on one campus location.
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Skilled Nursing. On the other end of the
spectrum are skilled nursing facilities, which offer a broad
range of care including nursing services, subacute care and
rehabilitative therapy services and which are generally designed
to assist patients in their recovery from acute illness or
injury.
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Nursing facilities, assisted living facilities and other
healthcare businesses are subject to licensure and other state
and local regulatory requirements. Skilled nursing and assisted
living facilities are generally subject to unannounced annual
inspections by state or local authorities for purposes of
licensure. These surveys confirm whether the nursing or assisted
living facility continues to meet the regulatory standards to
participate in the Medicare or, in the case of assisted living
facilities, Medicaid program. Though the regulatory standards
are similar, as a result of participating in the Medicare
reimbursement regime, skilled nursing facilities are generally
subject to heavier regulation at the federal level, and are
required to meet prescribed standards relating to provision of
services, resident rights, staffing, employee training, physical
environment and administration. Assisted living facilities are
generally subject to regulation and laws by federal, state and
local health and social service agencies,
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and other regulatory bodies. Although less burdensome and
punitive than the federal survey process conducted for skilled
nursing facilities, assisted living facilities are heavily
regulated by state-specific regulations.
The senior living industry is changing as a result of several
fundamental factors, including an aging population, cost
containment pressures and changing family dynamics and
economics, which are described below.
Aging Population. The aging of the
U.S. population is a leading driver of demand for senior
living services. According to the most recent census conducted
by the U.S. Census Bureau, there were approximately
35.0 million Americans aged 65 or older in 2000. The
U.S. Census Bureau has forecasted that the population of
Americans aged 65 or older will increase to 36.7 million in
2005, 40.2 million in 2010, 54.6 million by 2020 and
86.7 million in 2050. As a result, the percentage of
Americans aged 65 or older will increase from 12.4% in 2000 to
16.3% in 2020 and 20.7% by 2050. While the overall
U.S. population is projected to grow at a rate of
approximately 4% every five years from 2005 until 2030, the
65-years and
older segment of the U.S. population is expected to
increase by approximately 10% to 17% during each of the same
five-year periods. The following table indicates the projected
growth rates within the elderly U.S. populations.
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Total U.S.
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Total
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Population
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Elderly
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Growth Rate
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65-74
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75-84
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85+
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(65+)
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2005-2010
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4.5%
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14.2%
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(0.8
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)%
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19.6%
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9.7%
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2010-2015
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4.3%
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25.1%
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4.0
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%
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11.4%
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16.3%
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2015-2020
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4.2%
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19.4%
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16.6
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%
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6.6%
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16.8%
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2020-2025
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4.1%
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12.3%
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27.2
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%
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10.2%
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16.3%
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2025-2030
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4.0%
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6.3%
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20.6
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%
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19.9%
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12.5%
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Source: U.S. Census Bureau
Cost Containment Pressures. According to the
Social Security Administration, the remaining life expectancy of
a male age 65 has increased to 15.9 years in 2002 from
12.4 years in 1942, and the remaining life expectancy of a
female age 65 has increased to 19.0 years in 2002 from
14.1 years in 1942. As the number of people over
age 65 continues to grow and as advances in medicine and
technology continue to increase life expectancies, the
likelihood of chronic conditions requiring treatment, and the
resulting healthcare costs, are projected to rise faster than
the availability of resources from government-sponsored
healthcare programs. Federal and state governments that are
facing increased healthcare costs have responded by initiating
steps to limit the growth of healthcare funding. These steps
include cost containment measures that encourage reduced lengths
of stay in acute care hospitals. As a result, average acute care
hospital stays have been shortened, and many patients are
discharged despite a continuing need for nursing or specialty
healthcare services, including therapy. This trend has increased
demand for long-term care, including assisted living facilities,
home healthcare, outpatient facilities and hospices.
Changing Family Dynamics and
Economics. Changing family dynamics play an
important role in the growth of the senior living industry. As a
result of the growing number of two-income families, we believe
the immediate family has become less of a primary source of
care-giving for the elderly. Our opinion is based upon a number
of facts, including:
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according to the U.S. Department of Labor, women, who under
more traditional roles were viewed as the primary caretakers of
the family, have moved into the workforce in increasing numbers,
which is evidenced by their labor participation rates increasing
from 38% in 1970 to 46% in 2005, which is forecasted to increase
to 47% by 2014; and
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according to the U.S. Census Bureau, the parent support
ratio (the ratio of individuals over age 85 to those
50 to 64 years of age) has more than tripled from
3:100 in 1960 to 10:100 in 2000. Further, this ratio is expected
to reach 30:100 by the year 2050.
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The projected increase is partly due to the fact that, by 1989,
approximately 34% of early baby boomers and 44% of late baby
boomers, respectively, were childless. At the same time that the
ratio of elderly persons to middle aged persons has increased,
two-income families have become better able to provide financial
support for elderly parents to receive the care they need in
nursing homes or assisted living facilities. In addition, we
believe there is an
70
increasing number of seniors who are able to afford the costs of
assisted living facilities independent of their family’s
resources. According to a 2000 study by the Joint Center for
Housing Studies of Harvard University, almost 20% of
U.S. seniors have a net worth between $100,000 and
$200,000, and another 18% have a net worth between $200,000 and
$500,000. We believe this study underestimated seniors’
wealth because it excluded the value of ongoing social security
and pension plan benefits that many seniors receive. In 1984,
the mean net worth of Americans aged 65 and older was $98,900
(based on the value of the U.S. dollar in 2001). In 2001
the mean net worth was $179,800.
Our
Services
Residents of our facilities are individuals who, for a variety
of reasons, elect not to live alone, but do not need the
24-hour
skilled medical care provided in nursing facilities. We design
services provided to these residents to respond to their
individual needs and to improve their quality of life. This
individualized assistance is available 24 hours a day and
includes routine health-related services, which are made
available and are provided according to the resident’s
individual needs and state regulatory requirements. Available
services include:
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general services, such as meals, activities, laundry and
housekeeping;
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support services, such as assistance with medication, monitoring
health status, coordination of transportation, coordination with
physician offices;
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personal care, such as dressing, grooming and bathing; and
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the provision of a safe and secure environment with
24-hour
access to assistance.
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We also arrange access to additional services from third-party
providers beyond basic housing and related services, including
physical therapy, home health, hospice and pharmacy services.
Although a typical package of basic services provided to a
resident includes meals, housekeeping, laundry and personal
care, we accommodate the varying needs of our residents through
the use of individual service plans and flexible staffing
patterns. Our multi-tiered rate structure for services is based
upon the acuity, or level, of services needed by each resident.
Supplemental and specialized health-related services for those
residents requiring
24-hour
supervision, or more extensive assistance with activities of
daily living, are provided by third-party providers who are
reimbursed directly by the resident or a third-party payor (such
as Medicare, Medicaid or long-term care insurance). To ensure
that we are meeting the needs of our residents, we assess the
level of need of each resident regularly.
Operations
Sales
and Marketing
Most of our assisted living facilities are located in smaller
suburban bedroom communities. We focus our marketing efforts
predominantly at the local level. We believe that residents
selecting an assisted living facility are strongly influenced by
word-of-mouth
and referrals from physicians, hospital discharge planners,
community leaders, neighbors and family members. The residence
director, the wellness director and the sales team member at
each facility is, therefore, a key element of our sales
strategy. Each residence director is responsible for developing
relationships with potential referral sources. Each residence
director is supported by a regional director of sales and
marketing is responsible for establishing the overall sales and
marketing strategy, developing relationships with local
organizations and providing direction with training and
community specific promotional materials.
The corporate sales and marketing department has responsibility
for developing long-term strategic sales and marketing plans and
establishing a branding strategy. It also is responsible for the
development and maintenance of the sales and marketing process,
systems and training programs, and the establishment and
monitoring of occupancy goals. The corporate team works closely
with regional staff to conduct marketing evaluations and
development of specific marketing initiatives at the local or
regional level. In addition, the corporate department ensures
compliance with sales and marketing systems and processes across
all regions. Our goal is to be the provider of choice in the
communities we serve, known for wellness promotion, quality of
care and customer service.
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The assisted living industry is very competitive as there are
few barriers to entry for new and existing operators. We compete
with numerous other operators that provide a wide degree of
senior living alternatives, such as home healthcare agencies,
community-based service programs, and retirement and independent
living communities. Although new construction of senior living
communities has declined over the past five years, we continue
to experience new competition in the marketplace. We believe our
success will be determined by the quality of services we provide
and our reputation in the communities we serve.
Structure
Each of our facilities has an
on-site
residence director who is responsible for the overall
day-to-day
operation of the facility, including quality of care, sales,
life enrichment, dining services and financial performance. Each
residence director is assisted by a full or part-time associate
administrator, and they are supported by a staff of personal
service assistants, maintenance, and kitchen personnel. Each of
our facilities employs a full-time registered nurse as its
wellness director, who is responsible for the clinical plans for
the residents. In addition, independent third-party providers
are selectively used in connection with the provision of
ancillary healthcare or life enrichment services for our
residents. Company regional dieticians and registered nurses are
responsible for menu planning and responding to any special
dietary or care needs of residents. Personal service assistants,
who primarily are full-time employees, are responsible for
personal care, dining services, housekeeping and laundry
services. Maintenance services are performed by full and
part-time employees. We coordinate with external pharmacists to
meet the medication needs of our residents.
Our infrastructure currently includes three divisional vice
presidents of operations, each of whom oversees the overall
performance of a geographic division, 14 regional directors of
operations, each of whom oversees 14 to 18 facilities, and
operational specialists who provide peer support for subgroups
of facilities. Each region has a director of sales and
marketing, who, along with the residence directors, leads a team
of community and residence sales managers. Each region also has
a regional director of quality and clinical services who is a
registered nurse. We also employ divisional property managers
who oversee the maintenance and refurbishment of each of our
facilities. Corporate, divisional, and regional personnel work
with the residence directors to establish residence goals and
strategies, quality assurance oversight, development of our
internal policies and procedures, marketing and sales, community
relations, development and implementation of new wellness
programs, cash management, risk management, legal support,
treasury functions, and human resource management.
Quality
of Care
We strive to create warm, home-like settings for older adults
who want to live their life with choice. Whether that includes
an active social schedule or a slower-paced way of life, our
respect for each resident’s individuality and dignity is
central to our philosophy. To maintain an enriched quality of
life, each resident receives personalized care and service that
promotes wellness and independence.
Our corporate quality and clinical services department
establishes resident care and quality of life standards,
monitors issues and trends in the industry and implements our
systems, policies and procedures. Training programs and
initiatives are developed at the corporate level and implemented
throughout the company.
On-site data
is integrated with quality and clinical indicators,
facility-level human resource data and state regulatory outcomes
to provide a detailed picture of problems, challenges and
successes at all levels of our organization. This information
pool allows us to determine best practices. In addition, the
corporate quality and clinical services department conducts
periodic quality reviews of our residences to ensure compliance
with state regulations and corporate standards and programs. Our
corporate quality and clinical services group monitors residence
visit reports, quality and clinical key performance indicators
and survey results. It also drives continuous quality
improvement processes at the facility, regional and divisional
levels.
We hold focused interdisciplinary review conference calls and
meetings on a regular basis to monitor trends in residences and
to communicate new protocols and issues within the industry. The
corporate clinical services department directs an internal team
of field-based area directors of quality and clinical services.
These individuals are registered nurses who are responsible for
monitoring and communicating adherence with corporate policies
and standards, as well as state-specific regulations to ensure
ongoing compliance and quality of care. They are
72
instrumental in the continuous and on-going auditing of care and
service delivery systems. They also provide direction,
orientation and training for our wellness directors and all
levels of staff.
Quality
Improvement Processes
We coordinate our quality assurance programs through our
corporate clinical services staff. Our quality assurance program
is designed to continually improve the services we provide and
to assure a high degree of resident and family member
satisfaction with the care and services provided by us. An
example of one of our quality assurance programs is the Family
and Resident Feedback Program. Within one month of admission and
on a quarterly basis, we survey residents and family members to
monitor the quality of services provided to residents. Annual
written surveys are used to appraise and monitor the level of
satisfaction of residents and their families. We also have a
toll-free telephone line that may be used at any time by
residents or family members to convey comments.
In addition, our regional, divisional, and corporate operations
staff conduct a variety of inspections on a regular basis to
monitor the quality of care, dining and housekeeping services,
professionalism and friendless of staff, physical appearance of
the facility, and compliance with government regulations. All
inspections are documented and reports provided to the facility
administrator and regional senior management. Inspections also
conducted by members of our corporate team.
Employee
Training
The development and implementation of interdisciplinary
policies, educational initiatives and our employee training
program is coordinated through our corporate education and
training team. We seek to hire highly dedicated, experienced
personnel. Employee orientation and training at all levels is an
integral part of our ongoing efforts to improve and maintain our
service quality. Each new residence director and wellness
director is required to attend company-provided training to
ensure that he or she understands all aspects of the assisted
living residence operations, including sales training, quality
and clinical programs, regulatory compliance, and management and
business operations. We conduct additional training for these
individuals and all other staff on a regional, divisional or
local basis. For residence directors and senior management
staff, we provide an interdisciplinary modular based supervisory
training program, which is conducted in each division on a
quarterly basis. This supervisory training program includes a
sales and marketing seminar that is designed to improve the
overall sales skill set and to raise awareness of the need to
continually improve our referral base and our private pay census.
Risk
Management
The provision of services in assisted living facilities involves
an inherent risk of personal injury liability. Assisted living
facilities are subject to general and professional liability
lawsuits alleging negligence of care and services and related
legal theories, many of which may involve substantial claims and
can result in significant legal defense costs.
We approach risk management through various programs that center
on providing excellent customer service and quality clinical
care. Our corporate risk management group works closely with our
corporate clinical services group to track, trend and
investigate resident events. Resident complaints are also
monitored to ensure that we are managing expectations and
communicating appropriately with potential claimants. Based on
these reviews, policy or procedural changes are made or
additional training is delivered. Our corporate risk management
group works closely with our operations staff, our corporate
clinical services group and our corporate property management
group to maintain a safe environment for our residents and
employees.
We insure against general and professional liability risks in
loss-sensitive insurance policies with affiliated and
unaffiliated insurance companies with levels of coverage and
self-insured retention levels that we believe are adequate based
on the nature and risk of the business, historical experience
and industry standards. We are responsible for the costs of
claims up to a self-insured limits determined by individual
policies and subject to aggregate limits. We accrue based upon
an actuarial projection of future self-insured liabilities, and
have an independent actuary review our claims experience and
attest to the adequacy of our accrual on an annual basis. As of
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December 31, 2005, we had provided for $1.3 million in
accruals for known or potential general and professional
liability claims.
Our staff is involved in the acts of daily living with our
residents. As a result, there are risks beyond personal injury
lawsuits that are associated with assisted living facilities. We
conduct training sessions on basic health and safety practices
in the facility. However, we cannot eliminate the risk of injury
and are therefore subject to workers compensation claims. To
manage this risk, we maintain policies to cover such risks in
amounts that we believe are consistent with industry practice.
In the state of Washington, we are part of the state
workers’ compensation plan. Otherwise, we insure against
workers’ compensation risks in loss-sensitive policies with
third-party insurers with levels of coverage and self-insured
retention levels that we believe are adequate based upon the
nature and risk of the business, historical experience and
industry standards. We are responsible for the costs of claims
up to the self-insured limits determined by the policy.
Federal and state laws govern the handling and disposal of
medical, infectious and hazardous waste. Failure to comply with
these laws and other related regulations could subject the
applicable facility or employees to fines, criminal penalties
and other enforcement actions. Federal regulations established
by the Occupational Safety and Health Administration impose
additional requirements on us to protect employees from exposure
to blood borne pathogens. We have developed policies for the
handling and disposal of medical, infectious and hazardous waste
to assure that each of our facilities and employees complies
with these laws and regulations. As a result, we incur ongoing
operational costs to comply with environmental laws and
regulations.
As a result of fires in long-term care facilities in recent
years, states are reconsidering laws that would require various
types of facilities to have sprinkler systems. In February 2004,
the American Healthcare Association reaffirmed its position that
facilities nationwide should be required to install sprinkler
systems, provided that federal funding or low-cost financing is
made available for the installation of such systems. Currently,
all of our assisted living facilities contain fire sprinkler
systems.
Property
Management
We believe that our assisted living facilities should provide a
comfortable and warm appearance for our residents and their
families. Our goal is to ensure the proper maintenance of both
the interior and exterior of our facilities, as well as the
grounds they occupy. To achieve this goal, we have established
facility standards for appearance of the facilities, maintenance
programs for our maintenance personnel, a periodic renovation
plan for all facilities, and central control of all improvements
and major capital expenditures.
Our corporate property management department has the
responsibility for capital planning, the establishment of
building and renovation standards, oversight of state and other
building, fire, and life safety code compliance. The project
management department has project management responsibilities
for all renovations, major projects and equipment replacement
that involve contract and specification compliance, inspection
and acceptance of new construction projects.
The corporate property management department has a capital
replacement and systems upgrade program that addresses current
capital requirements for systems and refurbishment initiatives
based on useful life and other system replacement requirements.
An organization-wide interior standards program for carpeting
and hard-floor surfaces was developed to assure both an
aesthetically pleasing environment and to meet or exceed all
fire code, smoke density, and any other applicable flammability
standards. We maintain a contractor and supplier database that,
along with our construction contracts and procedures,
facilitates the management of the construction process, and
which includes construction draws and payments, mechanics lien
management and waivers, and warranty compliance.
The corporate property management department also has
responsibility for developing and maintaining the preventative
maintenance program and routine maintenance initiatives. Through
regionally located property management teams, periodic audits
are conducted on the assisted living facilities to ensure that
all required system testing is completed reliably and timely,
and that our assisted living facilities are properly maintained.
74
Competition
The senior living industry is highly competitive. We expect that
the assisted living business, in particular, will become even
more competitive in the future as a result of relatively low
barriers to entry combined with increased healthcare cost
containment pressures.
We compete with both other companies that provide assisted
living services to seniors as well as other companies that
provide similar long-term care alternatives. We operate in
17 states, and each community that we operate in within
those states presents unique challenges and rewards. In most of
our communities, we face one or two competitors that offer
assisted living facilities that are similar in size, price and
range of services offered by us. In addition, we face
competition from other providers in the senior living industry,
increasingly from independent living facilities and companies
that provide adult day care in the home, but also from
congregate care facilities where residents elect the services to
be provided, and continuing care retirement centers on
campus-like settings. Each of these types of competitors is
described above in “— The Senior Living
Industry.”
The senior living industry, and specifically the independent
living and assisted living segments thereof, are large and
fragmented, characterized predominantly by numerous local and
regional operators, although there are several national
operators similar in size or larger than us. According to
figures available from the American Seniors Housing Association
and the National Investment Center for the Seniors Housing and
Care Industry, the top five operators of senior living
facilities measure by total resident capacity control only 9% of
total capacity. Among national competitors, we face competition
from companies such as Brookdale Senior Living Inc., American
Retirement Corporation, Manor Care, Inc., Five Star Quality
Care, Inc., Capital Senior Living Corp. and Sunrise Assisted
Living, Inc. The independent and assisted living facility
industry can be segregated into different market segments based
on the resources of the target population. Some operators, such
as Sunrise Assisted Living, Inc., cater to a more affluent
market segment and typically offer larger facilities with more
amenities at higher prices. As a result, these facilities tend
to be located in more affluent areas outside of our targeted
communities. Other local, regional and national companies
compete with us directly in the middle-market, suburban bedroom
communities that we target.
We expect to face increased competition from new market entrants
as the demand for assisted living grows and the number of states
that include assisted living in their Medicaid programs
increases. Nursing facilities that provide long-term care
services are also a potential source of competition for us.
Providers of assisted living facilities compete for residents
primarily on the basis of quality of care, price, reputation,
physical appearance of the facilities, services offered, family
preferences, physician referrals and location. Some of our
competitors operate on a
not-for-profit
basis or as charitable organizations. We believe that many
markets, including some of the markets in which we operate, have
been overbuilt, in part because regulation and other barriers to
entry into the assisted living industry are not substantial. In
addition, because the segment of the population that can afford
to pay our daily resident fee is finite, the supply of assisted
living facilities may outpace demand in some markets. The impact
of such overbuilding include: (i) increased time to reach
capacity at assisted living facilities, (ii) loss of
existing residents to new facilities, (iii) pressure to
lower or refrain from increasing rates, (iv) competition
for workers in tight labor markets and (v) lower margins
until excess units are absorbed. In general, the markets in
which we currently operate are capable of supporting only one or
two assisted living facilities.
We believe that each local market is different, and our response
to the specific competitive environment in any market will vary.
However, if a competitor were to attempt to enter one of our
communities, we may be required to reduce our rates, provide
additional services, or expand our facilities to meet perceived
additional demand, any of which could adversely affect our
operating income. We may not be able to compete effectively in
markets that become overbuilt.
Sources
of Revenue
Assisted living residents or their families generally pay the
cost of care from their own financial resources, including
social security payments and other pension income. In addition,
depending on the nature of an individual’s health insurance
program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an “assisted
living,” “custodial” or “alternative care
benefit.” Government subsidies for assisted living have
been limited. Some state and local governments offer subsidies
for rent or services for low-income elders. Others may provide
subsidies in the form of additional payments for those who
receive Supplemental Security Income (SSI). Medicaid
75
provides coverage for certain financially needy persons,
regardless of age, and is funded jointly by federal, state and
local governments. Medicaid contracts for assisted living vary
from state to state.
Private pay and Medicaid accounted for approximately 78.7% and
21.3% of our revenues, respectively, in the three months ended
March 31, 2006.
Private
Pay
Assisted living facility revenue is primarily derived from
private pay residents at rates we establish based upon the
services we provide and market conditions in the area of
operation. Residents are charged for their type of accommodation
and services based upon their assessed level of care. The
assessed level of care service fee is determined based upon a
periodic assessment, which includes input of the resident, their
physician and family, and establishes the additional hours of
care and service provided to the resident. We offer various
levels of care for assisted living residents who require less or
more frequent and intensive care or supervision. Approximately
70% of our private-pay assisted living residents participate in
our level of care programs. Both the accommodation and level of
care service fee are charged on a daily basis. In addition, we
charge a non-refundable new resident fee that covers the costs
of moving a person into one of our communities.
Medicaid
In 1981, the federal government approved a Medicaid waiver
program called Home and Community Based Care, which was designed
to permit states to develop programs specific to the healthcare
and housing needs of the low-income elderly eligible for nursing
home placement (a “Medicaid Waiver Program”). In 1986,
Oregon became the first state to use federal funding for
licensed assisted living services through a Medicaid Waiver
Program authorized by CMS. Under a Medicaid Waiver Program,
states apply to CMS for a waiver to use Medicaid funds to
support community-based options for the low-income elderly who
need long-term care. These waivers permit states to reallocate a
portion of Medicaid funding for nursing facility care to other
forms of care such as assisted living. In 1994, the federal
government implemented new regulations that empowered states to
further expand their Medicaid Waiver Programs and eliminated
restrictions on the amount of Medicaid funding states could
allocate to community-based care, such as assisted living.
Certain states, including Oregon, New Jersey, Texas, Arizona,
Nebraska, Minnesota, Indiana, Iowa, Idaho and Washington,
currently have operating Medicaid Waiver Programs that allow
them to pay for assisted living care. We participate in Medicaid
programs in all of these states. Without a Medicaid Waiver
Program, states can only use federal Medicaid funds for
long-term care in nursing facilities.
We have elected in 9 of our 17 states to provide assisted
living services and to retain Medicaid funded residents in our
assisted living facilities. The majority of states provide or
have been approved to provide Medicaid reimbursement for board
and care services provided in assisted living facilities.
However, in states that we are registered to provide care to
Medicaid residents, the Medicaid program determines the total
amount of the accommodation and level of care rate. The basis of
the Medicaid rate varies by state. However, unlike nursing
facilities, Medicaid rates are not determined on a cost-based or
price-based system, and cost reports are not completed each year
to the state, with the exception of Texas. The table below
illustrates the average variance between rates paid by our
Medicaid residents and those paid by our private pay residents:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
2005 Average Rates per Day
|
|
|
Medicaid
|
|
|
State
|
|
Private
|
|
|
Medicaid
|
|
|
Difference
|
|
|
ADC(1)
|
|
|
|
|
Arizona
|
|
$
|
100.32
|
|
|
$
|
56.28
|
|
|
$
|
44.04
|
|
|
|
209
|
|
|
Idaho
|
|
$
|
94.55
|
|
|
$
|
48.99
|
|
|
$
|
45.56
|
|
|
|
184
|
|
|
Iowa
|
|
$
|
84.03
|
|
|
$
|
59.56
|
|
|
$
|
24.47
|
|
|
|
20
|
|
|
Indiana
|
|
$
|
76.77
|
|
|
$
|
56.66
|
|
|
$
|
20.11
|
|
|
|
34
|
|
|
Nebraska
|
|
$
|
94.56
|
|
|
$
|
65.99
|
|
|
$
|
28.57
|
|
|
|
73
|
|
|
New Jersey
|
|
$
|
116.05
|
|
|
$
|
78.50
|
|
|
$
|
37.55
|
|
|
|
135
|
|
|
Oregon
|
|
$
|
99.35
|
|
|
$
|
67.37
|
|
|
$
|
31.98
|
|
|
|
295
|
|
|
Texas
|
|
$
|
87.66
|
|
|
$
|
62.21
|
|
|
$
|
25.45
|
|
|
|
514
|
|
|
Washington
|
|
$
|
90.48
|
|
|
$
|
62.03
|
|
|
$
|
28.45
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
$
|
89.25
|
|
|
$
|
62.21
|
|
|
$
|
27.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average Daily Census, or ADC, is the average number of occupied
units over a period of time. |
76
Medicaid rates are normally increased on an annual basis. Should
a resident meet the financial asset and income qualifications, a
portion of the resident’s accommodation and care,
determined by the state, is funded by the Medicaid program. The
balance of the rate is paid by the resident and or family from
remaining assets or income of the resident. In states where we
are not registered to provide assisted living services to
Medicaid funded residents, or where there is no Medicaid funded
program and the resident exhausts their assets, we work with the
resident and family to find an alternative place of
accommodation.
Our goal is to reduce our dependency on state funding programs
by gradually reducing the number of our units that are available
for residents that rely on Medicaid. However, until we have
significantly increased our private pay census, we expect that
state Medicaid reimbursement programs will continue to
constitute a significant source of our revenue. If adopted at
either the federal or the state level, legislative proposals to
reduce the federal and state budget deficits by limiting
Medicaid reimbursement in general could have an adverse affect
on our revenue, financial condition, and results of operations.
Government
Regulation
Our assisted living facilities are generally subject to
regulation by federal, state and local health and social service
agencies, and other regulatory bodies. Although our regulation
by federal authorities is generally less burdensome than that of
nursing facilities, we are heavily regulated by state-specific
regulations. Requirements vary by state, however most
requirements include:
|
|
|
| |
•
|
licensure and certification and related community services;
|
| |
| |
•
|
qualifications of healthcare and support personnel;
|
| |
| |
•
|
minimum staffing levels and the provision of quality of
healthcare services, including monitoring of resident wellness
and medication administration;
|
| |
| |
•
|
minimum requirements and inspections related to dining and
housekeeping services;
|
| |
| |
•
|
admission and discharge criteria, and relationships with
physicians and referral sources;
|
| |
| |
•
|
documentation and reporting requirements, and confidentiality
and security issues associated with medical records;
|
| |
| |
•
|
operating policies and procedures, resident rights and
responsibilities;
|
| |
| |
•
|
licensure and certification related to additions or changes to
facilities and services;
|
| |
| |
•
|
maintenance of physical plant and equipment, safety and
evacuation plans; and
|
| |
| |
•
|
requirements related to maintenance of general common areas and
resident units.
|
Our facilities are licensed by state or local health and social
service agencies and are subject to state or local building
codes, life safety and fire codes, food service licensing and
certification requirements. State laws also regulate the
storage, exchange and administration of medications. In
addition, where we provide assisted living services to residents
funded by Medicaid, we are licensed and regulated under the
Medicaid programs within those states. In addition, there are
ongoing initiatives at the federal and state levels for
increased standards of facilities and services for assisted
living services and regulations and policies of regulatory
agencies are subject to change.
Assisted living facilities are subject to periodic unannounced
surveys by state and other local government agencies to assess
and assure compliance with the respective regulatory
requirements. A survey can also occur following a state’s
receipt of a complaint regarding the facility. When one of our
assisted living facilities is cited for alleged deficiencies by
the respective state or other agencies, we are required to
implement a plan of correction within a prescribed timeframe.
Upon notification or receipt of a deficiency report, our
regional and corporate teams assist the facility develop,
implement and submit an appropriate corrective action plan. Most
state citations and deficiencies are resolved through the
submission of a plan of correction that is reviewed and approved
by the state agency. In some instances, the survey team will
conduct a re-visit to validate substantial compliance with the
state rules and regulations.
If we do not comply with applicable laws and regulations, then
we could be subject to liabilities, including criminal penalties
and civil penalties and exclusion of one or more of our
facilities from participation in Medicaid
77
and state healthcare programs. If one of our facilities were to
lose its certification under the Medicaid program, then it would
have to cease future admissions and displace residents funded by
the programs from the facility. In order to become re-certified,
a facility must rectify all identified deficiencies and, over a
specified period of time, pass a survey conducted by
representatives of the respective program through demonstrated
care and operations for residents in the facility. Until the
appropriate agency has verified through the “reasonable
assurance” process that the facility can achieve and
maintain substantial compliance with all applicable
participation requirements, the facility will not be admitted
back into Medicaid programs. Re-certification requires
considerable staff resources. Like other assisted living
facilities, we have received notices of deficiencies from time
to time in the ordinary course of business. However, none of the
facilities in our portfolio have been de-certified since they
were acquired by Extendicare or, to our knowledge, prior to such
time.
Health
Privacy Regulations and Health Insurance Portability and
Accountability Act
Our assisted living facilities are subject to state laws to
protect the confidentiality of our resident health information.
We have implemented procedures to meet the requirements of the
state laws and have trained our facility personnel on those
requirements.
We are not a covered entity in respect of the Health Insurance
Portability and Accountability Act of 1996, or HIPAA. However,
we are subject to all of the requirements of HIPAA in the
facilities where we electronically invoice the state Medicaid
programs, and must comply with all of the standards outlined by
HIPAA. Currently, we electronically invoice state Medicaid
programs in 70 facilities in five states. In these states, we
use state provided software programs that reduce the complexity
and risk in compliance with the HIPAA regulations. HIPAA
requires us to comply with standards for the exchange of health
information at those facilities and to protect the
confidentiality and security of health data. The Department of
Health and Human Services has issued four rules that mandate the
standards with respect to certain healthcare transactions and
health information. The four rules pertain to:
|
|
|
| |
•
|
privacy standards to protect the privacy of certain individually
identifiable health information;
|
| |
| |
•
|
standards for electronic data transactions and code sets to
allow entities to exchange medical, billing and other
information and to process transactions in a more effective
manner;
|
| |
| |
•
|
security of electronic health information privacy; and
|
| |
| |
•
|
use of a unique national provider identifier effective May 2007.
|
We believe we are in compliance with the three rules that are
currently in effect at our facilities that electronically
invoice the state Medicaid program. We have a Privacy and
Security Officer to monitor compliance with health privacy rules
including the HIPAA standards. Should it be determined that we
have not complied with the new standards, we could be subject to
criminal penalties and civil sanctions.
Corporate
Organization
Our corporate headquarters is located in Milwaukee, Wisconsin,
where we have centralized various functions in support of our
assisted living operations, including our human resources,
legal, purchasing, internal audit, and accounting and
information technology support functions. At our corporate
offices, senior management provide overall strategic direction,
seek development and acquisition opportunities, and manage the
overall assisted living business. Human resources implement
corporate personnel policies and administer wage and benefit
programs. We have dedicated clinical, marketing, risk management
and environmental support groups for our assisted living
operations. Senior departmental staff are responsible for the
development and implementation of corporate-wide policies
pertaining to resident care, employee hiring, training and
retention, marketing initiatives and strategies, risk
management, facility maintenance and project coordination.
We have three area offices located in Dallas, Portland and
Milwaukee that oversee our South/Central, Western, and
Mid-West/Eastern operations, respectively. A small area office
staff is responsible for overseeing all operational aspects of
our facilities, through a team of professionals located
throughout the area. The area team is responsible for the
compliance to company standards involving resident care,
rehabilitative services, recruitment and personnel
78
matters, state regulatory requirements, marketing and sales
activities, internal control and accounting support, and
participation in state associations.
Our operations are organized into a number of different direct
and indirect wholly-owned subsidiaries primarily for legal
purposes. We manage our operations as a single unit. Operating
policies and procedures are substantially the same at each
subsidiary. Several of our subsidiaries own and operate a
significant number of our total portfolio of facilities. No
single facility generates more than 1.0% of our total revenues.
Properties
and Facilities
Immediately following our separation from Extendicare, our
assisted living operations will consist of 206 assisted living
facilities with 8,251 units, as outlined in the following
table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
|
|
Owned(1)
|
|
|
Leased from Others(2)
|
|
|
Under Operation(3)
|
|
|
|
|
|
|
|
Resident
|
|
|
|
|
|
Resident
|
|
|
|
|
|
Resident
|
|
|
|
|
Number
|
|
|
Capacity
|
|
|
Number
|
|
|
Capacity
|
|
|
Number
|
|
|
Capacity
|
|
|
|
|
Texas
|
|
|
27
|
|
|
|
1,085
|
|
|
|
14
|
|
|
|
563
|
|
|
|
41
|
|
|
|
1,648
|
|
|
Washington
|
|
|
13
|
|
|
|
588
|
|
|
|
8
|
|
|
|
308
|
|
|
|
21
|
|
|
|
896
|
|
|
Indiana
|
|
|
21
|
|
|
|
852
|
|
|
|
2
|
|
|
|
78
|
|
|
|
23
|
|
|
|
930
|
|
|
Ohio
|
|
|
15
|
|
|
|
541
|
|
|
|
5
|
|
|
|
191
|
|
|
|
20
|
|
|
|
732
|
|
|
Oregon
|
|
|
11
|
|
|
|
382
|
|
|
|
8
|
|
|
|
276
|
|
|
|
19
|
|
|
|
658
|
|
|
Wisconsin
|
|
|
12
|
|
|
|
614
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
|
|
614
|
|
|
Pennsylvania
|
|
|
10
|
|
|
|
376
|
|
|
|
1
|
|
|
|
39
|
|
|
|
11
|
|
|
|
415
|
|
|
Arizona
|
|
|
7
|
|
|
|
324
|
|
|
|
2
|
|
|
|
76
|
|
|
|
9
|
|
|
|
400
|
|
|
South Carolina
|
|
|
6
|
|
|
|
234
|
|
|
|
3
|
|
|
|
117
|
|
|
|
9
|
|
|
|
351
|
|
|
Idaho
|
|
|
5
|
|
|
|
196
|
|
|
|
4
|
|
|
|
148
|
|
|
|
9
|
|
|
|
344
|
|
|
Nebraska
|
|
|
5
|
|
|
|
168
|
|
|
|
4
|
|
|
|
156
|
|
|
|
9
|
|
|
|
324
|
|
|
New Jersey
|
|
|
5
|
|
|
|
195
|
|
|
|
3
|
|
|
|
117
|
|
|
|
8
|
|
|
|
312
|
|
|
Iowa
|
|
|
5
|
|
|
|
189
|
|
|
|
1
|
|
|
|
35
|
|
|
|
6
|
|
|
|
224
|
|
|
Louisiana
|
|
|
4
|
|
|
|
173
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
173
|
|
|
Michigan
|
|
|
3
|
|
|
|
117
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
117
|
|
|
Minnesota
|
|
|
1
|
|
|
|
58
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
58
|
|
|
Kentucky
|
|
|
1
|
|
|
|
55
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
151
|
|
|
|
6,147
|
|
|
|
55
|
|
|
|
2,104
|
|
|
|
206
|
|
|
|
8,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Owned facilities includes 15 facilities that EHSI has agreed to
sell to ALC and ALC agreed to purchase, subject only to the
receipt of approval from local planning commission to the
subdivision of the underlying property. We have leased these
facilities from EHSI in the interim. |
| |
|
(2) |
|
The remaining life of the leases, not including renewal options,
range from one to nine years, with the average being seven
years. We have two master leases with LTC Properties, Inc., or
LTC, in respect of 37 of our properties. Under the terms of the
master lease agreements, which became effective January 1,
2005, we agreed to increase the aggregate annual rent paid to
LTC by $250,000 per annum for each of the successive four
years, commencing on January 1, 2005, and amended the terms
relating to inflationary increases. There are three successive
10-year
lease renewal terms, to be exercised at our option and no
significant economic penalties to us if we decide not to
exercise the renewal options. The aggregate minimum rent
payments for the LTC leases for the calendar years 2005 through
2008 are $9.4 million, $9.8 million,
$10.2 million and $10.7 million, respectively. The
minimum rent will increase by 2% over the prior year’s
minimum rent for each of the calendar years 2009 through 2014.
Annual minimum rent during any renewal term will increase a
minimum of 2% over the minimum rent of the immediately preceding
year. In addition, we have options to purchase five assisted |
79
|
|
|
|
|
|
living properties that we lease from Assisted Living Facilities,
Inc., or ALF. We account for these leases as capital leases. The
remaining 13 leases are with independent third-party landlords. |
Employees
As of December 31, 2005, we employed approximately 4,300
people, including approximately 300 registered and licensed
practical nurses, 2,500 nursing assistants and 1,500 dietary,
housekeeping, maintenance and other staff.
We have not been subject to union organization efforts at any of
our facilities. To our knowledge, we have not been, and are not
currently subject to any other organizational efforts.
The national shortage of nurses and other personnel have
required us to adjust our wage and benefits packages to compete
in the healthcare marketplace. We compete for residence
directors and nurses with other healthcare providers and with
various industries for healthcare assistants and other
lower-wage employees. To the extent practicable, we avoid using
temporary staff, as the costs of temporary staff are prohibitive
and the quality of care provided is generally lower. We have
been subject to additional costs associated with the increasing
levels of reference and criminal background checks that we have
performed on our hired staff to ensure that they are suitable
for the functions they will perform within our facilities. Our
inability to control labor availability and costs could have a
material adverse effect on our future operating results.
Legal
Proceedings and Insurance
The provision of services in assisted living facilities involves
an inherent risk of personal injury liability. Assisted living
facilities are subject to general and professional liability
lawsuits alleging negligence of care and services and related
legal theories, many of which may involve substantial claims and
can result in significant legal defense costs.
We insure against general and professional liability risks in
loss-sensitive insurance policies with affiliated and
unaffiliated insurance companies with levels of coverage and
self-insured retention levels that we believe are adequate based
on the nature and risk of the business, historical experience
and industry standards. We are responsible for the costs of
claims up to a self-insured limits determined by individual
policies and subject to aggregate limits.
80
MANAGEMENT
Executive
Officers, Directors, and Significant Employees
Set forth below are the names and ages and current positions of
our executive officers, current and proposed directors and
significant employees, after giving effect to our separation
from Extendicare. Ages are as of the date of this Information
Statement. We also expect to appoint a chief financial officer
prior to our separation from Extendicare.
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Name
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Age
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Position
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Laurie A. Bebo
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35
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President and Chief Executive
Officer
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Alan Bell
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58
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Director Nominee
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Derek H.L. Buntain
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65
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Director Nominee
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Sir Graham Day
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73
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Director Nominee
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David M. Dunlap
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67
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Director Nominee
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David J. Hennigar
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67
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Director Nominee, Chairman Nominee
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Walter A. Levonowich
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50
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Vice President and Controller
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Malen S. Ng
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54
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Director Nominee
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Mel Rhinelander
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56
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Director, Vice-Chairman Nominee
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Charles H. Roadman II, MD
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62
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Director Nominee
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Rae Schweer
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38
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Vice President, Sales and Marketing
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Terry Usher
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Divisional Vice President
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Laurie A. Bebo, age 35, is currently one of our
directors and our President and Chief Operating Officer.
Immediately following our separation from Extendicare,
Ms. Bebo will no longer be a director and will become our
President and Chief Executive Officer. Ms. Bebo’s
career with EHSI began in 1999 when she joined the company as
Vice President of Sales and Marketing. In addition,
Ms. Bebo has overseen two areas of operation for
EHSI’s skilled nursing facilities, the Ohio/West Virginia
and Wisconsin/Minnesota regions. In February 2002, Ms. Bebo
was given responsibility for EHSI’s assisted living
operations. With the acquisition of Historic ALC in January
2005, Ms. Bebo became responsible for all of ALC’s
assisted and independent living properties in her capacity as
the Chief Operating Officer. In November 2005, Ms. Bebo was
appointed ALC’s President and Chief Operating Officer.
Ms. Bebo has worked in operations and sales in the
long-term care and senior living profession for more than ten
years. Ms. Bebo finished her undergraduate degree at
Marquette University, attended Webster University for her
Masters in Business Administration and completed the Harvard
University Advanced Management Program in November 2004.
Alan Bell, age 58, is a corporate partner of Bennett
Jones LLP specializing in mergers and acquisitions, private and
public financing and corporate governance. Bennett Jones LLP
advised Extendicare in connection with the Plan of Arrangement
and its separation from us. Mr. Bell resides in Toronto, Ontario.
Derek H.L. Buntain, age 65, is President of The
Dundee Bank, a private bank offering banking services to
international clients, and President and Chief Executive Officer
of Goodman & Company (Bermuda) Limited (investment
counsel). Mr. Buntain is currently a director of
Extendicare and following the separation will be appointed to
our Board of Directors. He also serves as a director of the
following public companies: Dundee Precious Metals Inc., Eurogas
Corporation, Sentex Systems Ltd., and CencoTech Inc.
Mr. Buntain resides in Grand Cayman, Cayman Islands.
Sir Graham Day, age 73, is Counsel to the Atlantic
Canada law firm of Stewart McKelvey Stirling Scales. He is
currently a director of Extendicare and following the separation
will be appointed to our Board of Directors. Sir Graham
also serves as a Lead Director of DHX Media Ltd. (a public film
production company) and as a director of Empire Company Limited
(a public holding company with investments in retail food
distribution, real estate, theatres and corporate investment
activities). He also serves as a director of a number of private
companies, including Minas Basin Holdings Limited, Scotia
Investments Limited and Jacques Whitford Group Ltd. (a private
consulting and environmental solutions firm). Sir Graham is a
Fellow of the Institute of Corporate Directors and
81
holds the Herbert S. Lamb Chair in Business Education at the
Dalhousie University Graduate Business School. Sir Graham
resides in Hantsport, Nova Scotia.
David M. Dunlap, age 67, is Chairman of G.F.
Thompson Co. Ltd., a private company in the business of
manufacturing and distributing plumbing products.
Mr. Dunlap is currently a director of Extendicare and
following the separation will be appointed to our Board of
Directors. He also is a director of St. Andrew’s College.
Mr. Dunlap resides in the Township of King, Ontario.
David J. Hennigar, age 67, is currently Chairman of
Extendicare and has held this position since 1985. Following the
separation, he will cease to be a director and Chairman of
Extendicare Inc., and will be appointed to our Board of
Directors as Chairman. Mr. Hennigar also is Chairman of
Annapolis Group Inc. (a private holding company in real estate
development), High Liner Foods Incorporated (a public
value-added food processing company), and Aquarius Coatings Inc.
(a public company in paint manufacturing and developing), as
well as Chairman and CEO of Landmark Global Financial
Corporation (a public investment and management company), and
Chairman and founder of Acadian Securities Inc. (a private
investment dealer). In addition, Mr. Hennigar serves as a
director of the following public companies: Crombie Real Estate
Investment Trust, MedX Health Corp., Sentex Systems Ltd.,
SolutionInc Technologies Limited and VR Interactive Corporation.
He also serves as a director of a number of private companies,
including Crown Life Insurance Company, Minas Basin Holdings
Limited and Scotia Investments Limited. Mr. Hennigar
resides in Bedford, Nova Scotia.
Walter A. Levonowich, age 50, has been our Vice
President and Controller since January 2005. Mr. Levonowich
became part of the Extendicare group of companies through the
acquisition on Unicare Health Services in 1983. He has held a
number of positions in various financial capacities including
Vice President of Reimbursement Services and Vice President of
Accounting for EHSI. He has over 28 years of experience in
the healthcare industry.
Malen S. Ng, age 54, is Chief Financial Officer of
the Workplace Safety and Insurance Board of Ontario
(2003 — present). She is currently a director of
Extendicare and following the separation will be appointed to
our Board of Directors. From 1975 to 2002, Ms. Ng was
employed by Hydro One Inc., its subsidiaries and predecessor
Ontario Hydro, where she occupied several executive positions,
including: President and CEO of Hydro One Networks Inc.
(2000 — 2002); Executive Vice President of Wires
Operations Hydro One Inc. (2001 — 2002); and Executive
Vice President and CFO of Hydro One Inc. (1999 —
2001). Ms. Ng is a director of Sobeys Inc. (a public retail
food distribution company) and of Jacques Whitford Group Ltd.
Ms. Ng resides in Richmond Hill, Ontario.
Mel Rhinelander, age 56, is currently a director and
the President and Chief Executive Officer of Extendicare, as
well as the Chairman and Chief Executive Officer of EHSI.
Following the separation, Mr. Rhinelander will no longer be
an employee of Extendicare, but will remain on the board of
Extendicare as a trustee and will become one of our directors.
He also serves as a director of Sobeys Inc. (a public retail
food distribution company). Mr. Rhinelander has been with the
Extendicare group of companies since 1977 and has served in a
number of senior positions. He was appointed Chief Executive
Officer of Extendicare Inc. in August 2000, following his
appointment as President in August 1999. Mr. Rhinelander
resides in Milwaukee, Wisconsin.
Charles H. Roadman II, MD, age 62, is the
retired President and Chief Executive Officer of the American
Health Care Association (1999 — 2004) and the
former Surgeon General of the U.S. Air Force
(1996 — 1999). He is currently a director of
Extendicare and following the separation will be appointed to
our Board of Directors. Dr. Roadman serves as a director
and advisor on a number of private corporate boards and
associations. He resides in San Antonio, Texas.
Rae Schweer, age 38, is our Vice President, Sales
and Marketing. Ms. Schweer joined ALC in March 2005 from Alterra
Healthcare where she worked collectively for nine years in
various sales and marketing management, training and systems
capacities on a national level, and during the last three years
as the Divisional Sales Manager for the Central United States.
Ms. Schweer started in the industry in Chicago with Hyatt
Hotel Senior Retirement Communities and has worked in the Senior
Housing division of the Prime Group, Inc., a worldwide real
estate/development company, and as Corporate Sales Director for
Brookdale Senior Living Communities in Chicago. She has
14 years of experience in assisted living/senior housing
sales and marketing. Ms. Schweer has been involved in all
phases of new construction, lease up and stabilized senior
communities, and has directed sales and marketing
82
efforts, managed budgets and increased occupancy for up to 137
assisted living residences. She holds a B.A. in Music with an
emphasis on Music and Business from Colorado University at
Boulder.
Terry Usher, age 57, has been our Divisional Vice
President of the Midwest/Atlantic region since January 2005.
Mr. Usher joined EHSI in January 1999 as Vice President of
Assisted Living Operations and Development. He is responsible
for senior living residences in Wisconsin, Minnesota, Michigan,
Ohio, Pennsylvania, New Jersey and South Carolina.
Mr. Usher has been involved in senior management positions
in the assisted living/retirement housing industry in both
Canada and the U.S. since 1987. His 17 years of
management experience in the Canadian Hospitality industry prior
to 1987 laid the foundation for a very successful transition to
the assisted living/retirement housing industry. Mr. Usher
is an Honors HRIA graduate from Ryerson University in Toronto.
Committees
of the Board of Directors after Our Separation from
Extendicare
The standing committees of our Board of Directors will be an
audit committee, a compensation/ nominating/governance committee
and an executive committee, each of which is described below.
Audit
Committee
Our audit committee members will be Malen S. Ng, who will be the
chairman, Alan Bell, Derek H.L. Buntain and Charles H.
Roadman, II. Our audit committee will comply with the
independence standards set forth in SEC regulations and NYSE
rules. We anticipate that Malen S. Ng will be designated by our
Board of Directors as the audit committee financial expert (as
defined in the applicable regulations of the Securities and
Exchange Commission). The audit committee will operate under a
written charter adopted by the Board of Directors, which
reflects standards set forth in SEC regulations and NYSE rules.
The composition and responsibilities of the audit committee and
the attributes of its members, as reflected in the charter, are
intended to be in accordance with applicable requirements for
corporate audit committees. The charter will be reviewed, and
amended if necessary, on an annual basis. The full text of the
audit committee’s charter will be available on our website
at www.alcco.com or will be available upon request from our
secretary.
As set forth in more detail in the charter, the audit
committee’s purpose is to assist the Board of Directors in
its general oversight of ALC’s financial reporting,
internal control and audit functions. Extendicare’s
internal audit department will document, test and evaluate our
internal control over financial reporting in response to the
requirements set forth in Section 404 of the Sarbanes-Oxley
Act of 2002 and related regulations. The responsibilities of the
audit committee will include:
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•
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recommending the hiring or termination of the independent
registered public accounting firm and approving any non-audit
work performed by such firm;
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•
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approving the overall scope of the audit;
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•
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assisting our Board of Directors in monitoring the integrity of
our financial statements, the independent registered public
accounting firm’s qualifications and independence, the
performance of the independent registered public accounting firm
and our internal audit function and our compliance with legal
and regulatory requirements;
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•
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annually reviewing our independent registered public accounting
firm’s report describing the independent registered public
accounting firm’s internal quality control procedures, any
material issues raised by the most recent internal quality
control review, or peer review, of the firm;
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•
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discussing the annual audited financial and quarterly statements
with our management and the independent registered public
accounting firm;
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•
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discussing earnings press releases, as well as financial
information and earnings guidance provided to analysts and
rating agencies;
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•
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discussing policies with respect to risk assessment and risk
management;
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•
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meeting separately, periodically, with management, internal
auditors and the independent registered public accounting firm;
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•
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reviewing with the independent registered public accounting firm
any audit problems or difficulties and management’s
response;
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•
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setting clear hiring policies for employees or former employees
of the independent auditors;
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•
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annually reviewing the adequacy of the audit committee’s
written charter;
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•
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reviewing with management any legal matters that may have a
material impact on us; and
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•
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reporting regularly to our full Board of Directors.
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Compensation/Nominating/Governance
Committee
The compensation/nominating/governance committee members will be
Derek H.L. Buntain, who will be the chairman, Alan Bell, Sir
Graham Day and David Dunlap. The
compensation/nominating/governance committee will operate under
a written charter adopted by the Board of Directors. The
committee will be responsible for administering our incentive
compensation plans, determining compensation arrangements for
all of our executive officers and for making recommendations to
the Board of Directors concerning compensation policies for us
and our subsidiaries. In addition, the committee will be
responsible for assembling and reviewing background information
for and recommending candidates for our Board of Directors,
including those candidates designated by our shareholders. The
committee will also make recommendations to our Board of
Directors regarding the structure and membership of the other
Board committees, annually review director compensation and
benefits and oversee annual self-evaluations of our Board of
Directors and committees.
Executive
Committee
The executive committee members will be David J. Hennigar, who
will be the chairman, Mel Rhinelander and Derek H.L. Buntain.
The executive committee will be responsible for acting on behalf
of the full Board between regularly scheduled Board meetings,
usually when timing is critical. The committee will have, and
may exercise, all of the powers and authority of the Board of
Directors, subject to such limitations as the Board or
applicable law may from time to time impose.
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
None of our executive officers serve as a member of the
compensation committee or as a member of the Board of Directors
of any other company of which any member of our compensation
committee or Board of Directors is an executive officer.
Code of
Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics applicable to
all of our directors and employees, including our chief
executive officer and chief financial officer, which is a
“code of ethics” as defined by applicable SEC rules.
This code will be publicly available on our website at
www.alcco.com or may be obtained upon request from our
Secretary. If we make any amendments to this code, other than
technical, administrative or other non-substantive amendments,
or grant any waivers, including implicit waivers, from any
provisions of this code that apply to our chief executive
officer and chief financial officer and relate to an element of
the SEC’s “code of ethics” definition, we will
disclose the nature of the amendment or waiver, its effective
date and to whom it applies on our website or in a report on
Form 8-K
filed with the SEC.
Director
Compensation
Directors who are our employees are not compensated for their
services as directors or members of committees of our Board of
Directors. Directors will be required to attain and hold common
shares of ALC equivalent to one year’s annual retainer
within five years of Board appointment.
Non-management directors will be entitled to receive the
following compensation for the next two years:
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•
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Annual retainer: $15,000;
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•
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Board chairman’s retainer: $50,000;
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•
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Board vice chairman’s retainer: $25,000;
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•
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Committee chair retainer: $10,000, or $15,000 for the chair of
the audit committee;
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•
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Board and committee meeting fee: $1,500;
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•
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Telephone conference meeting fee: $500; and
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•
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Related travel and
out-of-pocket
expenses (economy class airfare only).
|
Executive
Compensation
The following table sets forth compensation information for our
chief executive officer and our other three most highly
compensated executive officers, based on their employment with
Extendicare, as determined by reference to total annual salary
and bonus during 2005. We expect that our chief financial
officer, whom we have yet to designate, will be one of our four
most highly compensated officers other than our chief executive
officer. These officers are currently employed by Extendicare,
but will become our executive officers following our separation
from Extendicare, and therefore all of the information included
in this table reflects compensation earned by the individuals
for services with Extendicare. We refer to these individuals as
our “named executive officers” elsewhere in this
Information Statement.
Summary
Compensation Table
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Long-term
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Compensation
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Annual Compensation
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Securities
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Other Annual
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Underlying
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All Other
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Salary
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Bonus
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Compensation (1)
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Options/SARs
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Compensation (2)
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Name and Principal Position
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Year
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($)
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($)
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($)
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(#)
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($)
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L.A. Bebo
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2005
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275,000
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123,750
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—
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30,000
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31,979
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President and Chief
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Executive Officer(3)
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T. Usher
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2005
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185,000
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48,563
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—
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—
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—
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Division Vice President
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W. Levonowich
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2005
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144,200
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43,260
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—
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—
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—
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Vice President and Controller
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R.L. Schweer
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2005
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150,000
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33,750
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—
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—
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—
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Vice President
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Sales and Marketing
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(1) |
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The aggregate amount of perquisites and other benefits for each
named executive officer is less than the lesser of $50,000 or
10% of total annual salary and bonus. |
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(2) |
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In the case of Laurie A. Bebo, all other compensation includes
payments for life insurance and long-term disability premiums
and contributions to a deferred compensation plan and a defined
contribution retirement plan. The amount of salary or bonus
deferred by the named executive officer is included within the
figures set forth in the ‘‘Salary” or
‘Bonus‘ columns in the above table. EHSI’s
contribution is included within the ‘‘All Other
Compensation” column. The amounts contributed by the
officer to the deferred compensation plan are as follows: |
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Named Executive Officer
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2005
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L.A. Bebo
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$
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26,833
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Officer contribution
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—
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Officer interest
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2,383
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(3) |
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Ms. Bebo was President and Chief Operating Officer of
Assisted Living Concepts, Inc. during 2005, and will be
appointed our President and Chief Executive Officer upon our
separation from Extendicare. |
85
Share
Options
The following table sets forth certain information regarding
options to acquire shares of Extendicare granted to our named
executive officers in 2005. The options are subject to the terms
of Extendicare’s Amended and Restated Share Option and
Tandem SAR Plan. At the time of the Exchange, we will have in
place our own stock incentive plan. We expect to make stock
option or other stock-based awards under our new stock incentive
plan at or shortly after the time of the separation. However,
the number of shares covered by the initial awards and details
relating to individual awards have not yet been determined. The
effect of the separation on the Extendicare share options held
by our employees who separate from Extendicare is described
below under the heading “— Employee Benefit
Plans.”
Share
Option Grant Table
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Percent of
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Number of
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Total Options/
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Potential Realizable Value
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Securities
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SARs
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at Assumed Annual Rates
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Underlying
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Granted to
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Exercise
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of Stock Price
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Options/
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Employees in
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or Base
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Appreciation for Option
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SARs
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Fiscal
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Price (C$)
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Term (C$)
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Name
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Granted
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Year
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per Share
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5%
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10%
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Expiration Date
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L.A. Bebo
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30,000
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5.35
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18.00
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339,603
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860,621
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February 22, 2015
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These amounts do not represent the present value of the options.
All amounts are stated in Canadian dollars (C$), as Extendicare
is a Canadian entity and the awards underlying the option grants
are stated in Canadian dollars. The amounts shown represent what
would be received upon exercise 10 years after the date of
grant, assuming vesting and the stated rates of stock price
appreciation during the entire period.
Exercise
of Share Options
The following table discloses information regarding the exercise
of options to acquire shares of Extendicare by our named
executive officers in 2005 and the value of unexercised share
options held by the named executive officers.
Aggregated
Option Exercises and Fiscal Year-End Option Value
Table
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Number of Securities
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Underlying Unexercised
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Value of Unexercised
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Options/SARs at Fiscal
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In-the-Money
Options/SARs
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Shares Acquired
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Value
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Year-End
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at Fiscal Year-End
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on Exercise
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Realized
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(#)
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(C$)
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Name
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(#)
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(C$)
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Exercisable
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Unexercisable
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Exercisable
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Unexercisable
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L.A. Bebo
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21,250
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298,775
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10,000
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58,750
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|
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79,438
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226,475
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All amounts are stated in Canadian dollars (C$), as Extendicare
is a Canadian entity and the awards underlying the option grants
are stated in Canadian dollars, as Extendicare is a Canadian
entity and the awards underlying the agreements are stated in
Canadian dollars.
Employee
Benefit Plans
2006
Omnibus Incentive Compensation Plan
We intend to establish the 2006 Omnibus Incentive Compensation
Plan (the “Plan”) in connection with our separation
from Extendicare for the benefit of our and our affiliates’
directors, officers, employees or consultants (including any
prospective director, officer, employee or consultant). The
following description of the Plan is qualified by reference to
the full text thereof, a form of which is filed as an exhibit to
the registration statement of which this Information Statement
is a part.
86
Awards
The Plan provides for the grant of options intended to qualify
as incentive stock options (“ISOs”) under
Sections 421 and 422 of the Internal Revenue Code of 1986,
as amended (the “Code”), non-statutory stock options
(“NSOs”), stock appreciation rights
(“SARs”), restricted stock awards, restricted stock
units (“RSUs”), performance units, cash incentive
awards and other equity-based or equity-related awards.
Plan
Administration
The Plan will be administered by the
Compensation/Nominating/Governance committee of our Board of
Directors or such other committee as our Board may designate to
administer the plan (referred to below as the
“committee”). Subject to the terms of the plan and
applicable law, the committee has sole and plenary authority to
administer the Plan, including, but not limited to, the
authority to (i) designate Plan participants,
(ii) determine the type or types of awards to be granted to
a participant, (iii) determine the number of shares of our
common stock to be covered by, or with respect to which
payments, rights or other matters are to be calculated in
connection with, awards, (iv) determine the terms and
conditions of any awards, including vesting schedules (and
whether to accelerate such schedules), performance criteria and
whether awards may be deferred or settled or exercised in cash,
shares of our Class A common stock, other securities or
other property, or canceled, forfeited or suspended,
(v) amend an outstanding award or grant a replacement award
for an award previously granted under the Plan if, in its sole
discretion, the committee determines that (A) the tax
consequences of such award to us or the participant differ from
those consequences that were initially anticipated or
(B) clarifications or interpretations of, or changes to,
tax law or regulations permit awards to be granted that have
more favorable tax consequences than initially anticipated,
(vi) interpret, administer, reconcile any inconsistency in,
correct any default in and supply any omission in, the Plan and
any instrument or agreement relating to, or award made under,
the Plan, (vii) establish, amend, suspend or waive such
rules and regulations and appoint such agents as it shall deem
appropriate for the proper administration of the Plan,
(viii) accelerate the vesting or exercisability of, payment
for or lapse of restrictions on, awards and (ix) make any
other determination and take any other action that the committee
deems necessary or desirable for the administration of the Plan.
Committee
Decisions
Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations and other
decisions under or with respect to the Plan or any award shall
be within the sole and plenary discretion of the committee, may
be made at any time and shall be final, conclusive and binding
upon all persons, including us, any of our affiliates, any
participant, any holder or beneficiary of any award and any
stockholder.
Indemnification
No member of our Board of Directors, the committee or any of our
employees (each such person, a “Covered Person”) will
be liable for any action taken or omitted to be taken or any
determination made in good faith with respect to the Plan or any
award thereunder. Each Covered Person will be indemnified and
held harmless by us against and from (i) any loss, cost,
liability or expense (including attorneys’ fees) that may
be imposed upon or incurred by such Covered Person in connection
with or resulting from any action, suit or proceeding to which
such Covered Person may be a party or in which such Covered
Person may be involved by reason of any action taken or omitted
to be taken under the Plan or any award agreement and
(ii) any and all amounts paid by such Covered Person, with
our approval, in settlement thereof, or paid by such Covered
Person in satisfaction of any judgment in any such action, suit
or proceeding against such Covered Person; provided that
we will have the right, at our own expense, to assume and defend
any such action, suit or proceeding, and, once we give notice of
our intent to assume the defense, we will have sole control over
such defense with counsel of our choice. The foregoing right of
indemnification will not be available to a Covered Person to the
extent that a court of competent jurisdiction in a final
judgment or other final adjudication, in either case not subject
to further appeal, determines that the acts or omissions of such
Covered Person giving rise to the indemnification claim resulted
from such Covered Person’s bad faith, fraud or willful
criminal act or omission or that such right of indemnification
is otherwise prohibited by law or by our Certificate of
Incorporation or Bylaws. The foregoing right of indemnification
shall not be exclusive of any other rights of indemnification to
which Covered Persons may be entitled under our Certificate of
Incorporation or
87
Bylaws, as a matter of law, or otherwise, or any other power
that we may have to indemnify such persons or hold them harmless.
Awards to
Independent Directors
Notwithstanding anything to the contrary contained in the Plan,
our Board of Directors may, in its sole and plenary discretion,
at any time and from time to time, grant awards to independent
directors or administer the Plan with respect to such awards. In
any such case, the Board will have all the authority and
responsibility granted to the committee pursuant to the Plan.
Shares
Available For Awards
Subject to adjustment as provided below, the aggregate number of
shares of our Class A common stock that may be delivered
pursuant to awards granted under the Plan is 4,000,000. If an
award granted under the Plan is forfeited, or otherwise expires,
terminates or is canceled without the delivery of shares, then
the shares covered by such award will again be available to be
delivered pursuant to awards under the Plan. If shares issued
upon exercise,vesting or settlement of an award, or shares owned
by a participant (which are not subject to any pledge or other
security interest and which have been owned by the participant
for at least six months), are surrendered or tendered to us in
payment of the exercise price of an award or any taxes required
to be withheld in respect of an award, in each case, in
accordance with the terms and conditions of the Plan and any
applicable award agreement, such surrendered or tendered shares
shall again become available to be delivered pursuant to awards
under the Plan; provided, however, that in no
event shall such shares increase the number of shares that may
be delivered pursuant to ISOs granted under the Plan. Subject to
adjustment for changes in capitalization and similar events,
(i) the maximum number of shares of our Class A common
stock with respect to which awards may be granted to any
Participant in any fiscal year of the Company shall be 200,000,
provided that such number of shares shall automatically
be adjusted to take into account any stock distribution or stock
split that occurs in connection with the initial distribution of
our Class A common stock and (ii) the maximum
aggregate amount of cash and other property (valued at its fair
market value) other than shares that may be paid or delivered
pursuant to awards to any Participant in any fiscal year of the
Company shall be $2,000,000.
In the event of any corporate event affecting the shares of our
common stock, the committee in its discretion may make such
adjustments and other substitutions to the Plan and awards under
the Plan as it deems equitable or desirable in its sole
discretion.
Stock
Options
The committee may grant both ISOs and NSOs under the Plan.
Except as otherwise determined by the committee in an award
agreement, the exercise price for options is the price specified
in the applicable award agreement as the price-per-share at
which shares may be purchased pursuant to such option. In the
case of ISOs granted to an employee who, at the time of the
grant of an option, owns stock representing more than 10% of the
voting power of all classes or our stock or the stock of any of
our affiliates, the exercise price cannot be less than 110% of
the fair market value of a share of our common stock on the date
of grant. All options granted under the Plan will be NSOs unless
the applicable award agreement expressly states that the option
is intended to be an ISO.
Subject to any applicable award agreement, options shall vest
and become exercisable on each of the first four anniversaries
of the date of grant. The term of each option will be determined
by the committee; provided that no option will be
exercisable (i) after the tenth anniversary of the date the
option is granted or (ii) 90 days after the date the
participant who is holding the option ceases to be a director,
officer, employee or consultant of us or one of our affiliates.
The exercise price will be payable with cash (or its equivalent)
or by other methods as permitted by the committee. All options
are intended to qualify as “performance-based
compensation” under Section 162(m) of the Code.
Stock
Appreciation Rights
The committee may grant SARs under the Plan either alone or in
tandem with, or in addition to, any other award permitted to be
granted under the Plan. SARs granted in tandem with, or in
addition to, an award may be
88
granted either at the same time as the award or at a later time.
Subject to the applicable award agreement, the exercise price of
each share of our Class A common stock covered by a SAR is
the price specified in the applicable award agreement as the
price-per-share used to calculate the amount payable to the
participant. Upon exercise of a SAR, the holder will receive
cash, shares of our common stock, or other property or a
combination thereof, as determined by the committee, equal in
value to the excess, if any, of the fair market value of the
common stock subject to the SAR at the exercise date over the
exercise price. All SARs are intended to qualify as
“performance-based compensation” under
Section 162(m) of the Code. Subject to the provisions of
the Plan and the applicable award agreement, the committee will
determine, at or after the grant of a SAR, the vesting criteria,
term, methods of exercise, methods and form of settlement and
any other terms and conditions of any SAR.
Restricted
Shares and Restricted Stock Units
The committee may grant restricted shares and restricted stock
units to participants. Upon the grant of a restricted share,
certificates will be issued and registered in the name of the
participant and deposited by the participant, together with a
stock power endorsed in blank, with us or a custodian designated
by the committee or us. Upon lapse of the restrictions
applicable to such restricted shares, we or the custodian, as
applicable, will deliver such certificates to the participant or
his or her legal representative. An RSU will represent an
unfunded and unsecured promise to deliver shares of our
Class A common stock, cash, other securities, other awards
permitted under the Plan or other property in accordance with
the terms of the applicable award agreement.
Restricted shares and RSUs may not be sold, assigned,
transferred, pledged or otherwise encumbered except as provided
in the Plan or the applicable award agreement; provided,
however, that the committee may determine that restricted
shares and RSUs maybe transferred by the participant.
Performance
Units
Subject to the provisions of the Plan, the committee may grant
performance units to participants. Performance units are awards
with an initial value established by the committee (or that is
determined by reference to a valuation formula specified by the
committee or the fair market value of shares of our Class A
common stock). In its discretion, the committee will set
performance goals that, depending on the extent to which they
are met during a specified performance period, will determine
the number
and/or value
of performance units that will be paid out to the participant.
The committee, in its sole and plenary discretion, may pay
earned performance units in the form of cash, shares of our
Class A common stock or any combination thereof that has an
aggregate fair market value equal to the value of the earned
performance units at the close of the applicable performance
period. The determination of the committee with respect to the
form and timing of payout of performance units will be set forth
in the applicable award agreement.
Cash
Incentive Awards
Subject to the provisions of the Plan, the committee may grant
cash incentive awards payable upon the attainment of performance
goals.
Other
Stock-Based Awards
Subject to the provisions of the Plan, the committee may grant
to participants other equity-based or equity-related awards
(including, but not limited to, fully-vested shares of our
Class A common stock). The committee may determine the
amounts and terms and conditions of any such awards provided
that they comply with applicable laws.
Dividend
Equivalents
In the sole and plenary discretion of the committee, an award
(other than an option or SAR or cash incentive award) may
provide the participant with dividends or dividend equivalents,
payable in cash, shares of our Class A common stock, other
securities, other awards or other property, on such terms and
conditions as determined by the committee in its sole and
plenary discretion.
89
Performance
Compensation Awards
The committee may designate any award granted under the Plan
(other than ISOs, NSOs and SARs) as a performance compensation
award in order to qualify such award as “qualified
performance-based compensation” under Section 162(m)of
the Code. The committee will, in its sole discretion, designate
within the first 90 days of a performance period which
participants will be eligible to receive performance
compensation awards in respect of such performance period, as
well as the performance criteria and other terms related to the
award (to the extent required under Section 162(m) of the
Code).
The performance measure or measures shall be limited to the
following: (i) net income before or after taxes,
(ii) earnings before or after taxes (including earnings
before interest, taxes, depreciation and amortization, or
“EBITDA”), (iii) operating income,
(iv) earnings per share, (v) return on
shareholders’ equity, (vi) return on investment,
(vii) return on assets, (viii) level or amount of
acquisitions, (ix) share price,
(x) profitability/profit margins (including EBITDA
margins), (xi) market share, (xii) revenues or sales
(based on units or dollars), (xiii) costs, (xiv) cash
flow, (xv) working capital and (xvi) project completion
time and budget goals. Such performance criteria may be applied
on an absolute basis
and/or be
relative to one or more of our peer companies or indices or any
combination thereof.
The committee may adjust or modify the calculation of
performance goals for a performance period in the event of, in
anticipation of, or in recognition, of any unusual or
extraordinary corporate item, transaction, event or development
or any other unusual or nonrecurring events affecting our
company; provided that such adjustment or modification
does not cause the performance based award to fail to qualify as
“qualified performance-based compensation” under
Section 162(m) of the Code. In order to be eligible for
payment in respect of a performance compensation award for a
particular performance period, participants must be employed by
us on the last day of such performance period (unless otherwise
determined in the discretion of the committee), the performance
goals for such period must be satisfied and certified by the
committee and the performance formula must determine that all or
some portion of such performance compensation award has been
earned for such period. The committee may, in its sole and
plenary discretion, reduce or eliminate the amount of a
performance compensation award earned in a particular
performance period, even if applicable performance goals have
been attained. In no event shall any discretionary authority
granted to the committee under the Plan be used to grant or
provide payment in respect of performance compensation awards
for which performance goals have not been attained, increase a
performance compensation award for any participant at any time
after the first 90 days of the performance period or
increase a performance compensation award above the maximum
amount payable under the underlying award.
Amendment
and Termination of The Plan
Subject to any applicable law or regulation, to any requirement
that must be satisfied if the Plan is intended to be a
shareholder approved plan for purposes of Section 162(m) of
the Code and to the rules of the NYSE or any successor exchange
or quotation system on which shares of our Class A common
stock may be listed or quoted, the Plan may be amended, modified
or terminated by our Board of Directors without the approval of
our stockholders, except that stockholder approval shall be
required for any amendment that would (i) increase the
maximum number of shares of our Class A common stock
available for awards under the Plan or increase the maximum
number of shares of our Class A common stock that may be
delivered pursuant to ISOs granted under the Plan or
(ii) modify the requirements for participation under the
Plan. No modification, amendment or termination of the Plan may,
without the consent of the participant to whom any award was
granted, materially and adversely affect the rights of such
participant (or his or her transferee) under such award, unless
otherwise provided by the committee in the applicable award
agreement.
The committee may waive any conditions or rights under, amend
any terms of, or alter, suspend, discontinue, cancel or
terminate any award previously granted, prospectively or
retroactively; provided, however, that, unless
otherwise provided by the committee in the applicable award
agreement, any such waiver, amendment, alteration, suspension,
discontinuance, cancellation or termination that would
materially and adversely impair the rights of any participant to
any award previously granted will not to that extent be
effective without the consent of the affected participant.
90
Adjustment
of Awards Upon the Occurrence of Certain Unusual or Nonrecurring
Events
The committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, awards in
recognition of unusual or nonrecurring events (including,
without limitation, changes in capitalization or the occurrence
of a change of control) affecting the Company, any affiliate, or
the financial statements of the Company or any affiliate, or of
changes in applicable rules, rulings, regulations or other
requirements of any governmental body or securities exchange,
accounting principles or law (i) whenever the committee, in
its sole and plenary discretion, determines that such
adjustments are appropriate or desirable, including, without
limitation, providing for a substitution or assumption of
awards, accelerating the exercisability of, lapse of
restrictions on, or termination of, awards or providing for a
period of time for exercise prior to the occurrence of such
event, (ii) if deemed appropriate or desirable by the
committee, in its sole and plenary discretion, by providing for
a cash payment to the holder of an award in consideration for
the cancelation of such award, including, in the case of an
outstanding option or SAR, a cash payment to the holder of such
option or SAR in consideration for the cancelation of such
option or SAR in an amount equal to the excess, if any, of the
fair market value (as of a date specified by the committee) of
the shares of our Class A common stock subject to such
Option or SAR over the aggregate exercise price of such option
or SAR and (iii) if deemed appropriate or desirable by the
committee, in its sole and plenary discretion, by canceling and
terminating any option or SAR having a per share exercise price
equal to, or in excess of, the fair market value of a share
subject to such option or SAR without any payment or
consideration therefor.
Change of
Control
The Plan provides that, unless otherwise provided in an award
agreement, in the event of a change of control of ALC, unless
provision is made in connection with the change of control for
assumption, or substitution of, awards previously granted:
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any options and SARs outstanding as of the date the change of
control is determined to have occurred will become fully
exercisable and vested, as of immediately prior to the change of
control;
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all performance units and cash incentive awards will be paid out
as if the date of the change of control were the last day of the
applicable performance period and “target” performance
levels had been attained; and
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all other outstanding awards will automatically be deemed
exercisable or vested and all restrictions and forfeiture
provisions related thereto will lapse as of immediately prior to
such change of control.
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Unless otherwise provided pursuant to an award agreement, a
change of control is defined to mean any of the following
events, generally:
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the consummation of a merger, reorganization or consolidation or
sale or other disposition of all or substantially all of our
assets;
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•
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the approval by our stockholders of a plan of our complete
liquidation or dissolution; or
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an acquisition by any individual, entity or group of beneficial
ownership of 20% or more of either the then outstanding shares
of our Class A common stock or the combined voting power of
our then outstanding voting securities entitled to vote
generally in the election of directors.
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Term of
The Plan
The Plan will be effective as of the date of its adoption by our
Board; provided that no ISOs may be granted under the
Plan unless it is approved by the our stockholders within twelve
(12) months before or after the date the Plan is adopted.
No award may be granted under the Plan after the tenth
anniversary of the date the Plan is approved by our stockholders.
Employment
Agreements
Effective June 26, 2006, we entered into employment
agreements with each of our named executive officers. The
material terms of each employment agreement are substantially
the same. Each employment agreement provides that the executive
will be paid a base salary at the current rate, subject to
annual review, and that the
91
executive may be eligible to participate in our equity
compensation and other performance-based plans at a level
consistent with the executive’s position. In addition, the
executive is eligible to participate in our welfare benefit
plans and our deferred compensation and savings plans and is
entitled to a monthly automobile allowance.
If the executive’s employment is terminated by us for
reasons other than cause (as defined in the employment
agreements), death or disability, the executive is entitled to
receive a lump sum payment equal to: (i) any base salary
owed to the date of termination, (ii) one year of base
salary plus $15,000 (two years of base salary plus $30,000 in
the case of Laurie Bebo), (iii) an amount equal to 30% (45%
in the case of Ms. Bebo and Terry Usher) of base salary, in lieu
of bonus, (iv) an additional pro-rata bonus payment for the
year in which termination occurs, (v) the cash equivalent
of 12 months (24 months for Ms. Bebo) of automobile
allowance and (vi) any amount that would have been credited
by us to any deferred compensation plan for the executive over
the 12 month period after termination. In addition, the
executive will also be entitled to all vested deferred
compensation, continued coverage under any welfare benefit plans
(except medical benefit plans) for 12 months (24 months for
Ms. Bebo) after termination and medical plan continuation
coverage required under applicable law, subject to payment in
full of all insurance premiums by the executive.
In addition, in the event that the severance benefits payable to
the executive are made in connection with a change in control of
the Company and equal or exceed three times the executive’s
“base amount” within the meaning of
Section 280G(b)(3) of the Internal Revenue Code, such
severance benefits shall be reduced to an amount the present
value of which is equal to 2.99 times the “base
amount.”
The executive is also subject to restrictive covenants relating
to confidential information, nonsolicitation and noncompetition.
92
OUR
RELATIONSHIP WITH EXTENDICARE AFTER THE EXCHANGE
We have provided below a summary description of each of the
agreements between Extendicare and us relating to the separation
and our ongoing relationship with Extendicare after the
separation. This description, which summarizes the material
terms of these agreements, is not complete. You should read the
full text of these agreements, which have been included as
exhibits to the Registration Statement of which this Information
Statement is a part.
Overview
We and Extendicare will enter into a number of agreements, which
are described below, and which include:
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a separation agreement, which we refer to as the Separation
Agreement;
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a tax allocation agreement, which we refer to as the Tax
Allocation Agreement;
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a number of transitional services agreements, which we refer to
as the Transitional Services Agreements; and
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a number of operating leases and purchase agreements relating to
the transfer of EHSI assisted living facilities to us, which we
refer to as the EHSI Transfer Documents.
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These agreements will govern the allocation of assets and
liabilities related to our business as well as the ongoing
relationship between Extendicare and us after the separation. In
addition, we and Extendicare will execute any deeds, bills of
sale, stock powers, certificates of title, assignments and other
instruments of sale, contribution, conveyance, assignment,
transfer and delivery required to consummate our separation from
Extendicare. These documents, including the Separation
Agreement, the Tax Allocation Agreement, the Transitional
Services Agreements and the EHSI Transfer Documents, are
referred to as the Transaction Agreements.
Separation
Agreement
The Separation Agreement will set forth our agreements with
Extendicare related to the transfer of assets and the assumption
of liabilities necessary to separate our company from
Extendicare. It also will set forth our indemnification
obligations to each other following the separation.
The
Separation and Assumed Liabilities
Although we expect that most of the assets described as being
owned by us in this Information Statement will be owned by us
prior to our entering the Separation Agreement, the Separation
Agreement will obligate Extendicare to transfer, and cause its
affiliates to transfer to us or our subsidiaries any asset that
is held for use or intended to be used primarily in the
operation of our business, as described in this Information
Statement. We will be obligated to transfer to Extendicare
certain assets that we own or hold that are not used primarily
in the operation of our business. In addition, we or our
subsidiaries will assume and agree to perform, discharge and
fulfill:
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all liabilities primarily related to, arising out of or
resulting from the operation or conduct of our business, except
for any pre-separation liabilities related to the 29 assisted
living facilities being transferred to us by EHSI arising prior
to the transfer of the applicable facility, and including any
liabilities to the extent relating to, arising out of or
resulting from any other asset that is transferred to us by
Extendicare, in each case whether before, on or after the
completion of the Plan of Arrangement;
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all liabilities recorded or reflected in the financial
statements included in this Information Statement (except for
any liabilities related to the 29 assisted living facilities
being transferred to us by EHSI that arose or arise prior to
their transfer);
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all liabilities relating to certain specified lawsuits that
primarily relate to us; and
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all liabilities of Extendicare under any agreement between
Extendicare and any of our directors or director nominees,
entered prior to the completion of the Plan of Arrangement, that
indemnifies such directors or director nominees for actions
taken in their capacity as directors or director nominees of us.
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93
Except as expressly set forth in the Separation Agreement or in
any other Transaction Agreement, neither we nor Extendicare will
make any representation or warranty as to:
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the assets, businesses or liabilities transferred or assumed, or
excluded from such transfer or assumption, as part of the
separation, including any warranty of merchantability or fitness
for a particular use;
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any consents or authorization from any governmental entity
required in connection with the transfers;
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the value, or freedom from any encumbrances of, or any other
matter concerning, any assets or liabilities transferred or
assumed, or excluded from such transfer or assumption;
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the absence of any defenses or right of set-off or freedom from
counterclaim with respect to any claim of either us or
Extendicare; or
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the legal sufficiency of any assignment, document or instrument
delivered to convey title to any asset transferred.
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Except as expressly set forth in any transaction document, all
assets will be transferred on an “as is,” “where
is” basis, at the own risk of the respective transferees
without any warranty whatsoever on the part of the transferor,
and we and our subsidiaries will agree to bear the economic and
legal risks that any conveyance was insufficient to vest in us
good and marketable title, free and clear of any encumbrance,
and that any necessary consents or approvals were not obtained
or that any requirements of applicable laws were not met.
Pursuant to the Separation Agreement, we and Extendicare will
cooperate in all reasonable respects to ensure that the
separation, assumption of liabilities and transfer of assets to
ALC, and the retention by Extendicare of all assets and
liabilities excluded from the transfer are consummated in
accordance with the terms of the Separation Agreement.
Use of
Names
The Separation Agreement will provide that, after our separation
from Extendicare, and subject to a limited license that will
allow Extendicare to continue use for a short period following
the separation, we will have all rights in and use of the
“Assisted Living Concepts” name and all other names,
imprints, trademarks, trade names, trade name rights, trade
dress, domain names, service marks, service mark rights and
service names, which we refer to collectively as the ALC Names,
of Extendicare and its applicable subsidiaries, whether or not
registered, that include or are derivatives of the
“Assisted Living Concepts” name, including all common
law rights and all goodwill associated therewith, and
Extendicare will take such actions as are necessary or
appropriate to vest such rights in us and our subsidiaries. The
Separation Agreement will also contain complementary provisions
related to our use of Extendicare’s names.
Records;
Confidentiality
The Separation Agreement will also provide for the mutual
sharing of information between us and Extendicare to enable each
party to comply with reporting, filing, audit or tax
requirements for use in judicial proceedings and in order to
comply with other obligations as set forth in the Separation
Agreement. The Separation Agreement will also contain provisions
that require each party to treat confidential information of the
other party confidentially.
Indemnification;
Contribution
Pursuant to the Separation Agreement, we will indemnify, defend
and hold harmless and will pay or reimburse Extendicare, each of
its affiliates, including any of its direct or indirect
subsidiaries, each of its directors, officers and employees, or
any of its investment bankers, attorneys or other advisors or
representatives, for all identifiable losses, as incurred, to
the extent relating to or arising from:
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our assisted living care business, any assets transferred to us
by Extendicare, or any of the liabilities that we assume as part
of the separation, other than any pre-transfer liabilities
related to the 29 assisted living facilities being transferred
to us by EHSI;
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any untrue or allegedly untrue statement of a material fact
contained in any filing we make with the SEC, or any omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and
relating to information, statements, facts or omissions relating
to us or our subsidiaries; and
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the breach by us or our subsidiaries of any agreement or
covenant contained in any Transaction Agreement which is to be
performed or complied with by us or our subsidiaries after the
separation, unless and to the extent such Transaction Agreement
contains alternative indemnification provisions.
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Extendicare will indemnify, hold harmless and defend and will
pay or reimburse us, each of our affiliates, including any
direct or indirect subsidiaries, each of our directors, officers
and employees, or any of our investment bankers, attorneys or
other advisors or representatives, for all identifiable losses,
as incurred, to the extent relating to or arising from:
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those assets and liabilities that are not transferred to us as
part of the separation, whether such losses relate to or arise
from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted before, at or
after our separation from Extendicare;
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any pre-transfer liabilities related to the 29 assisted living
facilities being transferred to the Company by EHSI;
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any untrue or allegedly untrue statement of a material fact
contained in any filing Extendicare makes with the SEC, or any
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading and relating to information, statements, facts or
omissions not relating to us or our subsidiaries; and
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the breach by Extendicare or any of its affiliates (other than
us or our subsidiaries) of any agreement or covenant contained
in any Transaction Agreement which is to be performed or
complied with by it after our separation from Extendicare,
unless and to the extent such Transaction Agreement contains
alternative indemnification provisions.
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The Separation Agreement will also specify the procedures and
limitations with respect to claims subject to indemnification
and will provide for contribution in the event that
indemnification is not available or insufficient to hold
harmless an indemnified party.
Dispute
Resolution
Pursuant to the Separation Agreement, we and Extendicare will
agree to binding arbitration for any claims arising under the
Separation Agreement or any other Transaction Agreement (unless
otherwise specified in such Transaction Agreement). Any
arbitration will follow the rules of the International Chamber
of Commerce. The Separation Agreement will set forth the
procedures that we and Extendicare will be obligated to follow
with regard to any dispute, including the procedures to select
an arbitrator.
Tax
Allocation Agreement
The Tax Allocation Agreement, which we and Extendicare will
enter into immediately prior to the separation, will govern both
our and Extendicare’s rights and obligations after the
separation with respect to taxes for both pre- and post-
separation periods. Under the Tax Allocation Agreement, we
generally will be required to indemnify Extendicare for any
taxes attributable to our operations (excluding the assisted
living facilities being transferred to us from EHSI as of the
separation) for all pre-separation periods and Extendicare
generally will be required to indemnify us for any taxes
attributable to its operations (including the assisted living
facilities being transferred to us from EHSI as part of the
separation) for all pre-separation periods. In addition,
Extendicare will be liable, and will indemnify us, for any taxes
incurred in connection with the separation.
Under U.S. Federal income tax law, we will be jointly and
severally liable for any taxes imposed on Extendicare for the
periods during which we were a member of its consolidated group,
including any taxes imposed with respect to the disposition of
our common stock. Extendicare may not have sufficient assets,
however, to satisfy
95
any such liability and we may not successfully recover from
Extendicare any amounts for which we are held liable. Our
liability for any taxes imposed on Extendicare could materially
reduce the price of our common stock.
Though valid as between the parties, the Tax Allocation
Agreement is not binding on the U.S. Internal Revenue
Service or any other taxing authority and does not affect the
joint and several liability of Extendicare’s U.S.
affiliates and us for all U.S. federal taxes of the
U.S. consolidated group relating to periods before the
separation.
Transitional
Services Agreements
Following the separation, we will receive and rely on certain
transitional services to be provided to us by Extendicare and
its subsidiaries, including services related to information
technology, payroll and benefits processing and reimbursement
functions. These services will be provided pursuant to a number
of agreements (the “Transitional Services Agreements”)
that we will enter into with two subsidiaries of Extendicare,
Virtual Care Provider Inc. (“Virtual Care”) and EHSI.
We expect the cost of these services to be approximately
$1.5 million per year in the aggregate, which we believe
approximates the fair value of the services.
In addition to the terms described below, the Transitional
Services Agreements contain customary provisions designed to
protect the interests of the parties to the respective
agreements, including restrictions on the use of confidential
information and intellectual property, indemnification
provisions, restrictions on assignment and the availability of
remedies in connection with default.
Information
Technology Services
For an initial period of three years following the separation,
Virtual Care will provide specified information technology
services to us. The agreement with Virtual Care will provide for
termination, with or without cause, by either party upon
90 days’ notice. We expect to pay approximately
$1.1 million per year for these services, which include:
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hosting services for our software, messaging, data storage,
anti-virus and identity and access management programs;
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monitoring and management services for our information
technology systems;
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support services via telephone; and
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telecommunication services allowing us to maintain and grow our
network.
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Virtual Care also has agreed to provide us with other specified
technology services on an as-needed basis, including onsite
support and technology implementation services, information
technology consulting and procurement services and software
rental services.
Payroll
Processing and Employee Benefits Services
For an initial period of five years following the separation,
EHSI will provide specified payroll and benefits processing
services for all of our employees. We also will have the option
to extend these services for renewal periods of two additional
years under the same terms and conditions, other than the
renewal term. The agreement relating to these services may be
terminated by us, with or without cause, upon 90 days’
prior written notice. We expect to pay approximately $362,000
per year for payroll processing and employee benefits services,
subject to a 3% annual increase. These services will include the
following:
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payroll maintenance and processing services, including related
tax and banking matters;
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general management services for payroll processing, employee
benefits and customer service functions;
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services relating to additions, changes and deletions from
employee insurance plans; and
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services relating to benefit claims and 401(k) and ERISA
compliance.
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Reimbursement
Services
For an initial period beginning upon the separation and ending
on August 30, 2007, EHSI will provide specified
reimbursement and planning services to us. We also will have the
option to extend these services for a renewal period of one
additional year. We will not be able to terminate this agreement
during the initial period. We expect to pay approximately
$20,000 per year for these services, subject to a 3% annual
increase if we exercise our renewal option. These services
primarily relate to the development of facilities in Texas.
EHSI
Transfer Documents
Since March 31, 2006, we have acquired the license to
operate all of EHSI’s 29 assisted living facilities and
have entered into purchase agreements with respect to each
facility. We have completed the purchase of 14 of these
facilities for an aggregate purchase price of
$49.6 million. Unlike the 14 free standing facilities that
we have purchased, the remaining 15 facilities require the
approval of local planning commissions to subdivide the
properties between the assisted living facilities and skilled
nursing facilities that make up those properties. We have
applied for such approval and, once obtained, we expect to
complete the purchase of the remaining 15 facilities for an
aggregate purchase price of $44.9 million in accordance
with the terms of the purchase and sale agreements that we have
entered with EHSI with respect to these facilities. In the
interim, we have entered into a lease agreement with EHSI for
the land component of the properties and the assisted living
facilities. If EHSI has not obtained approval to subdivide any
of the properties immediately prior to the separation, we will
purchase all but the land component of the applicable property,
which in aggregate totals $42.3 million, and EHSI will make
a capital contribution to us in an amount equal to the purchase
price of the land component of the property, which in aggregate
totals $2.6 million, which we would subsequently loan back
to EHSI in exchange for a note. In addition, for any property
awaiting local planning approval, the applicable lease agreement
with EHSI will be adjusted to become only a land lease of such
property. We will lease the land component for any properties
awaiting planning permission for an initial term of five years,
with two successive renewal periods of five years each,
exercisable at our option. Should all of the properties await
local planning approval, the initial aggregate lease payments
due under these leases will be $0.3 million. The lease
amounts will increase annually based upon the Consumer Price
Index. In addition, at the end of each lease period, the lease
rates will be reassessed and reset to reflect fair market value
rates. Upon receipt of approval, the land leases will be
terminated, EHSI will repay the amount due on the note and we
will pay EHSI for the land. The note will bear interest at 6.0%
and will mature at the earliest of the date that planning
commission approval is received or the date that the
corresponding lease matures.
97
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Extendicare beneficially and of record holds, and will hold
before the separation, all of the outstanding shares of our
common stock. Holders of Extendicare Subordinate Voting Shares
and Extendicare Multiple Voting Shares, including certain of our
directors and executive officers will receive shares of our
common stock in the Exchange.
The following table provides information, based on information
known to Extendicare regarding the ownership of its Subordinate
and Multiple Voting Shares through June 30, 2006, regarding
the anticipated beneficial ownership of our common stock by
(1) each of our shareholders who we believe will be a
beneficial owner of more than 5% of any class of our common
stock, (2) each of our directors and those persons
nominated to serve as our directors, (3) each of our named
executive officers and (4) all of our executive officers
and directors as a group. Except as otherwise indicated, each
stockholder listed below has sole voting and investment power
with respect to the shares beneficially owned by such person.
The rules of the SEC consider a person to be the
“beneficial owner” of any securities over which the
person has or shares voting power or investment power, or any
security that the person has the right to acquire, within
60 days, such sole or shared power.
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Approximate Number of
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Percentage of
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Shares to be Owned(1)(2)
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Issued Shares(1)
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Percent of
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Name of Beneficial Owner
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Class A
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Class B
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Class A
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Class B
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Total Votes
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5% Beneficial
Holders:
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Scotia Investments Limited(3)
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8,667
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7,600,000
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*
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64.52
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%
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43.28
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%
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Clearwater Capital Management
Inc.(4)
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—
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1,762,320
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—
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14.96
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%
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10.04
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%
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Phillips, Hager & North
Investment Management
Ltd.(5)
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4,880,662
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—
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8.44
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%
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—
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2.78
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%
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Connor, Clark & Lunn
Investment Management Partnership(6)
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3,493,140
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—
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6.04
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%
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—
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1.99
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%
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Directors/Director
Nominees:
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Alan Bell
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—
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—
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—
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—
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—
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Derek H.L. Buntain
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115,900
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200
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*
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*
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*
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Sir Graham Day
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43,120
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2,000
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*
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*
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*
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David M. Dunlap
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120,500
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—
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*
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—
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*
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David J. Hennigar(3)
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80,000
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15,400
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*
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*
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*
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Malen S. Ng
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11,228
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—
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*
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—
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*
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Mel Rhinelander
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511,700
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2,000
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*
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*
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*
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Charles H. Roadman II, MD
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20,665
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—
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*
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—
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*
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Named Executives:
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Laurie A. Bebo
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85,565
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—
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*
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—
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*
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Walter A. Levonowich
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—
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—
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—
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—
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—
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Terry Usher
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37,750
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—
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*
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—
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*
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Rae Schweer
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—
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—
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—
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—
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—
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All directors and executive
officers as a group
(12 persons)
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1,026,428
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19,600
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1.78
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%
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*
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*
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Less than 1.0%. |
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(1) |
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Includes the shares underlying the options described below,
which are assumed to be exercised. All percentages assume that
all outstanding options of Extendicare, representing 1,643,875
Subordinate Voting Shares of Extendicare at June 30, 2006,
are exercised and the underlying shares issued prior to the
Exchange. |
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(2) |
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Each share of Class B common stock may be converted into
1.075 shares of Class A common stock at the option of
the holder thereof. Accordingly, the additional number of shares
of Class A common stock, assuming full conversion, that
would be owned by Scotia Investments Limited, Clearwater Capital
Management Inc., Mr. Buntain, Mr. Day,
Mr. Hennigar, Mr. Rhinelander and all of our directors
and executive officers as a group |
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would be 8,170,000 shares (Scotia), 1,894,494 shares
(Clearwater), 215 shares (Buntain), 2,150 shares
(Day), 16,555 shares (Hennigar), 2,150 shares
(Rhinelander) and 21,070 (all directors and executive officers),
respectively. Any conversion would have the effect of reducing
the voting power of the applicable holder of Class B common
stock, since each share of Class B common stock has ten
times the voting power of a share of Class A common stock.
For example, the holder of 1,000 shares of Class B
common stock would be entitled to 10,000 votes in connection
with a shareholder vote. Upon conversion into Class A
common stock, such holder would be entitled to 1,075 votes
instead. |
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(3) |
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Scotia Investments Limited holds directly 8,667 Subordinate
Voting Shares of Extendicare and 1,480,000 Multiple Voting
Shares of Extendicare. The remaining Multiple Voting Shares of
Extendicare are held indirectly through related companies as
follows: Minas Basin Creditco Limited — 5,420,000;
Parrsboro Lumber Company — 440,000; Minas Basin
Investments — 200,000; and BH Investments
Limited — 60,000. All of the outstanding voting shares
of Scotia Investments Limited are held directly or indirectly by
members of the family of the late R.A. Jodrey. David J.
Hennigar, our chairman nominee, is a member of the Jodrey family
and one of twelve directors of Scotia Investments Limited.
Mr. Hennigar disclaims beneficial ownership of the shares
to be held directly or indirectly by Scotia Investments Limited. |
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(4) |
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Based on information provided to Extendicare by Clearwater
Capital Management Inc. (“Clearwater”). Clearwater
holds the shares on behalf of its managed accounts and is
controlled by Ronald Keiper, President of Clearwater. Clearwater
has indicated that it has acquired the shares for investment
purposes only. |
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(5) |
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Based on publicly available information filed by Phillips,
Hager & North Investment Management Ltd. in Canada on
March 23, 2006. The report indicates that the securities of
Extendicare are controlled (but not owned) by Phillips,
Hager & North Investment Management Ltd., Phillips,
Hager & North Investment Management Limited Partnership
and Sky Investment Counsel Ltd. (collectively, the
“Eligible Institutional Investors”) on behalf of
client accounts over which they have discretionary trading
authority. The report further states that the securities were
acquired in the ordinary course of business, for investment
purposes only and not for the purpose of exercising control or
direction over Extendicare. |
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(6) |
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Based on a Schedule 13G filed with the U.S. Securities
and Exchange Commission by Connor, Clark & Lunn
Investment Management Partnership (“Connor Clark”),
which indicates that Connor Clark is a parent holding company of
Connor, Clark & Lunn Investment Management Ltd., which
is a registered investment adviser. The Schedule 13G filing
further states that the securities of Extendicare were acquired
in the ordinary course of business and were not acquired for the
purpose of and do not have the effect of changing or influencing
the control of the issuer of such securities and were not
acquired in connection with or as a participant in any
transaction having such purposes or effect. In addition, the
report states that Connor Clark and Connor,
Clark & Lunn Investment Management Ltd. are of the
view that they and the investment companies and other accounts
that they manage are not acting as a “group” for the
purposes of section 13(d) under the Securities and Exchange
Act and that they and such investment companies and accounts are
not otherwise required to attribute to each other the
“beneficial ownership” of securities
“beneficially owned” under
Rule 13D-3
promulgated under the Securities and Exchange Act of 1934.
Therefore, they are of the view that the shares held by Connor
Clark and Connor, Clark & Lunn Investment Management
Ltd. and such investment companies and accounts should not be
aggregated for purposes of section 13(d). |
99
MATERIAL
UNITED STATES AND CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS
The discussion below is a summary of the principal United States
federal and Canadian federal income tax considerations relating
to an investment in our common shares. The discussion does not
take into account the individual circumstances of any particular
investor. Therefore, prospective investors in our common shares
should consult their own tax advisors for advice concerning the
tax consequences of an investment in our common shares based on
their particular circumstances, including any consequences of an
investment in our common shares arising under state, provincial
or local tax laws or the tax laws of any jurisdiction other than
the United States or Canada.
This summary does not address the tax consequences of the
Exchange. Please see the management proxy Circular related to
the Plan of Arrangement for a description of the tax
consequences of the Exchange.
United
States Taxation
General
This section summarizes the material U.S. federal income
tax consequences of owning and disposing of shares of our common
stock. The discussion is limited in the following ways:
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The discussion only covers you if you will hold shares of our
common stock as a capital asset (that is, for investment
purposes), and if you do not have a special tax status.
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The discussion does not cover tax consequences that depend upon
your particular tax situation in addition to your ownership of
shares of our common stock.
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The discussion does not cover you if you are a partner in a
partnership (or entity treated as a partnership for
U.S. tax purposes). If a partnership holds shares of our
common stock, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of
the partnership.
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The discussion is based on current law. Changes in the law may
change the tax consequences discussed below.
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The discussion does not cover state, local or foreign law.
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We have not requested a ruling from the U.S. Internal
Revenue Service (“IRS”) on the tax consequences of
owning and disposing of our common stock. As a result, the IRS
could disagree with portions of this discussion.
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We suggest that you consult your tax advisor about the tax
consequences of owning and disposing of shares of our common
stock in your particular situation.
Tax
Consequences to U.S. Holders
This section applies to you if you are a
“U.S. Holder”. A “U.S. Holder” is
a beneficial owner of shares of our common stock that, for
U.S. federal tax purposes, is:
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an individual U.S. citizen or resident alien;
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a corporation that was created under U.S. law (federal or
state); or
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an estate or trust whose world-wide income is subject to
U.S. federal income tax.
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Distributions
The gross amount of any distribution we make on our common stock
generally will be included in the gross income of a
U.S. Holder as dividend income to the extent that the
distribution is paid out of our current or accumulated earnings
and profits. If the amount of any distribution exceeds our
earnings and profits, the excess will be treated first as a
non-taxable return of capital to the extent of the
U.S. Holder’s adjusted tax basis in its shares of our
common stock (resulting in a reduction by an equal amount of
that basis) and thereafter as a taxable capital gain.
100
If you are an individual, dividends you receive before
January 1, 2011 generally will be subject to reduced rates
of taxation. However, individuals who fail to satisfy a minimum
holding period during which they are not protected from a risk
of loss or who elect to treat the dividend income as
“investment income” will not be eligible for the
reduced rates of taxation. If you are a corporation, you may be
entitled, subject to holding period and other requirements, to
the dividends-received deduction under the Code. You should
consult your tax advisor regarding eligibility for reduced rates
on dividends and the dividends-received deduction.
Sale or
Disposition
A U.S. Holder generally will recognize gain or loss on the
sale or other disposition of our common stock in an amount equal
to the difference between the amount realized on the disposition
and the U.S. Holder’s adjusted tax basis in the stock.
The gain or loss will be long-term capital gain or loss if the
U.S. Holder has held the stock for more than one year. For
U.S. Holders that are individuals, long-term capital gain
is generally subject to a reduced rate of tax. Short-term
capital gain recognized by a U.S. Holder will be subject to
tax at ordinary income tax rates. Deductions for capital losses
are subject to certain limitations.
Non-U.S. Holders
This section applies to you if you are a
“Non-U.S. Holder.”
A
“Non-U.S.
Holder” is a beneficial owner of our common stock (other
than a partnership) that is not a U.S. Holder.
Dividends
In general, the gross amount of any distribution we make on our
common stock will be treated as a dividend to the extent of our
current or accumulated earnings and profits. If the amount of
any distribution exceeds our earnings and profits, the excess
will be treated first as a non-taxable return of capital to the
extent of the
Non-U.S. Holder’s
adjusted tax basis in its shares of our common stock (resulting
in a reduction by an equal amount of that basis) and thereafter
as capital gains from the disposition of our common stock. See
“— Sale or Disposition.”
Dividends paid to a
Non-U.S. Holder
generally will be subject to U.S. withholding tax at a rate of
30% or such lower rate as may be provided by an applicable
income tax treaty between the United States and the country of
which the
Non-U.S. Holder
is a tax resident. In general, the U.S. withholding tax
rate on dividends paid to a resident of Canada is 15%.
Dividends received by a
Non-U.S. Holder
that are effectively connected with the conduct of a trade or
business within the United States (and, in some instances if an
income tax treaty applies, are attributable to a permanent
establishment maintained by the
Non-U.S. Holder
in the United States) are subject to U.S. federal income
tax on a net income basis (that is, after allowance for
applicable deductions) at graduated individual or corporate
rates. Any such dividends received by a
Non-U.S. Holder
that is a corporation may, under certain circumstances, be
subject to an additional branch profits tax at a 30% rate or
such lower rate as may be specified by an applicable income tax
treaty.
A
Non-U.S. Holder
eligible for a reduced rate of withholding of U.S. federal
income tax may obtain a refund of any excess amounts withheld by
timely filing an appropriate claim for refund with the IRS.
Sale or
Disposition
A
Non-U.S. Holder
generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale, exchange or other
disposition of shares of our common stock unless (i) the
gain is effectively connected with the conduct of a United
States trade or business of such
Non-U.S. Holder
and, in some instances where an income tax treaty applies, is
attributable to a permanent establishment maintained by the
Non-U.S. Holder
in the United States, (ii) the
Non-U.S. Holder
is an individual who is present in the United States for 183 or
more days in the taxable year of disposition, and certain other
conditions are satisfied, or (iii) we are or have been a
“United States real property holding corporation” for
U.S. federal income tax purposes, and such
Non-U.S. Holder
owned more than 5% of the total fair market value of either
class of our common stock, at any time within the shorter of the
five-
101
year period ending on the date of disposition or the
Non-U.S. Holder’s
holding period. We expect to be a United States real property
holding corporation for U.S. federal income tax purposes.
Backup
Withholding Tax and Information Reporting
U.S. Holders
U.S. Holders will be subject to information reporting
requirements and backup withholding with respect to proceeds
paid on the disposition of, and dividends paid on, shares of our
common stock. Backup withholding will not apply if the
U.S. Holder provides an IRS
Form W-9
to the payor or otherwise establishes an exemption. Certain
shareholders (including, among others, corporations and
Non-U.S. Holders)
are not subject to the backup withholding rules. Under the
backup withholding rules, we are required to withhold and remit
to the IRS an amount equal to 28% of the fair market value of
any distributions on our common stock to a shareholder of record
if such shareholder is subject to backup withholding. If we do
not have the appropriate information from a shareholder or have
received a notice from the IRS that a shareholder is subject to
backup withholding, we will withhold pursuant to the backup
withholding rules.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be refunded or
credited against a shareholder’s U.S. federal income
tax liability, provided the required information is provided to
the IRS.
Non-U.S. Holders
Non-U.S. Holders
are generally subject to information reporting requirements with
respect to dividends paid by us to such
Non-U.S. Holders
and any tax withheld with respect to such dividends. Copies of
the information returns reporting such dividends and withholding
may also be made available to the tax authorities in the country
in which a
Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Non-U.S. Holders
are not subject to backup withholding provided the
Non-U.S. Holder
certifies under penalties of perjury as to his or its status as
a
Non-U.S. Holder
(and the payor does not have actual knowledge that such
Non-U.S. Holder
is a U.S. person) or otherwise establishes an exemption.
Canadian
Federal Taxation
The following is a summary of the principal Canadian federal
income tax considerations generally applicable to the ownership
and disposition of shares of our common stock acquired by
persons who, at all relevant times and for purposes of the
Income Tax Act (Canada) (“Tax Act”), are resident or
are deemed to be resident in Canada, deal at arm’s length
with us, are not affiliated with us and who hold or will hold
shares of our common stock as capital property
(“holder”). The Tax Act contains provisions relating
to securities held by certain financial institutions, registered
securities dealers and corporations controlled by one or more of
the foregoing (the
“Mark-to-Market
Rules”). This summary does not take into account the
Mark-to-Market
Rules and taxpayers that are “financial institutions”
as defined for the purpose of the
Mark-to-Market
Rules should consult their own legal and tax advisors. In
addition, this opinion assumes that the shares of our common
stock will, at all relevant times, be listed on a
“prescribed stock exchange” for purposes of the Tax
Act, which is currently defined to include the New York Stock
Exchange.
This summary is based upon the current provisions of the Tax Act
and regulations thereunder (the “Regulations’) in
force as at the date hereof, all specific proposals to amend the
Tax Act and Regulations that have been publicly announced by the
Minister of Finance (Canada) prior to the date hereof (the
“Proposed Amendments”) and counsel’s
understanding of the current published administrative policies
and practices of the Canada Revenue Agency. Except as otherwise
indicated, this summary does not take into account or anticipate
any changes in the applicable law or administrative practices or
policies whether by judicial, regulatory, administrative or
legislative action, nor does it take into account provincial,
territorial or foreign tax laws or considerations, which may
differ significantly from those discussed herein. No assurance
can be given that the Proposed Amendments will be enacted or
that they will be enacted in the form announced.
102
This summary is of a general nature only and is not intended to
be, nor should it be relied upon or construed to be, legal or
tax advice to any particular holder. This summary is not
exhaustive of all possible income tax considerations under the
Tax Act that may affect a holder. Accordingly, holders of shares
of our common stock should consult their own legal and tax
advisors with respect to their own particular circumstances.
All amounts relevant in computing the Canadian federal income
tax liability of a holder are to be reported in Canadian
currency at the rate of exchange prevailing at the relevant time.
Taxation
of Dividends
Dividends received by a holder of shares of our common stock
will be included in computing the income of that holder. The
gross-up and
dividend tax credit does not apply to dividends on shares of our
common stock.
The adjusted cost base to a holder of shares of our common stock
will be reduced by any amount received by the holder on a
reduction of our
paid-up
capital in respect of the holder’s shares. If the reduction
exceeds the adjusted cost base to a holder of the shares, the
amount of the excess is deemed to be a capital gain of the
holder from a disposition of the shares (see “—
Disposition of Shares” below).
The characterization of a particular distribution by us for
purposes of the Tax Act will generally be determined by the
classification of the distribution under the governing corporate
law.
A holder that is an individual may be entitled to a foreign tax
credit for U.S. withholding tax paid in respect of a
dividend on shares of our common stock up to a maximum of 15% of
the dividend. If the U.S. withholding tax in respect of a
particular dividend on shares of our common stock exceeds 15% of
that dividend, the individual may be entitled to deduct the
excess in computing income. A holder (other than an individual)
may be entitled to a foreign tax credit for the full amount of
U.S withholding tax paid by that holder in respect of a dividend
on shares of our common stock. Holders of shares of our common
stock should consult their own legal and tax advisers regarding
the availability of foreign tax credits in their particular
circumstances.
If we are a “foreign affiliate” (as defined in the Tax
Act) of a holder of shares of our common stock that is a
corporation, no foreign tax credit is available for U.S
withholding tax paid by that holder in respect of a dividend on
shares of our common stock and the foreign affiliate rules
apply. Any such holder should consult its own legal and tax
advisers regarding the application of these rules in its
particular circumstances.
Disposition
of Shares
In general, a disposition or a deemed disposition of shares of
our common stock will give rise to a capital gain (or a capital
loss) equal to the amount by which the proceeds of disposition
of such shares, net of reasonable costs of disposition, if any,
exceed (or are exceeded by) the adjusted cost base. For this
purpose, the adjusted cost base to a holder of shares of our
common stock will generally be determined by averaging the cost
of all shares of our common stock held at that time by the
holder.
One-half of a capital gain must be included in income as a
taxable capital gain and one-half of a capital loss is an
allowable capital loss. An allowable capital loss for a year may
be deducted from any taxable capital gains of the holder in the
year. Any allowable capital loss not deducted in the year may be
deducted against taxable capital gains of the holder realized in
any of the three preceding years or any subsequent year (in
accordance with the rules contained in the Tax Act). Capital
gains realized by an individual may give rise to liability for
alternative minimum tax.
A holder of shares of our common stock that is subject to
U.S. tax on a gain realized on a disposition of shares of
our common stock may be entitled to a foreign tax credit.
Holders of shares of our common stock should consult their own
legal and tax advisers regarding the availability of foreign tax
credits in their particular circumstances.
Additional
Refundable Tax
A holder that is a “Canadian-controlled private
corporation” (as defined in the Tax Act) may be liable to
pay an additional refundable tax of
62/3%
on certain investment income including taxable capital gains.
103
DESCRIPTION
OF OUR CAPITAL STOCK
Below we have provided a summary description of our capital
stock. This description is not complete. You should read the
full text of our amended and restated articles of incorporation
and amended and restated bylaws, which will be included
as exhibits to the Registration Statement of which this
Information Statement is a part, as well as the provisions of
applicable Nevada law.
General
Our authorized capital stock consists of 400,000,000 shares
of Class A common stock, par value $0.01 per share,
75,000,000 shares of Class B common stock, par value
$0.01 per share, and 25,000,000 shares of preferred
stock. Based on the number of Extendicare Subordinate and
Multiple Voting Shares outstanding as of June 30, 2006
(excluding shares underlying 1,643,875 outstanding options to
purchase Extendicare Subordinate Voting Shares), immediately
following the separation:
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56,177,520 shares of Class A common stock will be
issued and outstanding;
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11,778,433 shares of Class B common stock will be
issued and outstanding, all of which will be held by holders of
Extendicare Multiple Voting Shares as of the Effective
Time; and
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no shares of preferred stock will be outstanding.
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Common
Stock
The relative rights of the Class A common stock and
Class B common stock are substantially identical in all
respects, except for voting rights, conversion rights and
transferability.
Voting
Rights
Each share of Class A common stock entitles the holder to
one vote and each share of Class B common stock entitles
the holder to ten votes with respect to each matter presented to
our stockholders on which the holders of common stock are
entitled to vote. Except as otherwise provided in our amended
and restated certificate of incorporation or required by law,
all matters to be voted on by our stockholders must be approved
by a majority, or, in the case of election of directors, by a
plurality, of the votes entitled to be cast by all shares of
Class A common stock and Class B common stock present
in person or represented by proxy, voting together as a single
class.
In addition to any other vote required by our amended and
restated articles of incorporation or by applicable law, the
affirmative vote of the holders of a majority of the voting
power of all outstanding shares of Class A common stock,
voting separately as a class, will be required for certain
amendments to the dividend, subdivision or combination,
conversion and equivalent consideration provisions of our
amended restated articles of incorporation described below.
Our amended and restated articles of incorporation will also
provide that for so long as shares of Class B common stock
are outstanding, in addition to any other vote required by our
amended and restated certificate of incorporation or by
applicable law, the affirmative vote of the holders of 80% of
the voting power of all outstanding shares of Class B
common stock, voting separately as a class, will be required:
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for the authorization or issuance of shares of Class B
common stock or the authorization or issuance of any securities
convertible into or exchangeable for shares of Class B
common stock;
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for the authorization or issuance of shares of any series or
class of capital stock (other than Class A common stock or
Class B common stock) having more than one vote per share
or having any right to elect directors voting as a separate
class or any class voting or consent rights, in each case other
than as required by applicable law or the rules or regulations
of any stock exchange upon which such series or class of capital
stock is to be listed for trading (or securities convertible
into or exchangeable therefor);
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for any amendment to any provision of our amended and restated
articles of incorporation setting forth any of the rights,
powers or preferences of the Class A common stock or
Class B common stock; and
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for certain amendments to the dividend, subdivision or
combination, conversion, transfer restrictions and equivalent
consideration provisions of our amended and restated articles of
incorporation described below.
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Dividends
Holders of Class A common stock and Class B common
stock will share equally in any dividend declared by our Board
of Directors, subject to any preferential rights of any
outstanding preferred stock. Dividends consisting of shares of
Class A common stock or Class B common stock or any of
our other securities or the securities of any other legal entity
may be paid only as follows subject to the equivalent
consideration provisions described below:
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a share distribution consisting of shares of Class A common
stock (or convertible securities that are convertible into,
exchangeable for or evidence the right to purchase shares of
Class A common stock) with respect to shares of
Class A common stock and, on an equal per share basis,
shares of Class B common stock (or convertible securities
that are convertible into, exchangeable for or evidence the
right to purchase shares of Class B common stock) with
respect to shares of Class B common stock;
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in the case of a share distribution consisting of shares of any
class or series of our securities other than Class A common
stock or Class B common stock (and other than convertible
securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Class A common
stock or Class B common stock) or of one of our
subsidiaries, on the basis of a distribution of one class or
series of securities with respect to shares of our Class A
common stock and another class or series of securities with
respect to shares of our Class B common stock, and the
securities so distributed (and, if applicable, the securities
into which the distributed securities are convertible, or for
which they are exchangeable, or which the distributed securities
evidence the right to purchase) shall differ with respect to,
but solely with respect to, their relative voting rights and
related differences in conversion and share distribution
provisions, and all such differences shall be identical to the
corresponding differences in voting rights, conversion and share
distribution provisions between our Class A common stock
and our Class B common stock, so as to preserve the
relative voting rights of each class as in effect immediately
prior to such share distribution, and such distribution shall be
made on an equal per share basis; and
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in the case of a share distribution consisting of shares of any
class of series of securities of any other legal entity other
than us or one of our subsidiaries, on the basis of a
distribution of identical securities, on an equal per share
basis, with respect to shares of Class A common stock and
Class B common stock.
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Subdivision
or Combination
If we in any manner subdivide or combine the outstanding shares
of Class A common stock or Class B common stock, the
outstanding shares of other classes of common stock will be
proportionately subdivided or combined in the same manner and on
the same basis as the outstanding shares of Class A common
stock or Class B common stock, as the case may be, that
have been subdivided or combined.
Conversion
Each share of Class B common stock is convertible at any
time and from time to time at the option of the holder thereof
into 1.075 shares of Class A common stock. In
addition, any shares of Class B common stock transferred to
a person other than a permitted holder (as described below) of
Class B common stock will automatically convert into shares
of Class A common stock on a 1:1.075 basis upon any such
transfer. Shares of Class A common stock are not
convertible into shares of Class B common stock.
Transfer
Restrictions
In general, shares of our Class A common stock are freely
transferable by the holders thereof. Shares of our Class B
common stock are not transferable unless (i) first
converted into shares of our Class A common stock or
(ii) transferred pursuant to a Permitted Transfer. A
Permitted Transfer is a transfer of Class B common stock to:
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for holders that are not natural persons, (i) any
subsidiary entity of such holder; provided that all the
holders of the equity interests in such entity are holders of
our Class B common stock or the persons referred to under
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natural persons below, or (ii) any person or entity that
holds, directly or indirectly, all of the capital stock of such
holder or all of the capital stock of another holder;
provided such person or entity are holders of
Class B common stock or the persons referred to under
natural persons below or (iii) a wholly-owned subsidiary of
a person or entity described in clause (ii); or
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for holders that are natural persons, (i) the members of
the family of such holder or a trust existing for the benefit of
such holder or such family members or (ii) the estate of
such holder or a successor in interest of a holder, including
the executor, administrator or personal representative of such
holder’s estate or the heirs, legatees or any other persons
who have succeeded, by operation of law, to such holder’s
shares of Class B common stock if there is no executor,
administrator or personal representative then serving who has
control over such shares.
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Equivalent
Consideration in Certain Transactions
In the event of any merger, consolidation, share exchange,
reclassification of our capital stock or other reorganization to
which we are a party, pursuant to which shares of Class A
common stock or Class B common stock will be exchanged for
or converted into, or will receive a distribution of, cash or
other property or our securities or the securities of any other
person, each share of common stock will be entitled to receive
Equivalent Consideration (as defined below) on a per share
basis. As defined in our amended and restated certificate of
incorporation, the term “Equivalent Consideration”
means consideration in the same form, in the same amount and, if
applicable, with the same voting rights on a per share basis;
provided (i) that holders of Class B common
stock will be entitled to receive consideration in excess of
that received by holders of Class A common stock in an
amount equal to the Class B conversion premium described
above under “— Conversion” and (ii) that, in
the event that our securities (or securities of any surviving
entity or any direct or indirect parent of the surviving entity)
are to be issued or paid in a Control Transaction (as defined
below), then such securities shall be issued or paid in two
classes and such classes shall differ with respect to, but
solely with respect to, their relative voting rights and related
differences in conversion and share distribution provisions, and
all such differences shall be identical to the corresponding
differences in voting rights, conversion and share distribution
provisions between the Class A common stock and the
Class B common stock, so as to preserve the relative voting
rights of each class as in effect immediately prior such
transaction. As defined in our amended and restated certificate
of incorporation, the term “Control Transaction” means
any merger, consolidation, share exchange, reclassification of
our capital stock or other reorganization to which we are a
party in which the holders of our common stock immediately prior
to consummation of such transaction continue to hold at least a
majority of the equity or voting power in us (or any surviving
entity or any direct or indirect parent of the surviving entity)
immediately after consummation of such transaction.
Other
Rights
Our stockholders have no preemptive or other rights to subscribe
for additional shares. All holders of common stock, regardless
of class, are entitled to share equally on a
share-for-share
basis in any assets available for distribution to common
stockholders upon our liquidation, dissolution or winding up.
All outstanding shares are, and all shares distributed in the
Exchange will be, when distributed, validly issued, fully paid
and nonassessable.
Preferred
Stock
Subject to the voting rights of the holders of Class B
common stock described above, our Board of Directors is
authorized to provide for the issuance of preferred stock in one
or more series and to fix the designation, preferences, powers
and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including
the dividend rate, conversion rights, voting rights, redemption
price and liquidation preference and to fix the number of shares
to be included in any such series. Any preferred stock so issued
may rank senior to our common stock with respect to the payment
of dividends or amounts upon liquidation, dissolution or winding
up, or both. In addition, any such shares of preferred stock may
have class or series voting rights.
106
Anti-Takeover
Effects of Our Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws and Nevada Law
Some provisions of Nevada law and our amended and restated
certificate of incorporation and amended and restated bylaws
could make the following more difficult:
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acquisition of us by means of a tender offer or merger;
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acquisition of us by means of a proxy contest or
otherwise; or
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removal of our incumbent officers and directors.
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These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids. These
provisions also are designed to encourage persons seeking to
acquire control of us to first negotiate with our Board of
Directors. We believe that the benefits of the potential ability
to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure our company outweigh the
disadvantages of discouraging those proposals because
negotiation of them could result in an improvement of their
terms.
Shareholder
Action by Written Consent
Our amended and restated articles of incorporation provide that
any action required or permitted to be taken at any annual or
special meeting of the stockholders must be effected at a duly
called annual or special meeting of such holders and may not be
effected by any consent in writing by such holders, unless such
consent is unanimous.
Calling
of Special Meeting
Our amended and restated articles of incorporation and bylaws
provide that special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute, may
be called exclusively upon request by the majority of our Board
of Directors.
Requirements
for Advance Notification of Shareholder Nominations and
Proposals
Our bylaws establish advance notice procedures with respect to
stockholder proposals and nomination of candidates for election
as directors other than nominations made by or at the direction
of our Board of Directors or a committee of our Board of
Directors.
In general, for nominations or other business to be properly
brought before an annual meeting by a stockholder, the
stockholder must give notice in writing to our principal
executive office 50 to 75 days before the first anniversary
of the preceding year’s annual meeting, and the business
must be a proper matter for stockholder action. The
stockholder’s notice must include for each proposed nominee
and business, as applicable, (i) the proposed
nominee’s name, age, business address, residence and
principal occupation, (ii) the class, series and number of
shares of ALC beneficially owned by the nominee, (iii) all
required information under the Securities and Exchange Act of
1934, as amended, (iv) a brief description of the proposed
business and the reasons for conducting such business at the
meeting, (v) the stockholder’s name and address that
is making the proposal, (iv) the class, series and number
of shares which are beneficially owned by such stockholder and
(v) such stockholder’s material interest in the
business being proposed.
In general, the only business that shall be conducted at a
special meeting of stockholders shall be the matters set forth
in the applicable notice of meeting.
Only persons who are nominated in accordance with the procedures
set forth in our bylaws shall be eligible to serve as directors,
and the only business that shall be conducted at a meeting of
stockholders shall be the matters properly brought before the
meeting in accordance with the procedures set forth in our
bylaws. The chairman of the meeting shall have the power and
duty to determine whether a nomination or any business proposed
to be brought before the meeting was made or proposed in
accordance with the procedures set forth in our bylaws and, if
any proposed nomination or business is not in compliance with
our bylaws, to declare that such defective proposal or
nomination shall be disregarded.
107
Amendment
of Certain of the Provisions of our Amended and Restated
Articles of Incorporation and Bylaws
The provisions in our amended and restated articles of
incorporation and bylaws relating to amendment of the
certificate of incorporation and bylaws, advance notice of
director nominations and business at an annual meeting,
stockholder meetings and action by written consent may not be
amended, altered, changed or repealed in any respect unless such
amendment, alteration, change or repeal is approved by the
affirmative vote of not less than 80% of the combined voting
power of the voting stock.
In addition, our amended and restated articles of incorporation
and bylaws provide that the provisions of our bylaws relating to
the calling of meetings of stockholders, notice of meetings of
stockholders, required quorum at meetings of stockholders,
conduct of meetings of stockholders, stockholder action by
written consent, advance notice of stockholder business or
director nominations, the authorized number of directors, the
filling of director vacancies or the removal of directors and
indemnification of officers and directors (and any provision
relating to the amendment of any of these provisions) may only
be amended by the vote of a majority of our entire Board of
Directors or by the vote of holders of at least 80% of the votes
entitled to be cast by the outstanding capital stock in the
election of our Board of Directors.
Nevada
Anti-Takeover Law
Business
Combinations Act
We are subject to the anti-takeover provisions under Nevada law.
This law provides that specified persons who, together with
affiliates and associates, own, or within three years did own,
10% or more of the outstanding voting stock of a corporation
cannot engage in specified business combinations with the
corporation for a period of three years after the date on which
the person became an interested stockholder. The law defines the
term “combination” to encompass a wide variety of
transactions with or caused by an interested stockholder,
including mergers, asset sales, and other transactions in which
the interested stockholder receives or could receive a benefit
on other than a pro rata basis with other stockholders. Although
we have included a provision in our Amended and Restated
Articles of Incorporation pursuant to which we have elected not
to be governed by this anti-takeover law, we will remain subject
to the anti-takeover law for 18 months following the
amendment to our Articles of Incorporation. During this period,
third parties (other than certain existing shareholders of
Extendicare) may find it more difficult to pursue a takeover
transaction that was not approved by our board of directors.
No
Cumulative Voting
Our amended and restated certificate of incorporation and
amended and restated bylaws do not provide for cumulative voting
in the election of directors.
Blank
Check Preferred Stock
The authorization of our undesignated preferred stock makes it
possible for our Board of Directors to issue our preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other
provisions may have the effect of deterring hostile takeovers or
delaying changes of control of our management.
Pre-Exchange
Transactions with Extendicare
Our amended and restated certificate of incorporation provides
that neither any agreement nor any transaction entered into
between us or any of our affiliated companies and Extendicare
and any of its affiliated companies prior to the Exchange nor
the subsequent performance of any such agreement will be
considered void or voidable or unfair to us because Extendicare
or any of its affiliated companies is a party or because
directors or officers of Extendicare were on our Board of
Directors when those agreements or transactions were approved.
In addition, those agreements and transactions and their
performance will not be contrary to any fiduciary duty of any
directors or officers of our company or any affiliated company.
108
Limitation
on Liability of Directors and Indemnification of our Directors
and Officers
Nevada law provides that a corporation may indemnify directors
and officers as well as other employees and individuals against
expenses (including attorneys’ fees), judgments, fines and
amounts paid in settlement in connection with any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, in which such person
is made a party by reason of the fact that the person is or was
a director, officer, employee of or agent to the corporation, or
is or was serving at the request of the corporation in such
capacity of another entity (other than an action by or in the
right of the corporation — a “derivative
action”), if they are not liable under Section 78.138
of the Nevada Revised Statutes or if they acted in good faith
and in a manner they reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that
indemnification only extends to expenses (including amounts paid
in settlement and attorneys’ fees) incurred in connection
with the defense or settlement of such action, and the statute
requires court approval before there can be any indemnification
where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a
corporation’s certificate of incorporation, bylaws,
disinterested director vote, shareholder vote, agreement, or
otherwise.
Our amended and restated certificate of incorporation provides
that the personal liability of our directors, officers,
employees and agents is eliminated to the fullest extent
permitted by Nevada law.
Section 78.138(7) of the Nevada Revised Statutes provides
that, with certain exceptions, a director or officer is not
individually liable to the corporation or its stockholders or
creditors for any damages as a result of any act or failure to
act in his other capacity as a director or officer unless it is
proven that:
(a) his other act or failure to act constituted a breach of
his other fiduciary duties as a director or officer; and
(b) his other breach of those duties involved intentional
misconduct, fraud or a knowing violation of law.
Our amended and restated bylaws provide that, to the fullest
extent permitted by Nevada law, as now in effect or as amended,
we will indemnify and hold harmless any person made or
threatened to be made a party to any action by reason of the
fact that he or she, or a person of whom he or she is the legal
representative, is or was our director, officer, employee or
agent or while our director or officer is or was serving, at our
request, as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit
plans maintained or sponsored by us, whether the basis of such
proceeding is an alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity
while serving as a director or officer, employee or agent. Any
amendment of this provision will not reduce our indemnification
obligations relating to actions taken before an amendment. Our
amended and restated articles of incorporation contain similar
provisions.
We intend to obtain policies insuring our directors and officers
and those of our subsidiaries against certain liabilities they
may incur in their capacity as directors and officers. Under
these policies, the insurer, on our behalf, may also pay amounts
for which we have granted indemnification to our directors or
officers.
Transfer
Agent and Registrar
The transfer agent and registrar for our Class A common
stock is expected to be Computershare Trust Company, Inc.
New York
Stock Exchange Listing
We intend to have ALC’s Class A common stock listed on
the New York Stock Exchange under the symbol “ALC.”
109
DESCRIPTION
OF INDEBTEDNESS
We financed the acquisition or construction of some of our
assisted living facilities with various debt instruments, which
are described above in “Management’s Discussion and
Analysis of Financial Condition and Results of Operation”
under “— Debt Instruments.” Our existing debt
instruments that will survive our separation from Extendicare
are the Red Mortgage Capital Note in the principal amount of
$36.4 million, the DMG Notes in the principal amount of
$27.0 million, the Oregon Revenue Bonds in the principal
amount of $9.4 million and the HUD insured mortgages in the
principal amount of $7.7 million (each principal amount as
of March 31, 2006). In addition, our capital leases will
remain outstanding after the separation. As of March 31,
2006, we had capital lease obligations of $12.1 million. In
addition to our surviving indebtedness, we expect to enter into
a credit facility prior to our separation from Extendicare to
replace the borrowing capacity available to us under EHSI’s
existing credit facility.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (SEC)
a Registration Statement on Form 10 under the Securities
Exchange Act of 1934 (Exchange Act) with respect to the
Class A common stock being distributed. This Information
Statement, which forms a part of the Registration Statement,
does not contain all of the information set forth in the
Registration Statement. For further information with respect to
us and the shares of our Class A common stock, reference is
made to the Registration Statement. Statements contained in this
Information Statement as to the contents of any contract or
other document are not necessarily complete. We are not
currently subject to the informational requirements of the
Exchange Act. As a result of the distribution of the shares of
our Class A common stock, we will become subject to the
informational requirements of the Exchange Act and, in
accordance therewith, will file reports and other information
with the SEC. The Registration Statement, such reports and other
information can be inspected and copied at the Public Reference
Room of the SEC located at 100 F Street, N.E.,
Washington, D.C. 20549. Copies of such materials, including
copies of all or any portion of the Registration Statement, can
be obtained from the Public Reference Room of the SEC at
prescribed rates. You can call the SEC at
1-800-SEC-0330
to obtain information on the operation of the Public Reference
Room. Such materials may also be accessed electronically by
means of the SEC’s home page on the Internet at
http://www.sec.gov.
We intend to furnish holders of our common stock with annual
reports containing consolidated financial statements prepared in
accordance with U.S. generally accepted accounting principles
and audited and reported on, with an opinion expressed, by an
independent registered public accounting firm. We also intend to
furnish holders of our common stock with quarterly reports and
periodic updates.
No person is authorized to give any information or to make any
representations with respect to the matters described in this
Information Statement other than those contained in this
Information Statement or in the documents incorporated by
reference in this Information Statement and, if given or made,
such information or representation must not be relied upon as
having been authorized by us or Extendicare. Neither the
delivery of this Information Statement nor consummation of the
separation contemplated hereby shall, under any circumstances,
create any implication that there has been no change in our
affairs or those of Extendicare since the date of this
Information Statement, or that the information in this
Information Statement is correct as of any time after its date.
110
INDEX TO
COMBINED FINANCIAL STATEMENTS
ASSISTED
LIVING CONCEPTS, INC.
| |
|
|
|
|
|
|
|
Page
|
|
|
|
Combined Financial Statements of
Assisted Living Concepts, Inc. (a combination of the assisted
living businesses in the United States owned by Extendicare
Inc.) (ALC or the Company)
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
|
|
|
|
|
|
F-7
|
|
|
Consolidated Financial Statements
of Assisted Living Concepts, Inc. and subsidiaries (Historic ALC)
|
|
|
|
|
|
|
|
|
F-33
|
|
|
|
|
|
F-34
|
|
|
|
|
|
F-35
|
|
|
|
|
|
F-36
|
|
|
|
|
|
F-37
|
|
|
|
|
|
F-38
|
|
|
|
|
|
F-55
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Assisted Living Concepts, Inc.:
We have audited the accompanying combined balance sheets of
Assisted Living Concepts, Inc. (“the Company”) (a
combination of certain assisted living businesses in the United
States owned by subsidiaries of Extendicare Inc. as defined in
Notes 1 and 2), as of December 31, 2005 and 2004, and
the related combined statements of income, parent’s
investment, and cash flows for each of the years in the
three-year period ended December 31, 2005. These combined
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall combined financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of Assisted Living Concepts, Inc. as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
Milwaukee, Wisconsin
June 5, 2006
F-2
ASSISTED
LIVING CONCEPTS, INC.
COMBINED
BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,343
|
|
|
$
|
6,439
|
|
|
$
|
119
|
|
|
Accounts receivable, less
allowances of $727, $872 and $102 respectively
|
|
|
4,545
|
|
|
|
4,351
|
|
|
|
243
|
|
|
Supplies, prepaid expenses and
other current assets (Note 5)
|
|
|
5,075
|
|
|
|
4,904
|
|
|
|
453
|
|
|
Deferred state income taxes
(Note 16)
|
|
|
436
|
|
|
|
392
|
|
|
|
53
|
|
|
Due from shareholder and
affiliates (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
9
|
|
|
|
350
|
|
|
|
352
|
|
|
Other
|
|
|
—
|
|
|
|
76
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,408
|
|
|
|
16,512
|
|
|
|
1,220
|
|
|
Property and equipment, net
(Note 6)
|
|
|
373,563
|
|
|
|
378,362
|
|
|
|
73,390
|
|
|
Goodwill and other intangible
assets, net (Note 7)
|
|
|
19,423
|
|
|
|
19,953
|
|
|
|
9,983
|
|
|
Other assets (Note 8)
|
|
|
7,715
|
|
|
|
5,870
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
420,109
|
|
|
$
|
420,697
|
|
|
$
|
84,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARENT’S
INVESTMENT
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,111
|
|
|
$
|
5,027
|
|
|
$
|
1,435
|
|
|
Accrued liabilities (Note 10)
|
|
|
20,438
|
|
|
|
20,267
|
|
|
|
2,505
|
|
|
Accrued state income taxes
(Note 16)
|
|
|
632
|
|
|
|
570
|
|
|
|
|
|
|
Current maturities of long-term
debt (Note 9)
|
|
|
2,972
|
|
|
|
2,925
|
|
|
|
—
|
|
|
Due to shareholder and affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued federal income taxes
(Note 16)
|
|
|
998
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
3,527
|
|
|
|
—
|
|
|
|
—
|
|
|
Current portion of self-insured
liabilities (Note 11)
|
|
|
300
|
|
|
|
300
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
32,978
|
|
|
|
29,089
|
|
|
|
3,940
|
|
|
Accrual for self-insured
liabilities (Note 11)
|
|
|
1,086
|
|
|
|
1,027
|
|
|
|
—
|
|
|
Long-term debt (Note 9)
|
|
|
127,934
|
|
|
|
128,601
|
|
|
|
—
|
|
|
Deferred state income taxes
(Note 16)
|
|
|
857
|
|
|
|
814
|
|
|
|
173
|
|
|
Other long-term liabilities
(Note 12)
|
|
|
7,468
|
|
|
|
7,181
|
|
|
|
—
|
|
|
Due to shareholder and affiliates
(Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
|
3,224
|
|
|
|
3,324
|
|
|
|
1,137
|
|
|
Interest-bearing advances
(Note 3)
|
|
|
40,718
|
|
|
|
47,218
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
214,265
|
|
|
|
217,254
|
|
|
|
5,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent’s investment
|
|
|
205,844
|
|
|
|
203,443
|
|
|
|
79,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Parent’s Investment
|
|
$
|
420,109
|
|
|
$
|
420,697
|
|
|
$
|
84,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-3
ASSISTED
LIVING CONCEPTS, INC.
COMBINED
STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
REVENUES
|
|
$
|
56,776
|
|
|
$
|
37,665
|
|
|
$
|
204,949
|
|
|
$
|
33,076
|
|
|
$
|
31,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
37,214
|
|
|
|
25,605
|
|
|
|
138,126
|
|
|
|
23,837
|
|
|
|
22,163
|
|
|
General and administrative
|
|
|
3,454
|
|
|
|
2,226
|
|
|
|
6,789
|
|
|
|
506
|
|
|
|
503
|
|
|
Lease costs (Note 14)
|
|
|
3,488
|
|
|
|
2,348
|
|
|
|
12,852
|
|
|
|
66
|
|
|
|
73
|
|
|
Depreciation and amortization
|
|
|
4,123
|
|
|
|
2,390
|
|
|
|
14,750
|
|
|
|
3,281
|
|
|
|
3,032
|
|
|
Interest expense, net (Note 9)
|
|
|
2,830
|
|
|
|
2,452
|
|
|
|
11,603
|
|
|
|
1,738
|
|
|
|
2,698
|
|
|
Loss on early retirement of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
647
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
51,109
|
|
|
|
35,021
|
|
|
|
184,120
|
|
|
|
30,075
|
|
|
|
28,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
|
|
|
5,667
|
|
|
|
2,644
|
|
|
|
20,829
|
|
|
|
3,001
|
|
|
|
2,708
|
|
|
Income tax expense (Note 16)
|
|
|
2,189
|
|
|
|
1,008
|
|
|
|
8,119
|
|
|
|
1,138
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME FROM CONTINUING
OPERATIONS
|
|
|
3,478
|
|
|
|
1,636
|
|
|
|
12,710
|
|
|
|
1,863
|
|
|
|
1,695
|
|
|
Loss from discontinued operations
before income taxes (Note 18)
|
|
|
(1,927
|
)
|
|
|
(177
|
)
|
|
|
(692
|
)
|
|
|
(380
|
)
|
|
|
(1,018
|
)
|
|
Income tax benefit on discontinued
operations (Note 16)
|
|
|
(759
|
)
|
|
|
(67
|
)
|
|
|
(324
|
)
|
|
|
(152
|
)
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS FROM DISCONTINUED
OPERATIONS
|
|
|
(1,168
|
)
|
|
|
(110
|
)
|
|
|
(368
|
)
|
|
|
(228
|
)
|
|
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
2,310
|
|
|
$
|
1,526
|
|
|
$
|
12,342
|
|
|
$
|
1,635
|
|
|
$
|
1,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-4
ASSISTED
LIVING CONCEPTS, INC.
COMBINED
STATEMENTS OF PARENT’S INVESTMENT
| |
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
BALANCES at DECEMBER 31, 2002
|
|
$
|
71,771
|
|
|
Net income
|
|
|
1,067
|
|
|
Net cash transferred to parent
|
|
|
(2,070
|
)
|
|
Other intercompany transactions
|
|
|
624
|
|
|
|
|
|
|
|
|
BALANCES at DECEMBER 31, 2003
|
|
|
71,392
|
|
|
Net income
|
|
|
1,635
|
|
|
Net cash transferred from parent
|
|
|
5,758
|
|
|
Other intercompany transactions
|
|
|
587
|
|
|
|
|
|
|
|
|
BALANCES at DECEMBER 31, 2004
|
|
|
79,372
|
|
|
Net income
|
|
|
12,342
|
|
|
Cash contribution from parent for
acquisition of ALC
|
|
|
101,648
|
|
|
Net cash transferred from parent
|
|
|
9,521
|
|
|
Other intercompany transactions
|
|
|
560
|
|
|
|
|
|
|
|
|
BALANCES at DECEMBER 31, 2005
|
|
|
203,443
|
|
|
Net income (unaudited)
|
|
|
2,310
|
|
|
Net cash transferred to parent
(unaudited)
|
|
|
(35
|
)
|
|
Other intercompany transactions
(unaudited)
|
|
|
126
|
|
|
|
|
|
|
|
|
BALANCES at MARCH 31, 2006
(unaudited)
|
|
$
|
205,844
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-5
ASSISTED
LIVING CONCEPTS, INC.
COMBINED
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,310
|
|
|
$
|
1,526
|
|
|
$
|
12,342
|
|
|
$
|
1,635
|
|
|
$
|
1,067
|
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,177
|
|
|
|
2,402
|
|
|
|
14,920
|
|
|
|
3,744
|
|
|
|
4,237
|
|
|
Amortization of purchase accounting
adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases and debt
|
|
|
(131
|
)
|
|
|
(83
|
)
|
|
|
(663
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Below market resident leases
|
|
|
(475
|
)
|
|
|
—
|
|
|
|
(2,488
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Provision for bad debt
|
|
|
139
|
|
|
|
44
|
|
|
|
458
|
|
|
|
102
|
|
|
|
41
|
|
|
Provision for self-insured
liabilities (Note 11)
|
|
|
177
|
|
|
|
95
|
|
|
|
795
|
|
|
|
—
|
|
|
|
—
|
|
|
Payments of self-insured
liabilities (Note 11)
|
|
|
(117
|
)
|
|
|
(30
|
)
|
|
|
(371
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Loss on impairment of long-lived
assets
|
|
|
1,722
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
240
|
|
|
|
929
|
|
|
|
3,347
|
|
|
|
(516
|
)
|
|
|
(203
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(333
|
)
|
|
|
(23
|
)
|
|
|
(1,079
|
)
|
|
|
139
|
|
|
|
161
|
|
|
Other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
Supplies, prepaid expenses and
other current assets
|
|
|
(171
|
)
|
|
|
(972
|
)
|
|
|
(651
|
)
|
|
|
(55
|
)
|
|
|
(192
|
)
|
|
Accounts payable
|
|
|
(917
|
)
|
|
|
(502
|
)
|
|
|
764
|
|
|
|
(265
|
)
|
|
|
325
|
|
|
Accrued liabilities
|
|
|
645
|
|
|
|
5,796
|
|
|
|
3,010
|
|
|
|
34
|
|
|
|
(212
|
)
|
|
Income taxes payable/ receivable
|
|
|
1,557
|
|
|
|
(903
|
)
|
|
|
1,845
|
|
|
|
—
|
|
|
|
—
|
|
|
Current due to shareholder and
affiliates
|
|
|
3,160
|
|
|
|
—
|
|
|
|
(3,471
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
11,983
|
|
|
|
8,279
|
|
|
|
28,762
|
|
|
|
4,818
|
|
|
|
5,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for acquisition of Assisted
Living Concepts, Inc. (Note 4)
|
|
|
—
|
|
|
|
(144,199
|
)
|
|
|
(144,578
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Cash balances in ALC as of
acquisition
|
|
|
—
|
|
|
|
6,547
|
|
|
|
6,522
|
|
|
|
—
|
|
|
|
—
|
|
|
Payments for new construction
projects (Note 6)
|
|
|
(771
|
)
|
|
|
(5,187
|
)
|
|
|
(15,198
|
)
|
|
|
(12,684
|
)
|
|
|
(2,955
|
)
|
|
Payments for purchases of property
and equipment
|
|
|
(1,425
|
)
|
|
|
(1,058
|
)
|
|
|
(5,822
|
)
|
|
|
(1,520
|
)
|
|
|
(1,692
|
)
|
|
Proceeds from sale of property and
equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,728
|
|
|
|
966
|
|
|
Changes in other non-current assets
|
|
|
(64
|
)
|
|
|
(223
|
)
|
|
|
110
|
|
|
|
5
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(2,260
|
)
|
|
|
(144,120
|
)
|
|
|
(158,966
|
)
|
|
|
(10,471
|
)
|
|
|
(3,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions
(distributions) from (to) parent
|
|
|
(35
|
)
|
|
|
4,445
|
|
|
|
9,521
|
|
|
|
5,758
|
|
|
|
(2,070
|
)
|
|
Capital contributions to ALC
|
|
|
—
|
|
|
|
80,000
|
|
|
|
101,648
|
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from debt to finance ALC
acquisition
|
|
|
—
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Interest bearing advances from
parent to payoff debt
|
|
|
—
|
|
|
|
—
|
|
|
|
51,016
|
|
|
|
—
|
|
|
|
—
|
|
|
Repayment of interest bearing
advances to parent
|
|
|
(6,500
|
)
|
|
|
—
|
|
|
|
(3,798
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Payments of long-term debt
(Note 9)
|
|
|
(516
|
)
|
|
|
(4,344
|
)
|
|
|
(84,388
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other long-term liabilities
|
|
|
232
|
|
|
|
225
|
|
|
|
2,525
|
|
|
|
(211
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
(6,819
|
)
|
|
|
140,326
|
|
|
|
136,524
|
|
|
|
5,547
|
|
|
|
(2,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
2,904
|
|
|
|
4,485
|
|
|
|
6,320
|
|
|
|
(106
|
)
|
|
|
(638
|
)
|
|
Cash and cash equivalents,
beginning of period
|
|
|
6,439
|
|
|
|
119
|
|
|
|
119
|
|
|
|
225
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
9,343
|
|
|
$
|
4,604
|
|
|
$
|
6,439
|
|
|
$
|
119
|
|
|
$
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,946
|
|
|
$
|
2,279
|
|
|
$
|
12,116
|
|
|
$
|
1,738
|
|
|
$
|
2,702
|
|
|
Income tax payments, net of refunds
|
|
|
129
|
|
|
|
1,108
|
|
|
|
5,949
|
|
|
|
1,502
|
|
|
|
826
|
|
|
Supplemental schedule of non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company acquired all of the
capital stock of Assisted Living Concepts, Inc. In connection
with the acquisition, liabilities were assumed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
—
|
|
|
$
|
315,200
|
|
|
$
|
315,200
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash paid
|
|
|
—
|
|
|
|
(144,199
|
)
|
|
|
(144,578
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
$
|
—
|
|
|
$
|
171,001
|
|
|
$
|
170,622
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred
to purchase properties (Note 14)
|
|
$
|
—
|
|
|
$
|
12,848
|
|
|
$
|
12,848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-6
ASSISTED
LIVING CONCEPTS, INC.
The combined financial statements represent the combined
historical financial position and results of operation of the
assisted living operations of Extendicare Inc.
(“Extendicare”) in the United States. As of
December 31, 2005, Extendicare’s assisted living
operations consisted of 211 assisted living facilities
(8,673 units). Through the share acquisition of Assisted
Living Concepts, Inc. (“ALC”) on January 31,
2005, by a wholly owned subsidiary of Extendicare, Extendicare
Health Services Inc. (“EHSI”), Extendicare acquired
177 of these assisted living facilities. The remaining assisted
living facilities were owned by EHSI prior to the ALC
acquisition. Through a series of transactions that are expected
to occur in 2006 that are described in notes 2 and 19,
substantially all of Extendicare’s assisted living
operations and properties will be owned and operated by ALC.
These combined historical financial statements, referred to as
ALC (“the Company”) combined financial statements,
represent a combination of all of Extendicare’s assisted
living operations in the United States, the majority of which,
will be included within ALC upon the separation from
Extendicare. References to “Historic ALC” in these
combined financial statements pertain to ALC and its
consolidated subsidiaries, as constituted prior to its
acquisition by Extendicare on January 31, 2005.
Extendicare is a publicly traded company with shares listed on
the New York and Toronto Stock Exchanges. As of
December 31, 2005, Extendicare operated 439 nursing and
assisted living facilities in North America. Through its
U.S. wholly-owned subsidiary, EHSI, as at December 31,
2005, EHSI operated or managed 146 nursing facilities and 216
assisted living facilities. EHSI was incorporated in Delaware in
1984 and as at December 31, 2004, operated 32 assisted
living facilities (1,604 units) in nine states. On
January 31, 2005, EHSI completed its acquisition of all of
the outstanding common shares of ALC for a total of
approximately $285 million, including the assumption of
$141 million of ALC’s existing debt. Upon acquisition,
ALC had a portfolio of 177 assisted living facilities, including
122 owned and 55 leased facilities representing
6,838 units. During 2005, EHSI constructed two assisted
living facilities that were opened and operated by ALC. As at
December 31, 2005, Extendicare operated 211 assisted living
facilities (8,673 units) in the United States. As at
March 31, 2006, Extendicare operated 208 assisted living
facilities (8,521 units) in the United States.
|
|
|
2.
|
ALC
SEPARATION TRANSACTION
|
a) Transaction
Agreements to be Completed Prior to Separation Transaction
(unaudited)
In preparation for, and immediately prior to the completion of
the separation, EHSI and the Company expect to enter into a
Separation Agreement, a Tax Allocation Agreement and other
agreements related to the separation. These agreements are
intended to govern the allocation of assets and liabilities
between Extendicare and ALC as well as certain aspects of the
ongoing relationship between Extendicare and the Company after
the separation. In addition, the Company and Extendicare expect
to execute any deeds, bills of sale, stock powers, certificates
of title, assignments and other instruments of sale,
contribution, conveyance, assignment, transfer and delivery
required to consummate the separation of ALC from Extendicare.
Separation
Transaction
The Separation Agreement is expected to set forth the agreements
with Extendicare related to the transfer of assets and the
assumption of liabilities necessary to separate the Company from
Extendicare. It also is expected to set forth the Company’s
and Extendicare’s indemnification obligations following the
separation. Although the Company expects that most of the assets
that constitute its business will be owned by it prior to the
Company entering the Separation Agreement, the Separation
Agreement is expected to obligate Extendicare to transfer, and
cause its affiliates to transfer certain assets, to the Company
or its subsidiaries.
In addition, the Company is expected to assume and agree to
perform, discharge and fulfill: (i) all liabilities
primarily related to, arising out of or resulting from the
operation or conduct of the Company’s business, except for
any pre-separation liabilities related to the 29 assisted living
facilities being transferred to the Company by EHSI
F-7
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
(see Note 2(b)), and including any liabilities to the
extent relating to, arising out of or resulting from any other
asset that is transferred to the Company by Extendicare, in each
case whether before, on or after the completion of the Plan of
Arrangement; (ii) all liabilities recorded or reflected in
the financial statements of the Company; (iii) all
liabilities relating to certain specified lawsuits that
primarily relate to the Company; (iv) liabilities of
Extendicare under any agreement between Extendicare and any of
the Company’s directors or director nominees, entered prior
to the completion of the Plan of Arrangement that indemnifies
such directors or director nominees for actions taken in their
capacity as directors or director nominees of the Company.
Transitional
Services
The Company and Extendicare intend to enter into a number of
transitional services agreements immediately prior to the
separation, pursuant to which Extendicare and its affiliates
will perform certain services for the Company for a limited
period of time following the separation including.
(i) payroll and benefits processing for all of our
employees, at pre-defined monthly rates based upon the number of
facilities and units being processed; (ii) hosting services
for certain of the Company’s software applications; and
(iii) purchasing services, through EHSI’s purchasing
group, United Health Facilities, Inc. The Company expects to pay
Extendicare for the services it provides based upon rates
established with Extendicare that reflect market rates for the
applicable service.
Tax
Allocation Agreement
The Tax Allocation Agreement, which the Company and Extendicare
intend to enter into immediately prior to the separation, is
expected to govern both the Company’s and
Extendicare’s rights and obligations after the separation
with respect to taxes for both pre and post separation periods.
Under the Tax Allocation Agreement, the Company generally is
expected to be required to indemnify Extendicare for any taxes
attributable to its operations (excluding the assisted living
facilities being transferred to the Company from EHSI as part of
the separation) for all pre-separation periods and Extendicare
generally is expected to be required to indemnify the Company
for any taxes attributable to its operations (including the
assisted living facilities being transferred to the Company from
EHSI as part of the separation) for all pre-separation periods.
In addition, it is expected that Extendicare will be liable, and
indemnify the Company, for any taxes incurred in connection with
the separation.
Under U.S. Federal income tax law, we will be jointly and
severally liable for any taxes imposed on Extendicare for the
periods during which we were a member of its consolidated group,
including any taxes imposed with respect to the disposition of
our common stock. There is no assurance, however, that
Extendicare will have sufficient assets to satisfy any such
liability or that we will successfully recover from Extendicare
any amounts for which we are held liable. Our liability for any
taxes imposed on Extendicare could materially reduce the price
of our common stock.
b) Transactions
in 2006 Prior to ALC Separation Transaction
(unaudited)
As of December 31, 2005 EHSI owned 33 assisted living
facilities and leased one assisted living facility, and operated
32 of the 34 assisted living facilities, with two assisted
living facilities owned by EHSI being operated by ALC. In the
2006 March quarter, EHSI closed an assisted living facility
(60 units) in Texas, closed an assisted living facility in
Oregon (45 units) and the term of a leased assisted living
facility (63 units) in Washington ended and EHSI decided to
terminate the operations due to poor financial performance.
Therefore, as of March 31, 2006 EHSI owned 31 and operated
29 assisted living facilities, with two assisted living
facilities owned by EHSI, being operated by ALC.
Since March 31, 2006, the Company has acquired the licenses
to operate all of EHSI’s 29 assisted living facilities and
has entered into purchase agreements with respect to each
facility. The Company has completed the purchase of 14 of these
facilities for an aggregate purchase price of
$49.6 million. The remaining 15 facilities require the
approval of local planning commissions to subdivide the
properties between the assisted living facilities and skilled
nursing facilities that make up those properties. The Company
and EHSI have applied for such approval
F-8
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
and, once obtained, the Company expects to complete the purchase
of the remaining 15 facilities for an aggregate purchase price
of $44.9 million in accordance with the terms of the
purchase and sale agreements regarding these facilities. These
29 assisted living properties and the corresponding equity
contribution are recorded on the Company’s historical
combined balance sheet at net book value of $60.8 million
at December 31, 2005. See further discussion in
Note 19c.
In addition, prior to the separation, Extendicare or EHSI
expects to make certain capital contributions into ALC as
follows: (1) the contribution of cash into ALC to establish
Pearson Indemnity Company, Ltd. (“Pearson”), the
Company’s Bermuda based captive insurance company,
(2) the contribution of Omnicare, Inc.
(“Omnicare”) shares owned by EHSI to ALC with a fair
value of $2.7 million at March 31, 2006 (unaudited),
(3) the contribution of cash by EHSI into ALC for
$5.0 million to fund ALC’s acquisition of an
office building, (4) a capital contribution of
approximately $40.7 million by EHSI as settlement of the
outstanding debt owed by ALC to EHSI and an additional
$10.3 million cash contribution to equity and (5) the
contribution to the Company of Canadian share investments in BNN
Investments Ltd. (“BNN”) with a fair value of
$1.5 million at March 31, 2006 (unaudited) and MedX
Health Corporation (“MedX”) which had a carrying value
of $0.2 million at March 31, 2006 (unaudited), that
are currently owned by Extendicare. These transactions are not
reflected in these combined financial statements.
c) Basis
of Presentation of ALC Combined Financial
Statements
The historical combined financial statements of ALC have been
prepared to include all of the accounts of various subsidiaries
and divisions that comprise Extendicare’s assisted living
business in the United States and are a combination of:
(i) the assisted living facilities operated by EHSI prior
to and after its acquisition of Historic ALC, which ranged from
36 facilities as of January 1, 2003 to 29 facilities as of
December 31, 2005; (ii) 177 assisted living facilities
operated by ALC since Extendicare completed the acquisition of
Historic ALC on January 31, 2005; (iii) the assisted
living facilities that were constructed by EHSI during 2005 but
were opened and operated by ALC. Our historical audited combined
financial statements include results from several assets and
operations that will not be part of ALC’s business
following the separation transactions. These assets consist of
(i) two assisted living facilities that will be retained by
EHSI and another 129 assisted living units that are contained
within skilled nursing facilities and (ii) three assisted
living facilities formerly operated by EHSI where operations
were discontinued in the three months ended March 31, 2006.
The combined financial statements include the transfer of
assisted living facility operations and assets that are expected
to occur after March 31, 2006 from EHSI to ALC that are
outlined below and in Note 19. More specifically, these
historical financial statements reflect: (1) the transfer
of licenses from EHSI to ALC to operate 29 assisted living
facilities that were subject to state regulatory approval,
(2) the transfer of ownership from EHSI to ALC as an equity
contribution at an aggregate net book value of
$60.8 million, 29 assisted living properties that, for 15
of the properties, are subject to planning permission approval.
For purposes of the combined financial statements, assisted
living facilities that were sold or closed have been reported as
discontinued operations and are summarized in Note 18.
Discontinued operations include the two assisted living
facilities (141 units) that will be retained by EHSI along
with another 129 assisted living units that are contained within
skilled nursing facilities that are not expected to be
transferred to ALC as part of the Separation Transaction and
certain other assisted living facilities that were sold or
closed.
For periods prior to the acquisition of Historic ALC, during
which EHSI’s assisted living operations had a small
corporate management staff, estimated incremental costs to
support the accounting, human resources, information technology
and other administrative services have been allocated to the
assisted living operations. Interest expense has also been
allocated to the assisted living facilities based upon the
facilities historical allocated interest based upon the assisted
living facilities’ historic cost and current borrowing
rates. For the years ended 2003 and 2004, all other assets and
liabilities associated with EHSI assisted living operations and
its corporate staff have been reflected in the historical
audited combined financial statements.
F-9
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Prior to March 2005, Historic ALC’s were headquartered in
Dallas, Texas. As part of the consolidation of Historic ALC and
EHSI, the headquarters for the combined assisted living facility
business was moved to Milwaukee Wisconsin, senior management was
replaced and the majority of personnel in the Dallas office were
terminated. In addition, the Dallas office administrative
functions, composed of information technology, accounting, human
resources and corporate management personnel, were relocated to
Milwaukee.
For periods subsequent to March 31, 2005, charges related
to the combined operations for accounting, human resources,
information technology and other administrative services have
been allocated to ALC based upon estimated incremental cost to
support the combined operations. The incremental cost was
determined by comparing the number of employees required to
perform the above mentioned functions before and after the ALC
acquisition. The incremental employees’ wages and benefits
were considered an additional cost as a result of the ALC
acquisition. Non wage and benefit related costs were reviewed
individually and a determination was made as to whether they
were related to the ALC acquisition or not. The Company believes
that the method used is reasonable. The Company believes that
the stand alone costs would not be significantly different than
the incremental cost method of allocating these expenses. Stock
options of Extendicare shares granted to ALC senior management
have been charged to general and administrative expense.
Interest charges have been allocated to ALC based upon
(1) specific facility debt instruments in place with the
applicable interest charges, or (2) interest incurred on
the replacement of debt incurred by EHSI in order to repay
Historic ALC debt, or (3) for the facilities owned by EHSI,
historical allocated interest based upon the assisted living
facilities’ historic cost and current borrowing rates, or
(4) for the debt incurred against the EHSI line of credit
on the acquisition of Historic ALC, the interest incurred based
upon the average balance of the line of credit and EHSI’s
average line of credit interest rate. For the year ended
December 31, 2005, all assets and liabilities associated
with the EHSI assisted living operations have been reflected in
the historical audited combined financial statements. In
addition, all assets and liabilities associated with the
assisted living operations of ALC have been reflected in the
historical audited combined financial statements since
January 31, 2005, the date of acquisition of ALC.
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3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
a) Principles
of Presentation
The combined financial statements include a combination of
historical financial assets and operations of the assisted
living operations of Extendicare described in Note 1 and
Note 2. All significant intercompany accounts and
transactions with subsidiaries have been eliminated from the
consolidated financial statements.
The combined financial statements of the Company have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Management’s most significant estimates include revenue
recognition and valuation of accounts receivable, measurement of
acquired assets and liabilities in business combinations,
valuation of assets and determination of asset impairment,
self-insured liabilities for general and professional liability,
workers’ compensation and health and dental claims,
valuation of conditional asset retirement obligations and
valuation of deferred tax assets. Actual results could differ
from those estimates.
The combined financial statements as of, and for the three
months ended March 31, 2006 and 2005 are unaudited and have
been prepared in accordance with the Securities and Exchange
Commission regulations. Such financial statements do not include
all of the information and the footnotes required by accounting
principles generally accepted in the United States of America
for complete statements. In the opinion of the Company’s
management, all adjustments necessary for a fair presentation of
such financial statements have been included.
The Company operates in only one business segment, being the
assisted living business.
F-10
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
b) Cash
and Cash Equivalents
The Company considers highly liquid investments that have a
maturity of 90 days or less to be cash equivalents. EHSI
has a centralized approach to cash management and therefore
periodically transfers all excess funds of the Company to
EHSI’s main cash deposit account. Transfers of cash to
(from) EHSI reduces (increases) the Company’s advance to
EHSI.
c) Accounts
Receivable
Accounts receivable are recorded at the net realizable value
expected to be received from individual residents, other third-
party payors and state assistance programs.
Accounts receivable, other than from government agencies,
consist of receivables from residents, families of residents,
and various payors that are subject to differing economic
conditions. As of December 31, 2005 and December 31,
2004, the Company had approximately 49% and 37%, respectively of
its accounts receivable derived from services provided to and
owing from residents or third party payors, with the balance
owing under various state Medicaid programs. Management does not
believe there are any credit risks associated with these
government agencies other than possible funding delays.
The Company periodically evaluates the adequacy of its allowance
for doubtful accounts by conducting a specific account review of
amounts in excess of predefined target amounts and aging
thresholds, which vary by payor type. Allowances for
uncollectibility are considered based upon the evaluation of the
circumstances for each of these specific accounts. In addition,
the Company has established internally-determined percentages
for allowance for doubtful accounts, which is based upon
historical collection trends for each payor type and age of the
receivables. Accounts receivable that the Company specifically
estimates to be uncollectible, based upon the above process, are
fully reserved for in the allowance for doubtful accounts until
they are written off or collected. In 2005, 2004 and 2003 the
Company incurred write-offs of bad debts of $396,000, $99,000
and $63,000, respectively.
d) Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Provisions for depreciation and
amortization are computed using the straight-line method for
financial reporting purposes at rates based upon the following
estimated useful lives:
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Buildings
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30 to 40 years
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Building improvements
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5 to 20 years
|
|
Building expenditures pertaining
to conditional asset retirement obligations
|
|
The shorter of the useful life of
the asset or
35 years
|
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Furniture and equipment
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3 to 10 years
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Leasehold improvements
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The shorter of the useful life of
the assets or a term that includes required lease periods and
renewals that are deemed to be reasonably assured at the date
the leasehold improvements are purchased
|
Construction in progress includes pre-acquisition costs and
other direct costs related to acquisition, development and
construction of properties, including interest, which are
capitalized until the facility is opened. Depreciation of the
facility, including interest capitalized, is commenced the month
after the facility is opened and is based upon the useful life
of the asset, as outlined above.
Maintenance and repairs are charged to expense as incurred. When
property or equipment is retired or disposed, the cost and
related accumulated depreciation and amortization are removed
from the accounts and the resulting gain or loss is included in
the results of operations.
F-11
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
e) Leases
Leases that substantially transfer all of the benefits and risks
of ownership of property to the Company, or otherwise meet the
criteria for capitalizing a lease under accounting principles
generally accepted in the United States of America, are
accounted for as capital leases. An asset is recorded at the
time a capital lease is entered into together with its related
long-term obligation to reflect its purchase and financing.
Property and equipment recorded under capital leases are
depreciated on the same basis as previously described. Rental
payments under operating leases are expensed as incurred.
Leases that are operating leases with defined scheduled rent
increases are accounted for in accordance with FASB Technical
Bulletin 85-3.
The scheduled rent increases are recognized on a straight-line
basis over the lease term.
f) Goodwill
and Other Intangible Assets
Goodwill represents the cost of acquired net assets in excess of
their fair market values. Goodwill and intangible assets with
indefinite useful lives are not amortized but are tested for
impairment at least annually in accordance with the provisions
of Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other
Intangible Assets.” Intangible assets with estimable useful
lives are amortized over their respective estimated useful lives
and also reviewed at least annually for impairment. The Company
performs its annual assessment as of September 30 and did
not record an impairment of goodwill in 2005, 2004 or 2003.
Resident relationships intangible assets are stated at the
amount determined upon acquisition, net of accumulated
amortization. Resident relationships intangible assets are
amortized on a straight-line basis, based upon a review of the
residents’ average length of stay. The Company generally
amortizes the resident relationships asset over a
36-month
period. The amortization period is subject to evaluation upon
each acquisition. Amortization of the resident relationships
asset is included within amortization expense in the combined
statements of income.
g) Long-lived
Assets
The Company periodically assesses the recoverability of
long-lived assets, including property and equipment, in
accordance with the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets”. This statement requires that all long-lived assets
be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying value of an asset to the
undiscounted future cash flows expected to be generated by the
asset. If the carrying value of an asset exceeds its estimated
undiscounted future cash flows, an impairment provision is
recognized to the extent the book value of the asset exceeds
estimated fair value. Assets to be disposed of are reported at
the lower of the carrying amount or the fair value of the asset,
less all associated costs of disposition. In addition,
SFAS No. 144 requires separate reporting of
discontinued operations to the component of an entity that
either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale.
Management considers such factors as current results, trends and
future prospects, current market value, and other economic and
regulatory factors, in performing these analyses.
h) Parent’s
Investment
The Company’s Parent’s Investment represents the
historical investment of capital into the Company, accumulated
net earnings after taxes, offset by the inter-company
transactions that result from the net withdrawals of cash from
earnings of the Company. For purposes of these financial
statements, it is not possible to segregate the component of
Parent’s Investment into equity and retained earnings.
EHSI manages cash on a centralized basis, and prior to the
acquisition of Historic ALC did not retain any significant cash
balances at the assisted living facilities. As a result, cash
advances or withdrawals for EHSI facilities prior to and after
the acquisition of ALC are recorded in the Parent’s
Investment account.
F-12
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
After the acquisition of Historic ALC, EHSI maintained
ALC’s bank account, and until EHSI amended its senior
secured credit facility (“Revolving Credit Facility”),
did not transfer cash between EHSI and ALC. However, after EHSI
amended its Revolving Credit Facility in August 2005, EHSI
converted back to its centralized approach to cash management
and therefore periodically transferred all excess funds of the
Company to EHSI’s main cash deposit account. Transfers of
cash to (from) EHSI reduces (increases) the Company’s
advance to EHSI.
i) Revenue
Recognition
As of the years ended December 31, 2005, 2004 and 2003
approximately 78%, 93% and 94%, respectively, of revenues are
derived from private pay residents or their families directly or
through their insurers, Health Maintenance Organization
(“HMO”), or other third party providers. The remainder
of the Company’s revenue is derived from state-funded
Medicaid reimbursement programs. Revenues are recorded in the
period in which services and products are provided at
established rates. Revenues collected in advance are recorded as
deferred revenue upon receipt and recorded to revenue in the
period the revenues are earned.
j) Interest
For periods prior to the acquisition of Historic ALC, interest
expense was allocated to the EHSI assisted living facilities
based upon the assisted living facilities’ historic cost
and the average borrowing rates for those periods. For periods
after the acquisition of Historic ALC, interest charges are
allocated based upon: (1) any Historic ALC specific
facility-based debt instruments in place with the applicable
interest charges; (2) interest incurred by EHSI on the
replacement of Historic ALC debt; (3) for the facilities
owned by EHSI, based upon the assisted living facilities’
historic cost and average borrowing rates for those periods, or
(4) for the EHSI line of credit debt incurred on the
acquisition of Historic ALC, the interest incurred based upon
the average balance of the line of credit and EHSI’s
average interest rate on the line of credit.
k) Asset
Retirement Obligations
In March 2005, the FASB issued FASB Interpretation No. 47
(“FIN No. 47”), “Accounting for
Conditional Asset Retirement Obligations”.
FIN No. 47 clarified that the term “conditional
asset retirement obligation” as used in
SFAS No. 143, “Accounting for Asset Retirement
Obligations,” refers to a legal obligation to perform an
asset retirement activity in which the timing
and/or
method of settlement are conditional on a future event that may
or may not be in control of the entity. FIN No. 47
requires that either a liability be recognized for the fair
value of a legal obligation to perform asset-retirement
activities that are conditional on a future event if the amount
can be reasonably estimated, or where it can not, that
disclosure of the liability exists, but has not been recognized
and the reasons why a reasonable estimate can not be made.
FIN No. 47 became effective as of December 31,
2005. As of December 31, 2005, the Company determined that
the amount of the asset retirement obligations was
$0.2 million and recorded the charge through operating
expenses in the 2005 year.
The Company determined that a conditional asset retirement
obligation exists for asbestos remediation for a limited number
of older assisted living facilities. Although not a current
health hazard in its assisted living facilities, upon
renovation, the Company may be required to take the appropriate
remediation procedures in compliance with state law to remove
the asbestos. The removal of asbestos-containing materials
includes primarily floor and ceiling tiles from the
Company’s
pre-1980
constructed assisted living facilities. The fair value of the
conditional asset retirement obligation was determined as the
present value of the estimated future cost of remediation based
on an estimated expected date of remediation. This computation
is based on a number of assumptions which may change in the
future based on the availability of new information, technology
changes, changes in costs of remediation, and other factors.
The determination of the asset retirement obligation was based
upon a number of assumptions that incorporate the Company’s
knowledge of the facilities, the asset life of the floor and
ceiling tiles, the estimated timeframes for periodic renovations
which would involve floor and ceiling tiles, the current cost
for remediation of asbestos and the
F-13
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
current technology at hand to accomplish the remediation work.
These assumptions to determine the asset retirement obligation
may be imprecise or be subject to changes in the future. Any
change in the assumptions can impact the value of the determined
liability and impact future earnings of the Company.
l) Income
Taxes
The Company’s results of operations are included in the
consolidated federal tax return of the Company’s most
senior U.S. parent company, Extendicare Holdings, Inc.
(“EHI”). Federal current and deferred income taxes
payable (or receivable), are determined as if the Company had
filed its own income tax returns. 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 differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. 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.
m) Accounting
for Acquisitions
The Company accounts for acquisitions in accordance with
SFAS No. 141, “Business Combinations”. In
October 2002, the Emerging Issues Task Force (“EITF”),
issued
EITF 02-17,
“Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination”, which provides
implementation guidance in accounting for intangible assets in
accordance with FASB No. 141. The Company identifies and
accounts for acquired customer and resident relationships
pursuant to the provisions of
EITF 02-17.
The Company assesses the fair value of acquired assets which
include land, building, furniture and equipment, licenses,
resident relationships and other intangible assets, and acquired
leases and liabilities. In respect to the valuation of the real
estate acquired, the Company calculates the fair value of the
land and buildings, or properties, using an “as if
vacant” approach. The fair value of furniture and equipment
is determined on a depreciated replacement cost basis. The value
of resident relationships and below (or above) market resident
contracts are determined based upon the valuation methodology
outlined below. The Company allocates the purchase price of the
acquisition based upon these assessments with, if applicable,
the residual value purchase price being recorded as goodwill.
These estimates were based upon historical, financial and market
information. Goodwill acquired on acquisition is not deductible
for tax purposes.
Resident relationships represent the assets acquired by virtue
of acquiring a facility with existing residents and thus
avoiding the cost of obtaining new residents, plus the value of
lost net resident revenue over the estimated
lease-up
period of the property. In order to effect such purchase price
allocation, management is required to make estimates of the
average facility
lease-up
period, the average
lease-up
costs and the deficiency in operating profits relative to the
facility’s performance when fully occupied. Resident
relationships are amortized on a straight-line basis over the
estimated average resident stay at the facility.
Below (or above) market resident contracts represent the value
of the difference between amounts to be paid pursuant to the
in-place resident contracts and management’s estimate of
the fair market value rate, measured over a period of either the
average resident stay in the facility, or the period under which
the Company can change the current contract rates to market. The
amortization period for the ALC acquisition is 24 months.
Amortization of below (or above) market resident contracts are
included in revenues in the combined statement of income.
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4.
|
ACQUISITION
OF ASSISTED LIVING CONCEPTS, INC.
|
On January 31, 2005, EHSI completed the acquisition of
Historic ALC for a total purchase consideration of approximately
$285 million, including the assumption of Historic
ALC’s existing debt with a book value of approximately
$141 million. The acquisition was completed immediately
subsequent to, and pursuant to, Historic
F-14
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
ALC shareholder approval of the merger and acquisition agreement
entered into on November 4, 2004, that provided for the
acquisition of all of the outstanding shares and stock options
of ALC for $18.50 per share. EHSI financed the acquisition
by using approximately $29 million of cash on hand, a
$55 million 6% Term Note due 2010 from EHI, and drawing
$60 million from its Revolving Credit Facility. The
$55 million Term Note and $60 million loan incurred
from the Revolving Credit Facility have been accounted for as
equity contributions for purposes of the Company’s
financial statements. On January 31, 2005, ALC had a
portfolio of 177 assisted living facilities, comprised of 122
owned properties and 55 leased facilities representing
6,838 units, located in 14 states.
The impact of the acquisition on each asset and liability
category in the Company’s combined balance sheet is as
follows as of January 31, 2005:
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(In thousands)
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ASSETS:
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Cash, net of cash used to finance
the acquisition
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$
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2,348
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Accounts receivable
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2,898
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Other current assets
|
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8,722
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Total current assets
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13,968
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Property, plant and equipment
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283,686
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Resident relationships intangible
|
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6,357
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Goodwill
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5,556
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Other long-term assets
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|
|
1,459
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
311,026
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
Current maturities of long-term
debt
|
|
$
|
3,418
|
|
|
Unfavorable leases as lessor
|
|
|
3,715
|
|
|
Other current liabilities
|
|
|
18,318
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
25,451
|
|
|
Long term debt:
|
|
|
|
|
|
Long-term debt of ALC assumed
|
|
|
140,212
|
|
|
EHSI Credit Facility
|
|
|
60,000
|
|
|
Deferred income taxes
|
|
|
608
|
|
|
Other long-term liabilities
|
|
|
4,755
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
231,026
|
|
|
Parent’s investment:
|
|
|
|
|
|
Capital contribution from EHSI
|
|
|
80,000
|
|
|
|
|
|
|
|
|
Total liabilities and
parent’s investment
|
|
$
|
311,026
|
|
|
|
|
|
|
|
The financial position and results of operation of ALC are
included in the combined financial statements of income and the
consolidated statements of cash flows beginning February 1,
2005.
F-15
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Below is pro forma income statement information of the Company
prepared assuming the acquisition of ALC had occurred as of
January 1, 2004. This pro forma information includes
purchase accounting adjustments but does not include estimated
cost savings.
| |
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Total revenues
|
|
$
|
220,051
|
|
|
$
|
211,741
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
20,560
|
|
|
$
|
12,164
|
|
|
Net income
|
|
$
|
12,174
|
|
|
$
|
7,568
|
|
In January 2005, EHSI amended its then existing senior secured
revolving credit facility (“Revolving Credit
Facility”) to permit the loan from EHI and to partially
finance the ALC acquisition. Subsequently, Extendicare advanced
$55 million to EHI, which in turn advanced $55 million
as a 6% Term Note due to EHSI in 2010. See Note 9.
|
|
|
5.
|
SUPPLIES,
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Deposits
|
|
$
|
2,130
|
|
|
$
|
56
|
|
|
Prepaid expenses
|
|
|
1,747
|
|
|
|
80
|
|
|
Supplies
|
|
|
1,027
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,904
|
|
|
$
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment and related accumulated depreciation and
amortization as of December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Land and land improvements
|
|
$
|
26,317
|
|
|
$
|
4,901
|
|
|
Buildings and improvements
|
|
|
370,183
|
|
|
|
76,391
|
|
|
Furniture and equipment
|
|
|
15,797
|
|
|
|
7,717
|
|
|
Leasehold improvements
|
|
|
742
|
|
|
|
605
|
|
|
Construction in progress
(Note 15)
|
|
|
1,702
|
|
|
|
8,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,741
|
|
|
|
97,700
|
|
|
Less accumulated depreciation and
amortization (Note 3(d))
|
|
|
36,379
|
|
|
|
24,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
378,362
|
|
|
$
|
73,390
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Company completed eight construction projects
for a total cost of $25.5 million. During 2005 the Company
completed construction projects that resulted in the opening of
three new assisted living facilities (150 units) and
increasing the operational capacity at five assisted living
facilities (96 units).
During 2004, the Company completed three construction projects
for a total cost of $10.0 million. The Company completed
construction projects that resulted in increased capacity to two
assisted living facilities (46 units) in February 2004 and
opened a new assisted living facility (40 units).
F-16
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
|
7.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill and other intangible assets consisted of the following
at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Resident relationship intangible,
net
|
|
$
|
4,415
|
|
|
$
|
—
|
|
|
Goodwill
|
|
|
15,538
|
|
|
|
9,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,953
|
|
|
$
|
9,983
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization for resident relationships intangible
as at December 31, 2005 was $1.9 million. Estimated
amortization expense for the next three years is
$2.2 million in 2006, $2.1 million in 2007 and
$0.1 million in 2008.
Other assets consisted of the following at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Restricted cash for workers’
compensation
|
|
$
|
2,934
|
|
|
$
|
—
|
|
|
Cash held as collateral for ALC
letters of credit
|
|
|
1,041
|
|
|
|
—
|
|
|
Property tax, insurance and
capital expenditure trust funds
|
|
|
958
|
|
|
|
4
|
|
|
Fund held under deferred
compensation plan (Note 10)
|
|
|
275
|
|
|
|
—
|
|
|
Security deposits
|
|
|
463
|
|
|
|
—
|
|
|
Assets held for sale
|
|
|
199
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,870
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash for workers’ compensation is held on
deposit as security with a former workers’ compensation
insurer for periods prior to March 2005.
Cash is held on deposit for security for certain leased assisted
living properties. In addition, pursuant to certain leases, the
Company is required to fund on a monthly basis amounts for
property taxes, insurance and capital expenditures.
F-17
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Long-term debt consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
Rate(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
6.24% Red Mortgage Capital Note
due 2014
|
|
|
6.51
|
%
|
|
$
|
36,367
|
|
|
$
|
36,533
|
|
|
$
|
—
|
|
|
DMG Mortgage notes payable,
interest rates ranging from 7.58% to 8.65%, due 2008
|
|
|
6.01
|
%
|
|
|
26,981
|
|
|
|
27,263
|
|
|
|
—
|
|
|
Capital lease obligations,
interest rates ranging from 2.84% to 13.54%, maturing through
2009
|
|
|
6.36
|
%
|
|
|
12,126
|
|
|
|
12,222
|
|
|
|
—
|
|
|
Oregon Trust Deed Notes,
interest rates ranging from 0.25% to 10.90%, maturing from 2020
through 2026
|
|
|
6.75
|
%
|
|
|
9,425
|
|
|
|
9,483
|
|
|
|
—
|
|
|
HUD Insured Mortgages, interest
rates ranging from 7.40% to 7.55%, due 2036
|
|
|
6.89
|
%
|
|
|
7,655
|
|
|
|
7,673
|
|
|
|
—
|
|
|
Term Loan due 2010 under EHSI
Credit Facility, at variable interest rates
|
|
|
6.02
|
%
|
|
|
38,352
|
|
|
|
38,352
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt before current
maturities
|
|
|
|
|
|
|
130,906
|
|
|
|
131,526
|
|
|
|
—
|
|
|
Less current maturities
|
|
|
|
|
|
|
2,972
|
|
|
|
2,925
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
$
|
127,934
|
|
|
$
|
128,601
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest rate is effective interest rate as of December 31,
2005. Interest rates were the same at March 31, 2006
(unaudited) as at December 31, 2005 except that the rate on
Term Loan due 2010 was 6.31% as of March 31, 2006
(unaudited). |
6.24% Red
Mortgage Capital Note due 2014
The Red Mortgage Capital Note has a fixed interest rate of
6.24%, with a
25-year
principal amortization, and is secured by 24 assisted living
facilities. The Red Mortgage Capital Note was entered into by
subsidiaries of the Company and is subject to a limited guaranty
by ALC.
DMG
Mortgage Notes Payable due 2008
DMG Mortgage Notes Payable (“DMG Notes”) includes
three fixed rate notes that are secured by 13 assisted living
facilities located in Texas, Oregon and New Jersey. The DMG
Notes were entered into by subsidiaries of Historic ALC and are
subject to a limited guaranty by the Company. These notes
collectively require monthly principal and interest payments of
$0.2 million with balloon payments of $11.8 million,
$5.3 million and $7.2 million due at maturity in May,
August and September 2008, respectively. These loans bear
interest at fixed rates ranging from 7.58% to 8.65%.
Capital
Lease Obligations
In March 2005, the Company amended lease agreements with
Assisted Living Facilities, Inc. (“ALF”), an unrelated
party, relating to five assisted living facilities located in
Oregon. The amended lease agreements provide the Company with an
option to purchase the facilities in 2009 at a fixed price. The
option to purchase was determined to be a bargain purchase
price, requiring that the classification of these leases be
changed from operating to capital. As a result, a capital lease
obligation of $12.8 million was recorded, which represents
the estimated market value of the properties as of the lease
amendment date and also approximates the present value of
F-18
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
future payments due under the lease agreements, including the
purchase option payment. The option to purchase must be
exercised prior to July 1, 2009 with closing on or about
December 31, 2009.
Oregon
Trust Deed Notes
The Oregon Trust Deed Notes (“Oregon Revenue
Bonds”) are secured by buildings, land, furniture and
fixtures of six Oregon ALC assisted living facilities. The notes
are payable in monthly installments including interest at
effective rates ranging from 0.25% to 10.9%.
Under debt agreements relating to the Oregon Revenue Bonds, the
Company is required to comply with the terms of certain
regulatory agreements until the scheduled maturity dates of the
Oregon Revenue Bonds. Refer to Note 15 for details of the
regulatory agreements.
HUD
Insured Mortgages due 2036
The HUD insured mortgages include three separate loan agreements
entered into in 2001. The mortgages are each secured by a
separate assisted living facility located in Texas. These loans
mature between July 1, 2036 and August 1, 2036 and
collectively require principal and interest payments of
$50,000 per month. The loans bear interest at fixed rates
ranging from 7.40% to 7.55%.
Term Loan
due 2010 under EHSI Credit Facility
ALC has access to utilize, subject to certain restrictions, the
EHSI credit facility. EHSI has periodically borrowed under its
previous line of credit for reasons related to our assisted
living facilities. In January 2005, EHSI borrowed
$60.0 million under its credit facility to finance the
acquisition of Historic ALC. These borrowings have been
reflected on our historic combined balance sheet as long-term
debt. As of December 31, 2005, and March 31, 2006
(unaudited), ALC’s share of the term loan under the EHSI
credit facility was $38.4 million and is included in
ALC’s long-term debt. Interest paid to EHSI during 2005
relating to the EHSI term loan was $2.1 million.
EHSI will continue to be liable for the term loan. Although some
ALC and EHSI assisted living facilities currently secure
EHSI’s credit facility, these security interests will be
released, and ALC and its restricted subsidiaries will be
released from their obligations under the EHSI Credit Facility
in connection with the separation and EHSI’s refinancing of
its Revolving Credit Facility.
EHSI
Long-term Debt
EHSI has two private placements, consisting of Senior and
Subordinated Notes, that are secured by EHI, EHSI and ALC, and
in part by certain of the Company’s assisted living
facilities. Upon separation, the Senior and Subordinated Notes
will be repaid in full, the associated swap and cap agreements
will be terminated, and alternative financing will be arranged
by EHSI. EHSI has also a term note payable of $55.0 million
due to Extendicare. All costs associated with the repayment of
the Senior and Subordinated Notes and the Extendicare term note
will be borne by EHSI. The financial cost associated with such
repayments will be incurred by EHSI and have not been reflected
within these financial statements.
EHSI 6%
Advance to ALC
As of December 31, 2005 and March 31, 2006, EHSI had
advanced to ALC $47.2 million and $40.7 million
(unaudited), respectively. The EHSI advance is reported on the
combined balance sheet as “Due to Shareholders and
Affiliates,” and separate from long-term debt. See
Note 13.
F-19
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Principal
Repayment Schedule
Principal payments on long-term debt due within the next five
years and thereafter, as of December 31, 2005, are as
follows (dollars in thousands):
| |
|
|
|
|
|
2006
|
|
$
|
2,925
|
|
|
2007
|
|
|
3,115
|
|
|
2008
|
|
|
26,897
|
|
|
2009
|
|
|
30,691
|
|
|
2010
|
|
|
19,889
|
|
|
After 2010
|
|
|
48,009
|
|
|
|
|
|
|
|
|
|
|
$
|
131,526
|
|
|
|
|
|
|
|
The following summarizes the components of interest expense, net:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Interest expense
|
|
$
|
2,945
|
|
|
$
|
2,499
|
|
|
$
|
11,958
|
|
|
$
|
1,738
|
|
|
$
|
2,702
|
|
|
Interest income
|
|
|
(115
|
)
|
|
|
(47
|
)
|
|
|
(355
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,830
|
|
|
$
|
2,452
|
|
|
$
|
11,603
|
|
|
$
|
1,738
|
|
|
$
|
2,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For period prior to the acquisition of Historic ALC, Interest
expense was allocated to the assisted living facilities based
upon the assisted living facilities’ historic cost and the
average borrowing rates for those periods. For periods after the
acquisition of Historic ALC, interest charges have been
allocated based upon: (1) any Historic ALC specific
facility-based debt instruments in place with the applicable
interest charges; (2) interest incurred by EHSI on the
replacement of Historic ALC debt; (3) for the facilities
owned by EHSI, based upon the assisted living facilities’
historic cost and average borrowing rates for those periods, or
(4) for the EHSI line of credit debt incurred on the
acquisition of Historic ALC, the interest incurred based upon
the average balance of the line of credit and EHSI’s
average interest rate on the line of credit.
Accrued liabilities consisted of the following at
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Property taxes, utilities and
other taxes
|
|
$
|
4,989
|
|
|
$
|
562
|
|
|
Salaries and wages, fringe
benefits and payroll taxes
|
|
|
4,278
|
|
|
|
1,112
|
|
|
Workers’ compensation
|
|
|
4,361
|
|
|
|
509
|
|
|
Accrued operating expenses
|
|
|
3,965
|
|
|
|
142
|
|
|
Above (or below) market resident
contracts
|
|
|
1,227
|
|
|
|
—
|
|
|
Health and dental claims
|
|
|
1,179
|
|
|
|
180
|
|
|
Interest and financing
|
|
|
268
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,267
|
|
|
$
|
2,505
|
|
|
|
|
|
|
|
|
|
|
|
F-20
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
The Company self insures for health and dental claims. In
addition, the Company self insures for workers’
compensation in all states, with the exception of Washington
where the Company participates in a State plan and Texas where
the Company is insured with a third-party insurer.
|
|
|
11.
|
ACCRUAL
FOR SELF-INSURED GENERAL AND PROFESSIONAL LIABILITIES
|
The Company insures general and professional liability risks
with Laurier Indemnity Company Ltd. (“Laurier”), an
affiliated insurance subsidiary of Extendicare and other
third-party insurers. The Company insures through Laurier on a
claims made basis above specified self-insured retention levels.
Laurier insures above the Company’s
self-insured
retention levels and has re-insured for significant or
catastrophic risks up to a specified level through a third party
insurer. The insurance policies cover comprehensive general and
professional liability (including malpractice insurance) for the
Company’s health providers, assistants and other staff as
it relates to their respective duties performed on the
Company’s behalf and employers’ liability in amounts
and with such coverage and deductibles as determined by the
Company, based on the nature and risk of its businesses,
historical experiences, availability and industry standards.
Self-insured liabilities with respect to general and
professional liability claims are included within the accrual
for self-insured liabilities. Self-insured liabilities prior to
the acquisition of ALC were insignificant.
Management regularly evaluates the appropriateness of the
premiums paid to Laurier through independent third party
insurers and of the self-insured liability through an
independent actuarial review. General and professional liability
claims are the most volatile and significant of the risks for
which the Company self insures. Management’s estimate of
the accrual for general and professional liability costs is
significantly influenced by assumptions, which are limited by
the uncertainty of predicting future events, and assessments
regarding expectations of several factors. Such factors include,
but are not limited to: the frequency and severity of claims,
which can differ materially by jurisdiction; coverage limits of
third-party reinsurance; the effectiveness of the claims
management process; and the outcome of litigation. In addition,
the Company estimates the amount of general and professional
liability claims it will pay in the subsequent year and
classifies this amount as a current liability.
Following is a summary of activity in the accrual for
self-insured general and professional liabilities:
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balances at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Increase due to acquisition
|
|
|
903
|
|
|
|
—
|
|
|
Cash payments
|
|
|
(324
|
)
|
|
|
—
|
|
|
Provisions
|
|
|
748
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of year
|
|
$
|
1,327
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
300
|
|
|
$
|
—
|
|
|
Long-term portion
|
|
|
1,027
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of year
|
|
$
|
1,327
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
F-21
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
|
12.
|
OTHER
LONG-TERM LIABILITIES
|
Other long-term liabilities consisted of the following at
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Unfavorable lease adjustment as
lessee
|
|
$
|
3,832
|
|
|
$
|
—
|
|
|
Future lease commitments
|
|
|
2,137
|
|
|
|
—
|
|
|
Deferred compensation
|
|
|
914
|
|
|
|
—
|
|
|
Asset retirement obligation
|
|
|
298
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,181
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Unfavorable
Lease Adjustment as Lessee
The Company evaluated the ALC leases in existence at the date of
the acquisition and determined, based upon future discounted
lease payments over the remaining term of the lease, an excess
was to be paid, as compared to the market, based upon the
operating cash flows of the leased facilities. The unfavorable
lease liability upon acquisition was $4.0 million. The
unfavorable lease liability is amortized on a straight-line
basis, as an offset to lease expense, over the term of the lease
agreements. The amount of unfavorable lease amortization for the
eleven-month period ended December 31, 2005 was
$0.1 million.
Future
Lease Commitments
Future lease commitments represent the cumulative excess of
lease expense computed on a straight-line basis for the lease
term over actual lease payments. Under FASB Technical
Bulletin 85-3,
the effects of scheduled rent increases, which are included in
minimum lease payments under SFAS No. 13, Accounting
for Leases, are recognized on a straight-line basis over the
lease term.
Deferred
Compensation
The Company maintains an unfunded deferred compensation plan
offered to all company employees defined as highly compensated
by the Internal Revenue Code in which participants may defer up
to 10% of their base salary.
The Company matches up to 50% of the amount deferred. The
Company also maintains non-qualified deferred compensation plans
covering certain executive employees. Expenses incurred for
Company contributions under such plans were $26,000, $0 and $0
in 2005, 2004 and 2003, respectively.
Other
Employee Pension Arrangements
The Company maintains defined contribution retirement 401(k)
savings plans, which are made available to substantially all of
the Company’s employees. Effective January 1, 2006 for
ALC, and previously for EHSI, the Company pays a matching
contribution of 25% of every qualifying dollar contributed by
plan participants, net of any forfeiture. Expenses incurred by
the Company related to the 401(k) savings plans were $26,000,
$23,000 and $18,000 in 2005, 2004 and 2003, respectively.
F-22
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
|
13.
|
BALANCES
DUE TO AND TRANSACTIONS WITH SHAREHOLDER AND
AFFILIATES
|
Balances
Due to Shareholder and Affiliates
EHSI 6%
Advance to ALC
As of March 31, 2006 (unaudited) and December 31,
2005, EHSI had advanced to ALC $40.7 million and
$47.2 million, respectively. The advance was the result of
two advances after August 2005 when EHSI entered into its new
credit facility. The EHSI advance is reported on the combined
balance sheet as “Due to Shareholders and Affiliates”,
and separate from long-term debt. On August 4, 2005, EHSI
entered into a new credit facility and used the proceeds to
repay in full the $64.0 million balance under its former
credit facility (including the $60.0 million borrowed for
the ALC acquisition), advanced $34.0 million to ALC to
repay ALC’s GE Capital term loan, and used the remainder to
pay transaction fees and expenses. In December 2005, EHSI
advanced $17.0 million to ALC, the proceeds of which,
together with available cash, were used to repay
$21.1 million of certain revenue bonds. As a result of
these transactions, ALC incurred indebtedness of
$51.0 million to EHSI that was subsequently reduced to
$47.2 million at December 31, 2005 and further reduced
to $40.7 million at March 31, 2006 (unaudited) through
prepayments. The advance from EHSI bears interest at 6% and ALC
paid interest of $0.9 million to EHSI in 2005 on this
advance.
Refer to Note 19 (f) on the expected conversion of the
EHSI 6% advance into equity of ALC.
Non-interest
Bearing Balances Relating to Federal Income Taxes
EHI, the Company’s ultimate U.S. parent company, is
responsible for all federal tax return filings and therefore the
Company incurs charges (payments) from (to) shareholder for
income taxes and the Company has balances due to EHI in each of
the three years 2005, 2004 and 2003. Advances made and
outstanding in respect of federal tax payments are non-interest
bearing. Those balances are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
As of December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
receivable (payable)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
$
|
9
|
|
|
$
|
350
|
|
|
$
|
352
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes
|
|
$
|
(998
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred federal income taxes
|
|
$
|
(3,224
|
)
|
|
$
|
(3,324
|
)
|
|
$
|
(1,137
|
)
|
Transactions
with Shareholders and Affiliates
The following is a summary of the Company’s transactions
with Extendicare and its affiliates in 2005, 2004 and 2003:
Insurance
The Company insures certain risks with Laurier Indemnity
Company, Ltd. an affiliated insurance subsidiary of Extendicare
and third party insurers. The consolidated statements of income
for 2005, 2004 and 2003 include intercompany insurance premium
expenses of $704,000, $58,000 and $41,000, respectively.
F-23
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Computer,
Accounting and Administrative Services
The Company was provided with computer hardware and software
support services from Virtual Care Provider, Inc.
(“VCPI”). The annual cost of services was based upon
rates that are estimated to be equivalent to those from
unaffiliated sources and was $985,000, $267,000, $272,000 for
the years ended 2005, 2004 and 2003, respectively. In addition,
the Company was provided payroll and benefits, financial
management and reporting, tax, legal, human resources and
reimbursement services from EHSI. The annual cost was based upon
actual incremental costs of the services provided and was
$670,000, $238,000, $231,000 for the years ended 2005, 2004 and
2003, respectively.
As at December 31, 2005, as a lessee, the Company was
committed under non-cancelable leases requiring future minimum
rentals as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
|
|
2006
|
|
$
|
1,156
|
|
|
$
|
13,203
|
|
|
$
|
14,359
|
|
|
2007
|
|
|
1,185
|
|
|
|
13,066
|
|
|
|
14,251
|
|
|
2008
|
|
|
1,215
|
|
|
|
13,362
|
|
|
|
14,577
|
|
|
2009
|
|
|
11,558
|
|
|
|
13,472
|
|
|
|
25,030
|
|
|
2010
|
|
|
—
|
|
|
|
13,643
|
|
|
|
13,643
|
|
|
After 2010
|
|
|
—
|
|
|
|
48,870
|
|
|
|
48,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
15,114
|
|
|
$
|
115,616
|
|
|
$
|
130,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
(at rates from 2.8% to 13.5%)
|
|
|
2,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum
capital lease payments
|
|
|
12,222
|
|
|
|
|
|
|
|
|
|
|
Less current maturities of capital
lease obligations
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations,
excluding current maturities
|
|
$
|
11,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) Lease
agreement with LTC Properties, Inc.
In January 2005, the Company entered into two new master lease
agreements with LTC Properties, Inc. (“LTC”) in
respect of 37 facilities leased to the Company by LTC. Under the
terms of the master lease agreements, which became effective
January 1, 2005, the Company agreed to increase the annual
rent paid to LTC by $250,000 per annum for each of the
successive four years, commencing on January 1, 2005, and
amended the terms relating to inflationary increases. Formerly,
the 37 leases had expiration dates ranging from 2007 through
2015. Under the terms of the master lease agreements, the
initial 10 year lease term commenced on January 1,
2005, and there are three successive
10-year
lease renewal terms, to be exercised at the option of the
Company. There are no significant economic penalties to the
Company if it decides not to exercise the renewal options. The
aggregate minimum rent payments for the LTC leases for the
calendar years 2006 through 2008 are $9.8 million,
$10.2 million and $10.7 million, respectively. The
minimum rent will increase by 2% over the prior year’s
minimum rent for each of the calendar years 2009 through 2014.
Annual minimum rent during any renewal term will increase a
minimum of 2% over the minimum rent of the immediately preceding
year. In accordance with FASB Technical
Bulletin 85-3,
the Company accounts for the effect of scheduled rent increases
on a straight-line basis over the lease term.
LTC obtained financing for five of the leased properties in the
State of Washington through the sale of Revenue Bonds that
contain certain terms and conditions within the debt agreements.
The Company must comply with these
F-24
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
terms and conditions and failure to adhere to those terms and
conditions may result in an event of default to the lessor and
termination of the lease. Refer to Note 15 for further
details.
b) Lease
agreement with Assisted Living Facilities, Inc.
(“ALF”)
The Company has five leased properties with ALF in the State of
Oregon that within the lease contain an option to purchase the
properties in July 2009. The option to purchase was determined
to be a bargain purchase price, requiring that the
classification of these leases as capital leases (see
Note 9). ALF obtained financing for these properties
through the sale of Revenue Bonds that contain certain terms and
conditions within the debt agreements. The Company must comply
with these terms and conditions and failure to adhere to those
terms and conditions, may result in an event of default to the
lessor and termination of the lease. See Note 15 for
further details. In addition, a capital replacement escrow
account is required to be maintained for the ALF leases to cover
future expected capital expenditures.
c) Letters
of credit
As of December 31, 2005, the Company had issued
$3.7 million in letters of credit. Approximately
$1.0 million of the letters of credit are secured with cash
collateral and to provide security for landlords of leased
properties. Approximately $2.9 million of letters of credit
are secured through EHSI line of credit as security for workers
compensation liabilities. The letters of credit are renewed
annually and have maturity dates ranging from January 2007 to
February 2007.
|
|
|
15.
|
COMMITMENTS
AND CONTINGENCIES
|
Revenue
Bonds
The Company owns six assisted living facilities in Oregon,
financed by Oregon Revenue Bonds that mature between 2020
through 2026. Under the terms and conditions of the debt
agreements, ALC is required to comply with the terms of the
regulatory agreement until the original scheduled maturity dates
for the Revenue Bonds outlined below.
In addition, the Company formerly financed 15 assisted living
facilities located in the States of Washington, Idaho and Ohio
by Revenue Bonds that were prepaid in full in December 2005. The
aggregate amount of the Revenue Bonds upon repayment was
$21.1 million. However, despite the prepayment of the
Revenue Bonds, under the terms and conditions of the debt
agreements, the Company is required to continue to comply with
the terms of the regulatory agreement until the original
scheduled maturity dates for the Revenue Bonds. The original
scheduled maturity dates were 2018 for the Washington Revenue
Bonds, 2017 for the Idaho Revenue Bonds, and 2018 for the Ohio
Revenue Bonds.
Under the terms of the debt agreements relating to the Revenue
Bonds, the Company is required, among other things, to lease at
least 20% of the units of the projects to low or moderate income
persons as defined in Section 142(d) of the Internal
Revenue Code. This condition is required in order to preserve
the federal income tax exempt status of the Revenue Bonds during
the term they are held by the bondholders. There are additional
requirements as to the age and physical condition of the
residents that the Company must also comply. The Company must
also comply with the terms and conditions of the underlying
trust deed relating to the debt agreement and report on a
periodic basis to the State of Oregon, Housing and Community
Services Department (“OHCS”), for the Oregon Revenue
Bonds, the Washington State Housing Finance Commission
(“WSHFC”) for the former Washington Revenue Bonds, the
Ohio Housing Finance Commission (“OHFC”) for the
former Ohio Revenue Bonds, and Idaho Housing and Community
Services (“IHCS”) for the former Idaho Revenue Bonds.
Non-compliance with these restrictions may result in an event of
default and cause fines and other financial costs.
In addition, the Company leases five properties from ALF in
Oregon and five properties from LTC in Washington that were
financed through the sale of Revenue Bonds and contain certain
terms and conditions within
F-25
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
the debt agreements. The Company must comply with these terms
and conditions and failure to adhere to those terms and
conditions may result in an event of default to the lessor and
termination of the lease for the Company. The leases require,
among other things, that in order to preserve the federal income
tax exempt status of the bonds, the Company is required to lease
at least 20% of the units of the projects to low or moderate
income persons as defined in Section 142(d) of the Internal
Revenue Code. There are additional requirements as to the age
and physical condition of the residents with which the Company
must also comply. Pursuant to the lease agreements with ALF and
LTC, the Company must comply with the terms and conditions of
the underlying trust deed relating to the debt agreement and
report on a periodic basis to OHCS, for the ALF leases, and
WSHFC, for the LTC leases.
Capital
Expenditures
As of December 31, 2005, the Company has four new
construction projects in progress, which are expected to add 77
assisted living units. The total estimated cost of the projects
is $12.5 million, and they are expected to be completed in
2006 through 2007. Costs incurred through December 31, 2005
on these projects were approximately $2.2 million and
purchase commitments of $0.5 million are outstanding. As of
December 31, 2005, the Company had other capital
expenditure purchase commitments outstanding of approximately
$1.4 million.
Insurance
and Self-insured Liabilities
The Company insures certain risks with affiliated insurance
subsidiaries of Extendicare and third-party insurers. The
insurance policies cover comprehensive general and professional
liability (including malpractice insurance) for the
Company’s health providers, assistants and other staff as
it relates to their respective duties performed on the
Company’s behalf, workers’ compensation and
employers’ liability in amounts and with such coverage and
deductibles as determined by the Company, based on the nature
and risk of its businesses, historical experiences, availability
and industry standards. The Company also self insures for health
and dental claims, in certain states for workers’
compensation and employer’s liability and for general and
professional liability claims up to a certain amount per
incident. Self-insured liabilities with respect to general and
professional liability claims are included within the accrual
for self-insured liabilities.
Litigation
The Company and its subsidiaries are defendants in actions
brought against them from time to time in connection with their
operations. While it is not possible to estimate the final
outcome of the various proceedings at this time, such actions
generally are resolved within amounts provided.
The Company is subject to claims and lawsuits in the ordinary
course of business. The largest category of these relates to
workers’ compensation. The Company records reserves for
claims and lawsuits when they are probable and reasonably
estimable. For matters where the likelihood or extent of a loss
is not probable or cannot be reasonably estimated, the Company
has not recognized in the accompanying combined financial
statements all potential liabilities that may result. If
adversely determined, the outcome of some of these matters could
have material adverse effect on the Company’s business,
liquidity, financial position or results of operations.
The Company’s results of operations are included in a
consolidated federal tax return.
Total income taxes for the years ended December 31, 2005,
2004 and 2003 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(In thousands)
|
|
|
|
|
Income tax expense
|
|
$
|
8,119
|
|
|
$
|
1,138
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
The income tax expense (benefit) consists of the following for
the years ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(In thousands)
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
4,286
|
|
|
$
|
970
|
|
|
$
|
895
|
|
|
Deferred
|
|
|
2,612
|
|
|
|
(16
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal
|
|
|
6,898
|
|
|
|
954
|
|
|
|
850
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
448
|
|
|
|
187
|
|
|
|
172
|
|
|
Deferred
|
|
|
773
|
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total State
|
|
|
1,221
|
|
|
|
184
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
8,119
|
|
|
$
|
1,138
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between the effective tax rates on income before
income taxes and the United States federal income tax rate are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Increase (reduction) in tax rate
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of Federal
income tax benefit
|
|
|
3.8
|
|
|
|
4.1
|
|
|
|
4.0
|
|
|
Work opportunity credit
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
|
Other, net
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
39.0
|
%
|
|
|
37.9
|
%
|
|
|
37.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made payments to its parent of $5.2 million,
$1.3 million and $0.7 million in 2005, 2004 and 2003,
respectively for federal income taxes.
The components of the net deferred tax assets and liabilities as
of December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Employee benefit accruals
|
|
$
|
2,441
|
|
|
$
|
368
|
|
|
Accrued liabilities
|
|
|
832
|
|
|
|
—
|
|
|
Accounts receivable reserves
|
|
|
393
|
|
|
|
40
|
|
|
Capital loss carryforwards
|
|
|
155
|
|
|
|
—
|
|
|
Operating loss carryforwards
|
|
|
14,453
|
|
|
|
—
|
|
|
Goodwill
|
|
|
152
|
|
|
|
—
|
|
|
Fair value adjustment for leases
|
|
|
3,043
|
|
|
|
—
|
|
|
Fair value adjustment for debt
|
|
|
1,543
|
|
|
|
—
|
|
|
Deferred financing fee
|
|
|
2,058
|
|
|
|
—
|
|
|
Alternative minimum tax carry
forward
|
|
|
898
|
|
|
|
—
|
|
|
Other assets
|
|
|
2,049
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
28,017
|
|
|
|
413
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
28,347
|
|
|
|
1,285
|
|
|
Miscellaneous
|
|
|
3,066
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
31,413
|
|
|
|
1,318
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
(liabilities)
|
|
$
|
(3,396
|
)
|
|
$
|
(905
|
)
|
|
|
|
|
|
|
|
|
|
|
F-27
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
The Company paid state income taxes of $0.8 million,
$0.2 million and $ 0.1 million in 2005, 2004 and 2003,
respectively.
Historic ALC has $55.2 million of net operating losses
available for federal income tax purposes, which will expire
between 2009 and 2025. These net operating losses were partially
generated prior to and after Historic ALC’s emergence from
bankruptcy on January 1, 2002. Historic ALC’s
emergence from bankruptcy created an ownership change as defined
by the IRS. Section 382 of the Internal Revenue Code
imposes limitations on the utilization of the loss carryfowards
and built-in losses after certain ownership changes of a loss
company. Historic ALC was deemed to be a loss company for these
purposes. Under these provisions, ALC’s ability to utilize
the Historic ALC loss carryforwards generated prior to Historic
ALC’s emergence from bankruptcy and built-in losses in the
future will generally be subject to an annual limitation of
approximately $1.6 million. Any unused amount is added to
and increases the limitation in the succeeding year. Historic
ALC’s net unrealized built-in losses were
$38.2 million as of December 31, 2005. The deferred
tax assets include loss carryforwards and built-in losses and
their related tax benefit available to the Company to reduce
future taxable income within the allowable IRS carryover period.
The acquisition of the Historic ALC by EHSI also created an
ownership change as defined under Section 382 of the
Internal Revenue Code. Historic ALC’s loss carryforwards
generated subsequent to its emergence from bankruptcy are
available to the Company subject to an annual limitation of
approximately $5.5 million. Any unused amount is added to
and increases the limitation in the succeeding year.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or 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. Management
believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the valuation
allowances.
|
|
|
17.
|
DISCLOSURES
ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
|
The estimated fair values of the Company’s financial
instruments at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
(In thousands)
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,439
|
|
|
$
|
6,439
|
|
|
$
|
119
|
|
|
$
|
119
|
|
|
Supplies, prepaid expenses and
other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,130
|
|
|
|
2,130
|
|
|
|
56
|
|
|
|
56
|
|
|
Other assets (long-term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash for workers’
compensation
|
|
|
2,934
|
|
|
|
2,934
|
|
|
|
—
|
|
|
|
—
|
|
|
Cash held as collateral for ALC
letters of credit
|
|
|
1,041
|
|
|
|
1,041
|
|
|
|
—
|
|
|
|
—
|
|
|
Property tax, insurance and
capital expenditure trust funds
|
|
|
958
|
|
|
|
958
|
|
|
|
4
|
|
|
|
4
|
|
|
Fund held under deferred
compensation plan
|
|
|
275
|
|
|
|
275
|
|
|
|
—
|
|
|
|
—
|
|
|
Security deposits
|
|
|
463
|
|
|
|
463
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
LIABILITIES:
|
|
Long-term debt, including current
maturities
|
|
$
|
131,526
|
|
|
$
|
132,127
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest-bearing advance from EHSI
|
|
|
47,218
|
|
|
|
47,218
|
|
|
|
—
|
|
|
|
—
|
|
F-28
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Trade receivables and payables have an estimated market value
equal to their carrying value. The fair value of long-term debt
is estimated based on approximate borrowing rates currently
available to the Company for debt equal to the existing debt
maturities.
|
|
|
18.
|
DISCONTINUED
OPERATIONS
|
The following is a summary of the results of operations for
facilities that have been disposed of, or are under a plan of
divestiture.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Revenues
|
|
$
|
487
|
|
|
$
|
750
|
|
|
$
|
2,900
|
|
|
$
|
5,195
|
|
|
$
|
6,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
522
|
|
|
|
755
|
|
|
|
3,021
|
|
|
|
4,729
|
|
|
|
5,715
|
|
|
Lease costs
|
|
|
101
|
|
|
|
97
|
|
|
|
399
|
|
|
|
401
|
|
|
|
485
|
|
|
Depreciation and amortization
|
|
|
53
|
|
|
|
52
|
|
|
|
171
|
|
|
|
468
|
|
|
|
1,252
|
|
|
Interest expense (income)
|
|
|
7
|
|
|
|
23
|
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
(37
|
)
|
|
Loss on impairment of long-lived
assets
|
|
|
1,731
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,414
|
|
|
|
927
|
|
|
|
3,592
|
|
|
|
5,575
|
|
|
|
7,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
before income taxes
|
|
|
(1,927
|
)
|
|
|
(177
|
)
|
|
|
(692
|
)
|
|
|
(380
|
)
|
|
|
(1,018
|
)
|
|
Income tax benefit
|
|
|
(759
|
)
|
|
|
(67
|
)
|
|
|
(324
|
)
|
|
|
(152
|
)
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
$
|
(1,168
|
)
|
|
$
|
(110
|
)
|
|
$
|
(368
|
)
|
|
$
|
(228
|
)
|
|
$
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above summary of discontinued operations includes the
following:
|
|
|
(a)
|
Closure
and Disposition of Assisted Living Facility in
Texas
|
In the first quarter of 2006, due to future capital needs of the
facility and poor financial performance, the Company decided to
close an assisted living facility (60 units) located in
San Antonio, Texas and actively pursue the disposition of
the property on the market. In the first quarter of 2006 certain
required structural costs were identified which resulted in the
decision to close the facility. As a result, the Company has
reclassified the financial results of this facility to
discontinued operations and recorded an impairment charge of
$1.7 million. See Note 19 for subsequent events.
|
|
|
(b)
|
Closure
of Assisted Living Facility in Washington
|
In the first quarter of 2006, the lease term ended for an
assisted living facility (63 units) in Edmonds, Washington,
and the Company decided to terminate its operations due to poor
financial performance. The Company concluded its relationship
with the landlord on April 30, 2006. As a result, the
Company has reclassified the financial results of this facility
to discontinued operations. There was no gain or loss on
disposition of the operations and leasehold interest.
F-29
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
|
(c)
|
Sale
of Assisted Living Facilities in Arkansas
|
In August 2004, the Company sold its three assisted living
facilities (181 units) in Arkansas for cash of
$4.3 million, which was approximately equal to net book
value. There was no gain or loss from this sale.
|
|
|
(d)
|
Closure
of Other Assisted Living Units
|
The following assisted living units were discontinued for use
within the Company’s skilled nursing facilities: (1) a
12-unit
facility in Washington in 2005; (2) a
10-unit
facility in Ohio in 2004; and (3) a
24-unit
facility in Indiana and a
19-unit
assisted living facility in Ohio in 2003.
|
|
|
(a)
|
Strategic
Initiatives
|
In February 2006, the Board of Directors of Extendicare
announced the appointment of a committee of independent
directors to review and consider various structures and options
that would provide value to its shareholders. The Board of
Extendicare believed that the Extendicare share price had not
been reflective of its underlying operational performance and
historical results. A sale or reorganization of all, or part, of
Extendicare, were among the alternatives being explored.
Extendicare gave no assurance that any such transaction would be
completed in whole or in part.
|
|
|
(b)
|
ALC
Separation Transaction (unaudited)
|
On May 31, 2006, the Board of Directors of Extendicare
approved the separation of Company’s from Extendicare in
connection with the simultaneous conversion of Extendicare into
an unincorporated open-ended real estate investment trust
established under the laws of Ontario. If approved by the
holders of Extendicare’s Subordinate and Multiple Voting
Shares and the Ontario Superior Court of Justice (Commercial
List), the separation is expected to occur within two weeks
following the special meeting of holders of Extendicare’s
Subordinate and Multiple Voting Shares called to approve the
transactions. In connection with the separation, holders of
Extendicare Subordinate Voting Shares are expected to receive
(i) one Extendicare Common Share and (ii) one share of
Class A common stock of ALC from Extendicare for each
Extendicare Subordinate Voting Share that they hold as of the
Effective Time; holders of Extendicare Multiple Voting Shares
are expected to receive (i) 1.075 Extendicare Common Shares
and (ii) one share of Class B common stock of ALC from
Extendicare for each Extendicare Multiple Voting Share that they
hold as of the Effective Time; and each Extendicare Common Share
received in the transactions described above are expected to
immediately be exchanged by the holder thereof for units of
Extendicare REIT on a 1:1 basis, or, at the election of holders
that are Canadian residents, for units of Extendicare Holding
Partnership on a 1:1 basis. The separation is expected to be
accounted for at historical cost due to the pro rata nature of
the distribution.
The authorized capital stock of the Company consists of shares
of Class A common stock, par value of $0.01 per share
and shares of Class B common stock, par value
$0.01 per share. Subject to certain voting rights of the
holders of Class B common stock, the Company’s Board
of Directors is authorized to provide for the issuance of
preferred stock in one or more series and to fix the
designations, preferences, powers, participation rights,
qualifications and limitations and restrictions, including the
dividend rate, conversion rights, voting rights, redemption
price and liquidation preferences of such preferred stock.
Immediately following the separation, ALC expects to have
approximately 57.8 million shares of Class A common
stock outstanding, 11.8 million shares of Class B
common stock outstanding and no preferred stock outstanding,
based upon the number Subordinate and Multiple Voting Shares of
Extendicare outstanding as of May 31, 2006 (assuming all of
the approximately 1.6 million options to purchase
Extendicare Subordinate Voting Shares outstanding are
exercised). Each share of
F-30
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Class B common stock is convertible at any time and from
time to time at the option of the holder thereof into
1.075 shares of Class A common stock. Shares of
Class A common stock are not convertible into shares of
Class B common stock.
Upon the separation of the Company from Extendicare, the Company
will operate 206 facilities (8,251 units) in the United
States and hold certain other share investments. Following the
separation, the Company and Extendicare will operate
independently. Other than shares of our common stock held by
Extendicare as a result of holders of Extendicare Subordinate
and Multiple Voting Shares exercising dissent rights in
connection with the Plan of Arrangement, neither we nor
Extendicare will have any stock ownership, or, beneficial
interest, in the other.
Upon the separation of the Company from Extendicare, the Company
expects to have in place a stock incentive plan. Currently,
certain employees of the Company participate in
Extendicare’s stock option plan and have options to
purchase Extendicare stock. Compensation expense of $79,000,
nil, and nil, for the years ended 2005, 2004 and 2003,
respectively, have been reflected in the historical financial
statements. For the there month period ended March 31, 2006
and 2005, compensation expense was $278,000 and nil,
respectively.
|
|
|
(c)
|
Transfer
of EHSI Assisted Living Operations and Properties to the Company
(unaudited)
|
Since March 31, 2006, the Company has acquired the licenses
to operate all of EHSI’s 29 assisted living facilities and
has entered into purchase agreements with respect to each
facility. The Company has completed the purchase of 14 of these
facilities for an aggregate purchase price of
$49.6 million. The remaining 15 facilities require the
approval of local planning commissions to subdivide the
properties between the assisted living facilities and skilled
nursing facilities that make up those properties. The Company
and EHSI have applied for such approval and, once obtained, the
Company expects to complete the purchase of the remaining 15
facilities for an aggregate purchase price of $44.9 million
in accordance with the terms of the purchase and sale agreements
regarding these facilities.
In the interim, until local planning commission approval is
received for these 15 assisted living facilities, the Company
has entered into a lease for the land component of the
properties and assisted living facilities with EHSI. Since
March 31, 2006, the Company has acquired the license to
operate all of EHSI’s 29 assisted living facilities
and has entered into purchase agreements with respect to each
facility. The Company has completed the purchase of 14 of these
facilities for an aggregate purchase price of
$49.6 million. Unlike the 14 free standing facilities that
the Company has purchased, the remaining 15 facilities require
the approval of local planning commissions to subdivide the
properties between the assisted living facilities and skilled
nursing facilities that make up those properties. The Company
has applied for such approval and, once obtained, the Company
expects to complete the purchase of the remaining
15 facilities for an aggregate purchase price of
$44.9 million in accordance with the terms of the purchase
and sale agreements that we have entered with EHSI with respect
to these facilities. In the interim, the Company has entered
into a lease agreement with EHSI for the land component and
assisted living facilities. If EHSI has not obtained approval to
subdivide any of the properties immediately prior to the
separation, the Company expects to purchase all but the land
component of the applicable property, which in aggregate totals
$42.3 million, and EHSI expects to make a capital
contribution to us in an amount equal to the purchase price of
the land component of the property, which in aggregate totals
$2.6 million, which the Company would subsequently loan
back to EHSI in exchange for a note. In addition, for any
property awaiting local planning approval, the applicable lease
agreement with EHSI would be adjusted to become only a land
lease of such property. The Company expects to lease the land
component for any properties awaiting planning permission for an
initial term of five years, with two successive renewal periods
of five years each, exercisable at the Company’s option.
Should all of the properties await local planning approval, the
initial aggregate lease payments due under these leases are
expected to be $0.3 million. The lease amounts would
increase annually based upon the Consumer Price Index. In
addition, at the end of each lease period, the lease rates would
be reassessed and reset to reflect fair market value rates. Upon
receipt of approval, the land leases would be terminated, EHSI
would repay the amount due on the note and the Company
F-31
ASSISTED
LIVING CONCEPTS, INC.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
would pay EHSI for the land. The note would bear interest at
6.0% and would mature at the earliest of the date that planning
commission approval is received or the date that the
corresponding lease matures. The historical combined balance
sheets reflects the transfer of all 29 properties to ALC as
an equity contribution at the aggregate net book value of
$60.8 million.
|
|
|
(d)
|
Transfer
of Cash, Share Investments and Notes Prior to ALC
Separation (unaudited)
|
Prior to the separation, Extendicare is expected to make certain
capital contributions into ALC as follows: (1) the
contribution of share investments in Omnicare to ALC, that are
currently owned by EHSI, (2) the contribution of
$10.0 million in cash into Pearson, (3) a contribution
of $5.0 million in cash to enable ALC to purchase an office
building for its headquarters, (4) a capital contribution
in the amount of approximately $40.7 million by EHSI as
settlement of the outstanding debt owed by ALC to EHSI and an
additional $10.3 million cash contribution by EHSI and
(5) the transfer of Canadian share investments in BNN and
MedX to ALC, that are currently owned by Extendicare.
|
|
|
(e)
|
Transitional
Service Agreements with Extendicare (unaudited)
|
Prior to the separation, ALC expects to enter into transitional
service agreements with certain subsidiaries of Extendicare.
Pursuant to these agreements, Extendicare expects to continue to
provide certain information technology, payroll and benefits
processing and reimbursement services to the Company. Virtual
Care Provider, Inc. (“VCPI”) expects to provide the
information technology and hosting services for certain of the
Company’s software applications. The approximate cost of
the services fees is expected to be approximately
$1.5 million in aggregate, which approximates the fair
value of the services. The payroll and benefits processing and
technology services arrangements will be terminable upon
90 days’ prior notice, however, the Company may not
terminate the agreement for reimbursement services during the
initial term of that agreement.
|
|
|
(f)
|
Purchase
of Office Building (unaudited)
|
In May 2006, the Company entered into an agreement to acquire an
office building in Milwaukee, Wisconsin for approximately
$5.0 million in cash. The purchase of the office building
is anticipated to be completed in the third quarter of 2006 from
an unrelated party. The Company expects the building will be its
headquarters starting in June 2007. A portion of the office
space will be leased to VCPI.
F-32
Report
of Independent Registered Public Accounting Firm
The Board of Directors
Assisted Living Concepts, Inc.
We have audited the accompanying consolidated balance sheets of
Assisted Living Concepts, Inc. and subsidiaries (the Company) as
of December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders’ equity, and cash
flows for each of the years in the three-year period ended
December 31, 2004. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Assisted Living Concepts, Inc. and subsidiaries as
of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.
As discussed in note 2 to the Financial Statements, the
Company changed its method of accounting for
stock-based
compensation effective January 1, 2003.
KPMG LLP
Dallas, Texas
June 5, 2006
F-33
ASSISTED
LIVING CONCEPTS, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(In thousands, except share amounts)
|
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(Note 3)
|
|
$
|
6,309
|
|
|
$
|
1,943
|
|
|
Cash restricted for resident
security deposits (Note 4)
|
|
|
104
|
|
|
|
104
|
|
|
Accounts receivable, net of
allowance for doubtful accounts of $586 and $706 at
December 31, 2004 and 2003
|
|
|
2,976
|
|
|
|
3,415
|
|
|
Escrow deposits (Note 2)
|
|
|
4,256
|
|
|
|
3,269
|
|
|
Prepaid expenses
|
|
|
1,638
|
|
|
|
1,187
|
|
|
Cash restricted for workers’
compensation claims
|
|
|
2,861
|
|
|
|
4,014
|
|
|
Other current assets (Note 5)
|
|
|
1,056
|
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,200
|
|
|
|
15,327
|
|
|
Restricted cash (Note 6)
|
|
|
1,019
|
|
|
|
1,012
|
|
|
Property and equipment, net
(Note 7)
|
|
|
181,222
|
|
|
|
182,972
|
|
|
Deferred income taxes
(Note 11)
|
|
|
33,160
|
|
|
|
606
|
|
|
Other assets, net
|
|
|
3,655
|
|
|
|
4,297
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
238,256
|
|
|
$
|
204,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,009
|
|
|
$
|
1,800
|
|
|
Accrued real estate taxes
|
|
|
4,980
|
|
|
|
3,720
|
|
|
Accrued interest expense
|
|
|
647
|
|
|
|
96
|
|
|
Accrued payroll expense
|
|
|
6,778
|
|
|
|
7,275
|
|
|
Other accrued expenses
|
|
|
6,366
|
|
|
|
6,982
|
|
|
Income taxes payable (Note 11)
|
|
|
1,459
|
|
|
|
1,267
|
|
|
Resident security deposits
|
|
|
784
|
|
|
|
1,262
|
|
|
Other current liabilities
|
|
|
1,797
|
|
|
|
989
|
|
|
Current portion of unfavorable
lease adjustment
|
|
|
463
|
|
|
|
490
|
|
|
Current portion of long-term debt
(Note 8)
|
|
|
3,460
|
|
|
|
3,175
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,743
|
|
|
|
27,056
|
|
|
Other liabilities
|
|
|
694
|
|
|
|
523
|
|
|
Unfavorable lease adjustment, net
of current portion
|
|
|
1,864
|
|
|
|
2,327
|
|
|
Long-term debt, net of current
portion (Note 8)
|
|
|
133,841
|
|
|
|
144,279
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
165,142
|
|
|
|
174,185
|
|
|
Commitments and contingencies
(Notes 1, 2, 7, 8, 9, 10, 12, 14, 15
and 16)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par
value; 3,250,000 shares authorized; none issued or
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $.01 par value;
20,000,000 shares authorized; issued and outstanding
6,542,251 shares at December 31, 2004 and
6,431,925 shares at December 31, 2003 (57,241 and
68,241 shares to be issued upon settlement of pending
claims at December 31, 2004 and 2003, respectively)
|
|
|
66
|
|
|
|
65
|
|
|
Additional paid-in capital
|
|
|
70,529
|
|
|
|
34,221
|
|
|
Accumulated earnings (deficit)
|
|
|
2,519
|
|
|
|
(4,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
73,114
|
|
|
|
30,029
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity
|
|
$
|
238,256
|
|
|
$
|
204,214
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-34
ASSISTED
LIVING CONCEPTS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
Revenue
|
|
$
|
175,964
|
|
|
$
|
168,012
|
|
|
$
|
153,731
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residence operating expenses
|
|
|
114,334
|
|
|
|
111,965
|
|
|
|
105,997
|
|
|
Corporate general and
administrative
|
|
|
20,822
|
|
|
|
18,438
|
|
|
|
18,141
|
|
|
Building rentals
|
|
|
12,734
|
|
|
|
12,704
|
|
|
|
12,223
|
|
|
Depreciation
|
|
|
7,897
|
|
|
|
7,010
|
|
|
|
6,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
155,787
|
|
|
|
150,117
|
|
|
|
143,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
20,177
|
|
|
|
17,895
|
|
|
|
10,724
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(9,655
|
)
|
|
|
(13,714
|
)
|
|
|
(14,145
|
)
|
|
Interest income
|
|
|
69
|
|
|
|
179
|
|
|
|
214
|
|
|
Loss on early extinguishment of
debt
|
|
|
—
|
|
|
|
(2,956
|
)
|
|
|
—
|
|
|
Other income (expense), net
|
|
|
(23
|
)
|
|
|
(73
|
)
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,609
|
)
|
|
|
(16,564
|
)
|
|
|
(13,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
reorganization costs and discontinued operations
|
|
|
10,568
|
|
|
|
1,331
|
|
|
|
(3,146
|
)
|
|
Reorganization costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
10,568
|
|
|
|
1,331
|
|
|
|
(3,854
|
)
|
|
Income tax expense
|
|
|
3,792
|
|
|
|
1,668
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
6,776
|
|
|
|
(337
|
)
|
|
|
(3,854
|
)
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
(including gains and losses on sales of assets)
|
|
|
—
|
|
|
|
830
|
|
|
|
(560
|
)
|
|
Income tax expense
|
|
|
—
|
|
|
|
336
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
—
|
|
|
|
494
|
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,776
|
|
|
$
|
157
|
|
|
$
|
(4,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.04
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.59
|
)
|
|
Income (loss) from discontinued
operations
|
|
|
—
|
|
|
|
0.07
|
|
|
|
0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.04
|
|
|
$
|
0.02
|
|
|
$
|
0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
$
|
(0.59
|
)
|
|
Loss from continuing operations
|
|
$
|
0.98
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
—
|
|
|
|
0.07
|
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.98
|
|
|
$
|
0.02
|
|
|
$
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-35
ASSISTED
LIVING CONCEPTS, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings (Deficit)
|
|
|
Equity
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance at December 31, 2001
|
|
|
6,500
|
|
|
$
|
65
|
|
|
$
|
32,734
|
|
|
$
|
—
|
|
|
$
|
32,799
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,414
|
)
|
|
|
(4,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
6,500
|
|
|
|
65
|
|
|
|
32,734
|
|
|
|
(4,414
|
)
|
|
|
28,385
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157
|
|
|
|
157
|
|
|
Utilization of tax net operating
losses
|
|
|
—
|
|
|
|
—
|
|
|
|
1,229
|
|
|
|
—
|
|
|
|
1,229
|
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
257
|
|
|
|
—
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
6,500
|
|
|
$
|
65
|
|
|
$
|
34,221
|
|
|
$
|
(4,257
|
)
|
|
$
|
30,029
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,776
|
|
|
|
6,776
|
|
|
Reversal of tax net operating
losses
|
|
|
—
|
|
|
|
—
|
|
|
|
35,425
|
|
|
|
—
|
|
|
|
35,425
|
|
|
Exercise of stock options
|
|
|
100
|
|
|
|
1
|
|
|
|
379
|
|
|
|
—
|
|
|
|
380
|
|
|
Tax benefit of options
|
|
|
—
|
|
|
|
—
|
|
|
|
169
|
|
|
|
—
|
|
|
|
169
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
335
|
|
|
|
—
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
6,600
|
|
|
$
|
66
|
|
|
$
|
70,529
|
|
|
$
|
2,519
|
|
|
$
|
73,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-36
ASSISTED
LIVING CONCEPTS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
(In thousands)
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,776
|
|
|
$
|
157
|
|
|
$
|
(4,414
|
)
|
|
Adjustments to reconcile net
income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
7,897
|
|
|
|
7,010
|
|
|
|
6,761
|
|
|
Stock-based compensation expense
|
|
|
335
|
|
|
|
257
|
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
2,956
|
|
|
|
—
|
|
|
Amortization of debt issuance costs
|
|
|
645
|
|
|
|
110
|
|
|
|
106
|
|
|
Amortization of fair value
adjustment to building rentals
|
|
|
(490
|
)
|
|
|
(298
|
)
|
|
|
(681
|
)
|
|
Amortization of fair value
adjustment to long-term debt
|
|
|
13
|
|
|
|
418
|
|
|
|
427
|
|
|
Amortization of discount on
long-term debt
|
|
|
—
|
|
|
|
577
|
|
|
|
451
|
|
|
Straight line adjustment to
building rentals
|
|
|
91
|
|
|
|
149
|
|
|
|
374
|
|
|
Interest
paid-in-kind
|
|
|
—
|
|
|
|
1,339
|
|
|
|
1,244
|
|
|
Provision for doubtful accounts
|
|
|
240
|
|
|
|
778
|
|
|
|
340
|
|
|
(Gain) loss on sale or disposal of
assets, net
|
|
|
—
|
|
|
|
(833
|
)
|
|
|
728
|
|
|
Deferred income taxes
|
|
|
2,871
|
|
|
|
623
|
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
199
|
|
|
|
(1,478
|
)
|
|
|
(727
|
)
|
|
Deposit escrows
|
|
|
(987
|
)
|
|
|
(1,219
|
)
|
|
|
(242
|
)
|
|
Prepaid expenses and other current
assets
|
|
|
(112
|
)
|
|
|
791
|
|
|
|
254
|
|
|
Other assets
|
|
|
(3
|
)
|
|
|
(67
|
)
|
|
|
(197
|
)
|
|
Accounts payable
|
|
|
209
|
|
|
|
1,031
|
|
|
|
(681
|
)
|
|
Accrued expenses
|
|
|
698
|
|
|
|
327
|
|
|
|
836
|
|
|
Other liabilities
|
|
|
771
|
|
|
|
462
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
19,153
|
|
|
|
13,090
|
|
|
|
4,423
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
1,146
|
|
|
|
6,810
|
|
|
|
(1,522
|
)
|
|
Purchases of property and equipment
|
|
|
(6,148
|
)
|
|
|
(4,061
|
)
|
|
|
(2,621
|
)
|
|
Sales of property and equipment
|
|
|
1
|
|
|
|
2,569
|
|
|
|
4,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(5,001
|
)
|
|
|
5,318
|
|
|
|
608
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
20,000
|
|
|
|
80,400
|
|
|
|
3,508
|
|
|
Proceeds from exercise of stock
options
|
|
|
380
|
|
|
|
1
|
|
|
|
—
|
|
|
Payments on long-term debt
|
|
|
(30,166
|
)
|
|
|
(99,882
|
)
|
|
|
(7,372
|
)
|
|
Payment of costs for debt issuance
and extinguishment
|
|
|
—
|
|
|
|
(4,149
|
)
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(9,786
|
)
|
|
|
(23,630
|
)
|
|
|
(3,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
4,366
|
|
|
|
(5,222
|
)
|
|
|
1,088
|
|
|
Cash and cash equivalents,
beginning of year
|
|
|
1,943
|
|
|
|
7,165
|
|
|
|
6,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
6,309
|
|
|
$
|
1,943
|
|
|
$
|
7,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
8,446
|
|
|
$
|
13,925
|
|
|
$
|
10,864
|
|
|
Cash payments for income taxes
|
|
$
|
713
|
|
|
$
|
50
|
|
|
$
|
36
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-37
ASSISTED
LIVING CONCEPTS, INC.
Assisted Living Concepts, Inc. (“the Company”) owns,
leases and operates assisted living residences which provide
housing to residents who require assistance with their daily
activities. The Company provides personal care and support
services and makes available routine healthcare services, as
permitted by applicable law, designed to meet the needs of its
residents.
Reorganization
On October 1, 2001, Assisted Living Concepts, Inc. (the
“Company”), and its wholly owned subsidiary, Carriage
House Assisted Living, Inc. voluntarily filed for bankruptcy
protection under Chapter 11 of the United States
Bankruptcy Code. The bankruptcy court gave final approval to the
first amended joint plan of reorganization (the
“Plan”) on December 28, 2001, and the plan became
effective on January 1, 2002 (the “Effective
Date”). As a result of the consummation of the Plan, the
Company recognized an extraordinary gain on reorganization of
$79.5 million in 2001.
The Company held back from the initial issuance of Common Stock
and Notes on the Effective Date, $440.2 million of Senior
Secured Notes, $166.8 million of Junior Secured Notes and
68,241 shares of Common Stock (collectively, the
“Reserve”) to be issued to holders of general
unsecured claims at a later date. The total amount of, and the
identities of all of the holders of, the general unsecured
claims were not known as of the Effective Date, either because
they were disputed or they were not made by their holders prior
to December 19, 2001, the cutoff date for calculating the
Reserve (the “Cutoff Date”). In conjunction with the
refinancing (see Note 8), the Senior and Junior Notes held
in Reserve were defeased and the proceeds were distributed in
accordance with the Plan. The shares of New Common Stock held in
the Reserve were distributed pro rata to the general unsecured
creditors in 2005.
Fresh-start
Reporting
Upon emergence from Chapter 11 proceedings, the Company
adopted fresh-start reporting in accordance with the American
Institute of Certified Public Accountants Statement of
Position 90-7,
Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code
(SOP 90-7).
In connection with the adoption of fresh-start reporting, a new
entity has been deemed created for financial reporting purposes
effective December 31, 2001.
In adopting the requirements of fresh-start reporting as of
December 31, 2001, the Company was required to value its
assets and liabilities at fair value and eliminate its
accumulated deficit as of December 31, 2001. A
$32.8 million reorganization value was determined by the
Company with the assistance of financial advisors in reliance
upon various valuation methods, including discounted projected
cash flow analysis and other applicable ratios and economic
industry information relevant to the operation of the Company
and through negotiations with various creditor parties in
interest. Net fresh-start adjustments totaling
$119.3 million were charged to the statement of operations.
The adjustments included a $110.9 million write-down of
property and equipment.
Merger
and Acquisition with Extendicare Health Services
Inc.
On November 4, 2004, the Company entered into a definitive
merger and acquisition agreement with Extendicare Health
Services Inc. (“EHSI”) of Milwaukee, Wisconsin
providing for the acquisition of all outstanding shares and
stock options of the Company at $18.50 per share. The
completion of the acquisition was subject to certain conditions,
including approval by the Company’s shareholders and
certain customary regulatory approvals.
On January 31, 2005 the shareholders of the Company
approved the merger. Refer to Subsequent Events, Note 16.
F-38
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
a) Principles
of Consolidation
All significant intercompany balances and transactions have been
eliminated in consolidation.
b) Cash
Equivalents
Cash equivalents of $0.1 million and $0.2 million at
December 31, 2004 and 2003, respectively, consist of highly
liquid investments with maturities of three months or less at
the date of purchase.
c) Accounts
Receivable
Accounts receivable are recorded at the net realizable value
expected to be received from individual residents, third-party
payors
and/or state
assistance programs.
The Company periodically evaluates the adequacy of its allowance
for doubtful accounts by conducting a specific account review of
amounts in excess of predefined target amounts and aging
thresholds, which vary by payor type. Allowances for
uncollectibility are considered based upon the evaluation of the
circumstances for each of these specific accounts. In addition,
the Company has established internally determined percentages
for allowances for doubtful accounts, which are based upon
historical collection trends for each payor type and age of
receivables.
d) Escrow
Deposits
Under certain mortgage and loan agreements, the Company is
required to make escrow deposits for taxes, insurance, and
replacement or repair of property assets. Escrow deposits were
$4.3 million and $3.3 million at December 31,
2004 and 2003.
e) Property
and Equipment
Property and equipment are recorded at cost and depreciation is
computed over the assets’ estimated useful lives on the
straight-line basis as follows:
| |
|
|
|
|
|
Buildings and building improvements
|
|
|
35 to 40 years
|
|
|
Furniture and equipment
|
|
|
3 to 7 years
|
|
As of the Effective Date, the Successor Company adjusted its
property, plant and equipment to estimated fair value in
conjunction with the implementation of fresh-start reporting.
The Successor Company maintains the same policies concerning
transactions affecting property and equipment.
The Company evaluates long-lived assets for impairment whenever
facts and circumstances indicate an asset’s carrying value
may not be recoverable on an undiscounted cash flow basis. If an
impairment is determined to have occurred, an impairment loss is
recognized to the extent the asset’s carrying amount
exceeds its fair value. Assets the Company intends to dispose of
are reported at the lower of (i) carrying amount or
(ii) fair value less the cost to sell. The Company did not
recognize any impairment losses on property in 2004, 2003 or
2002.
Maintenance and repairs are charged to expense as incurred, and
significant betterments and improvements are capitalized.
f) Leases
The Company determines the classification of its leases as
either operating or capital at their inception. The Company
re-evaluates such classification whenever circumstances or
events occur that require the re-evaluation of the leases.
F-39
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company accounts for arrangements entered into under sale
and leaseback agreements pursuant to Statement of Financial
Accounting Standards (SFAS) No. 98, “Accounting for
Leases.” For transactions that qualify as sales and
operating leases, a sale is recognized and the asset is removed
from the books. For transactions that qualify as sales and
capital leases, the sale is recognized, but the asset remains on
the books and a capital lease obligation is recorded.
Transactions that do not qualify for sales treatment are treated
as financing transactions. In the case of financing
transactions, the asset remains on the books and a finance
obligation is recorded as part of long-term debt. Losses on sale
and leaseback agreements are recognized at the time of the
transaction absent indication that the sales price is not
representative of fair value. Gains are deferred and recognized
on a straight-line basis over the initial term of the lease.
All of the Company’s leases contain various provisions for
annual increases in rent, or rent escalators. Certain of these
leases contain rent escalators with future minimum annual rent
increases that are not considered contingent rents. The total
amount of the rent payments under such leases with
non-contingent rent escalators is charged to expense on the
straight-line method over the term of the leases. The Company
records a deferred credit, included in other liabilities, to
reflect the excess of rent expense over cash payments which is
subsequently reduced in the later years as the cash payments
exceed the rent expense. Deferred rent credits at
December 31, 2004 totaled $0.7 million.
As of the Effective Date, the Company revalued its leases in
conjunction with the implementation of fresh-start reporting.
Amortization of unfavorable leases is computed using the
straight-line method and credited to rent expense over the life
of the respective leases.
g) Long-Lived
Assets
The Company periodically assesses the recoverability of
long-lived assets, including property and equipment, in
accordance with the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets.” This statement requires that all long-lived assets
be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying value of an asset to the
undiscounted future cash flows expected to be generated by the
asset. If the carrying value of an asset exceeds its estimated
undiscounted future cash flows, an impairment provision is
recognized to the extent of the excess amount. Assets to be
disposed of are reported at the lower of the carrying amount or
the fair value of the asset, less all associated costs of
disposition. In addition, SFAS No. 144 requires
companies to separately report discontinued operations and
extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution
to owners) or is classified as held for sale. Management
considers such factors as current results, trends, and future
prospects, current market value and other economic and
regulatory factors, in performing these analyses.
The proposed sale of nine South Carolina properties was
terminated in May 2003 due to the purchaser’s inability to
obtain suitable financing. The Company discontinued marketing
the properties at that time. The transfer of the assets held for
sale to assets held for use did not result in any significant
gain or loss.
h) Deferred
Financing Costs
Financing costs related to the issuance of debt are capitalized
as other assets and amortized to interest expense over the term
of the related debt using a method which approximates the
effective interest method. Deferred financing costs of
$3.8 million were recorded related to the new financing and
$0.7 million was amortized to expense in the year ended
December 31, 2004. As a result of the refinancing completed
in December 2003 (see Note 8), the Company charged the
$0.5 million deferred financing balance related to the
extinguished debt to expense in the year ended December 31,
2003.
F-40
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
i) Workers’
Compensation and Professional Liability
The Company utilizes third-party insurance for losses and
liabilities associated with workers’ compensation and
professional liability claims subject to deductible and
retention levels (see Notes 9 and 10). Losses up to the
deductible or retention level are accrued based upon the
Company’s estimates of the aggregate liability for claims
incurred based on Company and industry experience.
j) Revenue
Recognition
Revenue is recognized when services are rendered and consists of
residents’ fees for basic housing and support services and
fees associated with additional services such as routine
healthcare and personalized assistance on a fee for service
basis. The majority of revenues are derived from private pay
residents or their families and the remainder of the
Company’s revenue is derived from state-funded Medicaid
reimbursement programs. Revenues are recorded in the period in
which services and products are provided at established rates.
Revenues collected in advance are recorded as deferred revenue
upon receipt and recorded to revenue in the period the revenues
are earned.
k) Residence
Operating and Corporate General and Administrative
Expenses
Residence operating expenses include costs directly associated
with providing services to residents and expenses associated
with the Company’s corporate home office or support
functions, which have been classified as corporate general and
administrative expense.
l) Income
Taxes
The Company uses the asset and liability method of accounting
for income taxes under which deferred tax assets and liabilities
are recognized for the estimated future tax consequences
attributable to the differences between the financial statement
carrying amounts of the existing assets and liabilities and
their respective tax bases (temporary differences). Deferred tax
assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
m) Net
Income (Loss) Per Common Share
Basic earnings per share (EPS) is calculated using net income
(loss) attributable to common shares divided by the weighted
average number of common shares outstanding for the period.
Diluted EPS is calculated in periods with net income using
income attributable to common shares divided by the weighted
average number of common shares and dilutive potential common
shares outstanding for the period. The weighted average common
shares used for basic net income (loss) per common share was
6,520,000 for the year ended December 31, 2004 and
6,500,000 for the years ended December 31, 2003 and 2002. .
The effect of dilutive stock options using the treasury stock
method added 369,000 and 171,000 shares for the years ended
December 31, 2004 and 2003, respectively. The weighted
average number of stock options outstanding for the year ended
December 31, 2002 was 151,000, and was antidilutive and
therefore was excluded from the calculation.
F-41
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
n) Stock-based
Compensation
The Company’s stock-based compensation plans are described
in Note 14. Previously, the Company accounted for
stock-based compensation plans under the recognition and
measurement provisions of APB Opinion No. 25,
“Accounting for Stock Issued to Employees” (APB
No. 25) and related interpretations. No stock-based
employee compensation expense for stock options was reflected in
Net Income (Loss) previous to April 1, 2003, as all stock
options granted under those plans had an exercise price equal to
the fair market value of the underlying common stock on the date
of grant. Effective January 1, 2003, the Company adopted
the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation,” and
recognizes compensation expense according to the prospective
transition method under SFAS No. 148, “Accounting
for Stock-Based Compensation — Transition and
Disclosure.” Under this method the Company expenses the
fair value of all new stock options granted after
January 1, 2003 over the vesting period. The following
table illustrates the effect on net income (loss) and earnings
per share had the company applied the fair value accounting
method to all of the Company’s stock option grants.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
In thousands
|
|
|
In thousands
|
|
|
In thousands
|
|
|
|
|
Net income (loss), as reported
|
|
$
|
6,776
|
|
|
$
|
157
|
|
|
$
|
(4,414
|
)
|
|
Add: Stock-based employee
compensation expense included in reported net income, net of
related tax effects
|
|
|
221
|
|
|
|
157
|
|
|
|
—
|
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value method for all
awards granted, net of related tax effects
|
|
|
(270
|
)
|
|
|
(188
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
6,727
|
|
|
$
|
126
|
|
|
$
|
(4,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — as reported
|
|
$
|
1.04
|
|
|
$
|
0.02
|
|
|
$
|
(0.68
|
)
|
|
Basic — pro forma
|
|
$
|
1.03
|
|
|
$
|
0.02
|
|
|
$
|
(0.70
|
)
|
|
Diluted — as reported
|
|
$
|
0.98
|
|
|
$
|
0.02
|
|
|
$
|
(0.68
|
)
|
|
Diluted — pro forma
|
|
$
|
0.98
|
|
|
$
|
0.02
|
|
|
$
|
(0.70
|
)
|
o) Segment
Reporting
Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information requires public enterprises to report certain
information about their operating segments in a complete set of
financial statements to shareholders. It also requires reporting
of certain enterprise-wide information about the Company’s
products and services, its activities in different geographic
areas, and its reliance on major customers. The basis for
determining the Company’s operating segments is the manner
in which management operates the business. The Company has no
foreign operations and no customers which provide over
10 percent of revenue. The Company reviews operating
results at the residence level; it also meets the aggregation
criteria in order to report the results as one business segment.
p) Use
of Estimates
The Company has made certain estimates and assumptions relating
to the reporting of assets and liabilities, and the disclosure
of contingent assets and liabilities, and the reported amounts
of revenue and expenses during the reporting period to prepare
these financial statements in conformity with accounting
principles generally accepted in the United States of America.
Actual results could differ from those estimates. Significant
estimates include professional liability, workers’
compensation, fresh-start accounting adjustments, the evaluation
of long-lived assets for impairment, and allowance for doubtful
accounts.
F-42
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
q) Reclassifications
Certain reclassifications have been made in the prior
years’ financial statements to conform to the current
year’s presentation. Such reclassifications had no effect
on previously reported net income (loss) or shareholders’
equity.
r) 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 practicable to estimate that value:
Cash and cash equivalents — The carrying amount
approximates fair value because of the short maturity of those
instruments.
Trading receivables and payables have an estimated fair value
equal to carrying value.
Long-term debt — The fair value of the Company’s
long term-debt is estimated based on 1) terms for same or
similar debt instruments, or 2) terms of recently completed
transactions of similar nature or terms offered to the Company,
or 3) quoted market rates.
The estimated fair values of the Company’s long-term debt
(in thousands) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Carrying value
|
|
$
|
137,301
|
|
|
$
|
147,454
|
|
|
Fair value
|
|
$
|
140,092
|
|
|
$
|
150,830
|
|
The Company’s cash and cash equivalents consist of the
following as of December 31 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Cash
|
|
$
|
6,247
|
|
|
$
|
1,733
|
|
|
Cash equivalents
|
|
|
62
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
6,309
|
|
|
$
|
1,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
CASH
RESTRICTED FOR RESIDENT SECURITY DEPOSITS
|
The Company is required to maintain a restricted cash account
for resident security deposits associated with the Oregon
Housing and Community Service Department loans. The amount of
cash restricted for resident security deposits was
$0.1 million as of December 31, 2004 and 2003.
The Company’s other current assets consist of the following
as of December 31 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Supplies
|
|
$
|
712
|
|
|
$
|
913
|
|
|
Refundable deposits
|
|
|
154
|
|
|
|
482
|
|
|
Insurance refund receivable
|
|
|
104
|
|
|
|
—
|
|
|
Other
|
|
|
86
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
1,056
|
|
|
$
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
F-43
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Restricted cash classified as non-current consists of the
following as of December 31 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Cash held as collateral for
various letters of credit
|
|
$
|
1,019
|
|
|
$
|
1,012
|
|
|
|
|
7.
|
PROPERTY
AND EQUIPMENT
|
As of December 31, 2004 and 2003, property and equipment,
consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Land
|
|
$
|
21,180
|
|
|
$
|
21,180
|
|
|
Buildings and building improvements
|
|
|
164,612
|
|
|
|
162,952
|
|
|
Equipment
|
|
|
9,549
|
|
|
|
7,554
|
|
|
Furniture
|
|
|
4,279
|
|
|
|
4,093
|
|
|
Vehicles
|
|
|
750
|
|
|
|
471
|
|
|
Improvements in progress
|
|
|
2,292
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
202,662
|
|
|
|
196,515
|
|
|
Less accumulated depreciation and
amortization
|
|
|
21,440
|
|
|
|
13,543
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
181,222
|
|
|
$
|
182,972
|
|
|
|
|
|
|
|
|
|
|
|
As of the Effective Date, the Successor Company adjusted its
property, plant and equipment to estimated fair value in
conjunction with the implementation of fresh-start reporting.
Land, buildings and certain furniture and equipment relating to
30 residences serve as collateral for the GE Capital loans
(See Note 8) and 24 residences serve as collateral for
the Red Mortgage Capital — FNMA loan (See
Note 8) and 41 residences serve as collateral for
other debt.
Depreciation expense was $7.9 million; $7.0 million
and $6.6 million for the years ended December 31,
2004, 2003, and 2002, respectively.
F-44
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
8.
|
LINE OF
CREDIT AND LONG-TERM DEBT
|
As of December 31, 2004 and 2003, debt consists of the
following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
December 31, 2003
|
|
|
|
|
Carrying
|
|
|
Principal
|
|
|
Carrying
|
|
|
Principal
|
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
|
|
Trust Deed Notes, payable to
the State of Oregon Housing and Community Services Department
(OHCS) (Oregon Notes) due 2028
|
|
$
|
9,322
|
|
|
$
|
9,229
|
|
|
$
|
9,508
|
|
|
$
|
9,412
|
|
|
Variable Rate Multifamily Revenue
Bonds, payable to the Washington State Housing Finance
Commission Department (Washington Bonds) due 2028
|
|
|
6,557
|
|
|
|
6,625
|
|
|
|
6,897
|
|
|
|
6,970
|
|
|
Variable Rate Demand Housing
Revenue Bonds, Series 1997, payable to the Idaho Housing
and Finance Association (Idaho Bonds) due 2017
|
|
|
5,701
|
|
|
|
5,760
|
|
|
|
5,996
|
|
|
|
6,060
|
|
|
Variable Rate Demand Housing
Revenue Bonds,
Series A-1
and A-2
payable to the State of Ohio Housing Finance Agency (Ohio bonds)
due 2018
|
|
|
9,502
|
|
|
|
9,610
|
|
|
|
9,989
|
|
|
|
10,105
|
|
|
Housing and Urban Development
(HUD) Insured Mortgages due 2036
|
|
|
7,228
|
|
|
|
7,303
|
|
|
|
7,280
|
|
|
|
7,358
|
|
|
Mortgage loans due 2008
|
|
|
26,785
|
|
|
|
26,749
|
|
|
|
27,384
|
|
|
|
27,343
|
|
|
Red Capital (Fannie Mae) due 2013
|
|
|
37,797
|
|
|
|
37,797
|
|
|
|
38,400
|
|
|
|
38,400
|
|
|
G.E. Capital Term Loan due 2008
|
|
|
34,409
|
|
|
|
34,409
|
|
|
|
35,000
|
|
|
|
35,000
|
|
|
G.E. Capital Credit Facility due
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
137,301
|
|
|
$
|
137,482
|
|
|
|
147,454
|
|
|
$
|
147,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
3,460
|
|
|
|
|
|
|
|
3,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
133,841
|
|
|
|
|
|
|
$
|
144,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2003, the Company used proceeds from a new
$38.4 million loan from Red Mortgage Capital (“New
FNMA Loan”), as lender for Fannie Mae, a new
$35 million term loan and a $15 million revolving
loan, both from GE Capital (“New GE Term Loan” and
“New GE Credit Facility,” respectively) to refinance
its Senior and Junior Secured Notes and the secured loan
provided by GE Capital (collectively “Refinanced
Debt”), which had a total principal amount of approximately
$90.5 million at the refinancing date. The Senior Notes
were due to mature in January 2009 and accrued interest at 10%.
The Junior Notes were due to mature in January 2012, bearing
interest payable in additional Junior Notes at 8% per annum
through 2004 and bearing interest at 12% payable in cash
beginning in 2005. Under the terms of the Junior and Senior
Indentures, the notes were legally defeased effective
December 29, 2003. The GE Capital loan had a maturity of
December 2004, and accrued interest at LIBOR plus 4.5% with a
minimum interest rate of 8%.
The Red Mortgage Capital Loan has a fixed interest rate of
6.24%, matures in 10 years, has a
25-year
principal amortization and is secured by 24 residences, which
serve as collateral. The Red Mortgage Capital Loan were entered
into by subsidiaries of the Company and are non-recourse to the
Company.
The G.E. Term Loan and Credit Facility mature in 5 years,
and are secured by a collective pool of 30 residences,
which serve as collateral. The G.E. Term Loan requires monthly
interest payments and principal reductions based on a
25-year
principal amortization schedule, with a balloon payment at
maturity. The G.E. Credit Facility has an initial revolving
borrowing period of 2 years, which may be extended annually
thereafter for three years upon mutual consent by G.E. Capital
and the Company. If the initial revolving borrowing period is
not extended, then the New GE Credit Facility converts from a
revolving loan to a term loan with the same terms as the New GE
Term
F-45
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Loan. During the initial revolving borrowing period, the GE
Credit Facility requires monthly interest payments, no principal
reductions, and accrues interest on the unused loan availability
at a rate of 0.75% per year, which is paid quarterly. Both
the Term Loan and Credit Facility accrue interest at LIBOR plus
4.0%, which is calculated based on a 360 day year and
charged for the actual number of days elapsed, with an interest
rate floor of 5.75%, The G.E. Term Loan and the G.E. Credit
Facility contain financial covenants that require a certain
level of financial performance for the residences which serve as
collateral for the loan. The G.E. Capital Term Loan and the G.E.
Capital Facility were entered into by subsidiaries of the
Company and were non-recourse to the Company. The Company had
$7.0 million in borrowings on the G.E. Credit Facility as
of December 31, 2003 and no borrowings on the G.E. Credit
Facility as of December 31, 2004.
At December 31, 2004, mortgage loans include three fixed
rate loans secured by seven Texas residences, three Oregon
residences and three New Jersey residences. These loans
collectively require monthly principal and interest payments of
$0.2 million, with balloon payments of $11.8 million,
$5.3 million and $7.2 million due at maturity in May,
August and September 2008, respectively. These loans bear
interest at fixed rates ranging from 7.6% to 8.7%.
The Oregon Notes are secured by land, buildings, furniture and
fixtures of six Oregon residences. The notes are payable in
monthly installments including interest at effective rates
ranging from 7.4% to 9.0%.
The Washington Bonds are secured by a $7.1 million letter
of credit and land, buildings, furniture and fixtures of the
five Washington residences and had an interest rate of 1.2% at
December 31, 2004. The letter of credit expires in July
2005 and has an annual commitment fee of 2.0%.
The Idaho Bonds are secured by a $6.2 million letter of
credit and land, buildings, furniture and fixtures of four Idaho
residences and had an interest rate of 1.2% at December 31,
2004. The letter of credit expires in July 2005 and has an
annual commitment fee of 2.0%.
The Ohio Bonds are secured by a $10.3 million letter of
credit and land, buildings, furniture and fixtures of six Ohio
residences and had an interest rate of 1.2% at December 31,
2004. The letter of credit expires in July 2005 and has an
annual commitment fee of 2.0%.
The HUD insured mortgages include three separate loan agreements
entered into in 2001. The mortgages are each secured by a
separate facility in Texas. These loans mature between
July 1, 2036 and August 1, 2036 and collectively
require monthly principal and interest payments of
$0.1 million. The loans bear interest at fixed rates
ranging from 7.4% to 7.6%.
As of the Effective Date of the Reorganization, the Successor
Company revalued its long-term debt in conjunction with the
implementation of fresh-start reporting. At December 31,
2001, an adjustment of $3.1 million was recorded to reduce
long-term debt to its estimated fair value. Amortization of this
adjustment is computed using the straight-line method over the
life of the corresponding debt.
As of December 31, 2004, the following annual principal
payments are required (in thousands):
| |
|
|
|
|
|
2005
|
|
$
|
3,460
|
|
|
2006
|
|
|
3,721
|
|
|
2007
|
|
|
3,960
|
|
|
2008
|
|
|
28,040
|
|
|
2009
|
|
|
3,574
|
|
|
Thereafter
|
|
|
94,727
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137,482
|
|
|
|
|
|
|
|
The Company has a series of Reimbursement Agreements with
U.S. Bank for Letters of Credit that support certain of our
Revenue Bonds Payable. The total amount of these Letters of
Credit was approximately $23.6 million as of
December 31, 2004. In September 2003, the Company entered
into an amendment to the Reimbursement
F-46
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Agreements effective as of June 2003, which primarily provided
for the following modifications among other things:
1) release of approximately $4.3 million of previously
restricted cash; 2) standardized and extended the
expiration date of the letters of credit to January 2005;
3) amended the annual fees to be 2% of the stated amount of
the letters of credit; 4) put in place new financial
covenants.
The Company’s agreements with U.S. Bank contain
financial covenants to include the following: 1) minimum
net worth; 2) minimum debt service coverage;
3) minimum liquidity; and 4) minimum earnings. Failure
to comply with these covenants could constitute an event of
default, which would allow U.S. Bank to declare any amounts
outstanding under the loan documents to be due and payable. The
agreements also require the Company to deposit $0.5 million
in cash collateral with U.S. Bank in the event certain
regulatory actions are commenced with respect to the properties
securing the Company’s obligations to U.S. Bank.
U.S. Bank is required to release such deposits upon
satisfactory resolution of the regulatory action.
Approximately $23.1 million of the Company’s
indebtedness was secured by letters of credit held by
U.S. Bank as of December 31, 2003, which in some cases
have termination dates prior to the maturity of the underlying
debt. As such letters of credit expire, in January 2005, the
Company will need to extend the current letters of credit,
obtain replacement letters of credit, post cash collateral or
refinance the underlying debt. There can be no assurance that
the Company will be able to extend the current letters of credit
or procure replacement letters of credit from the same or other
lending institutions on terms that are acceptable to us or at
all. In the event that the Company is unable to obtain a
replacement letter of credit or provide alternate collateral
prior to the expiration of any of these letters of credit, the
Company would be in default on the underlying debt.
In addition to the debt agreements with OHCS related to the six
owned residences in Oregon, the Company has entered into Lease
Approval Agreements with OHCS and the lessor of the Oregon
Leases, which obligates the Company to comply with the terms and
conditions of the underlying trust deed relating to the leased
buildings. Under the terms of the OHCS debt agreements, the
Company is required to maintain a capital replacement escrow
account to cover expected capital expenditure requirements for
the Oregon Leases and the six OHCS loans. As a further condition
of the OHCS debt agreements, the Company is required to comply
with the terms of certain regulatory agreements which provide,
among other things, that in order to preserve the federal income
tax exempt status of the bonds, the Company is required to lease
at least 20% of the units of the projects to low or moderate
income persons as defined in Section 142(d) of the Internal
Revenue Code. There are additional requirements as to the age
and physical condition of the residents with which the Company
must also comply. Non-compliance with these restrictions may
result in an event of default and cause acceleration of the
scheduled repayment.
In addition, the terms of certain outstanding indebtedness and
certain lease agreements may restrict the Company’s ability
to pay cash dividends.
|
|
|
9.
|
ACCRUAL
FOR WORKERS’ COMPENSATION
|
As of December 31, 2004, the Company utilized third-party
insurance for losses and liabilities associated with
workers’ compensation claims subject to deductible levels
of $0.5 million per occurrence for all claims incurred
beginning January 1, 2004, and $0.3 million for years
beginning January 1, 2000 through December 31, 2003.
Claims incurred prior to January 1, 2000 were fully
insured. Losses up to these deductible levels are accrued based
upon the Company’s estimates of the aggregate liability for
claims incurred based on Company and industry experience. At
December 31, 2004 and 2003, other accrued expenses include
reserves for workers’ compensation claims of approximately
$3.0 million and $3.2 million, respectively.
In addition, the Company maintains cash deposits as required by
the insurance carrier. At December 31, 2004 and 2003, such
deposits were $2.9 million and $4.0 million,
respectively. These deposits will be utilized to pay future
claim settlements.
F-47
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
10.
|
ACCRUAL
FOR PROFESSIONAL LIABILITY CLAIMS
|
As of December 31, 2004, the Company utilized third-party
insurance for losses and liabilities associated with
professional liability claims subject to a self-insured
retention of $0.1 million per occurrence for the year ended
December 31, 2000 and a self-insured retention of
$0.3 million for all states except Florida and Texas, which
are subject to a self-insured retention of $0.5 million per
occurrence, for the years ended December 31, 2001 and 2002
and a self-insured retention of $0.5 million and
$0.8 million for all states for the years ended
December 31, 2003 and 2004. For the years through 2002, the
third-party insurance provides the following limits in excess of
the self-insured retention: $1 million per occurrence;
$3 million aggregate per location; and $15 million
aggregate per policy year. For 2004 and 2003, the limit for
aggregate loss per policy year was lowered to $10 million.
If a lawsuit or claim arises which ultimately results in an
uninsured loss or a loss in excess of insured limits, such an
outcome could have a material adverse effect on the Company.
Losses up to the retention levels are accrued based upon the
Company’s estimates of the aggregate liability for claims
incurred based on Company and industry experience. At
December 31, 2004 and 2003, other accrued expenses includes
reserves for professional liability claims payable of
approximately $0.9 million, and $2.1 million,
respectively.
The Company had taxable income for both financial reporting and
tax return purposes for the years ended December 31, 2004
and 2003. The Company incurred a loss for financial reporting
and tax return purposes for the year ended December 31,
2002 and as such, there was no current or deferred tax provision
allocated to the loss from continuing operations or discontinued
operations in that year.
Total income taxes for the years ended December 31, 2004,
2003, and 2002 were allocated as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
Income tax expense
|
|
$
|
3,792
|
|
|
$
|
1,668
|
|
|
$
|
—
|
|
|
Income tax expense for
discontinued operations
|
|
|
—
|
|
|
|
336
|
|
|
|
—
|
|
|
Shareholder’s equity for
stock options
|
|
|
(169
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Shareholder’s equity for
Predecessor Company valuation allowance reversal
|
|
|
(35,425
|
)
|
|
|
(1,229
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(31,802
|
)
|
|
$
|
775
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amount of tax
determined by applying the applicable U.S. statutory
federal rate to income (loss) from continuing operations as a
result of the following items at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
Statutory federal tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
|
Reorganization cost not deductible
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
5.4
|
%
|
|
State income taxes, net of federal
benefit
|
|
|
3.9
|
%
|
|
|
6.2
|
%
|
|
|
—
|
%
|
|
Other non-deductible expenses
|
|
|
2.3
|
%
|
|
|
2.8
|
%
|
|
|
—
|
%
|
|
Change in valuation allowance
|
|
|
(339.5
|
)%
|
|
|
(10.1
|
)%
|
|
|
28.6
|
%
|
|
Utilization of Predecessor Company
NOL’s recorded as additional paid in capital
|
|
|
335.2
|
%
|
|
|
92.4
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
35.9
|
%
|
|
|
125.3
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income tax expense attributable to income from continuing
operations consists of the following at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,082
|
|
|
$
|
543
|
|
|
$
|
—
|
|
|
State
|
|
|
37
|
|
|
|
672
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,119
|
|
|
|
1,215
|
|
|
|
—
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,702
|
|
|
|
340
|
|
|
|
—
|
|
|
State
|
|
|
(29
|
)
|
|
|
113
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,673
|
|
|
|
453
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,792
|
|
|
$
|
1,668
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An analysis of the significant components of deferred tax assets
and liabilities consists of the following as of
December 31, 2004 and 2003 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Property and equipment, primarily
due to depreciation and fresh start adjustments
|
|
$
|
17,886
|
|
|
$
|
21,378
|
|
|
Net operating loss carryforward
|
|
|
4,206
|
|
|
|
4,817
|
|
|
Built-in losses limited under
Section 382 of the Internal Revenue Code
|
|
|
12,987
|
|
|
|
10,124
|
|
|
Investment in joint venture
operations
|
|
|
—
|
|
|
|
1,342
|
|
|
Employee benefit accruals
|
|
|
1,655
|
|
|
|
1,557
|
|
|
Accrued liabilities
|
|
|
335
|
|
|
|
802
|
|
|
Accounts receivable reserves
|
|
|
221
|
|
|
|
266
|
|
|
Goodwill
|
|
|
173
|
|
|
|
201
|
|
|
Capital loss carryforwards
|
|
|
146
|
|
|
|
146
|
|
|
Tax credit carryforwards
|
|
|
208
|
|
|
|
103
|
|
|
Other
|
|
|
2,934
|
|
|
|
2,931
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
40,751
|
|
|
|
43,667
|
|
|
Valuation allowance
|
|
|
(6,953
|
)
|
|
|
(42,843
|
)
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(638
|
)
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(638
|
)
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
33,160
|
|
|
$
|
606
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, the Company has approximately
$11.1 million of net operating loss (NOL) carryforwards
which will expire between 2009 and 2022. The NOLs are subject to
certain provisions of the Internal Revenue Code which restricts
the utilization of the losses. In addition, any net unrealized
built-in losses resulting from the excess of tax basis over the
carrying value of the Company’s assets (primarily property
and equipment) as of the Effective Date, which are recognized
within five years are also subject to these provisions.
Section 382 of the Internal Revenue Code imposes
limitations on the utilization of the loss carryforwards and
built-in losses after certain changes of ownership of a loss
company. The Company is deemed to be a loss company for these
purposes. Under these provisions, the Company’s ability to
utilize these loss carryforwards and built-in losses
F-49
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
in the future will generally be subject to an annual limitation
of approximately $1.6 million. The net unrealized built-in
losses were $34.4 million at December 31, 2004.
Pursuant to
SOP 90-7,
the income tax benefit, if any, of any realization of the NOL
carryforwards and other deductible temporary differences
existing as of the Effective Date is recorded as an adjustment
to additional paid-in capital.
The increase in the total valuation allowance for the year ended
December 31, 2002 was $1.4 million. The decrease in
the total valuation allowance for the years ended
December 31, 2004 and 2003 was $35.9 million and
$2.1 million, respectively. The decrease in the total
valuation allowance allowance in 2004 was the result of
recognition of anticipated utilization of loss carryforwards.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of the 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 reversals of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Management believes it is
more likely than not the Company will realize the benefits of
these deductible differences, net of valuation allowances.
As of December 31, 2004, 2003 and 2002 the Company has 55
leases, all of which are accounted for as operating leases.
The Company has 37 leases with LTC Properties Inc.
(“LTC”). In June 1999, the Company amended all of its
37 leases with LTC Properties, Inc., (“LTC”). These
amendments included provisions to eliminate future minimum
annual rent increases, or “rent escalators,” that were
not deemed to be contingent rents. Because of the rent
escalators, prior to the amendments, the Company accounted for
rent expense related to such leases on a straight-line basis.
From the date of the amendment forward, the Company has
accounted for the amended leases on a contractual cash payment
basis and amortizes the deferred rent balance, at the date of
the amendment, over the remaining initial term of the leases.
Those amendments also redefined the lease renewal option with
respect to certain leases and provided the lessor with the
option to declare an event of default in the event of a change
of control under certain circumstances. In addition, the
amendments also provide the Company with the ability, subject to
certain conditions, to sublease or assign its leases with
respect to two Washington residences. (see Note 13). The
LTC lease agreements provide LTC with the option to exercise
certain remedies, including the termination of the leases, upon
the occurrence of an Event of Default. A change of control of
the Company is deemed to be an Event of Default if certain
conditions are not met. A change of control is deemed to occur
if, among other things, (i) any person, directly or
indirectly, is or becomes the beneficial owner of thirty percent
(30%) or more of the combined voting power of the Company’s
outstanding voting securities, (ii) the stockholders
approve under certain conditions a merger or consolidation of
the Company with another corporation or entity, or
(iii) the stockholders approve a plan of liquidation or
sale of all or substantially all of the assets of the Company.
However, if upon a change of control, the surviving entity has a
net worth of $75 million or more, the change of control
would not constitute an Event of Default. In addition, there are
cross default provisions in the LTC leases. At the same time
that the Company entered into the Master Lease Agreement, it
also amended 16 other leases with LTC under which the renewal
rights of certain of those leases are tied together.
Andre Dimitriadis, who resigned from the Company’s Board of
Directors on September 10, 2004, is the President, Chief
Executive Officer and Chairman of the Board of LTC Properties,
Inc. Mr. Dimitriadis, acting solely as a director of the
Company and not in his capacity as an officer or director of
LTC, has orally raised certain issues regarding compliance with
certain of the LTC Leases, which include at this time, the
following: 1) whether there are inconsistencies in the
number of units that constitute the leased property in the
Athens, Texas, Greenville, Texas and Tiffen, Ohio leases,
2) whether the LTC leases require insurance based on the
limits stated in the lease on a per
F-50
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
facility basis, and 3) whether the 4 LTC leases with
Carriage House require Carriage House to deliver on an annual
basis audited consolidated financial statements of Carriage
House. Mr. Dimitriadis similarly raised the issue as to
whether the Company is required to obtain licenses for the 2
facilities located in Elkhart, Indiana and Madison, Indiana as
assisted living facilities. Management believes that the Company
has meritorious defenses available to it or could exercise its
cure rights under the leases to resolve these matters in the
event that LTC were to deliver a notice of default. LTC has not
delivered any notice of default to the Company. However, the
Company is continuing to review and assess these matters
internally and no assurance can be given as to whether the
eventual resolution of these issues will be favorable to the
Company. The Company is in the process of obtaining licenses for
the 2 Indiana properties as assisted living facilities which was
completed during 2005. The Company provides LTC on an annual
basis with annual consolidated audited financial statements of
the Company, but not Carriage House, which was acquired in 1997.
Failure to favorably resolve these issues in a manner that
avoids an occurrence of an Event of Default under one or more of
the LTC leases would have a material adverse effect on the
Company. This would include, but not be limited to, creating
Events of Default on loan covenants regarding a significant
portion of outstanding indebtedness which, if not cured, would
make such indebtedness become immediately payable. In January
2005, the Company entered into a Memorandum of Understanding in
respect of the LTC leases (refer to Subsequent Event,
Note 16).
The Company has five Oregon leases (the “Oregon
Leases”) where the lessor in each case obtained funding
through the sale of bonds issued by the state of Oregon, Housing
and Community Services Department (“OHCS”). In
connection with the Oregon Leases, the Company entered into
“Lease Approval Agreements” with OHCS and the lessor,
pursuant to which the Company is obligated to comply with the
terms and conditions of certain regulatory agreements to which
the lessor is a party (see Note 8). The leases, which have
terms ending in 2005 through 2014, have been accounted for as
operating leases. Aggregate deposits on these residences as of
December 31, 2004 totaled, $0.1 million, and as of
December 31, 2003 totaled $0.3 million, which are
reflected in escrow deposits.
Certain of the Company’s leases and loan agreements contain
covenants and cross-default provisions such that a default on
one of those instruments could cause the Company to be in
default on one or more other instruments. Pursuant to certain
lease agreements, the Company restricted $1.0 million of
cash balances as additional collateral (see Note 6).
As of December 31, 2004, future minimum annual lease
payments under operating leases are as follows (in thousands):
| |
|
|
|
|
|
2005
|
|
$
|
13,380
|
|
|
2006
|
|
|
13,205
|
|
|
2007
|
|
|
12,809
|
|
|
2008
|
|
|
12,484
|
|
|
2009
|
|
|
6,983
|
|
|
Thereafter
|
|
|
16,998
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75,859
|
|
|
|
|
|
|
|
Lease expense for 2004, 2003 and 2002 was $12.7 million,
$12.7 million and $12.2 million, respectively.
|
|
|
13.
|
RELATED
PARTY TRANSACTIONS
|
Andre Dimitriadis, who resigned from the Company’s Board of
Directors on September 10, 2004, is the President, Chief
Executive Officer and Chairman of the Board of LTC Properties,
Inc. (“LTC”). The Company currently leases 37
properties from LTC. (See Note 12). The Company incurred
annual lease expense of $8.5 million, $8.7 million and
$8.7 million for the years ended December 31, 2002,
2003, and 2004 respectively, pursuant to these leases.
F-51
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
14.
|
STOCK
OPTION PLANS AND RESTRICTED STOCK
|
On May 8, 2002, the shareholders approved a new Stock
Option Plan. The Stock Option Plan consists of two plans, one
pertaining solely to the grant of incentive stock options and
one pertaining to the grant of other incentive awards, including
non-qualified stock options. The Stock Option Plan is intended
to obtain, retain services of, and provide incentive for,
directors, key employees and consultants. The Stock Option Plan
allows for grants or awards of incentive stock options,
non-qualified stock options, stock appreciation rights,
restricted stock, performance awards, dividend equivalents,
deferred stock and stock payments.
Under the Stock Option Plan, the aggregate number of shares
which may be issued upon exercise of options or other awards
shall not exceed 650,000. Except for non-employee directors, the
exercise price and vesting period of each option is to be set by
the Company’s Compensation Committee of its Board of
Directors, but the exercise price may not be less than the
deemed fair market value of the Company’s stock on the date
of grant. Each option will expire on the date specified in the
option agreement, but not later than the tenth anniversary of
the date on which the option was granted. The Board of
Directors, at its option, may discontinue or amend the Stock
Option Plan at any time, provided that certain conditions are
satisfied.
Following is the per share weighted-average fair value of each
option grant as estimated on the date of grant using the
Black-Scholes option-pricing model with the following
weighted-average assumptions.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
58.7
|
%
|
|
|
58.9
|
%
|
|
|
46.1
|
%
|
|
Risk-free interest rate
|
|
|
4.1
|
%
|
|
|
3.9
|
%
|
|
|
3.4
|
%
|
|
Expected life (in years)
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
A summary of the status of the Company’s stock options
changes during the years ended December 31, 2004, 2003 and
2002 is presented below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
Options at beginning of the year
|
|
|
595,100
|
|
|
$
|
3.75
|
|
|
|
251,000
|
|
|
$
|
3.18
|
|
|
|
0
|
|
|
$
|
—
|
|
|
Granted
|
|
|
104,999
|
|
|
|
9.42
|
|
|
|
390,400
|
|
|
|
4.07
|
|
|
|
264,500
|
|
|
|
3.18
|
|
|
Exercised
|
|
|
(99,326
|
)
|
|
|
3.83
|
|
|
|
(166
|
)
|
|
|
3.35
|
|
|
|
0
|
|
|
|
—
|
|
|
Canceled
|
|
|
(85,971
|
)
|
|
|
3.81
|
|
|
|
(46,134
|
)
|
|
|
3.37
|
|
|
|
(13,500
|
)
|
|
|
3.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options at end of the year
|
|
|
514,802
|
|
|
$
|
4.72
|
|
|
|
595,100
|
|
|
$
|
3.75
|
|
|
|
251,000
|
|
|
$
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
197,306
|
|
|
|
|
|
|
|
145,446
|
|
|
|
|
|
|
|
28,853
|
|
|
|
|
|
|
Weighted-average fair value of
options granted during year
|
|
$
|
5.39
|
|
|
|
|
|
|
$
|
1.66
|
|
|
|
|
|
|
$
|
1.66
|
|
|
|
|
|
F-52
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information for the
Company’s stock options outstanding at December 31,
2004 issued to employees of the Company:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
Exercise
|
|
|
Number
|
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
Price
|
|
|
Exercisable
|
|
|
|
|
$2.94 - $ 3.84
|
|
|
401,767
|
|
|
7.8 years
|
|
$
|
3.50
|
|
|
|
196,831
|
|
|
$4.98 - $11.30
|
|
|
113,035
|
|
|
9.3 years
|
|
$
|
9.05
|
|
|
|
475
|
|
|
|
|
15.
|
COMMITMENT
AND CONTINGENCIES
|
Legal
Proceedings
The Company is involved in ordinary, routine, or regulatory
legal proceedings incidental to its business. In the aggregate,
such legal proceedings in management’s expectations should
not have a material adverse effect on the Company’s
financial condition, results of operations, cash flow and
liquidity.
Employee
Benefit Plans
The Company has a 401(k) Savings Plan (“the Savings
Plan”) which is a defined contribution plan covering
employees of Assisted Living Concepts, Inc. who have at least
three months of service and are age 21 or older. Each year
participants may contribute up to 15% of pre-tax annual
compensation and 100% of any Employer paid cash bonus (not to
exceed statutory limits), as defined in the Savings Plan. ALC
may provide matching contributions as determined annually by
ALC’s Board of Directors. Contributions are subject to
certain limitations. The Company has not made any contributions
to this Savings Plan.
Liquidity
The Company had working capital deficits of $9,543,000 and
$11,729,000 at December 31, 2004 and 2003, respectively.
The Company has certain contingencies and reserves, including
litigation reserves, recorded as current liabilities at
December 31, 2004 that management believes it will not be
required to liquidate in cash during 2005. However, in the event
that all current liabilities become due within twelve months,
the Company may be required to obtain debt financing or sell
securities on unfavorable terms. There can be no assurance that
such action may not be necessary to ensure appropriate liquidity
for the operations of the Company.
Concentration
of Credit Risk
The Company depends on the economies of Texas, Indiana, Oregon,
Ohio and Washington and to some extent, on the continued funding
of State Medicaid waiver programs in some of those states. As of
December 31, 2004, 22.6% of the Company’s properties
were in Texas, 11.3% in Indiana, 10.2% in Oregon, 9.6% in Ohio
and 9.0% in Washington. Adverse changes in general economic
factors affecting the respective healthcare industries or laws
and regulator environment in each of these states, including
Medicaid reimbursement rates, could have a material adverse
effect on the Company’s financial condition and results of
operations.
State Medicaid reimbursement programs constitute a significant
source of revenue for the Company. During the years ended
December 31, 2002, 2003, and 2004 direct payments received
from state Medicaid agencies accounted for approximately 12.8%,
13.6% and 14.7%, respectively, of the Company’s revenue
while the resident paid portion received from Medicaid residents
accounted for approximately 7.9%, 8.9% and 9.6%, respectively,
of the Company’s revenue during these periods. The Company
expects in the future that State Medicaid reimbursement programs
will constitute a significant source of revenue for the Company.
F-53
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On January 31, 2005, the shareholders of the Company
approved the merger and acquisition agreement with a subsidiary
of EHSI and subsequently shareholders who tendered their shares
received in exchange cash of $18.50 per share.
In January 2005, EHSI entered into a Memorandum of Understanding
(“MOU”) with LTC in respect of 37 leased facilities.
Under the terms of the MOU which become effective
January 1, 2005, ALC will increase the annual rent paid to
LTC by $250,000 per annum for each of the successive four
years, commencing on January 1, 2005 and amended the terms
of the inflationary increases. Formerly, the 37 leases had
expiration dates ranging from 2007 through 2015. Under the terms
of the MOU, the amended lease provides for an initial
10 year lease term commencing on January 1, 2005, and
three successive 10 year lease terms at the option of the
ALC. The aggregate minimum rent for the leases for the calendar
years 2005 through 2008 will be $9.4 million,
$9.8 million and $10.2 million and $10.7 million,
respectively. The minimum rent will increase by 2% over the
prior year’s minimum rent for each of the calendar years
2009 through 2014. Annual minimum rent during any extended term
will increase a minimum of 2% over the minimum rent of the
immediately preceding year. The MOU provides that LTC will not
assert certain events of default against the Company under the
original lease.
F-54
Schedule
12-09 — Consolidated Valuation and Qualifying
Accounts
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Year Ended December 31,
|
|
|
Description
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(In thousands)
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
872
|
|
|
$
|
102
|
|
|
$
|
102
|
|
|
$
|
99
|
|
|
$
|
121
|
|
|
Charged to cost and expenses
|
|
|
139
|
|
|
|
44
|
|
|
|
458
|
|
|
|
102
|
|
|
|
41
|
|
|
Acquisition of ALC
|
|
|
—
|
|
|
|
708
|
|
|
|
708
|
|
|
|
—
|
|
|
|
—
|
|
|
Deductions
|
|
|
(284
|
)
|
|
|
(158
|
)
|
|
|
(396
|
)
|
|
|
(99
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
727
|
|
|
$
|
696
|
|
|
$
|
872
|
|
|
$
|
102
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
