Notes to Consolidated Financial Statements
2.
|
Financial Statement Schedules are omitted because they are not applicable or because the required information is given in the consolidated financial statements and notes thereto.
|
See the Exhibit Index included as the last part of this report (following the signature page), which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk.
IND
EX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Balance Sheets as of December 31, 2012 and 2011
|
F-3
|
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010
|
F-4
|
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
|
F-5
|
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010
|
F-6
|
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
|
F-7
|
Notes to Consolidated Financial Statements
|
F-8
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Assisted Living Concepts, Inc.
We have audited the accompanying consolidated balance sheets of Assisted Living Concepts, Inc. (a Nevada Corporation) and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/GRANT THORNTON LLP
Milwaukee, Wisconsin
March 14, 2013
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,182
|
|
|
|
2,652
|
|
Cash and escrow deposits – restricted
|
|
|
2,714
|
|
|
|
3,150
|
|
Investments
|
|
|
900
|
|
|
|
1,840
|
|
Accounts receivable, less allowances of $3,461 and $2,903, respectively
|
|
|
4,294
|
|
|
|
4,609
|
|
Prepaid expenses, supplies and other receivables
|
|
|
4,604
|
|
|
|
3,387
|
|
Income tax receivable
|
|
|
4,089
|
|
|
|
606
|
|
Deferred income taxes
|
|
|
4,640
|
|
|
|
4,027
|
|
Total current assets
|
|
|
31,423
|
|
|
|
20,271
|
|
Property and equipment, net
|
|
|
481,913
|
|
|
|
430,733
|
|
Intangible assets, net
|
|
|
—
|
|
|
|
9,028
|
|
Restricted cash
|
|
|
2,035
|
|
|
|
1,996
|
|
Other assets
|
|
|
398
|
|
|
|
2,025
|
|
Total Assets
|
|
$
|
515,769
|
|
|
|
464,053
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,909
|
|
|
|
7,086
|
|
Accrued liabilities
|
|
|
21,034
|
|
|
|
17,877
|
|
Deferred revenue
|
|
|
8,266
|
|
|
|
8,004
|
|
Current maturities of long-term debt
|
|
|
114,575
|
|
|
|
2,538
|
|
Current portion of self-insured liabilities
|
|
|
500
|
|
|
|
500
|
|
Total current liabilities
|
|
|
154,284
|
|
|
|
36,005
|
|
Accrual for self-insured liabilities
|
|
|
1,700
|
|
|
|
1,557
|
|
Long-term debt
|
|
|
67,140
|
|
|
|
85,703
|
|
Deferred income taxes
|
|
|
8,701
|
|
|
|
23,961
|
|
Other long-term liabilities
|
|
|
6,301
|
|
|
|
9,107
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
238,126
|
|
|
|
156,333
|
|
Preferred Stock, par value $0.01 per share, 25,000,000 shares authorized, no shares issued and outstanding, respectively
|
|
|
—
|
|
|
|
—
|
|
Class A Common Stock, $0.01 par value, 160,000,000 authorized at December 31, 2012 and December 31, 2011; 25,004,381 and 24,980,958 shares issued and 20,072,509 and 20,049,086 shares outstanding, respectively
|
|
|
250
|
|
|
|
250
|
|
Class B Common Stock, $0.01 par value, 30,000,000 authorized at December 31, 2012 and December 31, 2011; 2,897,996 and 2,919,790 issued and outstanding, respectively
|
|
|
29
|
|
|
|
29
|
|
Additional paid-in capital
|
|
|
317,473
|
|
|
|
316,694
|
|
Accumulated other comprehensive income
|
|
|
19
|
|
|
|
156
|
|
Retained earnings
|
|
|
36,717
|
|
|
|
67,436
|
|
Treasury stock at cost, 4,931,872 and 4,931,872 shares, respectively
|
|
|
(76,845
|
)
|
|
|
(76,845
|
)
|
Total stockholders’ equity
|
|
|
277,643
|
|
|
|
307,720
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
515,769
|
|
|
|
464,053
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(
In thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenues
|
|
$
|
228,397
|
|
|
$
|
234,452
|
|
|
$
|
233,128
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residence operations (exclusive of depreciation and amortization and residence lease expense shown below)
|
|
|
154,194
|
|
|
|
136,659
|
|
|
|
139,689
|
|
General and administrative
|
|
|
19,822
|
|
|
|
13,361
|
|
|
|
15,080
|
|
Residence lease expense
|
|
|
13,369
|
|
|
|
17,686
|
|
|
|
19,846
|
|
Lease termination and settlement
|
|
|
37,430
|
|
|
|
—
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
24,915
|
|
|
|
23,103
|
|
|
|
22,806
|
|
Impairment of intangibles
|
|
|
8,650
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of long-lived asset
|
|
|
3,500
|
|
|
|
—
|
|
|
|
—
|
|
Transaction costs
|
|
|
1,046
|
|
|
|
—
|
|
|
|
—
|
|
Total operating expenses
|
|
|
262,926
|
|
|
|
190,809
|
|
|
|
197,421
|
|
(Loss)/income from operations
|
|
|
(34,529
|
)
|
|
|
43,643
|
|
|
|
35,707
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of securities
|
|
|
257
|
|
|
|
956
|
|
|
|
23
|
|
Other-than-temporary investments impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,026
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(8,143
|
)
|
|
|
(7,872
|
)
|
|
|
(7,782
|
)
|
Write-off of deferred financing fees
|
|
|
(1,137
|
)
|
|
|
(279
|
)
|
|
|
—
|
|
Interest income
|
|
|
9
|
|
|
|
12
|
|
|
|
11
|
|
(Loss)/income from operations before income taxes
|
|
|
(43,543
|
)
|
|
|
36,460
|
|
|
|
25,933
|
|
Income tax benefit/(expense)
|
|
|
17,418
|
|
|
|
(12,100
|
)
|
|
|
(9,449
|
)
|
Net (loss)/income
|
|
$
|
(26,125
|
)
|
|
$
|
24,360
|
|
|
$
|
16,484
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,970
|
|
|
|
22,955
|
|
|
|
23,080
|
|
Diluted
|
|
|
22,970
|
|
|
|
23,256
|
|
|
|
23,412
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(1.14
|
)
|
|
$
|
1.06
|
|
|
$
|
0.71
|
|
Diluted (loss)/earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(1.14
|
)
|
|
$
|
1.05
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared and paid per share
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(
In thousands)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net (loss)/income
|
|
$
|
(26,125
|
)
|
|
$
|
24,360
|
|
|
$
|
16,484
|
|
Other comprehensive (loss)/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investments, net of tax expense of $15, $112 and $305, in 2012, 2011 and 2010, respectively
|
|
|
25
|
|
|
|
182
|
|
|
|
500
|
|
Reclassification of realized gains on sales of investments to earnings, net of tax expense of $(95) and $(309) in 2012 and 2011, respectively
|
|
|
(162
|
)
|
|
|
(502
|
)
|
|
|
—
|
|
Unrealized gains/losses on swap derivatives, net of tax expense of $105 in 2010
|
|
|
—
|
|
|
|
—
|
|
|
|
170
|
|
Reclassifications of net losses on swap derivatives to earnings, net of tax benefit of $(349) in 2011
|
|
|
—
|
|
|
|
571
|
|
|
|
—
|
|
Other-than-temporary loss on investments, net of tax benefit of $765 in 2010
|
|
|
—
|
|
|
|
—
|
|
|
|
1,247
|
|
Total comprehensive (loss)/income
|
|
$
|
(26,262
|
)
|
|
$
|
24,611
|
|
|
$
|
18,401
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
Common
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Shares
Issued
|
|
|
Par
|
|
|
Paid-In
Capital
|
|
|
Comprehensive
Income
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Stockholders’
Equity
|
|
Balance, December 31, 2009
|
|
|
27,852
|
|
|
|
278
|
|
|
|
314,463
|
|
|
|
(2,012
|
)
|
|
|
33,486
|
|
|
|
(73,244
|
)
|
|
|
272,971
|
|
Conversion of Class B Common Stock to Class A Common Stock
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other-than-temporary impairment of investments, net of tax expense of $765
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,247
|
|
Unrealized gains on available for sale securities, net of tax expense
of $305
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
Issuance of shares for employee stock options
|
|
|
4
|
|
|
|
—
|
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
Unrealized gains on derivative, net of tax expense of $105
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
170
|
|
|
|
—
|
|
|
|
—
|
|
|
|
170
|
|
Compensation expense related to
employee and Director SAR/Options
|
|
|
—
|
|
|
|
—
|
|
|
|
659
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
659
|
|
Purchases of Treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,803
|
)
|
|
|
(2,803
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,484
|
|
|
|
—
|
|
|
|
16,484
|
|
Balance, December 31, 2010
|
|
|
27,857
|
|
|
|
278
|
|
|
|
315,153
|
|
|
|
(95
|
)
|
|
|
49,970
|
|
|
|
(76,047
|
)
|
|
|
289,259
|
|
Dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,894
|
)
|
|
|
—
|
|
|
|
(6,894
|
)
|
Unrealized gains on available for sale securities, net of tax expense of $112
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
182
|
|
|
|
—
|
|
|
|
—
|
|
|
|
182
|
|
Reclassification of unrealized gains on sales of investments, net of tax expense of $309
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(502
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(502
|
)
|
Issuance of shares for employee stock options
|
|
|
35
|
|
|
|
—
|
|
|
|
283
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
283
|
|
Conversion of Class B Common Stock to Class A Common Stock
|
|
|
9
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Excess tax benefits on options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
Reclassification of net losses on swap derivatives to earnings net of tax expense of $349
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
571
|
|
|
|
—
|
|
|
|
—
|
|
|
|
571
|
|
Compensation expense related to
employee and Director SAR/Options
|
|
|
—
|
|
|
|
—
|
|
|
|
1,199
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,199
|
|
Purchases of Treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(798
|
)
|
|
|
(798
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,360
|
|
|
|
—
|
|
|
|
24, 360
|
|
Balance, December 31, 2011
|
|
|
27,901
|
|
|
|
279
|
|
|
|
316,694
|
|
|
|
156
|
|
|
|
67,436
|
|
|
|
(76,845
|
)
|
|
|
307,720
|
|
Dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,594
|
)
|
|
|
—
|
|
|
|
(4,594
|
)
|
Unrealized gains on available for sale securities, net of tax expense of $15
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Conversion of Class B Common Stock to Class A Common Stock
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reclassification of unrealized gains on sales of investments, net of tax expense of $95
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(162
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(162
|
)
|
Compensation expense related to
employee and Director SAR/Options
|
|
|
—
|
|
|
|
—
|
|
|
|
779
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
779
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,125
|
)
|
|
|
—
|
|
|
|
(26,125
|
)
|
Balance, December 31, 2012
|
|
|
27,902
|
|
|
$
|
279
|
|
|
$
|
317,473
|
|
|
$
|
19
|
|
|
$
|
36,717
|
|
|
$
|
(76,845
|
)
|
|
$
|
277,643
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(26,125
|
)
|
|
$
|
24,360
|
|
|
|
16,484
|
|
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,915
|
|
|
|
23,103
|
|
|
|
22,807
|
|
Other-than-temporary investments impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
2,026
|
|
Deferred financing write off and amortization
|
|
|
1,674
|
|
|
|
782
|
|
|
|
455
|
|
Loss due to property and equipment impairment
|
|
|
3,500
|
|
|
|
—
|
|
|
|
—
|
|
Intangible impairment
|
|
|
8,650
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of purchase accounting adjustments for leases and debt
|
|
|
(402
|
)
|
|
|
(647
|
)
|
|
|
(645
|
)
|
Provision for bad debts
|
|
|
559
|
|
|
|
1,489
|
|
|
|
676
|
|
Provision for self-insured liabilities
|
|
|
1,638
|
|
|
|
554
|
|
|
|
639
|
|
Loss on sale or disposal of fixed assets
|
|
|
249
|
|
|
|
(121
|
)
|
|
|
401
|
|
Equity-based compensation expense
|
|
|
779
|
|
|
|
1,199
|
|
|
|
659
|
|
Deferred income taxes
|
|
|
(15,888
|
)
|
|
|
4,447
|
|
|
|
5,599
|
|
Gain on investments
|
|
|
(195
|
)
|
|
|
(956
|
)
|
|
|
(78
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(244
|
)
|
|
|
(2,897
|
)
|
|
|
(1,209
|
)
|
Prepaid expenses, supplies and other receivables
|
|
|
760
|
|
|
|
(199
|
)
|
|
|
517
|
|
Deposits in escrow
|
|
|
436
|
|
|
|
290
|
|
|
|
(378
|
)
|
Current assets – discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(132
|
)
|
Accounts payable
|
|
|
2,873
|
|
|
|
1,268
|
|
|
|
(1,170
|
)
|
Accrued liabilities
|
|
|
2,995
|
|
|
|
(1,376
|
)
|
|
|
25
|
|
Deferred revenue
|
|
|
262
|
|
|
|
3,220
|
|
|
|
(1,584
|
)
|
Current liabilities – discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(34
|
)
|
Payments of self-insured liabilities
|
|
|
(1,495
|
)
|
|
|
(592
|
)
|
|
|
(458
|
)
|
Income taxes payable/receivable
|
|
|
(3,483
|
)
|
|
|
(250
|
)
|
|
|
367
|
|
Changes in other non-current assets
|
|
|
(43
|
)
|
|
|
1,456
|
|
|
|
758
|
|
Other non-current assets – discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
399
|
|
Other long-term liabilities
|
|
|
(2,342
|
)
|
|
|
(455
|
)
|
|
|
48
|
|
Cash (used in)/provided by operating activities
|
|
|
-927
|
|
|
|
54,675
|
|
|
|
46,172
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for securities
|
|
|
(218
|
)
|
|
|
(208
|
)
|
|
|
(818
|
)
|
Proceeds on sales of securities
|
|
|
1,231
|
|
|
|
3,406
|
|
|
|
515
|
|
Payment for acquisitions
|
|
|
(62,570
|
)
|
|
|
—
|
|
|
|
(27,500
|
)
|
Proceeds on sale of fixed assets
|
|
|
1,486
|
|
|
|
168
|
|
|
|
—
|
|
Payments for new construction projects
|
|
|
(2,327
|
)
|
|
|
(684
|
)
|
|
|
(5,619
|
)
|
Payments for purchases of property and equipment
|
|
|
(16,572
|
)
|
|
|
(15,067
|
)
|
|
|
(11,000
|
)
|
Cash used in investing activities
|
|
|
(78,970
|
)
|
|
|
(12,385
|
)
|
|
|
(44,422
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of financing costs
|
|
|
(1,391
|
)
|
|
|
(1,907
|
)
|
|
|
(310
|
)
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(798
|
)
|
|
|
(2,803
|
)
|
Proceeds from issuance of shares for employee stock options
|
|
|
—
|
|
|
|
283
|
|
|
|
31
|
|
Repayment of borrowings on revolving credit facility
|
|
|
(99,000
|
)
|
|
|
(137,500
|
)
|
|
|
—
|
|
Proceeds on borrowings on revolving credit facility
|
|
|
195,000
|
|
|
|
99,500
|
|
|
|
—
|
|
Repayment of mortgage debt
|
|
|
(2,588
|
)
|
|
|
(5,686
|
)
|
|
|
(1,914
|
)
|
Proceeds from mortgage debt
|
|
|
—
|
|
|
|
—
|
|
|
|
12,250
|
|
Payment of dividends
|
|
|
(4,594
|
)
|
|
|
(6,894
|
)
|
|
|
—
|
|
Cash provided by/(used in) financing activities
|
|
|
87,427
|
|
|
|
(53,002
|
)
|
|
|
7,254
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
7,530
|
|
|
|
(10,712
|
)
|
|
|
9,004
|
|
Cash and cash equivalents, beginning of year
|
|
|
2,652
|
|
|
|
13,364
|
|
|
|
4,360
|
|
Cash and cash equivalents, end of year
|
|
$
|
10,182
|
|
|
$
|
2,652
|
|
|
$
|
13,364
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Supplemental schedule of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
8,114
|
|
|
$
|
7,324
|
|
|
$
|
7,285
|
|
Income tax payments, net of refunds
|
|
|
3,473
|
|
|
|
8,651
|
|
|
|
3,459
|
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assisted Living Concepts, Inc. and its subsidiaries (“ALC” or the “Company”) have 211 assisted and independent living residences in 20 states in the United States totaling 9,348 units as of December 31, 2012. ALC’s residences average 40 to 60 units and offer a supportive, home-like setting. Residents may receive assistance with activities of daily living either directly from ALC employees or indirectly through ALC’s wholly-owned health care subsidiaries.
ALC was formed as a Nevada corporation in 1994 and operated as an independent company until January 31, 2005 when it was acquired by Extendicare Health Services, Inc. (“EHSI”) (the “ALC Purchase”), a wholly-owned subsidiary of Extendicare Inc. (“Extendicare”). ALC became an independent, publicly traded company listed on the New York Stock Exchange on November 10, 2006, (the “Separation Date”) when ALC Class A and Class B Common Stock was distributed by Extendicare to its stockholders (the “Separation”).
Effective March 16, 2009, ALC implemented a one-for-five reverse stock split of its Class A and Class B Common Stock and effective May 20, 2011, ALC implemented a two-for-one stock split of its Class A and Class B Common Stock. All share amounts, stock prices and per share data in this report have been adjusted to reflect these stock splits.
ALC operates in a single business segment with all revenues generated from those properties located within the United States.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a) Principles of Presentation and Consolidation
ALC’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated 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.
(b) Cash and Cash Equivalents
ALC considers highly liquid investments that have a maturity of 90 days or less to be cash equivalents. ALC has a centralized approach to cash management. From time to time, ALC may have deposits in banks that exceed Federal Deposit Insurance Corporation limits. Management believes the credit risk related to these deposits is minimal.
(c) Investments
Investments in marketable securities are stated at fair value. Investments with no readily determinable fair value are carried at cost. Fair value is determined using quoted market prices at the end of the reporting period and, when appropriate, exchange rates at that date. All of our marketable securities are classified as available-for-sale. ALC accounts for its investments in the executive retirement plan in accordance with the fair value. The fair value option provides for unrealized gains and losses to be recorded in the consolidated statements of operations instead of through comprehensive income. ALC records unrealized gains and losses from executive retirement plan investments in general and administrative expense; interest income and dividends from these investments are reported as a component of interest income. The purpose for making this election was to mitigate volatility in ALC’s reported earnings as the change in market value of the investments will be offset by the recording of the related deferred compensation expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All other investments will continue to have their unrealized gains and losses recorded in other comprehensive income, net of tax. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in the consolidated statements of operations. The cost of securities held to fund executive retirement plan obligations is based on the average cost method and for the remainder of our marketable securities we use the specific identification method.
ALC regularly reviews its investments to determine whether a decline in fair value below the cost basis is other-than-temporary. To determine whether a decline in value is other-than-temporary, ALC evaluates several factors, including the current economic environment, market conditions, operational and financial performance of the investee, and other specific factors relating to the business underlying the investment, including business outlook of the investee, future trends in the investee’s industry, and ALC’s intent to carry the investment for a sufficient period of time for any recovery in fair value. If declines in value are deemed other-than-temporary, ALC records reductions in carrying values to estimated fair values, which are determined based on quoted market prices, if available, or on one or more valuation methods such as pricing models using historical and projected financial information, liquidation values, and values of other comparable public companies. ALC recorded an other-than-temporary impairment of investments in the year December 31, 2010 of $2.0 million. There was no such impairment recorded in the years ended December 31, 2012 and 2011.
Accounts receivable are recorded at the net realizable value expected to be received from individual residents or their responsible parties (“private payers”) and to a lesser extent, government assistance programs such as Medicaid.
At both December 31, 2012 and 2011, ALC had approximately 99% of its accounts receivable derived from private payer sources, with the balance owing under various state Medicaid programs. Although management believes there are no credit risks associated with government agencies other than possible funding delays, claims filed under the Medicaid program can be denied if not properly filed prior to a statute of limitations.
ALC 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 payer type. Allowances for uncollectibility are considered based upon the evaluation of the circumstances
for each of these specific accounts. In addition, ALC has developed internally-determined percentages for establishing an allowance for doubtful accounts, which are based upon historical collection trends for each payer type and age of the receivables. Accounts receivable that ALC specifically estimates to be uncollectible, based upon the above process, are fully reserved in the allowance for doubtful accounts until they are written off or collected.
The activity in the accounts receivable allowance for the years ended December 31, 2012, 2011 and 2010 consists of the following (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of year
|
|
|
2,903
|
|
|
|
1,414
|
|
|
|
740
|
|
Bad debt expense
|
|
|
2,790
|
|
|
|
2,339
|
|
|
|
1,702
|
|
Write-offs
|
|
|
(2,232
|
)
|
|
|
(850
|
)
|
|
|
(1,028
|
)
|
Balance at end of year
|
|
|
3,461
|
|
|
|
2,903
|
|
|
|
1,414
|
|
(e) 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Buildings
|
|
30 to 40 years
|
Building improvements
|
|
4 to 20 years
|
Furniture and equipment
|
|
3 to 10 years
|
Leasehold improvements
|
|
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 advance payments for refurbishment projects, pre-acquisition costs and other direct costs related to acquisition, development and construction of properties, including interest, which are capitalized until the residence is opened or the refurbishment project is completed. Depreciation of the residence, including interest capitalized, is commenced the month after the residence is opened and is based upon the useful life of the asset, as outlined above. ALC did not capitalize any interest expense in 2012 or 2011. ALC capitalized interest expense of $39,000 in 2010.
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 consolidated statements of operations.
Depreciation expense for 2012, 2011 and 2010 was $24.9 million, $21.9 million, and $21.2 million, respectively.
(f) Leases
Leases that are operating leases with defined scheduled rent increases are accounted for in accordance with accounting guidance. The scheduled rent increases are recognized on a straight-line basis over the lease term.
(g) Other Intangible Assets
Operating lease intangibles are valued upon acquisition using discounted cash flow projections that assume certain future revenues and costs over the remaining expected lease term. The value assigned to operating lease intangibles is amortized on a straight-line basis over the lease term.
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 time period to achieve optimal occupancy. The amortization period is subject to evaluation upon each acquisition and range from 36 to 48 months. Amortization of the resident relationships asset is included within amortization expense in the consolidated statements of operations. Acquisitions have included both independent and assisted living residents. Independent residents generally will occupy a unit for a longer period of time.
All intangible assets have been completely amortized or written off as of December 31, 2012.
(h) Long-lived Assets
ALC assesses annually the recoverability of long-lived assets, including property and equipment. Accounting guidance 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, including the eventual liquidation of 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. ALC incurred an impairment of long-lived asset charge in operations of $3.5 million on eight properties in 2012. The 2012 impairment charge resulted from continuing operating cash flow decreases over a period of several years. Carrying values were compared to fair market values of the properties as determined by independent third party appraisals. There were no impairment charges in either 2011 or 2010. 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. Accounting guidance also 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Self-insured Liabilities
ALC maintains business insurance programs with significant self-insured retentions which cover workers’ compensation and general and professional liability claims. ALC accrues estimated losses using actuarial calculations, models and assumptions based on historical loss experience. ALC also maintains a self-insured health benefits plan which provides medical benefits to employees electing coverage under the plan. ALC maintains a reserve for incurred but not reported medical claims based on historical experience and other assumptions. ALC uses independent actuarial firms to assist in determining the adequacy of general, professional and workers’ compensation liability reserves.
ALC has authorized 160,000,000 shares of Class A Common Stock, $0.01 par value, and also has authorized 30,000,000 shares of Class B Common Stock, $0.01 par value.
The relative rights of the Class A Common Stock and the Class B Common Stock are substantially identical in all respects, except for voting rights, conversion rights and transferability. 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 10 votes with respect to each matter presented to our stockholders on which the holders of common stock are entitled to vote.
Each share of Class B Common Stock is convertible at any time, and from time to time, at the option of the holder 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 in our amended and restated articles of incorporation) 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.
ALC has also authorized 25,000,000 shares of Preferred Stock, none of which has been issued as of December 31, 2012 and 2011.
Effective May 20, 2011, ALC implemented a two-for-one stock split of its Class A and Class B Common Stock. All share amounts, stock prices and per share data in this report have been adjusted to reflect this stock split.
A reconciliation of our outstanding shares is as follows:
|
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
Treasury
Stock
|
|
December 31, 2010
|
|
|
|
19,934,066
|
|
|
|
3,040,620
|
|
|
|
4,882,672
|
|
|
Conversion of Class B to Class A
|
|
|
129,882
|
|
|
|
(120,830
|
)
|
|
|
—
|
|
|
Repurchase of Class A Common Stock
|
|
|
(49,200
|
)
|
|
|
—
|
|
|
|
49,200
|
|
|
Issuance of shares for stock options
|
|
|
34,338
|
|
|
|
—
|
|
|
|
—
|
|
December 31, 2011
|
|
|
|
20,049,086
|
|
|
|
2,919,790
|
|
|
|
4,931,872
|
|
|
Conversion of Class B to Class A
|
|
|
23,423
|
|
|
|
(21,794
|
)
|
|
|
—
|
|
December 31, 2012
|
|
|
|
20,072,509
|
|
|
|
2,897,996
|
|
|
|
4,931,872
|
|
On August 9, 2009, ALC’s Board of Directors authorized the repurchase of up to $15 million of shares of ALC’s outstanding Class A Common Stock over the twelve-month period ended August 9, 2010. This share repurchase authorization replaced the share repurchase program initiated in December 2006 which initially authorized the repurchase of up to $20 million of shares of Class A Common Stock (expanded to $80 million) and which expired August 6, 2009.
On August 9, 2010, the Board of Directors extended and expanded the repurchase program by authorizing the purchase of up to $15 million in Class A Common Stock over the twelve-month period ending August 9, 2011. On May 2, 2011, the Board of Directors extended the stock repurchase plan by resetting the authorized amount of repurchases to $15 million and removing the expiration date. The plan will no longer be subject to an annual expiration date and will only expire upon completion of stock repurchases totaling $15 million or by action of the Board of Directors. Shares may be repurchased in the open market or in privately negotiated transactions from time to time in accordance with appropriate Securities and Exchange Commission guidelines and regulations and subject to market conditions, applicable legal requirements, and other factors. In 2011, ALC repurchased 49,200 shares of its Class A
Common Stock at an aggregate cost of approximately $0.8 million and an average price of $16.21 per share (excluding fees) under share repurchase programs. No Class A Common Stock purchases were made in 2012. At December 31, 2012, $15 million remained available under the repurchase program. Stock repurchases have been financed through existing funds and borrowings under the Company’s $120 million and $125 million revolving credit facilities. Treasury stock has been accounted for using the cost method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(k) Revenue Recognition
For 2012, 2011 and 2010 approximately 100%, 99% and 98%, respectively, of revenues were derived from private payers. The remainder of ALC’s revenue was 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.
From time to time, ALC collects new residency fees from private pay residents. These fees are non-refundable and are generally used to prepare a resident’s room for occupancy. ALC defers these revenues and amortizes them over the average expected stay of private pay residents, which is approximately 14 months.
(l) Advertising Expense
Advertising costs are expensed as incurred. Advertising expense incurred for 2012, 2011 and 2010 totaled $0.8 million, $0.6 million and $0.8 million, respectively.
(m) Deferred Financing Costs
Costs associated with obtaining financing are capitalized and amortized over the term of the related debt. In 2012, ALC incurred deferred financing costs of $2.0 million related to the first, second and third amendments to the $125 million revolving credit facility with U.S. Bank National Association, as administrative agent and collateral agent (“U.S. Bank”), and certain other lenders (the “U.S. Bank Credit Facility”) and charged $1.1 million of deferred financing costs to interest expense in connection with reduction of the borrowing capacity on the U.S. Bank Credit Facility. In 2011, ALC incurred deferred financing costs of $1.9 million related to the U.S. Bank Credit Facility and charged $0.3 million of deferred financing costs to interest expense in connection with the termination of the revolving credit facility with General Electric Capital Corporation and other lenders (the “GE Credit Facility”). In 2010, ALC incurred deferred financing costs of $0.3 million related to mortgage debt refinancing. ALC amortized $0.6 million, $0.8 million and $0.5 million of these deferred financing fees through interest expense in 2012, 2011 and 2010, respectively. The deferred costs are being amortized over the life of the related debt through expense on a straight line basis.
Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity which under GAAP are excluded from results of operations. In 2012, 2011 and 2010, this consists of unrealized gains (losses) on available for sale investment securities, net of tax, unrealized gains (losses) on interest rate swap derivatives, net of tax, and other than temporary losses on investments, net of tax. In 2012, $0.3 million of realized gains on investment securities were reclassified to earnings. In 2011, $0.6 million of unrealized losses on derivatives and $0.5 million of realized gains on investment securities were reclassified to earnings. In 2010, ALC performed its quarterly review of investment securities and determined the severity and duration of the impairment on its equity investments and the likelihood of recovery of these investments was such that the investments were other-than-temporarily impaired and as a result reclassified a $1.2 million comprehensive loss to earnings. No such impairment took place in 2012 or 2011.
The components of Accumulated Other Comprehensive Income (loss), net of tax, are as follows:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Unrealized gains on investments
|
|
$
|
19
|
|
|
$
|
156
|
|
|
$
|
476
|
|
Net unrealized loss on derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
(571
|
)
|
Accumulated other comprehensive income/(loss)
|
|
$
|
19
|
|
|
$
|
156
|
|
|
$
|
(95
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(o) Income Taxes
In all periods presented, 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.
ALC accrues interest and penalties related to unrecognized tax benefits in the provision for income taxes. See Note 16 to the consolidated financial statements for additional disclosures.
(
p) Derivative Financial Instruments
In November 2008 and March 2009, ALC entered into financial instruments to hedge interest rate risk and effectively converted floating rate debt to a fixed rate basis. The derivative instruments are recognized as accrued liabilities in the 2010 consolidated balance sheet with a negative fair value of $0.9 million. The change in mark-to-market of the value of the derivative was recorded as other comprehensive loss because it has been designated and qualified as a cash flow hedge. ALC
determined the hedge was 100% effective as of December 31, 2010. In 2011, ALC elected to forego hedge accounting when its revolving credit facility was refinanced. Subsequent to the refinancing, changes in the fair value of the derivatives were recorded directly to interest expense. The derivative instruments expired in November 2011 and the accumulated derivative losses were reclassified to earnings in 2011. ALC had no outstanding interest rate contracts as of December 31, 2012.
ALC has a policy of only entering into contracts with major financial institutions based upon their credit rating and other factors.
(q) Accounting for Acquisitions
In order to allocate the purchase price of an acquisition, ALC 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, ALC calculates the fair value of the land and buildings, or properties, using an “as if vacant” approach or obtains independent appraisals. 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. ALC 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.
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 residence lease-up period, the average lease-up costs and the deficiency in operating profits relative to the residence’s performance when fully occupied. Resident relationships are amortized on a straight-line basis over the estimated average resident stay at the residence and the expense is reflected in the depreciation and amortization line on the consolidated statements of operations.
(r) Fair Value Measurements
Accounting guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
ALC’s derivative position, if any, is valued using models developed internally by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.
ALC considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives, if any. Any adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period consolidated statement of operations.
(s) New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards,” which amends the current fair value measurement and disclosure guidance of ASC Topic 820 “Fair Value Measurement” to include increased transparency around valuation inputs and investment categorization. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and is applied prospectively. ALC adopted the provisions of this update as of January 1, 2012. The adoption of this accounting standard update did not have an impact on ALC’s consolidated financial position, results of operations, or cash flows.
In June 2011, the FASB issued ASU No. 2011-5, “Presentation of Comprehensive Income”, an accounting standard update which requires the presentation of components of other comprehensive income with the components of net income in either (1) a continuous statement of comprehensive income that contains two sections, net income and other comprehensive income, or (2) two separate but consecutive statements and in December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” ("ASU 2011-12"). These accounting standard updates eliminated the option to present components of other comprehensive income as part of the statement of shareholders’ equity, and is effective for interim and annual periods beginning after December 15, 2011. ALC adopted the provisions of this update as of January 1, 2012 and has been reflected retrospectively in the accompanying financial statements. The adoption of this accounting standard update did not have an impact on ALC’s consolidated financial position, results of operations, or cash flows, as it only required a change in the format of its current presentation of comprehensive income.
On November 1, 2010, ALC completed the acquisition of nine senior living residences from HCP, Inc. The nine residences, two of which are located in New Jersey and seven in Texas, contain a total of 365 units and were previously leased and operated by ALC under leases expiring between November 2010 and May 2012. The cash purchase price was $27.5 million plus certain transaction costs and was allocated $24.1 million to buildings and $3.4 million to land. As part of the consideration, ALC reclassified $0.5 million of unamortized leasehold improvements to property and equipment.
Because ALC has operated these nine properties in all periods presented, no transaction related pro forma adjustments to revenues are necessary in the consolidated financial statements of operations for all periods presented.
The pro forma impact on income from operations before tax and net income would have been an increase in each reported amount by approximately $0.1 million in 2010. The pro forma impact for the 2010 period consists of a decrease from reported residence lease expense of $2.7 million and an increase in reported interest expense, depreciation and amortization, and income tax expense of $1.8 million, $0.7 million, and $0.1 million, respectively. The pro forma impact related to interest expense assumes the transaction was 100% financed using an interest rate of 6.5%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 15, 2012, ALC signed and closed on an agreement (the “Purchase Agreement”) with Ventas Realty, Limited Partnership (“Ventas Realty”) and MLD Delaware Trust (“MLD”) to purchase 12 residences consisting of 696 units (the “Properties”) for a purchase price of $97 million plus $3 million for a litigation settlement fee plus Ventas’s expenses in connection with the litigation. The Properties, five located in Georgia, four in South Carolina and one in each of Florida, Alabama and Pennsylvania were previously operated by ALC under (i) the Amended and Restated Master Lease Agreement, dated as of January 1, 2008, between Ventas Realty and various ALC subsidiaries signatory thereto, and (ii) the Master Lease and Security Agreement, effective January 1, 2002, between MLD and ALC (together the “Master Leases”). The transaction was funded with borrowings available under ALC’s $125 million revolving credit agreement.
As part of the Purchase Agreement, Ventas Realty and MLD have agreed to release all past, present and future claims with respect to the Master Leases, the Properties and the Guaranty of Lease dated as of January 1, 2008, made by ALC for the benefit of Ventas Realty, as well as those set forth in the complaint and amended complaint filed in
Ventas Realty, Limited Partnership v. ALC CVMA, LLC, et al
., 12-cv-03107, in the United States District Court for the Northern District of Illinois. Additionally, pursuant to the Purchase Agreement, ALC is obligated to indemnify Ventas against losses from third party claims, arising on or prior to the nine year anniversary of the Purchase Agreement, relating to the Master Leases or the Properties. No claims are expected to arise and none have been recorded in connection with the acquisition.
The 2012 pro forma impact on net income from operations and net income would have been an increase in each reported amount by approximately $0.6 million and $0.4 million, respectively. The pro forma impact for the 2012 period consists of a decrease from reported residence lease expense of $3.0 million and an increase in reported interest expense, depreciation and amortization, and income tax expense of $1.5 million, $0.9 million, and $0.2 million, respectively. The pro forma impact related to interest expense assumes the transaction was 100% financed using an interest rate of 3.3%.
The following table summarizes the initial estimated fair values of the assets acquired at the acquisition date (no
liabilities
were assumed):
|
|
(In thousands)
|
|
Land
|
|
$
|
5,770
|
|
Building and building improvements
|
|
|
56,800
|
|
Total
|
|
$
|
62,570
|
|
ALC also reclassified $3.1 million of unamortized leasehold improvements to land improvements, building and building improvements.
ALC obtained third party appraisals to determine the fair value received. Such appraisals are preliminary and subject to change. In conjunction with the acquisition, ALC also recorded a $37.5 million lease termination and settlement fee, an $8.7 million write-off of an operating lease intangible, and $1.0 million of transaction costs.
At December 31, 2012, investments consist of $0.7 million of money market funds and $0.2 million of equity securities, both held to fund ALC’s executive retirement plan (“ERP”) obligations, and $30,138 held in an individual equity security which was contributed to ALC’s capital upon the Separation. At December 31, 2011, investments consisted of $0.7 million of money market funds and $0.2 million of equity securities, both held to fund ALC’s ERP obligations, and $0.7 million held in individual equity securities. The investments are Level 1 investments and are classified as available-for-sale and stated at fair value based on market quotes at December 31, 2012 and 2011, respectively.
The securities related to the executive retirement plan are held in a securities brokerage account and are invested at the specific direction of the participants. Investment options include a limited number of mutual funds and money market funds.
ALC accounts for securities related to the executive retirement plan under the fair value option. All gains and losses related to these investments are recorded in the consolidated statements of operations as a component of general and administrative expense. Interest income and dividends are reported as a component of interest income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The other equity investments are recorded at fair value. Unrealized gains and losses which are determined to be temporary in nature are recorded net of deferred taxes as a component of other comprehensive income. In the event unrealized losses are determined to be other-than-temporary, the unrealized loss is reclassified from comprehensive income and reported in the consolidated statements of operations. The current fair market value of the impaired investment then becomes the new cost basis of the investment. In the second quarter of 2010, the Company performed its quarterly review of investment securities and determined the severity and duration of the impairment on its equity investments and the likelihood of recovery of these investments was such that the investments were other-than-temporarily impaired. An other-than-temporary loss on investments of $2.0 million was recorded in the year ended December 31, 2010. No such impairment was recorded in the years ended December 31, 2011 or 2012.
ALC recorded realized gains of $0.3 million in 2012 and $1.0 million in 2011, and $23,000 in 2010. All of the gains were reported as a separate line item in the consolidated statements of operations. Gains and losses on ERP investments are reported in general and administrative expense.
Investments consisted of the following:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Cost
|
|
|
Fair
Market
Value
|
|
|
Unrealized
Gain
|
|
|
Cost
|
|
|
Fair
Market
Value
|
|
|
Unrealized
Gain
|
|
|
|
(In thousands)
|
|
ERP Investments
|
|
$
|
856
|
|
|
$
|
870
|
|
|
$
|
14
|
|
|
$
|
1,120
|
|
|
$
|
1,127
|
|
|
$
|
7
|
|
Equity Investments with unrealized gains
|
|
|
—
|
|
|
|
30
|
|
|
|
30
|
|
|
|
474
|
|
|
|
713
|
|
|
|
239
|
|
Total Investments
|
|
$
|
856
|
|
|
$
|
900
|
|
|
$
|
44
|
|
|
$
|
1,594
|
|
|
$
|
1,840
|
|
|
$
|
246
|
|
5.
|
PREPAID EXPENSES, SUPPLIES AND OTHER RECEIVABLES
|
Supplies, prepaid expenses and other receivables consisted of the following at December 31:
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Prepaid expenses
|
|
$
|
3,143
|
|
|
$
|
1,705
|
|
Supplies
|
|
|
977
|
|
|
|
974
|
|
Other receivables
|
|
|
484
|
|
|
|
708
|
|
|
|
$
|
4,604
|
|
|
$
|
3,387
|
|
6.
|
PROPERTY AND EQUIPMENT
|
Property and equipment and related accumulated depreciation and amortization consisted of the following at December 31:
|
|
2012
|
|
2011
|
|
|
|
(In thousands)
|
|
Land and land improvements
|
|
$
|
39,293
|
|
|
$
|
32,680
|
|
Buildings and improvements
|
|
|
543,547
|
|
|
|
478,596
|
|
Furniture and equipment
|
|
|
41,409
|
|
|
|
38,715
|
|
Leasehold improvements
|
|
|
11,467
|
|
|
|
11,009
|
|
Construction in progress
|
|
|
1,560
|
|
|
|
4,723
|
|
|
|
|
637,276
|
|
|
|
565,723
|
|
Less accumulated depreciation and amortization
|
|
|
(155,363
|
)
|
|
|
(134,990
|
)
|
|
|
$
|
481,913
|
|
|
$
|
430,733
|
|
ALC evaluated property, plant and equipment for impairment in the years ended December 31, 2012, 2011 and 2010. ALC compared the estimated fair values of the assets to their carrying values for properties with impairment indicators and recorded an impairment charge for the excess of carrying value over fair value. For the year ended December 31, 2012, ALC incurred an
impairment charge in operations of $3.5 million on eight properties. The eight properties had declining net cash flows over a period of several years. ALC obtained independent third party appraisals to estimate fair values of the properties.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2012, 2011 and 2010, ALC capitalized $2.5 million, $0.7 million and $5.6 million of costs related to the building additions, respectively.
7.
|
INTANGIBLE ASSETS, NET
|
Intangible assets with definite useful lives are amortized over their estimated lives and are tested for impairment whenever indicators of impairment arise. The following is a summary of other intangible assets (in thousands):
|
|
December 31, 2011
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Resident relationships
|
|
$
|
3,169
|
|
|
$
|
(3,167
|
)
|
|
$
|
2
|
|
Operating lease intangible and renewal options
|
|
|
11,665
|
|
|
|
(2,705
|
)
|
|
|
8,960
|
|
Non-compete agreements
|
|
|
331
|
|
|
|
(265
|
)
|
|
|
66
|
|
Total
|
|
$
|
15,165
|
|
|
$
|
(6,137
|
)
|
|
$
|
9,028
|
|
The resident relationships and non-compete agreements were fully amortized as of second and fourth quarter of 2012, respectively. The remaining balance of $8.7 million of unamortized operating lease intangible was written off in connection with the purchase of the underlying leased properties in the second quarter of 2012.
Amortization expense related to definite-lived intangible assets for the years ended December 31, 2012, 2011 and 2010, was $0.4 million, $1.2 million, and $1.6 million, respectively.
As of December 31, 2012 and 2011, restricted cash consisted of $0.4 million of cash deposits as security for Oregon Trust Deed Notes and $1.6 million of cash deposits as security for HUD insured mortgage loans.
Other assets consisted of the following at December 31:
|
|
|
2012
|
|
|
|
2011
|
|
|
|
|
(In thousands)
|
|
Deferred financing costs, net
|
|
$
|
375
|
|
|
$
|
2,006
|
|
Security deposits and other
|
|
|
23
|
|
|
|
19
|
|
|
|
$
|
398
|
|
|
$
|
2,025
|
|
ALC incurred deferred financing costs of $2.0 million and $1.9 million related to debt refinancing in 2012 and 2011, respectively. In 2012, ALC wrote-off $1.1 million of deferred financing costs as a result of the reduction in borrowing capacity on the U.S. Bank Credit Facility and reclassified the remaining deferred financing costs on the U. S. Bank Credit Facility to a current asset as the line of credit is expected to be repaid within 12 months, as discussed in Note 11.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued liabilities consisted of the following at December 31:
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Property taxes and other taxes
|
|
$
|
7,578
|
|
|
$
|
6,952
|
|
Salaries, wages and benefits
|
|
|
6,449
|
|
|
|
6,181
|
|
Workers’ compensation
|
|
|
3,327
|
|
|
|
3,180
|
|
Legal expenses
|
|
|
1,817
|
|
|
|
22
|
|
Accrued operating expenses
|
|
|
1,049
|
|
|
|
726
|
|
Other
|
|
|
814
|
|
|
|
816
|
|
|
|
$
|
21,034
|
|
|
$
|
17,877
|
|
ALC uses a combination of insurance and self-insurance for health and dental claims. ALC self-insures the first $1 million of risk for workers’ compensation in all states, with the exception of Washington where ALC participates in a state plan and Texas where ALC is insured with a third-party insurer. ALC participated in a state plan in Ohio until June 2012 when it became self-insured.
Long-term debt consisted of the following at December 31:
|
|
2012
|
|
|
|
2011
|
|
|
|
(In thousands)
|
|
$125 million credit facility bearing interest at floating rates, due February 2016
(1)
|
$
|
108,000
|
|
|
$
|
12,000
|
|
Mortgage note, bearing interest at 6.24%, due 2014
|
|
30,708
|
|
|
|
31,703
|
|
Mortgage note, bearing interest at 6.50%, due 2015
|
|
23,834
|
|
|
|
24,775
|
|
Mortgage note, bearing interest at 7.07%, due 2018
|
|
8,391
|
|
|
|
8,552
|
|
Oregon Trust Deed Notes, weighted average interest rate of 7.33%, maturing from 2021 through 2026
|
|
6,946
|
|
|
|
7,274
|
|
HUD Insured Mortgages, interest rates ranging from 5.66% to 5.85%, due 2032
|
|
3,836
|
|
|
|
3,937
|
|
Total debt
|
|
181,715
|
|
|
|
88,241
|
|
Less current maturities
|
|
(114,575
|
)
|
|
|
(2,538
|
)
|
Total long-term debt
|
$
|
67,140
|
|
|
$
|
85,703
|
|
(1)
Prior to December 31, 2012, borrowings under this facility bore interest at a floating rate at ALC’s option equal to LIBOR or prime plus a margin. The margin was determined by ALC’s consolidated leverage ratio (as defined in the U.S. Bank Credit Facility) and ranged from 137.5 to 250 basis points over prime or 225 to 350 basis points over LIBOR. From February 18, 2011 through May 6, 2011, ALC’s prime and LIBOR margins were 175 and 275 basis points, respectively. On May 7, 2011, the prime and LIBOR margins were reduced to 150 and 250 basis points, respectively. On December 31, 2012, commencing with the Third Amendment, the facility bears interest at the base rate plus 350 basis points. At December 31, 2012, prime was 3.25% and one month LIBOR was 0.21%. Pursuant to the Third Amendment (as defined below), the debt associated with the U.S. Bank Credit Facility now expires in the current year.
$125 Million Credit Facility
On February 18, 2011, ALC entered into the U.S. Bank Credit Facility. ALC’s obligations under the U.S. Bank Credit Facility are guaranteed by three ALC subsidiaries that own 36 residences with a combined net book value of $93.1 million and are secured by mortgage liens against such residences and by a lien against substantially all of the assets of ALC and those subsidiaries. Prior to December 31, 2012, interest rates applicable to funds borrowed under the facility were based, at ALC’s option, on either a base rate essentially equal to the prime rate plus a margin or LIBOR plus a margin that varies according to a pricing grid based on a consolidated leverage test. The First Amendment (as defined below) increased the margins on base rate and LIBOR loans to 2.00% and 3.00%, respectively, and increased the quarterly commitment fee of .375% per annum on the unused portion of the facility to 0.5%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 18, 2012, in anticipation of the purchase agreement with Ventas Realty, ALC entered into the first amendment to the U.S. Bank Credit Facility (the “First Amendment”). The First Amendment allowed ALC to exceed the limitation of $35,000,000 of consolidated growth capital expenditure per year. The First Amendment also limits ALC consolidated growth capital expenditures to $15,000,000 for the period from May 18, 2012 through December 31, 2012. The annual limitation is restored to $35,000,000 for the year ended December 31, 2013 and each year thereafter. ALC paid a fee of $0.4 million for the First Amendment which is being amortized over the remaining term of the U.S. Bank Credit Facility.
In general, borrowings under the U.S. Bank Credit Facility are limited to three and three quarters times ALC’s consolidated net income during the prior four fiscal quarters plus, in each case to the extent included in the calculation of consolidated net income, customary add-backs in respect of provisions for taxes, consolidated interest expense, amortization and depreciation, losses from extraordinary items, loss on the sale of property outside the ordinary course of business, and other non-cash expenditures (including the amount of any compensation deduction as the result of any grant of stock or stock equivalent to employees, officers, directors or consultants), non-recurring expenses incurred by ALC in connection with transaction fees and expenses for acquisitions minus, in each case to the extent included in the calculation of consolidated net income, customary deductions related to credits for taxes, interest income, gains from extraordinary items, gains from the sale of property outside the ordinary course of business and other non-recurring gains.
On August 1, 2012, ALC entered into waiver and amendment No. 2 to the U.S. Bank Credit Facility which provided for the definition of Consolidated EBITDA (as defined in the U.S. Bank Credit Facility) to be amended to( i) allow a one-time charge for a lease termination and settlement fee to net income to arrive at Consolidated EBITDA, (ii) require ALC to remove from the collateral pool any residence with an occupancy percentage of less than 62% for two consecutive months and replace it with a residence with an occupancy greater than 62% and (iii) limit the borrowing base to 70% of the aggregate value of the eligible collateral pool. As of a result of this amendment, ALC added five properties comprising of 195 units to the collateral pool.
On December 31, 2012, ALC entered into Waiver & Amendment No. 3 to Credit Agreement (the “Third Amendment”) with the lenders currently party to the $125 million credit agreement and U.S. Bank.
Pursuant to the Third Amendment, the lenders waived “Existing Alleged Defaults” under the U.S. Bank Credit Facility potentially arising from certain events and matters, and specifically waived any noncompliance with the maximum consolidated leverage ratio, which occurs (i) on or before December 31, 2012, (ii) from the date of the Third Amendment through March 31, 2013, and (iii) from and after the date ALC provides the lenders with a fully-executed agreement which provides for the repayment of all of the obligations under the U.S. Bank Credit Facility within a reasonable period of time through August 15, 2013, subject to extension to September 30, 2013 (for so long as such contemplated agreement is in full force and effect). The Merger Agreement (as defined in the section entitled “Future Liquidity” below) was delivered to U. S. Bank on February 27, 2013 in satisfaction of the March 31, 2013 requirement described below.
As a result, pursuant to the Third Amendment, compliance with the maximum consolidated leverage ratio was waived through August 15, 2013, subject to extension to September 30, 2013, for so long as the Merger Agreement remains in full force and effect.
Pursuant to the Third Amendment, the listing of an event or matter as an “Existing Alleged Default” is not, nor should it be deemed to be, an admission or agreement by ALC that any of the following singly or collectively, are a default or an event of default under the U.S. Bank Credit Facility or the documents relating to the U.S. Bank Credit Facility.
One such “Existing Alleged Default” that the lenders waived relates to that certain Amended and Restated Loan Agreement, dated September 30, 2010 (the “TCF Loan”), by and between ALC Three, LLC, as borrower (“TCF Borrower”), ALC, as guarantor, and TCF National Bank (“TCF”). TCF Borrower is a wholly-owned subsidiary of ALC. Due to regulatory issues, ALC or its direct or indirect wholly-owned entities voluntarily surrendered an operating license for a property that is part of the collateral under the TCF Loan, resulting in ALC’s anticipated inability to meet the EBITDA covenant under the TCF Loan for such property for the year ending December 31, 2012. Under the terms of the TCF Loan, a breach of the TCF Loan would occur at March 31, 2013 if the EBITDA covenant was not satisfied at December 31, 2012. TCF Borrower, ALC and TCF entered into a First Amendment to Amended and Restated Loan Agreement effective as of December 31, 2012, pursuant to which TCF agreed to release the affected facility from the loan collateral under the TCF Loan and ALC agreed to substitute two facilities into the loan collateral and thereby cure the potential breach of the TCF Loan.
Other “Existing Alleged Defaults” that the lenders waived include, among other things, the alleged failure to timely disclose to U.S. Bank the receipt of certain correspondence from Red Mortgage Capital, LLC, as servicer (“Red Cap”), the proposed voluntary repayment of approximately $4.1 million to Red Cap, the alleged failure to timely provide to U.S. Bank certain financial reports provided to certain other lenders or servicers, including Red Cap and TCF, the maintenance of a brokerage
account that was not subject to a collateral securities agreement for the benefit of the lenders, the receipt and appeal of a notice of revocation of license in connection with a facility, the surrender of the assisted living licenses or “stop placement” notices with respect to certain facilities, the temporary absence of possession of title to eight condominium units in a recently acquired facility and the fact that ALC and its affiliates are parties to certain investigations and lawsuits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Third Amendment includes the following terms, among others:
|
·
|
The interest rate on the loan will be increased by 100 basis points from the base rate plus 2.50% to the base rate plus 3.50% and the unused commitment fee will be 0.625%. Interest and fees will be paid monthly, not quarterly.
|
|
·
|
ALC will provide to U.S. Bank mortgages on certain properties, which are estimated to represent in the aggregate at least $25 million in fair market value. ALC will also provide the lenders with mortgages or deeds of trust on any properties released by Red Cap as a result of the proposed voluntary repayment of approximately $4.1 million. Such repayment to Red Cap by ALC was required to be made by December 31, 2012; however, on December 20, 2012, ALC and Red Cap entered into an agreement to defer the repayment to January 31, 2013. On January 28, 2013, ALC and Red Cap entered into an agreement to extend the dates by which two of the mortgage loans shall be prepaid to February 28, 2013 and the earlier of the sale of the property or June 30, 2013, respectively. On January 31, 2013, and February 28, 2013, ALC made required repayments to Red Cap.
|
|
·
|
The lenders will permit ALC to borrow under the revolver and renew letters of credit, absent a default or event of default or other breach of the existing conditions to new borrowings; provided, that ALC will agree to maintain $4 million of unused availability under the revolver, which shall not be subject to the unused commitment fee.
|
|
·
|
The lenders will not release their mortgages or deeds of trust on the properties otherwise scheduled to be released, which are valued at approximately $17 million.
|
|
·
|
ALC may not sell any properties mortgaged to the lenders without the consent of the lenders (except for one pre-approved property). Upon any sale of any such mortgaged property (other than the pre-approved property), (i) ALC shall pay the lenders the net proceeds of the sale of such mortgaged property and (ii) the revolving credit commitment shall be permanently reduced by the amount of such payment.
|
|
·
|
Except for the voluntary repayment of approximately $4.1 million to Red Cap described above and payments to other secured creditors from the proceeds of the sale of their collateral, if any, ALC will not voluntarily prepay other indebtedness without prepaying the indebtedness owed under the U.S. Bank Credit Facility on a pari passu basis with a corresponding reduction in the commitment.
|
|
·
|
ALC will provide to the lenders, on or before March 31, 2013, a fully-executed agreement which provides for the repayment of all of the obligations under the U.S. Bank Credit Facility within a reasonable period of time. ALC will close the transaction contemplated by the foregoing agreement by August 15, 2013, subject to extension to September 30, 2013.
|
|
·
|
ALC will provide the lenders with timely written notice of any defaults or alleged defaults on other indebtedness of $2.5 million or more (instead of $10 million or more).
|
|
·
|
ALC will provide to U.S. Bank monthly financial statements within 45 days of month-end and weekly 13-week cash flow forecasts.
|
|
·
|
On or before July 2, 2013, ALC will obtain not less than $15 million from a new credit facility, sale of unencumbered assets, or otherwise.
|
|
·
|
ALC shall release U.S. Bank, each lender, each letter of credit lender and certain other releases from any and all claims of ALC related to the loan documents arising on or before the date of the Third Amendment.
|
|
·
|
ALC will no longer have the ability to borrow under any swing loans, as contemplated by the U.S. Bank Credit Facility.
|
|
·
|
ALC will no longer have the ability to borrow at the eurodollar rate, as contemplated by the U.S. Bank Credit Facility.
|
|
·
|
ALC paid, pro rata, a fee of $625,000 to the lenders.
|
|
·
|
ALC will pay all undisputed, reasonable fees of the lenders in connection with the Third Amendment.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALC continues to be current with all principal and interest payments due on all its outstanding indebtedness. Because our borrowings under the U.S. Bank Credit Facility are due within the current year pursuant to the Third Amendment, all of our outstanding indebtedness under the U.S. Bank Credit Facility was classified as a current liability in our consolidated financial statements.
If the lenders were to declare a default under the U.S. Bank Credit Facility and ALC’s other borrowings subject to cross-default provisions ($23.8 million in total as of December 31, 2012), they could, among other remedies, accelerate the repayment of all existing borrowings, terminate ALC’s ability to make new borrowings and foreclose on their liens described above. There is no assurance that ALC would be able to obtain financing to pay amounts owed under such circumstances.
ALC is subject to certain restrictions and financial covenants under the U.S. Bank Credit Facility including maintenance of greater than a minimum consolidated fixed charge coverage ratio, and restrictions on payments for capital expenditures, expansions and acquisitions. ALC may not make payments for dividends and stock repurchases. In addition, upon the occurrence of certain transactions, including but not limited to property loss events, ALC may be required to make mandatory prepayments. ALC is also subject to other customary covenants and conditions.
Outstanding borrowings under the U.S. Bank Credit Facility at December 31, 2012, and 2011 were $108.0 million and $12.0 million, respectively. In addition, the U.S. Bank Credit Facility provided collateral for $5.0 million and $5.6 million in outstanding letters of credit at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, ALC was in compliance with all applicable covenants and available borrowings under the U.S. Bank Credit Facility were $8.0 million and $107.4 million, respectively.
Mortgage Note due 2014
The mortgage note due in 2014 (the “6.24% 2014 Note”) has a fixed interest rate of 6.24% with a 25-year principal amortization and is secured by 24 assisted living residences with a carrying value of $55.1 million. Monthly principal and interest payments amount to approximately $0.3 million. A balloon payment of $29.6 million is due in January 2014. The 6.24% 2014 Note was entered into by subsidiaries of ALC and is subject to a limited guaranty by ALC. As a result of certain alleged defaults identified in correspondence from Red Mortgage Capital, LLC, as servicer of the 6.24% 2014 Note (“Red Cap”), ALC agreed on August 24, 2012 to make a voluntary repayment of approximately $4.1 million to Red Cap on or before December 31, 2012, releasing three properties from the lien securing the 6.24% 2014 Note. On December 20, 2012, ALC and Red Cap entered into an agreement to defer the repayment to January 31, 2013. On January 28, 2013, ALC and Red Cap entered into an agreement to extend the dates by which two of the mortgage loans shall be prepaid to February 28, 2013 and the earlier of the sale of the property or June 30, 2013, respectively. On January 31, 2013 and February 28, 2013, ALC made required prepayments to Red Cap.
6.5% Mortgage Note due 2015
On June 12, 2009, ALC entered into a loan agreement by and between ALC Three, LLC, a wholly-owned subsidiary of ALC (“Borrower”), ALC as guarantor, and TCF National Bank pursuant to which TCF National Bank lent $14 million to Borrower. On September 29, 2010, ALC and Borrower entered into an amended and restated loan agreement with TCF National Bank, effective September 30, 2010, which increased the original principal amount of the loan to $26.3 million and extended the term of the loan to September 30, 2015.
The amended and restated loan bears interest at a fixed rate of 6.5% per annum and is secured by a mortgage and assignment of leases with respect to two senior living residences in Iowa, three in Indiana, one in Michigan and one in Wisconsin consisting of a combined total of units with a carrying value of $24.3 million. The original $14.0 million portion of the loan is amortized
over a twenty year period from June 12, 2009 and the additional $12.25 million portion of the loan is amortized over a fifteen year period from September 30, 2010. Prepayment of the loan in excess of 10% of the principal balance in any anniversary year will require a prepayment fee of 3% in the first or second year, 2% in the third or fourth year, and 1% thereafter. Performance and payment of obligations under the loan agreement and related note are guaranteed by ALC pursuant to the terms of a guaranty agreement. ALC incurred $0.4 million of closing costs which are being amortized over the five year life of the loan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to customary representations, covenants and default provisions, the loan requires that the senior living residences securing the loan maintain minimum annual levels of EBITDA (earnings before interest, taxes, depreciation and amortization) and rental income. In addition, the loan requires that ALC maintain less than a maximum consolidated leverage ratio and greater than a minimum consolidated fixed charge coverage ratio. As of December 31, 2012 and 2011, ALC was in compliance with all applicable financial covenants.
Due to regulatory issues, ALC or its direct or indirect wholly-owned entities voluntarily surrendered an operating license for a property that is part of the collateral under the amended and restated loan, resulting in ALC’s anticipated inability to meet the EBITDA covenant under the amended and restated loan for such property for the year ending December 31, 2012. Under the terms of the amended and restated loan, a breach of the amended and restated loan would occur at March 31, 2013 if the EBITDA covenant was not satisfied at December 31, 2012. Borrower, ALC and TCF National Bank entered into a First Amendment to Amended and Restated Loan Agreement effective as of December 31, 2012, pursuant to which TCF National Bank agreed to release the affected facility from the loan collateral under amended and restated loan and ALC agreed to substitute two facilities into the loan collateral and thereby cure the potential breach of the amended and restated loan.
Mortgage Note due 2018
The mortgage note due in 2018 (“2018 Note”) has a fixed interest rate of 7.07%, an original principal amount of $9.0 million, and a 25-year principal amortization. It is secured by a deed of trust, assignment of rents and security agreement and fixture filing on three assisted living residences in Texas with a carrying value of $10.3 million. Monthly principal and interest payments
amount to approximately $64,200. The 2018 Note, which has a balloon payment of $7.2 million due in July 2018 and was entered into by a wholly-owned subsidiary of ALC, is subject to a limited guaranty by ALC.
Oregon Trust Deed Notes
The Oregon trust deed notes (“Oregon Trust Deed Notes”) are secured by buildings, land, furniture and fixtures of six Oregon assisted living residences with a combined carrying value of $9.4 million. The notes are payable in monthly installments including interest at rates ranging from 0% to 9.00%. The effective rate on the remaining term of the Oregon Trust Deed Notes is 4.16%.
Under debt agreements relating to the Oregon Trust Deed Notes, ALC is required to comply with the terms of certain regulatory agreements until their scheduled maturity dates which range from June 2021 to March 2026.
HUD Insured Mortgages
The HUD insured mortgages (the “HUD Loans”) included three separate loan agreements entered into in 2001 between subsidiaries of ALC and the lenders. Two of the three HUD Loans were refinanced in the third quarter of 2007. One of the HUD loans with a principal balance of $2.8 million was repaid in the third quarter of 2011. The two remaining HUD loans bear interest of 5.66% and 5.85% and average 5.74%. The two remaining mortgages are each secured by a separate assisted living residence located in Texas with a combined carrying value of $4.3 million. Prepayments may be made any time after the first two years. The two remaining HUD Loans mature in September 2032.
Unfavorable Market Value of Debt
Adjustment
ALC debt in existence at the date of the ALC Purchase was evaluated and determined, based upon prevailing market interest rates, to be undervalued. The unfavorable market value adjustment upon acquisition was $3.2 million. The market value adjustment reserve is amortized on an effective interest basis, as an offset to interest expense, over the term of the debt agreements. The amount of amortization of the unfavorable market value adjustment for 2012, 2011 and 2010 was $0.1 million, $0.2 million, and $37,100, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal Repayment Schedule
Principal payments on long-term debt due within the next five years and thereafter, as of December 31, 2012, are as follows (in thousands):
2013
|
|
$
|
114,575
|
|
2014
|
|
|
27,565
|
|
2015
|
|
|
22,440
|
|
2016
|
|
|
749
|
|
2017
|
|
|
805
|
|
After 2017
|
|
|
15,443
|
|
|
|
|
181,577
|
|
Plus: Unamortized market value adjustment
|
|
|
138
|
|
Total debt
|
|
$
|
181,715
|
|
Letters of Credit
As of December 31, 2012, ALC had $5.0 million in outstanding letters of credit, all of which are collateralized under the U.S. Bank Credit Facility. Approximately $4.8 million of the letters of credit provide security for worker’s compensation insurance and the remaining $0.2 million of letters of credit serve to secure against liens which were previously filed by contractors involving several ALC properties. The letters of credit have maturity dates ranging from March 2013 to December 2013.
As of December 31, 2011, ALC had $5.6 million in outstanding letters of credit, all of which are collateralized under the U.S. Bank Credit Facility. Approximately $5.1 million of the letters of credit provide security for worker’s compensation insurance and the remaining $0.5 million of letters of credit are security for landlords of leased properties. The letters of credit have maturity dates ranging from March 2012 to December 2012.
Future Liquidity
The Company is a party to the U.S. Bank Credit Facility among the Company, the lenders party thereto (collectively, the "Lenders"), and U.S. Bank, in its separate capacities as administrative agent and collateral agent for the Lenders, as Swingline Lender, and L/C Issuer.
At December 31, 2012, we had approximately $181.7 million of outstanding debt of which $114.6 million is due within one year. $108.0 million of amounts due within one year are owed under the U.S. Bank Credit Facility (the "US Bank Indebtedness"). Our cash flow from operations in 2013 will not be sufficient to repay the US Bank Indebtedness.
On February 25, 2013, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Aid Holdings, LLC, a Delaware corporation ("Aid Holdings"), and Aid Merger Sub, LLC, a Delaware corporation and a wholly owned subsidiary of Aid Holdings ("Aid Merger Sub"), providing for the merger of Aid Merger Sub with and into ALC (the "Merger"), with ALC surviving the Merger as a wholly-owned subsidiary of Aid Holdings. Aid Holdings and Aid Merger Sub are beneficially owned by an affiliate of TPG Capital, L.P.
In accordance with the provisions of the U.S. Bank Credit Facility, the Company delivered to the Lenders a fully executed agreement which provides for the repayment of the US Bank Indebtedness before August 15, 2013 (which date may be extended to September 30, 2013 for the purpose of obtaining of requisite approvals).
The delivery of the Merger Agreement was one of various alternatives available to the Company to arrange for the timely payment of the US Bank Indebtedness. Subject to the completion of the Merger, alternatives that are still available to the Company include the refinancing of the US Bank Indebtedness, the sales of assets, a private placement of securities, or one or more combinations of the foregoing. The Company has received various unsolicited inquiries from institutional investors inquiring as to the Company's interest in selling assets or completing a financing on a private placement basis. The Company does not believe that asset sales would be required to effect such a refinancing; however, the combination of asset sales and refinancing may result in more favorable debt financing terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.
|
ACCRUAL FOR SELF-INSURED GENERAL AND PROFESSIONAL LIABILITIES
|
ALC insures general and professional liability risks with Pearson, its wholly-owned consolidated subsidiary, and other third-party insurers. ALC insures through Pearson on a claims made basis above specified self-insured retention levels. Pearson insures above ALC’s self-insured retention levels and re-insures for significant or catastrophic risks up to a specified level through third party insurers. The insurance policies cover comprehensive general and professional liability and employers’ liability in such amounts and with such deductibles as determined by ALC to be prudent and reasonable, based on the nature and risk of its business, historical experiences, availability of coverage and industry standards. Self-insured liabilities with respect to general and professional liability claims are included within the accrual for self-insured liabilities.
ALC regularly evaluates levels of the self-insured liability through an independent actuarial review. ALC believes that the methods for pricing and evaluating the Pearson insurance coverage are reasonable and that the historical cost of similar coverage would not have been materially different if ALC had obtained such coverage from third parties. General and professional liability
claims are the most volatile and significant of the risks for which ALC self-insures. ALC’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, ALC 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:
|
|
|
2012
|
|
|
|
2011
|
|
|
|
|
(In thousands)
|
|
Balances at beginning of year
|
|
$
|
2,057
|
|
|
$
|
2,097
|
|
Cash payments
|
|
|
(1,495
|
)
|
|
|
(592
|
)
|
Provisions
|
|
|
1,638
|
|
|
|
552
|
|
Balances at end of year
|
|
$
|
2,200
|
|
|
$
|
2,057
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
500
|
|
|
$
|
500
|
|
Long-term portion
|
|
|
1,700
|
|
|
|
1,557
|
|
Balances at end of year
|
|
$
|
2,200
|
|
|
$
|
2,057
|
|
13.
|
OTHER LONG-TERM LIABILITIES
|
Other long-term liabilities consisted of the following at December 31:
|
|
|
2012
|
|
|
|
2011
|
|
|
|
|
(In thousands)
|
|
Unfavorable lease adjustment as lessee
|
|
$
|
464
|
|
|
$
|
929
|
|
Future lease commitments
|
|
|
2,163
|
|
|
|
3,755
|
|
Deferred compensation
|
|
|
3,368
|
|
|
|
4,132
|
|
Asset retirement obligation
|
|
|
306
|
|
|
|
291
|
|
|
|
$
|
6,301
|
|
|
$
|
9,107
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unfavorable Lease Adjustment as Lessee
ALC evaluated the leases in existence at the date of the ALC Purchase and determined, based upon future discounted lease payments over the remaining terms of the leases, 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. In 2010, in conjunction with the acquisition of nine residences which were formerly leased by ALC, the related $0.3 million purchase accounting reserve was reversed. The unfavorable lease amortization, including the $0.3 million reversal in 2010, was $0.5 million, $0.5 million and $0.7 million for 2012, 2011 and 2010, respectively.
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. The effects of scheduled rent increases, which are included in minimum lease payments, are recognized on a straight-line basis over the lease term.
Deferred Compensation
ALC implemented an unfunded deferred compensation plan in 2005 which is 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. ALC matches
50% of the amount deferred. Expenses incurred by ALC under the deferred compensation plan were $197,000, $199,000 and $170,000 in 2012, 2011 and 2010, respectively.
ALC implemented the ERP, a non-qualified deferred compensation plan in 2005, covering certain executive employees. Expenses incurred from ALC contributions under the plan were $218,000, $193,000 and $280,000 in 2012, 2011 and 2010, respectively. The plan does not require ALC to fund the liability currently but ALC has funded it since the plan’s inception. Assets related to the plan are recorded as investments and classified as available for sale and were $0.9 million and $1.1 million as of December 31, 2012 and 2011, respectively.
Other Employee Pension Arrangements
ALC maintains a defined contribution retirement 401(k) savings plan, which is made available to substantially all employees. ALC pays a matching contribution of 25% of every qualifying dollar contributed by plan participants, net of any forfeiture. Expenses incurred by ALC related to the 401(k) savings plans were $160,000, $160,000 and $200,000 in 2012, 2011 and 2010, respectively.
Asset Retirement Obligation
ALC determined that a conditional asset retirement obligation exists for asbestos remediation in one of its residences. Although not a current health hazard, if ALC were to renovate the residence, ALC would be required to follow the appropriate remediation procedures in compliance with state law. The removal of asbestos-containing materials includes primarily floor and ceiling tiles. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2012, as a lessee, ALC was committed under non-cancelable leases requiring future minimum rentals as follows:
|
|
Operating
Leases
|
|
|
|
(in thousands)
|
|
2013
|
|
$
|
12,140
|
|
2014
|
|
|
12,125
|
|
2015
|
|
|
20
|
|
2016
|
|
|
20
|
|
2017
|
|
|
20
|
|
After 2017
|
|
|
590
|
|
Total minimum lease payments
|
|
$
|
24,915
|
|
Lease agreement with LTC Properties, Inc.
Effective January 1, 2005, ALC entered into two new master lease agreements with LTC Properties, Inc. (“LTC”) relating to 37 residences leased to ALC by LTC. Under the terms of the master lease agreements, the initial 10 year lease term commenced on January 1, 2005, with three successive 10-year lease renewal terms, which subject to certain conditions may be exercised at the option of ALC. There are no significant economic penalties to ALC if it decides not to exercise the renewal options. The aggregate minimum rent payments for the LTC leases for the calendar year 2012 was $11.6 million. The minimum rent will increase by 2% over the prior year’s minimum rent for each of the calendar years 2013 and 2014. Annual minimum rent during any renewal term will increase a minimum of 2% over the minimum rent of the immediately preceding year. ALC 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. ALC 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.
Lease agreement with Assisted Living Facilities, Inc. (“ALF”)
ALC had leased five properties in the State of Oregon with ALF until the close of business on December 31, 2009, that contained options to purchase the properties in July 2009. At the inception of the lease, the options were determined to be at bargain purchase prices, requiring the classification of these leases as capital leases. ALC elected not to exercise the purchase option and ceased operations at four of the buildings on December 31, 2009. Based on the terms of the original agreement, the fifth building reverted back to its original operating lease. ALF obtained financing for these properties through the sale of revenue bonds that contain certain terms and conditions within the debt agreements. ALC must continue to comply with these terms and conditions with respect to the one building ALC continues to operate and failure to adhere to those terms and conditions may result in an event of default to the lessor and termination of the lease.
Lease agreements with Ventas, Inc.
On January 1, 2008, a wholly-owned subsidiary of ALC acquired the operations of eight assisted and independent living residences consisting of a total of 541 leased units for a purchase price including fees and expenses of $14.8 million. The lease has an initial term expiring in March 2015 with three five-year renewal options. Aggregate minimum rent payments for the remainder of the initial lease term (years 2012 through 2015) are $5.5 million, $5.6 million, $5.8 million, and $1.4 million (three months), respectively. The minimum rent for each year of the first renewal option term is scheduled to increase by 3.0% over the prior year’s minimum rent. The minimum rent for each year of the second renewal option term is scheduled to increase by the greater of 3.0% or 75% of the consumer price index over the prior year’s minimum rent. The rental rate for the final five-year renewal option is subject to negotiation. ALC accounts for the effect of scheduled rent increases on a straight-line basis over the lease term.
On June 15, 2012, ALC signed and closed on an agreement with Ventas Realty and MLD to purchase 12 residences consisting of 696 units for a purchase price of $97 million plus $3 million for a litigation settlement fee plus Ventas’s expenses in connection with the litigation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the lease, ALC guarantees certain performance and payment obligations, including minimum occupancy, net worth, and capital expenditures per residence levels and minimum fixed charge coverage ratios. Failure to comply with these covenants could result in events of default under the lease and the guaranty. At December 31, 2011, ALC was in compliance with all covenants.
Effective January 1, 2002, ALC entered into a master lease and security agreement with Nationwide Health Properties, Inc. (“NHP”, acquired by Ventas, Inc. in July 2011) relating to four residences leased to ALC by NHP. Under the terms of the master lease agreement, the initial 5 year lease term commenced on January 1, 2002, and there were seven successive 5-year lease renewal terms, to be exercised at the option of ALC at rents determined by the fair market value of the property at the time of the renewal. There were no significant economic penalties to ALC if it decided not to exercise the renewal options. ALC exercised its second 5-year lease renewal resulting in no change in rent from 2011 to 2012. The aggregate minimum rent payments for the NHP leases for the calendar year 2011 were $1.1 million.
The four NHP leased properties were acquired by ALC in conjunction with the purchase agreement with Ventas Realty and MLD which was signed on June 15, 2012.
HCPI lease agreement
On November 1, 2010, ALC completed the acquisition of nine senior living residences from HCP, Inc. The nine residences were previously leased and operated by ALC under leases expiring between November 2010 and May 2012. The cash purchase price was $27.5 million plus certain transaction costs. See Note 3 Acquisitions for further details. The nine residences, two of which are located in New Jersey and seven in Texas, contain a total of 365 units.
15.
|
COMMITMENTS AND CONTINGENCIES
|
Revenue Bonds
ALC owns six assisted living facilities in Oregon, financed by Oregon Revenue Bonds that mature between 2021 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, ALC 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 in Washington, ALC could be 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. Under an agreement with the State of Idaho, the regulatory agreement with Idaho expired.
Under the terms of the debt agreements relating to the Washington revenue bonds, ALC is required, among other things, to lease or make available 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 ALC must also comply. ALC 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, for the Oregon Revenue Bonds and the Washington State Housing Finance Commission for the former Washington Revenue Bonds. Non-compliance with these restrictions may result in an event of default and cause fines and other financial costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, ALC leases five properties from LTC in Washington that were financed through the sale of revenue bonds and contain certain terms and conditions within the debt agreements. ALC 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 ALC. The leases require, among other things, that in order to preserve the federal income tax exempt status of the bonds, ALC is required to lease or make available 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 ALC must also comply. Pursuant to the lease agreements with LTC, ALC must comply with the terms and conditions of the underlying trust deed relating to the debt agreement. ALC had leased five properties from ALF in Oregon until the close of business on December 31, 2009 that were financed through the sale of revenue bonds and contain certain terms and conditions within the debt agreements. ALC elected not to exercise a purchase option on four of the buildings and terminated operations with the close of business on December 31, 2009. With the election not to purchase, the fifth
building reverted back to its original operating lease. With regard to the operating lease, ALC must continue to comply with the original 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 ALC. The leases require, among other things, that in order to preserve the federal income tax exempt status of the bonds, ALC is required to lease or make available 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 ALC must also comply. Pursuant to the lease agreements with ALF, ALC must comply with the terms and conditions of the underlying trust deed relating to the debt agreement.
Insurance and Self-insured Liabilities
ALC insures certain risks with Pearson, a wholly-owned subsidiary, and third-party insurers. The insurance policies with Pearson cover comprehensive general and professional liability (including malpractice insurance) for ALC’s health providers, assistants and other staff as it relates to their respective duties performed on ALC’s behalf, and employers’ liability in amounts and with such coverage and deductibles as determined by ALC, based on the nature and risk of its businesses, historical experiences, availability and industry standards. ALC 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
ALC is involved in various unresolved legal matters that arise in the normal course of operations, the most prevalent of which relate to commercial contracts and premises and professional liability matters. Although the outcome of these matters cannot be predicted with certainty and favorable or unfavorable resolutions may affect the results of operations on a quarter-to-quarter basis, we believe that the outcome of such legal and other matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
In addition, we are involved in the following legal matters:
On May 29, 2012, the Board of Directors terminated Ms. Laurie Bebo’s employment as President and CEO for cause. On June 29, 2012, Ms. Bebo initiated an arbitration proceeding against ALC disputing the existence of cause for her termination and alleging that she is entitled to more than $2.4 million in severance pay and other termination benefits because her termination was without cause. That arbitration is being administered by the American Arbitration Association. In addition, ALC learned, on or around October 15, 2012, that on July 26, 2012, Ms. Bebo filed a purported Sarbanes-Oxley whistleblower complaint with the Occupational Safety and Health Administration of the U.S. Department of Labor. Ms. Bebo’s whistleblower complaint alleges that her termination was in retaliation for her purported suggestion that ALC disclose that the reason for the delay in its earnings report and earnings call, announced on May 3, 2012, was the litigation filed against ALC by Ventas Realty, Limited Partnership (“Ventas Realty”) on April 26, 2012 (which litigation was dismissed with prejudice as part of a transactional resolution with Ventas Realty in June 2012). ALC has responded to Ms. Bebo’s claim in arbitration, denying the material allegations of Ms. Bebo’s demand. ALC has also responded to Ms. Bebo’s whistleblower complaint, asserting that Ms. Bebo’s complaint is legally and factually without merit. ALC will continue to vigorously defend against Ms. Bebo’s arbitration demand and the whistleblower complaint. ALC determined not to file a counterclaim in the arbitration, but retains the ability to file claims against Ms. Bebo, including for matters relating to her conduct and performance in her capacity as CEO of ALC.
On June 29, 2012, a lawsuit captioned
Laurie Bebo v. Assisted Living Concepts, Inc.
was filed in Waukesha County Circuit Court, State of Wisconsin. The lawsuit seeks an order requiring ALC to produce certain company records previously requested by Ms. Bebo as a director of ALC and a judgment requiring ALC to indemnify Ms. Bebo for all expenses incurred in connection with ALC’s internal investigation relating to the Ventas lease as well as to advance Ms. Bebo all expenses
incurred by her in connection with the investigation. On October 19, 2012, the court granted ALC’s motion to dismiss Ms. Bebo’s claim for access to company records and allowed the claims for indemnification. ALC will continue to vigorously defend against Ms. Bebo’s claims.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 2, 2012, ALC was informed by the United States Securities and Exchange Commission (the “SEC”) that the SEC staff is conducting an investigation relating to ALC. As part of this investigation, the SEC issued a subpoena to ALC. The first subpoena was subsequently withdrawn and replaced by a new subpoena requesting additional information. In compliance with the subpoenas, ALC has produced to the SEC documents on a number of topics, including, among others, compliance with occupancy covenants in the now-terminated lease with Ventas Realty and leasing of units for employee use. ALC intends to cooperate fully with the SEC in its investigation.
On August 29, 2012, a putative securities class action lawsuit was filed against ALC and Ms. Bebo on behalf of individuals and entities who allegedly purchased or otherwise acquired ALC’s Class A Common Stock between March 12, 2011 and August 6, 2012. The complaint, captioned
Robert E. Lifson, Individually and On Behalf of All Others Similarly Situated, v. Assisted Living Concepts, Inc. and Laurie A. Bebo, 2:12-cv-00884
, was filed in the United States District Court for the Eastern District of Wisconsin. On November 14, 2012, the court approved the Pension Trust for Operating Engineers as lead plaintiff in the action and also appointed lead counsel for the putative class. An amended complaint was filed on February 15, 2013, among other things changing the start date of the class period to March 4, 2011. The lawsuit, as amended, asserts that ALC did not accurately disclose occupancy data, falsely touted the success of its “private pay” business model, and falsely reported that it was in compliance with its former lease with Ventas Realty, and seeks damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, plus an award of plaintiff’s legal fees and expenses with respect to the litigation. ALC intends to vigorously defend itself against these claims.
On September 13, 2012, a lawsuit was filed derivatively by an alleged stockholder of ALC against certain of ALC’s current and former executive officers and directors and ALC, as nominal defendant. The complaint is captioned
George Passaro, Individually and Derivatively on Behalf of Assisted Living Concepts, Inc. v. Laurie A. Bebo, et al., Case No. 12CV010106
, and was filed in the Milwaukee County Circuit Court for the State of Wisconsin. The complaint alleges that the individual defendants, which include all of ALC’s directors at the filing date of the lawsuit, certain senior officers and Ms. Bebo, breached their fiduciary duties to exercise good faith to ensure that ALC was operated in a diligent, honest and prudent manner, and to exercise good faith in taking appropriate action to prevent and correct certain issues relating to ALC’s legal and regulatory compliance. The lawsuit seeks damages and other relief in favor of the Company and the plaintiff's costs and disbursements with respect to the litigation. On February 15, 2013, the defendants filed motions to dismiss the complaint. ALC believes that this lawsuit is without merit.
On or around October 19, 2012, ALC’s Board of Directors received a demand letter from another potential derivative plaintiff, David Raul, asserting matters similar to those asserted in the Passaro complaint. The Board of Directors has determined to defer detailed consideration of Mr. Raul’s demand until a ruling on the motion to dismiss the Passaro action and has so informed Mr. Raul.
On December 21, 2012, a lawsuit was filed derivatively by an alleged stockholder of ALC against certain of ALC’s current and former executive officers and directors and ALC, as nominal defendant. The complaint is captioned Guy Somers, Derivatively on Behalf of Assisted Living Concepts, Inc. v. Laurie A. Bebo, et al., Case No. A-12-674054-C, and was filed in the Eighth Judicial District Court of the State of Nevada in and for Clark County. The substantive allegations of the Somers complaint, as originally filed, were similar to the allegations in the Passaro litigation described above, and focused upon ALC’s alleged failure to comply with state regulatory and licensing requirements bearing upon the operation of assisted living facilities, and the defendants’ alleged failure to take action to correct the claimed regulatory noncompliance. Unlike the Passaro complaint, which purports to allege only a breach of the fiduciary duty of good faith, the original Somers complaint purported to allege four causes of action, for breach of fiduciary duty, contribution and indemnification, waste of corporate assets, and unjust enrichment.
On February 28, 2013, the Somers plaintiff filed an amended complaint. While repeating the substantive allegations contained in the original complaint, the amended complaint added new claims, purportedly asserted on a class action basis, against ALC’s directors and certain newly added defendants arising from the proposed sale of ALC to affiliates of TPG Capital, L.P., announced on February 26, 2013 (the “Proposed Sale”). The amended complaint is captioned Guy Somers, Derivatively on Behalf of Assisted Living Concepts, Inc. and on Behalf of all Others Similarly Situated v. Laurie A. Bebo, et al., and names as
additional defendants TPG Capital, L.P., Aid Holdings, LLC and AID Merger Sub, LLC. The newly asserted claims allege that (i) certain of ALC’s directors breached their fiduciary duties in connection with the Proposed Sale, and (ii) TPG Capital, L.P. and its affiliates aided and abetted the claimed fiduciary breaches by the aforementioned directors. The relief sought in the amended complaint on behalf of the purported shareholder class includes, among other things, an injunction prohibiting the consummation of the Merger and attorneys’ costs and fees. ALC believes that this lawsuit is without merit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 4, 5, and 6, 2013, three additional complaints, all purportedly asserted on a class action basis, were filed in the Eighth Judicial District Court of the State of Nevada in and for Clark County, captioned Scott Simpson, on behalf of himself and all others similarly situated v. Assisted Living Concepts, Inc., et al., Case No. A-13-677683-C, David Raul as Custodian for Malka Raul Utma NY, on behalf of itself and all others similarly situated v. Assisted Living Concepts, et al., Case No. A-13-677797-C, and Elizabeth Black, Individually and on behalf of all others similarly situated v. Assisted Living Concepts, Inc., et al., Case No. A-13-677838-C, respectively. Each of these complaints asserts claims that ALC’s directors breached their fiduciary duties to ALC stockholders in connection with the Proposed Sale. These complaints further claim that TPG Capital, L.P., Aid Holdings, LLC and Aid Merger Sub, LLC aided and abetted those alleged breaches of fiduciary duties.
Also on March 6, 2013, another putative class action complaint was filed in the Eighth Judicial District Court of the State of Nevada in and for Clark County, captioned The Joel Rosenfeld IRA, On Behalf of Itself and All Others Similarly Situated v. Assisted Living Concepts, Inc., et al., Case No. A-13-677902-C, against ALC and certain of its directors. This complaint alleges the directors breached their fiduciary duties in connection with the Proposed Sale.
The plaintiffs in the Simpson, Raul, Black and Rosenfeld actions seek equitable relief, including an injunction preventing the consummation of the Proposed Sale, rescission or rescissory damages in the event the Proposed Sale is consummated, and an award of attorneys’ and other fees and costs. ALC believes that these lawsuits are without merit.
No accruals of liability have been recorded in the financial statements on the specifically identified lawsuits described above as the likelihood of loss on any of the lawsuits is not both probable and reasonably estimated.
Energy Purchases
ALC enters into energy contracts for the purchase of electricity and natural gas for use in certain of our operations to reduce the variability of energy costs. The deregulation of the energy markets in selected areas of the country, the availability of products offered through energy brokers/providers, and our relatively stable demand for energy make it possible for us to enter longer term contracts to obtain favorable and more stable pricing. It is ALC’s intent to enter into contracts solely for its own use. Further, it is fully anticipated that ALC will make use of all the energy contracted. Expiration dates on our current energy contracts range from January 2013 to December 2013. Accounting guidance requires ALC to evaluate these contracts to determine whether the contracts are derivatives. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting guidance as normal purchases or normal sales. Normal purchases are contracts that provide for the
purchase of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases and sales are documented and exempted from typical accounting and reporting of derivatives. ALC has evaluated these energy contracts and determined they meet the normal purchases and sales exception and therefore are exempted from the accounting and reporting requirements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALC’s results of operations are included in a consolidated federal tax return.
The income tax (benefit)/expense consists of the following for the years ended December 31:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(1,846
|
)
|
|
$
|
7,412
|
|
|
$
|
2,585
|
|
Deferred
|
|
|
(13,330
|
)
|
|
|
3,109
|
|
|
|
5,245
|
|
Total Federal
|
|
$
|
(15,176
|
)
|
|
$
|
10,521
|
|
|
$
|
7,830
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
222
|
|
|
|
989
|
|
|
|
1,265
|
|
Deferred
|
|
|
(2,464
|
)
|
|
|
590
|
|
|
|
354
|
|
Total State
|
|
|
(2,242
|
)
|
|
|
1,579
|
|
|
|
1,619
|
|
Total income tax expense
|
|
$
|
(17,418
|
)
|
|
$
|
12,100
|
|
|
$
|
9,449
|
|
The differences between the effective tax rates on income before income taxes and the United States federal income tax rate are as follows:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Statutory federal income tax rate
|
|
|
(35.0
|
%)
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (reduction) in tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
|
(3.4
|
)
|
|
|
4.0
|
|
|
|
4.0
|
|
Work opportunity credit
|
|
|
(0.9
|
)
|
|
|
(1.0
|
)
|
|
|
(1.2
|
)
|
Deductible goodwill amortization
|
|
|
(1.0
|
)
|
|
|
(1.2
|
)
|
|
|
(1.7
|
)
|
Settlement with former parent
|
|
|
—
|
|
|
|
(2.0
|
)
|
|
|
—
|
|
Decrease is state tax reserve
|
|
|
—
|
|
|
|
(1.6
|
)
|
|
|
—
|
|
Other, net
|
|
|
0.3
|
|
|
|
—
|
|
|
|
0.4
|
|
Effective tax rate
|
|
|
(40.0
|
%)
|
|
|
33.2
|
%
|
|
|
36.5
|
%
|
Unrecognized tax benefits
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
|
|
2012
|
|
|
2011
|
|
Gross unrecognized tax benefits at December 31, 2011
|
|
$
|
125
|
|
|
$
|
722
|
|
Decrease due to expiration of statute of limitations
|
|
|
—
|
|
|
|
(597
|
)
|
Gross unrecognized tax benefits at December 31, 2012
|
|
$
|
125
|
|
|
$
|
125
|
|
Included in the balance of unrecognized tax benefits at December 31, 2012 and 2011 are tax positions related to past state income tax filings which will not reoccur in the future. There are no unrecognized tax benefits related to federal income tax issues.
The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.1 million at December 31, 2012. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. At December 31, 2012, we had no accrued interest and penalties related to unrecognized tax benefits. ALC and its subsidiaries file income tax returns in the U.S. and in various state and local jurisdictions. Federal tax returns for all periods after December 31, 2008 are open for examination. Various state tax returns for all periods after December 31, 2007 are open for examination. For the tax periods between February 1, 2005 and November 10, 2006, ALC was included in the consolidated federal tax returns of Extendicare Holdings, Inc. (“EHI”). Tax issues between ALC and Extendicare were governed by a Tax Allocation Agreement
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
entered into by ALC and Extendicare at the time of the Separation. During 2009, the Internal Revenue Service completed an examination of the partial tax year ended December 31, 2005 and the partial tax year ended November 10, 2006. In May 2011, EHI and ALC agreed to settle this matter, and all matters under the Tax Allocation Agreement, with a $0.8 million payment from EHI to ALC. The $0.8 million settlement was paid in the second quarter of 2011 and is included as a reduction of the income tax provision in the consolidated statements of operations for the year ended December 31, 2011. As a result of this settlement, ALC wrote-off $2.9 million of net operating losses and a related $2.7 million of valuation allowance which off-set these net operating losses.
The components of the net deferred tax assets and liabilities as of December 31 are as follows:
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Employee benefit accruals
|
|
$
|
4,378
|
|
|
$
|
4,233
|
|
Accrued liabilities
|
|
|
890
|
|
|
|
835
|
|
Accounts receivable reserves
|
|
|
1,394
|
|
|
|
1,172
|
|
Deferred revenue
|
|
|
710
|
|
|
|
712
|
|
Capital loss carryover
|
|
|
191
|
|
|
|
—
|
|
Operating loss carryforwards
|
|
|
7,118
|
|
|
|
7,820
|
|
Goodwill/Intangibles
|
|
|
5,736
|
|
|
|
2,683
|
|
Fair value adjustment for leases
|
|
|
376
|
|
|
|
565
|
|
Fair value adjustment for debt
|
|
|
56
|
|
|
|
31
|
|
Deferred financing fee
|
|
|
552
|
|
|
|
155
|
|
Alternative minimum tax carry forward
|
|
|
46
|
|
|
|
46
|
|
Write down of investments
|
|
|
134
|
|
|
|
290
|
|
Other assets
|
|
|
1,153
|
|
|
|
2,714
|
|
Total deferred tax assets before valuation allowance
|
|
|
22,734
|
|
|
|
21,256
|
|
Valuation allowance
|
|
|
(163
|
)
|
|
|
(163
|
)
|
Total deferred tax assets
|
|
|
22,571
|
|
|
|
21,093
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
26,245
|
|
|
|
40,710
|
|
Unrealized loss – equity investments
|
|
|
11
|
|
|
|
91
|
|
Miscellaneous
|
|
|
376
|
|
|
|
228
|
|
Total deferred tax liabilities
|
|
|
26,632
|
|
|
|
41,029
|
|
Net deferred tax liabilities
|
|
$
|
(4,061
|
)
|
|
$
|
(19,936
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
(163
|
)
|
|
$
|
(2,840
|
)
|
Decrease during year
|
|
|
—
|
|
|
|
2,677
|
|
End of year
|
|
$
|
(163
|
)
|
|
$
|
(163
|
)
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Deferred tax assets (liabilities) as presented on the consolidated balance sheet:
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
4,640
|
|
|
$
|
4,027
|
|
Long-term deferred tax liabilities
|
|
|
(8,701
|
)
|
|
|
(23,961
|
)
|
Net deferred tax liabilities
|
|
$
|
(4,061
|
)
|
|
$
|
(19,934
|
)
|
ALC paid state income taxes of $0.8 million and $1.3 million in 2012 and 2011, respectively.
As of December 31, 2012, ALC has $19.7 million (before a $0.2 million valuation allowance) of net operating losses available for federal income tax purposes, which will expire between 2013 and 2026. These net operating losses were partially generated
prior to and after ALC’s emergence from bankruptcy on January 1, 2002. The emergence from bankruptcy created an ownership change as defined by the IRS. Section 382 of the Internal Revenue Code and imposes limitations on the utilization of the
loss carryforwards and built-in losses after certain ownership changes of a loss company. ALC was deemed to be a loss company for these purposes. Under these provisions, ALC’s ability to utilize the pre-acquisition loss carryforwards generated prior to 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. ALC’s net unrealized built-in losses were $19.4 million as of December 31, 2012, and $20.9 million as of December 31, 2011. The deferred tax assets include loss carryforwards and built-in losses and their related tax benefit available to ALC to reduce future taxable income within the allowable IRS carryover period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ALC will realize the benefits of these deductible differences, net of the valuation allowances.
ALC computes earnings per share under two different methods, basic and diluted, and presents per share data for all periods in which consolidated statements of operations are presented. Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of common stock and common stock equivalents outstanding. Common stock equivalents consist of incremental shares available upon conversion of Class B Common Stock and dilutive stock options. During 2012, ALC reported a consolidated net loss. As a result of the net loss, common stock equivalents from convertible shares of Class B Common Stock and stock options were antidilutive for the year and were not included in the computation of diluted weighted average shares. For 2011 and 2010, common stock equivalents of 32,418 and 6,452, respectively, were excluded from the diluted weighted average share calculations because their impact would have been antidilutive.
The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for 2012, 2011 and 2010:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
Basic (loss)/earnings per share calculation
:
|
|
|
|
Net (loss)/income to common stockholders
|
|
$
|
(26,125
|
)
|
|
$
|
24,360
|
|
|
$
|
16,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
22,970
|
|
|
|
22,955
|
|
|
|
23,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss)/income per common share
|
|
$
|
(1.14
|
)
|
|
$
|
1.06
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per share calculation
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income to common stockholders
|
|
$
|
(26,125
|
)
|
|
$
|
24,360
|
|
|
$
|
16,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
22,970
|
|
|
|
22,955
|
|
|
|
23,080
|
|
Assumed conversion of Class B Common Stock
|
|
|
—
|
|
|
|
221
|
|
|
|
228
|
|
Effect of dilutive stock options
|
|
|
—
|
|
|
|
80
|
|
|
|
104
|
|
Diluted weighted average number of common shares outstanding
|
|
|
22,970
|
|
|
|
23,256
|
|
|
|
23,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss)/income per common share
|
|
$
|
(1.14
|
)
|
|
$
|
1.05
|
|
|
$
|
0.70
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
|
DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
|
The estimated fair values of ALC’s financial instruments at December 31 are as follows:
|
|
2012
|
|
|
2011
|
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
|
(In thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,182
|
|
|
$
|
10,182
|
|
|
$
|
2,652
|
|
|
$
|
2,652
|
|
Investments
|
|
|
900
|
|
|
|
900
|
|
|
|
1,840
|
|
|
|
1,840
|
|
Cash and escrow deposits - restricted
|
|
|
2,714
|
|
|
|
2,714
|
|
|
|
3,150
|
|
|
|
3,150
|
|
Other assets (long-term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
1,956
|
|
|
|
1,956
|
|
|
|
1,996
|
|
|
|
1,996
|
|
Security deposits
|
|
|
23
|
|
|
|
23
|
|
|
|
19
|
|
|
|
19
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current maturities
|
|
$
|
181,715
|
|
|
$
|
186,703
|
|
|
$
|
88,241
|
|
|
$
|
94,901
|
|
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 ALC for debt equal to the existing debt maturities.
Investment securities available-for-sale
. The carrying values of investment securities classified as available-for-sale are recorded at their fair values based on quoted market prices using public information for the issuers.
The following table presents information about ALC’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011, and indicates the fair value hierarchy of the valuation techniques utilized by ALC to determine such fair value (in thousands):
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December
31
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
$
|
212
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
$
|
1,028
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,028
|
|
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ALC has the ability to access. For example, ALC’s investment in available-for-sale equity securities is valued based on the quoted market price for those securities.
Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. For example, ALC uses market interest rates and yield curves that are observable at commonly quoted intervals in the valuation of its interest rate swap contract.
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. ALC’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALC recognized an unrealized gain of $0.3 million on the fair value of equity investments for both years ended December 31, 2012 and 2011, respectively.
The following table presents information about ALC’s assets measured at fair value on a nonrecurring basis as of December 31, 2012 (in thousands):
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December
31
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,401
|
|
|
$
|
14,401
|
|
|
$
|
3,500
|
|
The fair value approach for long-lived assets utilizes a number of significant unobservable inputs or Level 3 assumptions. These assumptions include, among others, projections of the properties future operating results, industry and comparable property capitalization rates, discounted cash flow models to determine cost of lease up and other subjective assumptions. ALC obtained independent third party appraisals to arrive at estimate fair market value. Upon completion of its 2012 impairment analysis, ALC determined that the carrying value exceeded the fair market value on eight properties which had experienced declining operating cash flows over a period of several years. ALC recorded an impairment charge of $3,500.
19.
|
QUARTERLY RESULTS OF OPERATIONS (unaudited)
|
The following is a summary of our unaudited quarterly results of operations for 2012 and 2011:
|
|
Quarter
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
|
(In thousands, except per share data)
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
58,978
|
|
|
$
|
56,863
|
|
|
$
|
55,576
|
|
|
$
|
56,980
|
|
|
$
|
228,397
|
|
Income/(loss) from operations before taxes
|
|
|
8,960
|
|
|
|
(41,123
|
)
|
|
|
(6,683
|
)
|
|
|
(4,697
|
)
|
|
|
(43,543
|
)
|
Net income/(loss)
|
|
|
5,649
|
|
|
|
(25,109
|
)
|
|
|
(4,042
|
)
|
|
|
(2,623
|
)
|
|
|
(26,125
|
)
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income/(loss) per share
|
|
$
|
0.25
|
|
|
$
|
(1.09
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(1.14
|
)
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.24
|
|
|
$
|
(1.09
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(1.14
|
)
|
|
|
Quarter
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
|
(In thousands, except per share data)
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
58,409
|
|
|
$
|
58,627
|
|
|
$
|
58,553
|
|
|
$
|
58,863
|
|
|
$
|
234,452
|
|
Income/(loss) from operations before taxes
|
|
|
6,752
|
|
|
|
9,998
|
|
|
|
9,151
|
|
|
|
10,559
|
|
|
|
36,460
|
|
Net income/(loss)
|
|
|
5,011
|
|
|
|
6,276
|
|
|
|
5,763
|
|
|
|
7,310
|
|
|
|
24,360
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income/(loss) per share
|
|
$
|
0.22
|
|
|
$
|
0.27
|
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
|
$
|
1.06
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.22
|
|
|
$
|
0.27
|
|
|
$
|
0.25
|
|
|
$
|
0.31
|
|
|
$
|
1.05
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20.
|
LONG-TERM EQUITY-BASED COMPENSATION PROGRAM
|
Effective October 31, 2006, the Board of Directors approved and adopted and our sole stockholder approved the Assisted Living Concepts, Inc. 2006 Omnibus Incentive Compensation Plan (the “2006 Omnibus Plan”). On May 5, 2008, the 2006 Omnibus Plan was again approved by ALC stockholders. On April 30, 2009, the Board of Directors of ALC approved the amendment and restatement of the 2006 Omnibus Incentive Compensation Plan to reflect the March 16, 2009 one-for-five reverse stock split. On August 4, 2011, the Board of Directors of ALC approved the amendment and restatement of the 2006 Omnibus Incentive Compensation Plan to reflect the May 20, 2011 two-for-one stock split. The 2006 Omnibus Plan is administered by the Compensation/Nomination/Governance Committee of the Board of Directors (the “Committee”) and provides for grants of a variety of incentive compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock units, cash incentive awards and other equity-based or equity-related awards (performance awards).
A total of 1,600,000 shares of our Class A Common Stock are reserved for issuance under the 2006 Omnibus Plan. Awards with respect to a maximum of 80,000 shares may be granted to any one participant in any fiscal year (subject to adjustment for stock distributions or stock splits). The maximum aggregate amount of cash and other property other than shares that may be paid or delivered pursuant to awards to any one participant in any fiscal year is $2.0 million.
The terms applicable to all Options/SARs that have been granted under the 2006 Omnibus Plan to date, as described below, provide that, once the options/SARs become vested, they become exercisable in one-third increments on the first, second and third anniversaries of the approval date and they expire five years from the approval date. Once exercisable, awards may be exercised either by purchasing shares of Class A Common Stock at the exercise price or exercising the related stock appreciation right. The Committee has sole discretion to determine whether stock appreciation rights are settled in shares of Class A Common Stock, cash or a combination of shares of Class A Common Stock and cash.
On February 22, 2009, the Committee approved the 2009 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs granted to all participants was 190,000 and the exercise price is $7.68 per share. The Options/SARs had both time
vesting and performance vesting features. One fifth (1/5) of each grant was vested on February 22, 2010. Also on February 22, 2010, the Committee determined that three-fourths (3/4) of the remaining four-fifths (4/5) of each grant vested. On April 30, 2009, the Committee recommended and the Board of Directors approved grants of 8,000 Options/SARs to each of the eight non-management directors. The aggregate number of Options/SARs granted was 64,000 and the exercise price is $8.27 per share.
On March 3, 2010, the Committee approved the 2010 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs
granted to all participants was 192,500 and the exercise price is $15.86 per share. The Options/SARs have both time vesting and
performance vesting features. Two-elevenths (2/11) of each grant become exercisable in one-third increments on the first, second and third anniversaries of the approval date. On March 3, 2011, the Committee determined that four-elevenths (4/11) of the grants vested and becomes exercisable in one-third increments beginning March 3, 2011.
On May 3, 2010, the Committee recommended and the Board of Directors approved grants of 10,000 Options/SARs to each of the eight non-management directors. The aggregate number of Options/SARs granted was 80,000 and the exercise price is $16.57 per share.
On March 2, 2011, the Committee approved the 2011 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs granted to all participants was 170,500 and the exercise price is $18.69 per share. The Options/SARs have both time vesting and performance vesting features. One-fifth (1/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of the approval date. On March 7, 2012, the Committee determined that all of the grants vested and become exercisable in one-third increments beginning March 3, 2012.
On May 2, 2011, the Committee recommended and the Board of Directors approved grants of 10,000 Options/SARs to each of the seven non-management directors. The aggregate number of Options/SARs granted was 70,000 and the exercise price is $17.49 per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 15, 2012, the Committee approved the 2012 Long-Term Equity-Based Compensation Program and granted awards of Options/SARs to certain key employees (including executive officers). The aggregate maximum number of Options/SARs
granted to all participants was 198,000 and the exercise price is $17.01 per share. The Options/SARs have both time vesting and performance vesting features. One-fifth (1/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of the approval date. If the established performance goals (related to increases in private pay resident occupancy) are achieved in fiscal 2012, some or all of the remaining four fifths (4/5) of each grant becomes exercisable in one-third increments on the first, second and third anniversaries of March 15, 2012.
A summary of Options/SARs activity for the years ended December 31, 2012, 2011 and 2010 is presented below:
|
|
Shares
|
|
|
Wtd. Avg.
Exercise Price
Per Share
|
|
|
Wtd. Avg.
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding, January 1, 2010
|
|
|
318,000
|
|
|
$
|
9.48
|
|
|
|
|
|
|
|
Granted
|
|
|
272,500
|
|
|
|
16.07
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,000
|
)
|
|
|
7.68
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
(38,000
|
)
|
|
|
7.68
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(13,332
|
)
|
|
|
7.68
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
531,168
|
|
|
$
|
13.06
|
|
|
|
3.6
|
|
|
|
1,702
|
|
Exercisable, December 31,2010
|
|
|
106,706
|
|
|
$
|
11.15
|
|
|
|
3.0
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2011
|
|
|
531,168
|
|
|
$
|
13.06
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
240,500
|
|
|
|
18.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(34,338
|
)
|
|
|
8.24
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
(122,500
|
)
|
|
|
15.86
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(50,164
|
)
|
|
|
13.98
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
564,666
|
|
|
$
|
14.91
|
|
|
|
3.2
|
|
|
|
—
|
|
Exercisable, December 31, 2011
|
|
|
187,018
|
|
|
$
|
12.17
|
|
|
|
2.3
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2012
|
|
|
564,666
|
|
|
$
|
14.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
198,000
|
|
|
|
17.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(126,500
|
)
|
|
|
16.19
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
636,166
|
|
|
$
|
15.31
|
|
|
|
2.6
|
|
|
|
—
|
|
Exercisable, December 31, 2012
|
|
|
323,020
|
|
|
$
|
13.26
|
|
|
|
1.7
|
|
|
$
|
—
|
|
The following table summarizes nonvested options outstanding and the related weighted average grant date fair value at December 31, 2012:
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at December 31, 2011
|
|
$
|
377,648
|
|
|
$
|
5.56
|
|
Granted
|
|
|
198,000
|
|
|
|
7.08
|
|
Vested
|
|
|
(178,335
|
)
|
|
|
7.70
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
7.70
|
|
Forfeited
|
|
|
(84,167
|
)
|
|
|
8.09
|
|
Nonvested at December 31, 2012
|
|
$
|
313,146
|
|
|
$
|
8.24
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes options outstanding, exercisable, the related weighted average exercise price and remaining contractual life information at December 31, 2012:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise Prices
|
|
Shares
|
|
Weighted Avg.
Remaining
Contractual
Life
(in years)
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Avg.
Exercise
Price
|
|
$
|
7.68
|
|
74,666
|
|
|
1.2
|
|
|
$
|
7.68
|
|
|
|
74,666
|
|
|
$
|
7.68
|
|
$
|
8.27
|
|
56,000
|
|
|
1.3
|
|
|
$
|
8.27
|
|
|
|
56,000
|
|
|
$
|
8.27
|
|
$
|
15.86
|
|
40,000
|
|
|
2.2
|
|
|
$
|
15.86
|
|
|
|
26,004
|
|
|
$
|
15.86
|
|
$
|
16.05
|
|
56,000
|
|
|
0.3
|
|
|
$
|
16.05
|
|
|
|
56,000
|
|
|
$
|
16.05
|
|
$
|
16.57
|
|
70,000
|
|
|
2.3
|
|
|
$
|
16.57
|
|
|
|
46,676
|
|
|
$
|
16.57
|
|
$
|
17.01
|
|
148,500
|
|
|
4.2
|
|
|
$
|
17.01
|
|
|
|
—
|
|
|
$
|
17.01
|
|
$
|
17.49
|
|
70,000
|
|
|
3.3
|
|
|
$
|
17.49
|
|
|
|
23,338
|
|
|
$
|
17.49
|
|
$
|
18.69
|
|
121,000
|
|
|
3.2
|
|
|
$
|
18.69
|
|
|
|
40,336
|
|
|
$
|
18.69
|
|
|
|
|
636,166
|
|
|
2.6
|
|
|
$
|
15.31
|
|
|
|
323,020
|
|
|
$
|
13.26
|
|
The grant of Options/SARs increased the number of diluted shares by 80,000 and 80,000 in 2012 and 2011. Compensation expense related to the director Options/SARs of $0.5 million, $0.5 million and $0.4 million was recorded in the years ended December 31, 2012, 2011 and 2010, respectively. Compensation expense related to the management Options/SARs was $0.3 million, $0.7 million and $0.3 million for 2012, 2011 and 2010, respectively. In 2011, ALC received $0.3 million in cash related to 34,338 exercised Options/SARs which had a total intrinsic value of $0.3 million. No options were exercised in 2012. Unrecognized compensation cost at December 31, 2012 and 2011, was approximately $1.0 million and $2.2 million, respectively, and the weighted average period over which it is expected to be recognized is 1.2 years and 1.5 years as of December 31, 2012 and 2011.
ALC uses the Black-Scholes option value model to estimate the fair value of stock options and similar instruments. Stock option valuation models require various assumptions, including the expected stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. In estimating the fair value of Options/SARs granted, the Company uses a risk free rate equal to the five year U.S. Treasury yield in effect on the first business day after the grant date. The expected life of the Options/SARs (five years) was estimated using expected exercise behavior of option holders. Expected volatility was based on ALC’s Class A Common Stock volatility since it began trading on November 10, 2006, and ending on the date of grant. Because the Class A Common Stock has traded for less than the expected contractual term, an average of a peer group’s historical volatility for a period equal to the Options/SARs’ expected life, ending on the date of grant, was compared to the historical ALC volatility with no material difference. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. Because of a lack of history, the forfeiture rate was estimated at zero percent of the Options/SARs awarded and may be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. The Options/SARs have characteristics that are significantly different from those of traded options and changes in the various input assumptions can materially affect the fair value estimates. The fair value of the Options/SARs was estimated at the date of
grant using the following weighted average assumptions.
|
|
March 12,
2012
|
|
|
May 2,
2011
|
|
|
March 2,
2011
|
|
|
May 3,
2010
|
|
|
March 3,
2010
|
|
Expected life from grant date (in years)
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Risk-free interest rate
|
|
|
1.11
|
%
|
|
|
1.88
|
%
|
|
|
2.21
|
%
|
|
|
2.13
|
%
|
|
|
2.33
|
%
|
Volatility
|
|
|
55.52
|
%
|
|
|
57.68
|
%
|
|
|
58.63
|
%
|
|
|
62.60
|
%
|
|
|
63.70
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average fair value (per share)
|
|
$
|
7.08
|
|
|
$
|
8.87
|
|
|
$
|
9.69
|
|
|
$
|
8.99
|
|
|
$
|
8.74
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21.
|
RELATED PARTY DISCLOSURE
|
ALC engaged Bennett Jones LLP, a Canadian law firm, to provide advisory services commencing in August 2012. Alan Bell, a member of the Board of Directors of ALC, is a partner in this law firm. Prior to such engagement of Bennett Jones, Mr. Bell was elected Co-Vice Chairman of the Board of Directors and stepped down as a member of both the Audit Committee and the Compensation/Nominating/Governance Committee. In 2012, ALC incurred fees of $804,000 to Bennett Jones under the terms of this engagement.
On February 25, 2013, we entered into an Agreement and Plan of Merger with Aid Holdings and Aid Merger Sub, providing for the merger of Aid Merger Sub with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Aid Holdings. Aid Holdings and Aid Merger Sub are affiliates of TPG Capital, L.P. At the effective time of the Merger, each share of Class A Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than shares owned by the Company, Aid Holdings or any direct or indirect subsidiary of either of them) will be converted automatically into the right to receive $12.00 in cash, without interest (the “Class A Per Share Merger Consideration”). Each share of Class B Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than shares owned by the Company, Aid Holdings or any direct or indirect subsidiary of either of them or stockholders who have properly exercised and perfected dissenters’ rights under Nevada law) will be converted automatically into the right to receive $12.90 in cash, without interest (as required under the Company’s amended and restated articles of incorporation based on the Class A Per Share Merger Consideration). See “Item 1 – Business — The Merger Agreement” above for additional information about the conditions to the consummation of the Merger. The Merger is expected to close in the summer of 2013, but we cannot be certain when or if the conditions to the closing of the Merger will be satisfied or, to the extent permitted, waived.