<PAGE> 1
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-04595
PROSPECTUS
6,000,000 SHARES
(LOGO)ALTERNATIVE LIVING SERVICES
COMMON STOCK
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Of the 6,000,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering"), 3,443,206 shares of Common
Stock are being sold by Alternative Living Services, Inc. ("ALS" or the
"Company"), and 2,556,794 shares of Common Stock are being sold by certain
existing stockholders of the Company (the "Selling Stockholders"). The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders. A substantial portion of the proceeds from this Offering will
benefit affiliates of the Company. See "Use of Proceeds" and "Principal and
Selling Stockholders." Prior to this Offering, there has been no public market
for the Common Stock. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. It is anticipated
that approximately 500,000 shares of Common Stock will be offered outside of the
United States. The shares of Common Stock have been approved for listing on the
American Stock Exchange under the symbol "ALI".
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SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THE OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ 13.00 $ 0.91 $ 12.09 $ 12.09OPF
- ----------------------------------------------------------------------------------------------------
Total(3) $78,000,000 $5,460,000 $41,628,361 $30,911,639
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,600,000.
(3) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 900,000 shares of Common Stock
on the same terms and conditions as set forth above solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be
$89,700,000, $6,279,000, $43,616,356 and $39,804,644, respectively.
------------------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to withdraw, cancel or modify the Offering and
to reject orders in whole or in part. It is expected that delivery of stock
certificates will be made in New York, New York on or about August 9, 1996.
------------------
NATWEST SECURITIES LIMITED
MCDONALD & COMPANY
SECURITIES, INC.
THE CHICAGO CORPORATION
The date of this Prospectus is August 6, 1996
<PAGE> 2
[Map of the United States with markings indicating the Company's operating
residences and residences in progress. Also includes a montage of photographs
depicting a Company residence under construction. The Company's logo will appear
on the top of this page.]
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Crossings(R) and WovenHearts(R) are registered service marks of the Company
and the Company claims service mark protection in the marks Wynwood(SM) and
Clare Bridge(SM).
---------------------
FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby
may not be offered or sold in the United Kingdom other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments, whether as principal or agent (except in circumstances that do not
constitute an offer to the public within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986), and this
Prospectus may only be issued or passed on to any person in the United Kingdom
if that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or a person to whom
this Prospectus may otherwise lawfully be passed on.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, financial statements, including the notes thereto, and pro forma
financial information and notes thereto appearing elsewhere in this Prospectus.
Prospective investors should consider carefully the information set forth under
"Risk Factors." Unless the context otherwise requires, references made to the
"Company" or "ALS" shall mean Alternative Living Services, Inc., its
"Predecessor," as described in the Notes to Summary Consolidated Financial and
Operating Data, and its subsidiaries. Unless otherwise indicated, all share and
per share data (i) assumes the Underwriters' over-allotment option will not be
exercised and (ii) gives effect to the 1,812.55 for one stock split with respect
to the Common Stock effected on May 17, 1996 (the "Stock Split"). This
Prospectus contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
of the factors set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Alternative Living Services, Inc. is a leading national assisted living
company operating 57 residences with an aggregate capacity of approximately
2,500 residents. Of these total residences, the Company owns 17, leases 23,
holds equity interests in and operates eight and manages an additional nine. The
Company provides a full range of assisted living services in its residences for
the frail elderly and free-standing specialty care residences for individuals
with Alzheimer's disease and other dementias. ALS and its predecessor have
operated assisted living residences since 1981 including specialty dementia care
residences since 1985. See "Business -- Residences" for a description of the
Company's ownership interests in the residences operated by the Company.
The Company provides a broad continuum of personal care (such as assistance
with bathing, toileting, dressing, eating and ambulation), support services
(such as housekeeping, laundry and transportation) and health care (such as
medication administration and health monitoring) to its residents. In addition,
the Company offers a wide range of specialized services, including behavior
management and environmental adaptation programs, to residents who suffer from
Alzheimer's disease and other dementias. All of these services are provided on a
24-hour basis in "home-like" settings which emphasize privacy, individual choice
and independence. The Company operates four distinct assisted living product
lines, each serving a particular segment of the private pay elderly population.
Each assisted living product line is designed to permit residents to age in
place by meeting their personal and health care needs across a range of pricing
options.
- Clare Bridge -- These specially designed free-standing residences serve
the programmatic needs of individuals with Alzheimer's disease and other
dementias. This upper-income model accommodates 24 to 52 residents and is
primarily located in metropolitan and suburban markets. The average amount
paid by residents for the month of March 1996 was approximately $3,090 (or
$103 per day).
- Wynwood -- Designed to serve primarily upper-income frail elderly
individuals, these larger, multi-story residences are typically located in
metropolitan and suburban markets. The capacity of this model ranges from
50 to 72 residents. The average amount paid by residents for the month of
March 1996 was approximately $2,530 (or $84 per day).
- Crossings -- These residences provide supportive services and personal
care to elderly individuals in apartment-style settings. This model
typically accommodates 60 to 80 residents and is generally located in
metropolitan areas. The average monthly amount paid by residents for the
month of March 1996 was approximately $1,600 (or $53 per day).
- WovenHearts -- These smaller residences serve primarily moderate-income
frail elderly individuals. This model accommodates 20 residents and has
been expanded to accommodate 26 residents and is primarily located in
smaller communities and rural markets. The average monthly amount paid by
residents for the month of March 1996 was approximately $1,560 (or $52 per
day).
Since 1993, the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions. During this
period the Company has developed or acquired 48 residences with an aggregate
capacity of approximately 2,400 residents. The Company intends to continue its
development strategy and is currently constructing 19 residences (i.e.,
construction activities have commenced and
3
<PAGE> 4
are ongoing) and is developing 24 residences (i.e., the site is under control
and development activities such as site permitting, preparation of surveys and
architectural plans and negotiation of construction contracts have commenced).
Of these residences, 15 to 21 are expected to open during 1996. The Company also
intends to continue to pursue strategic acquisitions of assisted living
operations. In keeping with its acquisition strategy, in May 1996, the Company
acquired New Crossings International Corporation ("Crossings"), an assisted
living company which operated 15 residences with a capacity of approximately
1,420 residents throughout the Western United States. This strategic merger
provides the Company with access to several new geographic markets and
complements its existing assisted living product lines with the addition of
apartment-style assisted living residences. In January 1996, the Company
acquired Heartland Retirement Services, Inc. ("Heartland"), an assisted living
company which operated 20 WovenHearts residences throughout Wisconsin. As a
result of this transaction, the Company has broadened its assisted living
product lines to serve frail elderly individuals in moderate income markets and
rural communities.
The Company's management team has extensive operational and strategic
experience in the health care industry. The Company's President and Chief
Executive Officer, William F. Lasky, founded the Company's predecessor and has
been actively involved in the assisted living industry for over 15 years. Mr.
Lasky currently serves as Chairman of the Assisted Living Facilities Association
of America ("ALFAA"), the nation's largest dedicated assisted living trade
organization. The Company's Chairman, William G. Petty, Jr., has held senior
management positions and has managed strategic investments in companies in the
long-term care, assisted living and senior living industries. Mr. Petty served
as the Chairman, Chief Executive Officer and President of Evergreen Healthcare,
Inc. ("Evergreen"), a NYSE-listed operator of long-term care facilities, from
June 1993 until July 1995, when Evergreen merged with GranCare, Inc.
("GranCare"), for which he now serves as Vice Chairman. See "Management."
The assisted living industry is a rapidly growing segment within the long
term care industry. The Company's target market, which consists of seniors age
75 and older, is one of the fastest growing segments of the United States
population. According to the United States Census Bureau, this age group is
expected to grow by 33.5% between 1990 and 2000. The Company believes that the
market for assisted living services, including dementia care services, will
continue to grow due to (i) the aging of the U.S. population, (ii) rising public
and private cost containment pressures, (iii) declining availability of
traditional nursing home beds given nursing home operators' increasing focus on
higher acuity patients, (iv) quality of life advantages of assisted living
residences over traditional skilled nursing homes and (v) the decreasing
availability of family care as an option for elderly family members. The Company
believes that it is well positioned to capitalize on these trends given its
growth, operating strategies and extensive experience in the assisted living
industry.
THE OFFERING
Common Stock offered by:
The Company............................... 3,443,206 shares
The Selling Stockholders.................. 2,556,794 shares(1)
Total Common Stock offered.............. 6,000,000 shares
Common Stock to be outstanding after the
Offering.................................. 12,966,555 shares(2)
Use of proceeds to the Company............ For repayment of $15.3 million of
indebtedness and accrued interest, including $8.7 million in bridge financing
provided by an affiliate in
connection with the Heartland
acquisition, for the development,
construction and possible
acquisition of assisted living
residences and for general
corporate purposes, including
working capital. See "Use of
Proceeds."
American Stock Exchange Symbol............ ALI
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(1) In the event the over-allotment option is exercised in full, an additional
164,433 shares will be sold by the Company and an additional 735,567 shares
will be sold by the Selling Stockholders.
(2) Excludes 789,149 shares of Common Stock issuable upon the exercise of
options to purchase Common Stock outstanding as of June 30, 1996 at a
weighted average exercise price of $6.08, including options granted under
the Company's 1995 Incentive Compensation Plan (the "1995 Plan"). See
"Capitalization" and "Management."
4
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated financial and operating data of the
Company is qualified in its entirety by the more detailed information in the
financial statements and the pro forma financial information (including the
notes thereto), appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------ ------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
1993(1) 1994 1995 1995(2) 1995(2)(3)(6) 1995 1996(4) 1996(5) 1996(3)(6)
------- ------ ------- --------- ------------- ------ ------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue............ $2,788 $4,956 $10,464 $38,153 $38,153 $2,081 $ 4,325 $11,609 $11,609
Operating loss............... (124 ) (390) (1,046) (2,642) (2,642) (420) (1,352) (1,110) (1,110)
Interest expense, net........ (56 ) (301) (813) (3,595) (2,208) (180) (391) (921) (574)
Equity in income (losses) of
unconsolidated
affiliates................. -- (1) (438) (47) (47) 39 (85) (28) (28)
Minority interest in losses
of consolidated
subsidiaries............... -- 49 112 125 125 23 45 45 45
Net loss before extraordinary
items...................... $ (180 ) $ (643) $(1,746) $(5,978) $(4,591) $ (538) $(1,804) $(2,026) $(1,679)
====== ====== ======= ======== ============ ====== ======= ======== =========
Net loss..................... $ (180 ) $ (643) $(1,746) $ (538) $(1,804)
====== ====== ======= ====== =======
Net loss before extraordinary
items per share............ $(0.22) $ (0.30) $ (0.72) $ (0.40) $(0.18) $ (0.22) $ (0.20) $ (0.12)
====== ======= ======== ============ ====== ======= ======== =========
Net loss per share........... $(0.22) $ (0.30) $(0.18) $ (0.22)
====== ======= ====== =======
Weighted average shares
outstanding................ 2,959 5,863 8,304 11,594 2,959 8,060 10,240 13,529
====== ======= ======== ============ ====== ======= ======== =========
OTHER OPERATING DATA (END OF PERIOD)(7):
Number of residences......... 12 13 19 52 52 15 41 56 56
Total resident capacity...... 160 340 616 2,368 2,368 474 1,060 2,482 2,482
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
---------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(5) ADJUSTED(3)(5)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 6,816 $ 10,449 $ 35,777
Working capital (deficit)...................................................... 5,672 (4,657) 26,699
Total assets................................................................... 53,824 93,048 118,376
Long term debt, less current installments...................................... 30,632 41,624 32,952
Redeemable common stock(8)..................................................... 1,500 3,000 --
Stockholders' equity........................................................... 17,850 29,179 72,207
</TABLE>
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(1) The Company was organized December 14, 1993. In connection with the initial
capitalization of the Company, substantially all of the tangible assets of
two operating companies were contributed to the Company (collectively
referred to herein as the "Predecessor"). For purposes of this summary
financial data, amounts for the year ended December 31, 1993 represent the
sum of: (i) the results of operations of the Predecessor for the period from
January 1, 1993 through December 13, 1993; and (ii) the results of
operations of the Company for the period from December 14, 1993 through
December 31, 1993. Per share amounts for 1993 are not presented as they
would not provide comparable or meaningful information. See "History and
Organization -- The Company and its Predecessor."
(2) Gives effect to the following transactions (collectively, the "1996
Transactions") as if such transactions had occurred on January 1, 1995 with
respect to statement of operations and other operating data for the year
ended December 31, 1995: (a) the January 26, 1996 acquisition by the Company
(effective as of January 1, 1996) of all outstanding shares of common stock
of Heartland for cash and shares of Common Stock; (b) the January 1996 sale
and leaseback of two of the Company's residences; (c) the May 24, 1996
private placement of shares of Common Stock; (d) the May 24, 1996
acquisition of the remaining general and limited partnership interests not
owned by the Company in various partnerships comprising the operations of
ALS-Midwest (as defined herein) for a combination of cash, notes and shares
of Common Stock; and (e) the May 24, 1996 merger with Crossings pursuant to
which all outstanding capital stock of Crossings was exchanged for shares of
Common Stock. See "Pro Forma Financial Information."
(3) Gives effect to the sale by the Company of 3,443,206 shares of Common Stock
(based upon an initial public offering price of $13.00 per share after
deducting the underwriting discounts and commissions and estimated expenses
payable by the Company and the application of the net proceeds therefrom),
as if such transaction had occurred on January 1, 1995 and 1996 with respect
to statement
5
<PAGE> 6
of operations for the year ended December 31, 1995 and for the quarter ended
March 31, 1996, respectively, and as of March 31, 1996 with respect to the
balance sheet data. See "Pro Forma Financial Information" and "Use of
Proceeds."
(4) The results of the Company for the three months ended March 31, 1996 include
the operations of Heartland, which was acquired effective as of January 1,
1996. See "History and Organization -- Acquisition of Heartland Retirement
Services, Inc."
(5) Gives effect to (a) the May 24, 1996 private placement of shares of Common
Stock; (b) the May 24, 1996 acquisition of the remaining general and limited
partnership interests not owned by the Company in various partnerships
comprising the operations of ALS-Midwest for a combination of cash, notes
and shares of Common Stock; and (c) the May 24, 1996 merger with Crossings
pursuant to which all outstanding capital stock of Crossings was exchanged
for shares of Common Stock, as if such transactions had occurred on January
1, 1996 with respect to statement of operations for the quarter ended March
31, 1996, and as of March 31, 1996 with respect to the balance sheet data.
(6) The pro forma as adjusted weighted average number of shares of Common Stock
outstanding does not include 153,846 shares, the net proceeds from the
issuance and sale of which have been designated for general corporate
purposes.
(7) Includes residences which the Company owns, leases, holds equity interests
in and manages.
(8) The redeemable common stock will no longer be redeemable upon consummation
of the Offering.
6
<PAGE> 7
RISK FACTORS
Potential investors should consider carefully the following factors, as
well as the more detailed information contained elsewhere in this Prospectus,
before making a decision to invest in the Common Stock offered hereby.
HISTORY OF, AND ANTICIPATED, OPERATING LOSSES
The Company has experienced significant operating losses and net losses in
each year since inception, primarily as a result of the Company's development,
construction and residence lease-up activities as well as the incurrence of
certain expenses to establish its corporate infrastructure to support future
planned growth. For the years ended December 31, 1993, 1994 and 1995, the
Company incurred operating losses of $124,000, $390,000 and $1.0 million,
respectively, and net losses of $180,000, $643,000 and $1.7 million,
respectively. For the three months ended March 31, 1996, the Company incurred an
operating loss and net loss of $1.4 million and $1.8 million, respectively.
After giving effect to the 1996 Transactions, for the year ended December 31,
1995 and the three months ended March 31, 1996, the Company incurred operating
losses of $2.6 million and $1.1 million, respectively, and net losses before
extraordinary items of $6.0 million and $2.0 million, respectively. See "History
and Organization" and "Pro Forma Financial Information."
Newly opened assisted living residences typically operate at a loss during
the first six to 12 months of operation, primarily due to the incurrence of
certain fixed and variable expenses in advance of the achievement of targeted
rent and service fee revenues from the lease-up of such residences. Of the
Company's 57 residences, 21 have been open for 12 months or less. In addition,
the development and construction of assisted living residences involve the
commitment of substantial capital over a typical six to 12 month construction
period, the consequence of which may be an adverse impact on the Company's
liquidity. Currently, the Company has 19 residences under construction and an
additional 24 residences under development. In the case of acquired residences,
resident turnover and increased marketing expenditures which may be required to
reposition such residences, together with the possible disruption of operations
resulting from the implementation of renovations, may adversely impact the
financial performance of such residences for a period of time after their
acquisition.
The Company plans to use approximately $19.5 million of the estimated net
proceeds of the Offering to develop, construct and, to the extent opportunities
are available, acquire additional assisted living residences. See "Use of
Proceeds." Principally as a result of the Company's development and construction
activities, the Company anticipates that it will incur additional operating
losses for at least the next 12 to 18 months as the operating expenses
associated with developing and operating new residences and supporting its
corporate infrastructure necessary to manage the Company's growth strategy will
be only partially offset by operating profits generated by stabilized
residences. There can be no assurance, however, that the Company will achieve
profitability or that the Company will not experience unforeseen expenses,
difficulties, complications and delays which could result in greater than
anticipated operating losses or otherwise materially adversely affect the
Company's financial condition and results of operations. See "-- Development and
Construction Risks," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," and "Business -- Business Strategy."
ABILITY TO CONTINUE GROWTH; ABILITY TO MANAGE RAPID EXPANSION
The Company has and expects to continue to pursue an aggressive expansion
strategy focused on developing, constructing and acquiring assisted living
residences. The Company's prospects are directly affected by its ability to
develop, construct and, to a lesser extent, acquire additional residences. The
Company's ability to continue to grow will depend in large part on its ability
to identify suitable and affordable development and acquisition opportunities
and successfully pursue such opportunities, identify and obtain necessary
financing commitments and effectively operate its assisted living residences.
There can be no assurance, however, that the Company will be successful in
developing, constructing or acquiring any additional residences or that it will
be able to continue to achieve or exceed its historical growth rate.
7
<PAGE> 8
The Company's rapid expansion places significant demands on the Company's
management and operating personnel. The Company's ability to manage its recent
and future growth effectively will require it to continue to improve its
operational, financial and management information systems and to continue to
attract, retain, train, motivate and manage key employees. If the Company is
unable to manage its growth effectively, its business, operating results and
financial condition will be adversely affected. See "Business -- Business
Strategy" and "Management -- Executive Officers and Directors."
DEVELOPMENT AND CONSTRUCTION RISKS
The Company's growth strategy is dependent, in part, on its ability to
develop and construct a significant number of additional residences. Currently,
the Company has 19 residences under construction and 24 residences under
development. The Company expects to open between 15 to 21 of these residences
during 1996. Development projects generally are subject to various risks,
including zoning, permitting, health care licensing and construction delays,
that may result in construction cost overruns and longer development periods
and, accordingly, higher than anticipated start-up losses. Project management is
subject to a number of contingencies over which the Company will have little or
no control and which might adversely affect project costs and completion time.
Such contingencies include shortages of, or the inability to obtain, labor or
materials, the inability of the general contractor or subcontractors to perform
under their contracts, strikes, adverse weather conditions and changes in
applicable laws or regulations or in the method of applying such laws and
regulations. As a result of these various factors, there can be no assurance
that the Company will not experience construction delays, that it will be
successful in developing and constructing currently planned or additional
residences or that any developed residence will be economically successful. If
the Company's planned development is delayed, the Company's business, operating
results and financial condition could be adversely affected. See
"Business -- Business Strategy" and "-- Residences."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has acquired residences in the past and intends to continue to
seek acquisition opportunities in the future. However, the Company has not
identified any such opportunities and no assurances can be made that the Company
will be successful in identifying any future acquisition opportunities or
completing any identified acquisitions. The acquisition of residences involves a
number of risks. Existing residences available for acquisition frequently serve
or target different market segments than those presently served by the Company.
It may be necessary in such cases to reposition and renovate acquired residences
or turn over the existing resident population to achieve a resident acuity and
income profile which is consistent with the Company's current operations. In
addition, the Company may also determine that staff and operating management
personnel changes are necessary to successfully integrate such residences into
the Company's existing operations. No assurances can be made that management
will be successful in repositioning any acquired residences or in effecting any
necessary operational or structural changes and improvements on a timely basis.
Any failure by the Company to make necessary operational or structural changes
or to successfully reposition acquired residences may adversely impact the
Company's business, operating results and financial condition. In undertaking
acquisitions of residences, the Company also may be adversely impacted by
unforeseen liabilities attributable to the prior operators of such residences,
against whom the Company may have little or no recourse. See
"Business -- Business Strategy."
DIFFICULTIES ASSOCIATED WITH INTEGRATING THE OPERATIONS OF CROSSINGS AND
HEARTLAND
Since December 1995, the Company has completed two significant transactions
pursuant to which the Company added a total of 35 additional residences. In May
1996, the Company merged with Crossings, which operated 15 residences with an
aggregate capacity of approximately 1,420 residents. In addition, in January
1996 the Company completed the acquisition of Heartland, which operated 20
assisted living residences. On a pro forma basis, after giving effect to the
1996 Transactions, the Company would have reported operating revenue of $38.2
million and a loss before extraordinary items of $6.0 million in 1995 as
compared to operating revenue of $10.5 million and a net loss before
extraordinary items of $1.7 million on a historical basis.
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<PAGE> 9
The Company believes that it can successfully integrate and manage the
operations of Crossings and Heartland, as well as achieve certain economies of
scale. However, because of the inherent uncertainties associated with efforts to
integrate and manage the operations of the three companies, there can be no
assurance that the Company will be successful in such integration and
management, that any cost savings or operating synergies will be realized, or
that there will not be offsetting increases in other expenses or other charges
to earnings resulting from the combined operations. The Company expects to
establish a reserve for severance and other non-recurring charges expected to be
incurred in connection with the merger and integration of Crossings' operations.
While the Company has no current plans, it may also elect to dispose of certain
of its residences and may as a result incur further non-recurring expenses.
DISCRETIONARY USE OF PROCEEDS
The Company will have broad discretion in using the net proceeds received
by the Company from the Offering. While $15.3 million of the net proceeds
received by the Company will be used for debt retirement, the Company expects to
use approximately $19.5 million of the remaining net proceeds to develop and
construct additional residences. While the Company currently has 19 residences
under construction and 24 residences under development, the Company will have
broad discretion in modifying its current construction and development plan,
selecting and developing future sites, acquiring additional residences and
otherwise using the net proceeds of the Offering. See "Use of Proceeds" and
"Business -- Residences."
NEED FOR ADDITIONAL FINANCING; RISK OF RISING INTEREST RATES
To achieve the Company's growth strategy, the Company will need to obtain
sufficient financing to fund its development, construction and acquisition
activities. The estimated cost to complete and lease up the 43 residences under
construction or development during the next 18 months is approximately $145
million, which substantially exceeds the estimated net proceeds of the Offering.
Accordingly, the Company's future growth will depend on its ability to obtain
additional financing on acceptable terms. The Company has executed non-binding
letters of intent with a health care REIT for additional financing commitments
aggregating approximately $250 million which it believes, together with the net
proceeds from the Offering and existing financing commitments, will be
sufficient to fund its development and acquisition programs for at least the
next 18 months. The Company will from time to time seek additional funding
through public or private financing, including equity or debt financing. If
additional funds are raised by issuing equity securities, the Company's
stockholders may experience further dilution. See "Dilution." In addition, the
Company will require sufficient financial resources to meet its operating and
working capital needs. The Company expects negative cash flow to continue for at
least the next 12 to 18 months as it continues to develop and construct assisted
living residences. There can be no assurance that any newly constructed
residences will achieve a stabilized occupancy rate and attain a resident mix
that meet the Company's expectations or generate sufficient positive cash flow
to cover operating and financing costs associated with such residences. There
can be no assurance that the Company will be successful in securing additional
financing or that adequate funding will be available and, if available, will be
on terms that are acceptable to the Company. A lack of funds may require the
Company to delay or eliminate all or some of its development projects and
acquisition plans. In addition, the Company may require additional financing to
enable it to acquire additional residences, to respond to changing economic
conditions, to expand the Company's development program or to account for
changes in assumptions related to its development program.
On a pro forma basis, approximately $8.1 million, or 15.8%, of the
Company's total indebtedness as of March 31, 1996 was subject to floating
interest rates. Although a majority of the Company's debt and lease payment
obligations are not subject to floating interest rates, indebtedness that the
Company may incur in the future may bear interest at a floating rate. In
addition, future fixed rate indebtedness and lease obligations will be based on
interest rates prevailing at the time such arrangements are obtained. Therefore,
increases in prevailing interest rates could increase the Company's interest or
lease payment obligations and could have an adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS
As of March 31, 1996, on a pro forma basis to give effect to the 1996
Transactions and as adjusted to give effect to the application of the net
proceeds of the Offering, the Company's long-term debt would have been $33.0
million. On a pro forma basis to give effect to the 1996 Transactions, the
Company would have had lease expense for the year ended December 31, 1995 of
$7.8 million. Long-term debt and annual operating lease payment obligations will
increase significantly as the Company pursues its growth strategy. In addition,
the Company anticipates that future development of residences may be financed
with construction loans and, therefore, there is a risk that, upon completion of
construction, permanent financing for newly developed residences may not be
available or may be available only on terms that are unfavorable or unacceptable
to the Company. There can be no assurance that the Company will generate
sufficient cash flow to meet its obligations. Any payment or other default with
respect to such obligations could cause the lender to foreclose upon the
residences securing the indebtedness or, in the case of an operating lease,
could terminate the lease, with a consequent loss of income and asset value to
the Company. Moreover, because of cross-default and cross-collateralization
provisions in certain of the Company's mortgages, debt instruments and leases, a
default by the Company on one of its payment obligations could result in
acceleration of other obligations and adversely affect a significant number of
the Company's other residences. As of March 31, 1996, approximately $5.8 million
of the Company's indebtedness was subject to cross-default provisions and
approximately $1.9 million of indebtedness related to four WovenHearts
residences was subject to cross-collateral provisions. The Company has executed
non-binding letters of intent with a health care REIT for financing commitments
aggregating approximately $250 million to develop, construct and permanently
finance assisted living residences. See "-- Need for Additional Financing; Risk
of Rising Interest Rates," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Business Strategy."
DEPENDENCE ON, AND OTHER ACTIVITIES OF, SENIOR MANAGEMENT
The Company depends, and will continue to depend, upon the services of
William F. Lasky, the Company's President and Chief Executive Officer, William
G. Petty, Jr., the Company's Chairman of the Board, and the Company's other
executive officers. Mr. Lasky is subject to the terms of an employment agreement
with the Company which terminates in 1997 and generally prohibits Mr. Lasky from
competing with the Company within specified geographic areas for a period of 18
months if his employment is terminated. The Company intends to purchase "keyman"
life insurance on Mr. Lasky in the amount of $2.0 million. Mr. Petty is a party
to a services agreement pursuant to which he has agreed to provide management,
financial and strategic planning services to the Company through April 1998.
However, Mr. Petty is not bound by any noncompetition agreement. Mr. Petty is a
principal of Beecken, Petty & Company, L.L.C., a company formed to serve as
general partner of a health care investment fund to be formed in 1996 to make
privately negotiated equity or equity-related investments in growth companies in
the health care service industry (the "Fund"). Upon formation of the Fund
(expected in the summer of 1996), it is expected that Mr. Petty will devote a
substantial portion of his business time and energy to the business and affairs
of the Fund. Certain, but not all, of the Company's other executive officers are
parties to employment agreements with the Company containing noncompete
provisions. However, none of such employment agreements (and none of the
noncompete provisions contained therein) provide the Company with assurances
that such executive officers will remain with the Company. The loss of the
services of any such executive officers could have a material adverse effect on
the Company's financial condition or results of operations. See "Management."
POTENTIAL CONFLICTS OF INTEREST OF CERTAIN EXECUTIVE OFFICERS AND DIRECTORS
Mr. Lasky, Douglas A. Hennig, the Company's Senior Vice President, and
Richard W. Boehlke, the Company's Vice Chairman, each owns interests in assisted
living residences operated by the Company pursuant to management agreements or,
in the case of Mr. Boehlke, pursuant to a long-term lease. On a pro forma basis
giving effect to the 1996 Transactions, revenues attributable to these
residences represented less than 5.0% of operating revenue for the year ended
December 31, 1995. Payments of management fees to the
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Company by an affiliate of Mr. Lasky aggregated $252,000 and $290,000 for 1995
and 1994, respectively. Annual lease payments to a partnership controlled by Mr.
Boehlke are expected to aggregate approximately $652,000 during 1996 (all of
which is expected to be used by such partnership to service existing debt on the
leased residence). During 1996, the Company also expects to receive management
fees of approximately $25,000 from a partnership in which Mr. Hennig has a 25%
general partner interest. These agreements are on terms which the Company
believes are fair and are substantially similar to those that the Company could
have obtained from unaffiliated third parties. In addition, in the case of the
management agreements, the Company has the right to terminate such agreements,
in its sole discretion, at least on an annual basis. However, such ownership
interests of Messrs. Lasky, Hennig and Boehlke may create actual or potential
conflicts of interest on the part of these officers. In the case of related
party transactions, it is the Company's policy to enter into such arrangements
on terms, which in the opinion of the Company, are substantially similar to
those that could otherwise be obtained from unrelated third parties, and to
require that any such transactions be approved by a majority of the
disinterested members of the Company's Board of Directors. See
"Management -- Executive Officers and Directors" and "Certain Relationships and
Related Transactions."
In addition, Mr. Petty also serves as the Vice Chairman of GranCare, a
publicly-owned operator of skilled nursing facilities and institutional
pharmacies, which also operates four assisted living residences. The Company
understands that GranCare may develop or acquire additional assisted living
facilities in the future which may compete directly with the Company's
residences. GranCare currently owns 19.9% of the outstanding shares of Common
Stock, all of which shares are being sold in the Offering. Gene E. Burleson, a
director of the Company, is Chairman of the Board and Chief Executive Officer of
GranCare. Ronald G. Kenny, a director of the Company, is also a director of
GranCare. In addition, Messrs. Burleson, Petty and Kenny and their affiliates
are shareholders of GranCare. These relationships with, and ownership interests
in, GranCare may create actual or potential conflicts of interests. The Company
has no agreement or understanding with GranCare as to how business opportunities
will be allocated between the two firms. Such opportunities presented to persons
having fiduciary duties to both the Company and GranCare will be subject to
applicable state law doctrines of corporate opportunity, which prohibit persons
acting in fiduciary capacities for a corporation from usurping a corporate
opportunity of that corporation. However, the corporate opportunity doctrine
requires that, when presented with an opportunity, persons serving as
fiduciaries to two competing corporations determine to which corporation such
opportunity belongs. In the absence of a Company policy or an agreement or
understanding between the Company and GranCare with respect to such matters,
corporate opportunities presented to such individuals owing fiduciary duties to
both the Company and GranCare could be directed by such individuals to GranCare
and, accordingly, not presented to the Company. See "Management -- Executive
Officers and Directors," "Principal and Selling Stockholders" and "Certain
Relationships and Related Transactions."
SUBSTANTIAL PORTION OF THE OFFERING TO BENEFIT AFFILIATES OF THE COMPANY
The Selling Stockholders, which include GranCare, Capital Consultants, Inc.
("CCI") and Heartland Development Corporation ("HDC") will receive net proceeds
of approximately $30.9 million (after deducting underwriting discounts and
commissions) for the shares of Common Stock to be sold by them in the Offering.
If the over-allotment option is fully exercised, then Care Living Centers, Inc.
("CLC") and certain members of Alternative Living Investors, L.L.C. ("ALI") will
receive an aggregate amount of $8.9 million. The Company will not receive any of
the proceeds from the sale of shares of Common Stock by the Selling
Stockholders. In addition, approximately $8.7 million of the net proceeds to the
Company of the Offering will be used to retire a bridge loan provided to the
Company by RDV Capital Management L.P. in connection with the Heartland
acquisition. Jerry Tubergen, a director of the Company, serves as President of
RDV Corporation, the general partner of RDV Capital Management L.P. See "Use of
Proceeds," "Principal and Selling Stockholders" and "Certain Relationships and
Related Transactions."
GEOGRAPHIC CONCENTRATION
On a pro forma basis, giving effect to the 1996 Transactions, operations in
Wisconsin, Oregon and Colorado would have accounted for approximately 58.5% of
total operating revenue for the three months ended March 31, 1996. The Company's
business prospects are significantly affected by general economic
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factors affecting such areas and the laws and regulatory environment of such
states. In addition, the Company's growth strategy involves the development and
acquisition of residences within a concentrated area in each geographic region
into which it expands. Therefore, even if the Company is able to expand into
other geographic regions, its prospects may become significantly affected by
general economic factors affecting such local areas and by applicable local laws
and regulatory environments in such regions. See "Business -- Residences" and
"Business -- Government Regulation."
RESIDENCE MANAGEMENT, STAFFING AND LABOR COSTS
The Company competes with other providers of long-term care with respect to
attracting and retaining qualified and skilled personnel. The Company is
dependent upon its ability to attract and retain management personnel
responsible for the day-to-day operations of each of the Company's residences.
Any inability of the Company to attract or retain qualified residence management
personnel could have a material adverse effect on the Company's financial
condition or results of operations. In addition, a possible shortage of nurses
or trained personnel may require the Company to enhance its wage and benefits
package in order to compete in the hiring and retention of such personnel. The
Company will also be dependent upon the available labor pool of semi-skilled and
unskilled employees in each of the markets in which it operates. No assurance
can be given that the Company's labor costs will not increase, or that, if they
do increase, they can be matched by corresponding increases in rates charged to
residents. Any significant failure by the Company to attract and retain
qualified management and staff personnel, to control its labor costs or to pass
on any increased labor costs to residents through rate increases would have a
material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION
The long-term care industry is highly competitive and, given the relatively
low barriers to entry and continuing health care cost containment pressures, the
Company expects that the assisted living segment of such industry will become
increasingly competitive in the future. The Company competes with other
companies providing assisted living services as well as numerous other companies
providing similar service and care alternatives, such as home health care
agencies, congregate care facilities, retirement communities and skilled nursing
facilities. While the Company believes there is a need for additional assisted
living residences in the markets where the Company is constructing or developing
residences, the Company expects that as assisted living residences receive
increased attention and the number of states which include assisted living
services in their Medicaid programs increases, competition will increase from
new market entrants, many of whom may have substantially greater financial
resources than the Company. No assurance can be given that increased competition
will not adversely affect the Company's ability to attract or retain residents
or maintain its existing rate structures. Moreover, in implementing its growth
strategy, the Company expects to face competition for development and
acquisition opportunities from local developers and regional and national
assisted living companies. Some of the Company's present and potential
competitors have, or may have access to, greater financial resources than those
of the Company. Consequently, there can be no assurance that the Company will
not encounter increased competition in the future which could limit its ability
to attract and retain residents, to maintain or increase resident service fees
or to expand its business and could have a material adverse effect on the
Company's financial condition, results of operations and prospects. See
"Business -- Competition."
JOINT VENTURES AND RELATED MANDATORY PURCHASE OBLIGATIONS
The Company has entered into several joint ventures with regional real
estate development partners for the construction, development and ownership of
assisted living residences in targeted geographic areas. Of the 43 residences
which are either under construction or development, 20 of such residences are
being constructed or developed under joint venture agreements. There can be no
assurance that the Company's joint venture partners will be successful in
identifying sites for future residences, securing necessary permits and licenses
for the construction of new residences and supervising the construction of new
residences on time and within budget. In addition, the Company has agreed not to
own or operate competing assisted living residences within specified geographic
areas adjacent to residences developed through joint ventures. While the Company
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typically receives a fee for managing residences developed through joint
ventures, the Company shares with the other joint venture partners certain
decision-making authority as well as any profits or losses realized from the
operation or sale of such residences. The Company will be obligated under its
joint venture arrangements to purchase the equity interests of its joint venture
partners upon the election of such joint venture partners at a price based on
the appraised value of the residence owned by the applicable joint venture.
These purchase rights generally become exercisable during the first six months
to two years following the opening of the residence owned by such joint venture.
As a result of these provisions, the Company might become obligated to acquire
additional interests in residences developed through joint ventures on terms or
at times that would otherwise not be acceptable to the Company, including times
during which the Company may not have adequate liquidity to fund such
acquisitions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Joint Ventures and Strategic
Alliances."
GOVERNMENT REGULATION
Health care is an area of extensive and frequent regulatory change. The
assisted living industry is relatively new, and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels is evolving.
Changes in the laws or new interpretations of existing laws may have a
significant impact on the Company's methods and costs of doing business. The
Company is, and will be, subject to varying degrees of regulation and licensing
by health or social service agencies and other regulatory authorities in the
various states and localities where it operates or intends to operate.
The Company's success will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses in rapidly changing regulatory environments. Any failure to satisfy
applicable regulations or to procure or maintain a required license could have a
material adverse effect on the Company's financial condition, results of
operations and prospects. The Company's operations could also be adversely
affected by, among other things, regulatory developments such as revisions in
building code requirements for assisted living residences, mandatory increases
in the scope and quality of care to be offered to residents and revisions in
licensing and certification standards. There can be no assurance that Federal,
state or local laws or regulations will not be imposed or expanded which
adversely impact the Company's business, financial condition, results of
operations or prospects. The Company's residence operations are also subject to
health and other state and local government regulations.
Pursuant to recently adopted Wisconsin legislation, effective as of July 1,
1996 only certain independent apartment model assisted living facilities may be
designated as an "assisted living facility" in the State of Wisconsin. Most of
the Company's residences located in Wisconsin would not meet the definitional
requirements of this statute. As administrative guidelines for this legislation
have not yet been finalized, its scope and application are still uncertain. If
the Company is ultimately compelled to discontinue any reference to the generic
term "assisted living" in its sales and marketing materials for its Wisconsin
residences, such compliance could have a material adverse effect on the
Company's business, results of operation or financial condition. See
"Business -- Government Regulation."
LIABILITY AND INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the long-term care industry have
become subject to an increasing number of lawsuits alleging malpractice or
related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. In addition, compared to more
institutional long-term care facilities, assisted living residences (especially
dementia care residences) of the type operated by the Company offer residents a
greater degree of independence in their daily lives. This increased level of
independence, however, may subject the resident and the Company to certain risks
that would be reduced in more institutionalized settings. The Company currently
maintains liability insurance intended to cover such claims which it believes is
adequate based on the nature of the risks, its historical experience and
industry standards. There can be no assurance, however, that claims in excess of
the Company's insurance or claims not covered by the Company's insurance, such
as claims for punitive damages, will not arise. A successful claim against the
Company not covered by, or in excess of, the Company's insurance could have a
material adverse effect upon the Company's financial
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condition and results of operations. Claims against the Company, regardless of
their merit or eventual outcome, may also have a material adverse effect upon
the Company's ability to attract or retain residents or expand its business and
may require management to devote substantial time to matters unrelated to the
Company's operations. In addition, the Company's insurance policies must be
renewed annually. There can be no assurance that the Company will be able to
obtain liability insurance in the future or that, if such insurance is
available, it will be available on acceptable economic terms. See
"Business -- Insurance."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
The Company currently relies, and for the foreseeable future expects to
rely, primarily on the ability of its residents to pay for the Company's
services from their own and their families' financial resources. Generally, only
elderly adults with income or assets meeting or exceeding the comparable median
in the region where the Company's assisted living residences are located can
afford the Company's fees for its residences. Inflation or other circumstances
which adversely affect the ability of residents and potential residents to pay
for assisted living services could have an adverse effect on the Company. In the
event that the Company encounters difficulty in attracting seniors with adequate
resources to pay for the Company's services, the Company would be adversely
affected.
ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean up responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminants, and
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or lease such property or to borrow using such property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is owned or operated by such person. Finally, the
owner of a site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from a
site.
The Company has conducted environmental assessments of all of its operating
residences and has conducted, or is in the process of conducting, environmental
assessments of all of its undeveloped sites and sites currently under
construction. These assessments have not revealed, and the Company is not
otherwise aware of, any environmental liability that it believes would have a
material adverse effect on the Company's business, assets or results of
operations. There can be no assurance, however, that environmental assessments
would detect all environmental contamination which may give rise to material
environmental liabilities. The Company believes that its residences are in
compliance in all material respects with all Federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware, of any material non-compliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the residences it currently operates.
CONTROL BY OFFICERS AND DIRECTORS
Upon completion of the Offering, the Company's officers and directors and
entities with which they are affiliated will continue to beneficially own
approximately 24.6% of the outstanding shares of Common Stock. Accordingly,
following the Offering, such individuals will have the ability, by voting their
shares in concert, to significantly influence (i) the election of the Company's
Board of Directors and, thus, the direction and future
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operations of the Company, and (ii) the outcome of all other matters submitted
to the Company's stockholders, including mergers, consolidations, and the sale
of all or substantially all of the Company's assets. In addition, the 1995 Plan
authorizes the issuance of options to purchase up to 1,425,000 shares of Common
Stock to employees and directors of the Company. As of June 30, 1996, the
Company's officers and directors held options to acquire 713,851 shares of
Common Stock, which options are subject to certain vesting requirements. The
issuance of additional shares of Common Stock pursuant to the exercise of stock
options granted to management under the 1995 Plan would increase the number of
shares held by the Company's executive officers and directors in the future. See
"Management -- Executive Compensation" and "Principal and Selling Stockholders."
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation authorizes the issuance
of 5 million shares of preferred stock and 30 million shares of Common Stock.
After giving effect to the Offering, the Company will have 17.0 million shares
of authorized but unissued shares of Common Stock. The Company's Board of
Directors has the power to issue any or all of these additional shares without
stockholder approval, and the preferred shares can be issued with such rights,
preferences and limitations as may be determined by the Board. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of any holders of preferred stock that may be issued in the future.
The Company presently has no commitments or contracts to issue any additional
shares of Common Stock (other than pursuant to outstanding stock options) or any
shares of preferred stock. Authorized and unissued preferred stock and Common
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could delay, discourage, hinder or
preclude an unsolicited acquisition of the Company, could make it less likely
that stockholders receive a premium for their shares as a result of any such
attempt and could adversely affect the market price of and the voting and other
rights of the holders of outstanding shares of Common Stock. As a Delaware
corporation, the Company is subject to Section 203 of the Delaware General
Corporation Law which, in general, prevents an "interested stockholder" (defined
generally as a person owning 15% or more of the corporation's outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203) for
three years following the date such person became an interested stockholder
unless certain conditions are satisfied. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. The shares of Common
Stock outstanding prior to the Offering will be eligible for sale in the public
market at various times in the future. Upon completion of the Offering, the
Company will have 12,966,555 shares of Common Stock outstanding. Of these
shares, the 6,000,000 shares sold in the Offering will be freely tradeable
without restriction or limitation under the Securities Act of 1933, as amended
(the "Securities Act"), except for shares purchased by "affiliates" of the
Company, as such term is defined in Rule 144 promulgated under the Securities
Act. The remaining 6,966,555 shares are "restricted securities" within the
meaning of Rule 144. The Company, all of its directors and officers and all
holders of 5% or more of the shares of Common Stock after the Offering have
agreed with the Underwriters not to sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of NatWest Securities Limited, other than, in the case
of the Company, grants of stock options under the 1995 Plan and the issuance of
stock upon the exercise of outstanding stock options. NatWest Securities Limited
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. Beginning 90 days after
the date of this Prospectus, 456,763 restricted shares will first become
eligible for sale in the public market pursuant to Rule 144 promulgated under
the Securities Act, subject to the volume and resale restrictions of such rule.
All of these shares will be subject to lock-up agreements with the Underwriters.
See "Principal and Selling Stockholders" and "Shares Eligible for Future Sale."
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NO PRIOR PUBLIC TRADING MARKET
Prior to the Offering, there has been no public trading market for the
Common Stock. The public offering price for the Common Stock will be determined
by negotiations among the Company and the Underwriters based upon several
factors and will not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth, or any other generally accepted
criteria of value, and should not be considered as indicative of the actual
value of the Company. Therefore, the market price of the Common Stock may fall
below the public offering price of the Common Stock at any time following the
Offering. See "Underwriting."
While the Common Stock has been approved, subject to notice of issuance,
for listing on the American Stock Exchange, there can be no assurance that an
active trading market will develop. Further, if a market does develop, it may be
limited, and there can be no assurance that it will be sustained. To the extent
that an active trading market does develop, factors such as quarterly variations
in the Company's financial results, announcements by the Company or others,
general market conditions or certain regulatory pronouncements may cause the
market price of the Common Stock to fluctuate substantially. There can be no
assurance that the Common Stock can be resold at or above the initial public
offering price.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will incur immediate dilution
of $7.85 per share in the net tangible book value of their investment, based
upon an initial public offering price of $13.00 per share. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $40.0 million, based upon an initial public offering price of
$13.00 per share and after deducting the underwriting discounts and commissions
and the estimated expenses of the Offering payable by the Company. The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders. See "Principal and Selling Stockholders." The Company
intends to use the net proceeds to it from the Offering (i) to repay bridge
financing incurred in connection with the Heartland acquisition, which
represented aggregate principal obligations and accrued interest through March
31, 1996 of $8.7 million and $163,000, respectively (the "Heartland Bridge
Financing"); (ii) to repay promissory notes (and interest thereon) issued in
connection with the recent acquisition by the Company of the remaining equity
interests not owned by the Company in its Michigan residences ("ALS-Midwest"),
which notes represent aggregate principal obligations of $4.3 million (the
"ALS-Midwest Notes"); (iii) to repay an aggregate of $2.2 million of
construction loans on certain ALS-Midwest residences (the "ALS-Midwest
Construction Loans"); (iv) to acquire the remaining 40% interest of a joint
venture partner in three residences in the aggregate amount of approximately
$3.2 million; (v) to finance the development and construction of currently
planned residences; and (vi) for general corporate purposes, including working
capital.
The Heartland Bridge Financing, which represents aggregate principal
obligations of $8.7 million, is comprised of a "Tranche A Loan" and a "Tranche B
Loan," both of which were made in January 1996 and both of which are due in
January 1998. The Tranche A Loan, representing a principal obligation of $2.9
million, bears interest at the rate of 9% per annum for the first six months of
the loan, 10.5% per annum for the second six months of the loan and at an annual
interest rate thereafter which escalates on a quarterly basis by 2% per annum
per quarter. The Tranche B Loan, representing a $5.8 million principal
obligation, bears interest at the rate of 9% for the first year of the loan with
an annual interest rate for the last year of the loan term which escalates on a
quarterly basis by 2% per annum quarter. The proceeds from the Heartland Bridge
Financing were used to acquire all of the common stock of Heartland and to
retire certain indebtedness of Heartland. See "History and
Organization -- Acquisition of Heartland Retirement Services, Inc." and "Certain
Relationships and Related Transactions."
The ALS-Midwest Notes, which represent aggregate principal obligations of
$4.3 million, are comprised of $2.9 million in promissory notes bearing interest
at the rate of 8% and maturing in January 1997 and of
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$1.4 million in promissory notes bearing interest at the rate of 9% and maturing
in September 1996. See "History and Organization -- Acquisition of Remaining
Equity Interest in ALS-Midwest."
The ALS-Midwest Construction Loans at March 31, 1996 are comprised of
promissory notes in the principal amount of $5.7 million bearing interest at
rates between 10.95% and prime plus 0.50% and maturing at various dates between
January 1997 and December 2014, of which $2.2 million will be repaid with
proceeds from the Offering.
The Company has reached an agreement in principle with one of its joint
venture partners to acquire the remaining 40% equity interest of this joint
venture partner in three residences. See "Business -- Joint Ventures and
Strategic Alliances -- Joint Venture with Continuing Care Concepts, Inc." The
Company does not believe that this acquisition will be material to its results
of operation or financial condition. If this transaction is consummated, the
Company intends to use approximately $3.2 million of the net proceeds to
purchase these equity interests. If this transaction is not consummated, then
the Company intends to use this amount to finance the development and
construction of assisted living residences.
The Company expects to use approximately $19.5 million of the net proceeds
primarily to finance the development and construction of assisted living
residences, including completion of the 19 residences currently under
construction and the 24 residences under development. The estimated cost to
complete and lease up the 43 residences under construction or development during
the next 18 months is approximately $145 million. The Company has executed
non-binding letters of intent with a health care REIT for additional financing
commitments aggregating approximately $250 million which it believes, together
with the net proceeds from the Offering, will be sufficient to fund its
development and acquisition programs during such period. The Company may also
use the net proceeds to finance further development and construction or, if
appropriate opportunities arise, the acquisition of existing assisted living
operations. While the Company intends to seek, consider and review possible
acquisitions of assisted living residences and assisted living operators from
time to time, the Company is not currently in negotiations with respect to any
such acquisitions other than the possible acquisition of its joint venture
partners' equity interest in certain of the residences operated by the Company.
See "Business -- Joint Ventures and Strategic Alliances -- Joint Venture with
Continuing Care Concepts, Inc."
In June 1996, the Company borrowed $8.5 million, $3.5 million of which was
used to refinance a portion of the ALS-Midwest Construction Loans and the
remainder of which will be used for working capital purposes. This loan is due
and payable on October 1, 1996 and bears interest at the rate of 10% per annum.
The Company currently intends to refinance the entire principal amount of this
loan upon its maturity. If, however, the Company is unable to refinance this
loan on terms acceptable to the Company, then the Company may use approximately
$8.5 million of the net proceeds to repay such loan.
The Company also anticipates using the remaining net proceeds for general
corporate purposes, including working capital. To the extent that the net
proceeds from the Offering are not immediately used for the foregoing purposes,
the Company intends to invest such net proceeds in investment grade, short-term,
interest-bearing securities. See "Risk Factors -- History of, and Anticipated,
Operating Losses," "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources,"
"Business -- Business Strategy," "Business -- Residences" and "Business -- Joint
Ventures and Strategic Alliances.'
DIVIDEND POLICY
The Company has never paid or declared cash dividends and currently intends
to retain any future earnings for the operation and expansion of its business.
Any determination to pay cash dividends in the future will be at the discretion
of the Board of Directors and will be dependent on the Company's financial
condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.
17
<PAGE> 18
DILUTION
At March 31, 1996, the pro forma net tangible book value of the Company
after giving effect to (a) the May 24, 1996 private placement of shares of
Common Stock (the "Recent Equity Transactions"); (b) the May 24, 1996
acquisition of the remaining general and limited partnership interests not owned
by the Company in various partnerships comprising the operations of ALS-Midwest
for a combination of cash, notes and shares of Common Stock (the "ALS-Midwest
Restructuring"); and (c) the May 24, 1996 merger with Crossings pursuant to
which all outstanding capital stock of Crossings was exchanged for shares of
Common Stock as if they had been effective on March 31, 1996 (the "Crossings
Merger"), but prior to the Offering, would have been approximately $26.8
million, or $2.81 per share. Pro forma net tangible book value per share of
Common Stock is determined by dividing the number of shares of Common Stock
outstanding after giving effect to the above transactions into the pro forma net
tangible book value of the Company (total pro forma tangible assets less total
pro forma liabilities) but without giving effect to the possible exercise of
stock options which have been or will be granted by the Company prior to the
consummation of the Offering under its stock option plans. After giving effect
to the Offering, based upon an initial public offering price of $13.00 per
share, the pro forma net tangible book value at such date would have been $66.8
million or $5.15 per share, representing an immediate increase in pro forma net
tangible book value of $2.34 per share to existing stockholders. Accordingly,
purchasers of the Common Stock in the Offering would sustain an immediate
dilution of $7.85 per share.
The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price........................................ $13.00
Historical net tangible book value as of March 31, 1996............ $ 2.47
Increase per share attributable to the pro forma effects of the
Recent Equity Transactions, the ALS-Midwest Restructuring and
the Crossing Merger............................................. 0.34
------
Pro forma net tangible book value as of March 31, 1996............. 2.81
Increase in pro forma net tangible book value attributable to the
Offering(1)..................................................... 2.34
Pro forma net tangible book value after the Offering................. 5.15
------
Dilution to new investors in the Offering............................ $ 7.85
======
</TABLE>
- ---------------
(1) After deducting underwriting discounts and commissions and estimated
expenses of the Offering payable by the Company.
The following table summarizes, on a pro forma basis as of March 31, 1996,
after giving effect to the Recent Equity Transactions, the ALS-Midwest
Restructuring, the Crossings Merger and the Offering, the differences between
the holders of Common Stock prior to the Offering, as a group, and the new
investors in the Common Stock offered hereby, with respect to the number of
shares purchased, the total consideration paid and the average price paid per
share, based upon an initial public offering price of $13.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)........ 9,523,349 73.4% $37,524,000 45.6% $ 3.94
New investors................... 3,443,206 26.6 44,761,678 54.4 13.00
---------- ------- ----------- -------
Total................. 12,966,555 100.0% $82,285,678 100.0%
========= ===== ========== =====
</TABLE>
- ---------------
(1) Sales of shares of Common Stock by the Selling Stockholders in the Offering
will reduce the number of shares held by existing stockholders to 6,966,555
or 53.7% of the total number of shares outstanding after the Offering, and
will increase the number of shares to be purchased by new investors to
6,000,000 or 46.3% of the total number of shares outstanding after the
Offering. If the Underwriter's over-allotment option is exercised in full,
the number of shares of Common Stock held by existing stockholders would be
further reduced to 47.5% of the total number of shares to be outstanding
after the Offering and the number of shares of Common Stock held by new
investors would be increased to 52.5% of the total number of shares to be
outstanding after the Offering.
(2) Excludes 789,149 shares of Common Stock issuable upon the exercise of
options to purchase Common Stock outstanding as of June 30, 1996 at a
weighted average exercise price of $6.08 per share, including options
granted under the 1995 Plan. See "Capitalization" and "Management."
18
<PAGE> 19
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1996 (i) on an actual basis; (ii) as adjusted to give pro
forma effect to (a) the Recent Equity Transactions; (b) the ALS-Midwest
Restructuring; and (c) the Crossings Merger, as if such transactions had
occurred on March 31, 1996; and (iii) as adjusted to give pro forma effect to
such transactions as if they had been effective on March 31, 1996 and to the
Offering based upon an initial public offering price of $13.00 per share after
deducting the underwriting discounts and commissions and estimated expenses
payable by the Company and the application of the net proceeds therefrom. This
table should be read in conjunction with "Pro Forma Financial Information,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto appearing elsewhere in this Prospectus. See "Index to
Consolidated Financial Statements."
<TABLE>
<CAPTION>
AT MARCH 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(1)
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term indebtedness:
Current installments of long-term debt................... $ 105 $ 277 $ 277
Notes payable(1)......................................... -- 9,365 3,500
------- --------- --------------
Total short-term indebtedness............................ 105 9,642 3,777
======= ======== ===========
Long-term debt, less current installments.................. $30,632 $41,624 $ 32,952
Minority interest.......................................... 637 637 637
Redeemable common stock(2)................................. 1,500 3,000 --
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, none issued............................... -- -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 6,652,059, 9,089,390 and 12,966,555 shares
outstanding actual, pro forma and pro forma as
adjusted, respectively(3)............................. 67 91 127
Additional paid-in capital............................... 22,176 33,481 76,473
Accumulated deficit...................................... (4,393) (4,393) (4,393)
------- --------- --------------
Total stockholders' equity....................... 17,850 29,179 72,207
------- --------- --------------
Total capitalization............................. $50,619 $74,440 $105,796
======= ======== ===========
</TABLE>
- ---------------
(1) Excludes $8.5 million of short-term secured debt incurred in June 1996, $3.5
million of which was used to refinance existing short-term notes payable and
the remainder of which is expected to be used to finance the development and
construction of residences and for general corporate purposes.
(2) The redeemable common stock will no longer be redeemable upon consummation
of the Offering.
(3) Excludes 789,149 shares of Common Stock issuable upon the exercise of
options to purchase Common Stock outstanding as of June 30, 1996 at a
weighted average exercise price of $6.08 per share, including options
granted under the 1995 Plan. See "Management -- Executive Compensation."
19
<PAGE> 20
PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined financial
statements set forth the pro forma effects of the following recently completed
acquisitions and transactions of the Company: (i) the January 1996 acquisition
by the Company (effective as of January 1, 1996) of all outstanding shares of
common stock of Heartland for cash and shares of Common Stock (the "Heartland
Acquisition"); (ii) the January 1996 sale/leaseback of the Company's Bradenton
and Sarasota residences (the "Florida Sale/leaseback"); (iii) the Recent Equity
Transactions; (iv) the ALS-Midwest Restructuring; and (v) the Crossings Merger.
The column captioned "The Company Pro Forma As Adjusted" reflects each of the
aforementioned transactions, as applicable, as well as the Offering and the
application of the estimated net proceeds to the Company therefrom. See "Use of
Proceeds" and "History and Organization."
The following unaudited pro forma condensed combined balance sheet of the
Company as of March 31, 1996 reflects the pro forma effects of: (i) the Recent
Equity Transactions (ii) the ALS-Midwest Restructuring; and (iii) the Crossings
Merger, as if such transactions had occurred as of March 31, 1996.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1995 reflects the pro forma effects of: (i) the
Heartland Acquisition; (ii) the Florida Sale/leaseback; (iii) the Recent Equity
Transactions; (iv) the ALS-Midwest Restructuring; and (v) the Crossings Merger
as if such transactions had occurred on January 1, 1995. The unaudited pro forma
condensed combined statement of operations for the three months ended March 31,
1996 reflects the pro forma effects of: (i) the Recent Equity Transactions; (ii)
the ALS-Midwest Restructuring; and (iii) the Crossings Merger, as if such
transactions had occurred on January 1, 1996. Extraordinary charges or credits
that result directly from the Offering are not included in the pro forma
condensed combined statements of operations.
The following unaudited pro forma condensed combined financial information
has been prepared by the Company based on the audited financial statements and
the related notes thereto of the Company, Heartland, Crossings and ALS-Midwest
for the year ended December 31, 1995 and the unaudited financial statements of
the Company, Crossings and ALS-Midwest for the three months ended March 31, 1996
included elsewhere in this Prospectus, giving effect to these transactions and
the assumptions and adjustments described in the accompanying notes. The
following unaudited pro forma condensed combined financial information is not
necessarily indicative of the actual results that would have been achieved if
these transactions had actually been completed as of the dates indicated, or
which may be realized in the future. The unaudited pro forma condensed combined
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of the Company, Heartland, Crossings and ALS-Midwest
and the related notes thereto included elsewhere in this Prospectus. See "Index
to Consolidated Financial Statements."
20
<PAGE> 21
ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECENT ALS-MIDWEST CROSSINGS
THE EQUITY PRO FORMA PRO FORMA
COMPANY TRANSACTIONS(A) ALS-MIDWEST ADJUSTMENTS(B) CROSSINGS(C) ADJUSTMENTS(D)
------- --------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $ 6,816 $ 2,000 $ 845 $ (1,000) $ 1,788 $ --
Short-term investments................... 50 -- -- -- -- --
Resident receivables, net................ 236 -- 309 -- 257 --
Other current assets..................... 424 -- 93 -- 691 --
------- ------- ----------- -------------- ------------ --------------
Total current assets.................. 7,526 2,000 1,247 (1,000) 2,736 --
Property, plant and equipment, net....... 35,030 -- 15,189 2,954 10,822 4,485
Long-term investments.................... 1,168 -- -- -- -- --
Investments in and advances to
unconsolidated affiliates.............. 6,754 -- -- (5,121) -- --
Other assets............................. 1,091 -- 408 -- 2,362 --
Goodwill................................. 2,255 -- -- -- 3,142
------- ------- ----------- -------------- ------------ --------------
Total assets.......................... $53,824 $ 2,000 $16,844 $ (3,167) $ 15,920 $ 7,627
======== ============= =========== ============= ========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt................................. $ 105 $ -- $ -- $ -- $ 172 $ --
Accounts payable....................... 389 -- 2,215 -- 805 --
Accrued expenses and other............. 1,360 -- 597 -- 1,478 680
Notes payable.......................... -- -- 5,660 $ 2,900 -- --
805
Advances from and notes payable to
related entities..................... -- -- 3,959 (3,959) -- --
------- ------- ----------- -------------- ------------ --------------
Total current liabilities............. 1,854 -- 12,431 (254) 2,455 680
Long-term debt, less current
installments........................... 30,632 -- -- -- 13,662 (2,670)
Deferred gain on sale.................... 1,083 -- -- -- 10,980 (10,980)
Other long-term liabilities.............. 268 -- -- -- 91 --
Minority interest........................ 637 -- 2,623 (2,623) -- --
Redeemable common stock.................. 1,500 -- -- 1,500 -- --
Common stock and additional paid-in
capital................................ 22,243 2,000 2,679 (2,679) 12,832 (12,832)
9,329
Accumulated deficit...................... (4,393) -- (889) 889 (24,100) 24,100
------- ------- ----------- -------------- ------------ --------------
Total stockholders' equity
(deficit)............................ 17,850 2,000 1,790 (1,790) (11,268) 20,597
------- ------- ----------- -------------- ------------ --------------
Total liabilities and stockholders'
equity (deficit)..................... $53,824 $ 2,000 $16,844 $ (3,167) $ 15,920 $ 7,627
======== ============= =========== ============= ========== =============
<CAPTION>
THE THE COMPANY
COMPANY OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS(E) AS ADJUSTED
--------- -------------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $10,449 $ 25,328 $ 35,777
Short-term investments................... 50 -- 50
Resident receivables, net................ 802 -- 802
Other current assets..................... 1,208 -- 1,208
--------- -------------- -----------
Total current assets.................. 12,509 25,328 37,837
Property, plant and equipment, net....... 68,480 -- 68,480
Long-term investments.................... 1,168 -- 1,168
Investments in and advances to
unconsolidated affiliates.............. 1,633 -- 1,633
Other assets............................. 3,861 -- 3,861
Goodwill................................. 5,397 -- 5,397
--------- -------------- -----------
Total assets.......................... $93,048 $ 25,328 $ 118,376
======== ============= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt................................. $ 277 $ -- $ 277
Accounts payable....................... 3,409 -- 3,409
Accrued expenses and other............. 4,115 (163) 3,952
Notes payable.......................... 9,365 (2,160) 3,500
(2,900)
(805)
Advances from and notes payable to
related entities..................... -- -- --
--------- -------------- -----------
Total current liabilities............. 17,166 (6,028) 11,138
Long-term debt, less current
installments........................... 41,624 (8,672) 32,952
Deferred gain on sale.................... 1,083 -- 1,083
Other long-term liabilities.............. 359 -- 359
Minority interest........................ 637 -- 637
Redeemable common stock.................. 3,000 (3,000) --
Common stock and additional paid-in
capital................................ 33,572 40,028 76,600
3,000
Accumulated deficit...................... (4,393) -- (4,393)
--------- -------------- -----------
Total stockholders' equity
(deficit)............................ 29,179 43,028 72,207
--------- -------------- -----------
Total liabilities and stockholders'
equity (deficit)..................... $93,048 $ 25,328 $ 118,376
======== ============= =========
</TABLE>
21
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
- ---------------
A) To record cash proceeds of $2,000,000 from the issuance of 430,281
shares of Common Stock in two private equity transactions in May 1996.
See "Business -- Joint Ventures and Strategic Alliances -- Proposed
Joint Venture with Pioneer Development Company" and
"Management -- Executive Compensation -- Employment and Services
Agreements -- Services Agreement with Petty, Kneen & Company."
B) To record the acquisition of the remaining general and limited partner
interests in ALS-Midwest not owned by the Company (the "Former
ALS-Midwest Owners") which closed on May 24, 1996 for a total purchase
price of $6,205,000 consisting of $1,000,000 in cash, the issuance of
$3,705,000 of debt and 172,536 shares of redeemable Common Stock valued
at $1,500,000. The purchase price was allocated to the net assets
acquired in accordance with generally accepted accounting principles.
Purchase accounting adjustments include: (i) an increase in property,
plant and equipment of $2,954,000; (ii) the elimination of previous
equity investments in affiliates and advances to affiliates of
$5,121,000; (iii) recording ALS-Midwest Notes payable to the Former
ALS-Midwest Owners of $2,900,000 and $805,000 (such balances exclude
advances made by the Former ALS-Midwest Owners subsequent to March 31,
1996 of $600,000); (iv) the elimination of advances from affiliates of
$3,959,000; (v) the elimination of minority interest of $2,623,000; and
(vi) the elimination of ALS-Midwest's equity prior to the acquisition
including common stock of $2,679,000 and accumulated deficit of
$889,000. No goodwill resulted from this acquisition. As a result of
these transactions, ALS-Midwest became a wholly-owned subsidiary of the
Company. See "Use of Proceeds."
C) Reflects the unaudited pro forma condensed combined balance sheet of
Crossings as of March 31, 1996 after giving effect to the May 1996
conversion of Crossings' mandatorily redeemable preferred stock of
$6,000,000 into shares of common stock of Crossings as if such
transaction had occurred on March 31, 1996.
D) To record the Crossings Merger which closed on May 24, 1996 pursuant to
which all capital stock of Crossings was converted into 2,007,049 shares
of Common Stock valued at $9,329,000. The purchase price was allocated
to the net assets acquired in accordance with generally accepted
accounting principles. Purchase accounting adjustments include: (i) an
increase in property, plant and equipment of $4,485,000; (ii) the
recognition of goodwill of $3,142,000 which will be amortized over 40
years; (iii) the recognition of an accrued transaction fee of $680,000;
(iv) the reduction in long-term debt of $2,670,000 reflecting the fair
value of the capital lease and financing obligations; (v) the
elimination of deferred gain relating to various Crossings
sale/leaseback transactions of $10,980,000; and (vi) the elimination of
Crossings' equity prior to the merger including common stock of
$12,832,000 and accumulated deficit of $24,100,000.
E) To record the effects of the sale of 3,443,206 shares of Common Stock by
the Company and the receipt of the estimated net proceeds of
$40,028,000, based upon an initial public offering price of $13.00 per
share and after deducting underwriting discounts and commissions of
$3,133,000 and estimated offering expenses of $1,600,000. Of the total
net proceeds, $14,700,000 will be used to repay debt and accrued
interest which included as of March 31, 1996: (i) the Heartland Bridge
Financing of an aggregate principal obligation of $8,672,000 and accrued
interest of $163,000; (ii) $2,160,000 principal amount of the
ALS-Midwest Construction Loans; and (iii) the ALS-Midwest Notes of
$2,900,000 and $805,000 (such balances exclude advances made by the
former ALS-Midwest owners subsequent to March 31, 1996 of $600,000). The
remainder of the net proceeds will be used to finance the development
and construction of residences, to finance the development, construction
or acquisition of additional residences, and for general corporate
purposes, including working capital. See "Use of Proceeds." To reflect a
transfer to Common Stock of $3,000,000 redeemable common stock which
will no longer be redeemable upon consummation of the Offering.
22
<PAGE> 23
ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEARTLAND FLORIDA ALS-MIDWEST CROSSINGS
THE PRO FORMA SALE/ ALS- PRO FORMA CROSSINGS PRO FORMA
COMPANY HEARTLAND ADJUSTMENTS LEASEBACK(K) MIDWEST ADJUSTMENTS PRO FORMA(O) ADJUSTMENTS(P)
------- --------- ----------- ------------ ------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Resident service fees.... $9,684 $ 1,141 $ -- $ -- $2,505 $ -- $ 23,463 $ --
Other.................... 780 282 -- -- 298 -- -- --
------- --------- ----------- ----- ------- ----------- ------------ ------
Operating revenue...... 10,464 1,423 -- -- 2,803 -- 23,463 --
Operating expenses:
Residence operations..... 7,206 1,675 -- -- 2,765 -- 13,353 --
Lease expense............ 890 -- -- 120 -- -- 6,139 623
(18)
General and
administrative......... 2,600 861 -- 320 -- 2,188 --
Depreciation and
amortization........... 814 109 103(H) (36) 380 76(L) 360 150
39(H) 79
------- --------- ----------- ----- ------- ----------- ------------ ------
Total operating
expenses............. 11,510 2,645 142 66 3,465 76 22,040 852
------- --------- ----------- ----- ------- ----------- ------------ ------
Operating income (loss).... (1,046 ) (1,222) (142) (66) (662 ) (76) 1,423 (852)
Other income (expense),
net:
Interest expense......... (1,047 ) (227) (867)(I) -- (543 ) (232)(M) (1,101) --
91(I) (72)(M)
Interest income.......... 234 8 -- -- 57 (50)(M) 154 --
Gain on sale of land..... 439 -- -- -- -- -- -- --
Equity in income (losses)
of unconsolidated
affiliates............. (438 ) (47) -- -- -- 438(N) -- --
Other expenses........... -- -- -- -- -- (257) --
Minority interest........ 112 13 -- -- 424 (424)(N) -- --
Income tax benefit....... -- 586 (586)(J) -- -- -- --
------- --------- ----------- ----- ------- ----------- ------------ ------
Total other income
(expense), net....... (699 ) 333 (1,362) -- (62 ) (340) (1,204) --
------- --------- ----------- ----- ------- ----------- ------------ ------
Income (loss) before
extraordinary items...... $(1,746) $ (889) $(1,504) $(66) $ (724 ) $(416) $ 219 $ (852)
======= ======== ========== =========== ======= =========== =========== ============
Loss before extraordinary
items per share.......... $(0.30 )
-------
Weighted average shares
outstanding.............. 5,863 (F)(G)
-------
<CAPTION>
THE THE COMPANY
COMPANY OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS(Q) AS ADJUSTED
----------- -------------- -----------
<S> <C> <C> <C>
Revenue:
Resident service fees.... $36,793 $ -- $36,793
Other.................... 1,360 -- 1,360
----------- ------ -----------
Operating revenue...... 38,153 -- 38,153
Operating expenses:
Residence operations..... 24,999 -- 24,999
Lease expense............ 7,754 -- 7,754
General and
administrative......... 5,969 -- 5,969
Depreciation and
amortization........... 2,074 -- 2,074
----------- ------ -----------
Total operating
expenses............. 40,796 -- 40,796
----------- ------ -----------
Operating income (loss).... (2,643) -- (2,643)
Other income (expense),
net:
Interest expense......... (3,998) 867 (2,611)
216
232
72
Interest income.......... 403 -- 403
Gain on sale of land..... 439 -- 439
Equity in income (losses)
of unconsolidated
affiliates............. (47) -- (47)
Other expenses........... (257) -- (257)
Minority interest........ 125 -- 125
Income tax benefit....... -- -- --
----------- ------ -----------
Total other income
(expense), net....... (3,335) 1,387 (1,948)
----------- ------ -----------
Income (loss) before
extraordinary items...... $(5,978) 1,387 $(4,591)
=========== ============= ===========
Loss before extraordinary
items per share.......... $ (0.72) $ (0.40)
----------- -----------
Weighted average shares
outstanding.............. 8,304 11,594(R)
----------- -----------
</TABLE>
23
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
F)The weighted average shares outstanding includes the effect of the Recent
Equity Transactions which resulted in the issuance of 430,281 shares of
Common Stock.
G)For purposes of calculating loss before extraordinary items per share,
Common Stock issued and Common Stock options granted subsequent to May
1995 at per share amounts less than the initial public offering price of
$13.00 per share have been reflected as outstanding for the period
presented. Accordingly, weighted average shares outstanding were
increased by 1,146,928 shares for the effect of such Common Stock and
Common Stock options.
H)To record additional depreciation and amortization relating to the
Heartland Acquisition of $103,000 attributable to the increase in the
carrying value of property, plant and equipment (depreciated over the
estimated average remaining useful life of 30 years) and the amortization
of goodwill of $39,000 (amortized over 40 years).
I)To record interest expense for the Heartland Bridge Financing of $867,000
relating to the Heartland Acquisition (average interest rate of 10%) and
the elimination of interest expense of $91,000 related to the repayment
of debt at the time of acquisition.
J)To eliminate the income tax benefit of $586,000 which had been previously
recognized pursuant to a tax sharing arrangement between Heartland and
its former parent.
K)To record the effects of the Florida Sale/leaseback transactions,
including: (i) lease expense of $120,000; (ii) accretion of deferred gain
of $18,000; and (iii) the elimination of depreciation of $36,000. The
aggregate annual lease expense for the two residences, which commenced
operations in October and December 1995, respectively, is $720,000.
L)To record additional depreciation and amortization relating to the
ALS-Midwest Restructuring of $76,000 attributable to the increase in the
carrying value of property, plant and equipment (depreciated over the
estimated average remaining useful life of 30 years).
M)To record interest expense for ALS-Midwest of $232,000 (interest rate of
8%) and $72,000 (interest rate of 9%), respectively, relating to the
ALS-Midwest Notes and elimination of interest income of $50,000 resulting
from reduced cash balances (assumed interest rate of 5%).
N)To eliminate the Company's equity in losses of unconsolidated affiliates
of $438,000 relating to ALS-Midwest and minority interest in earnings of
$424,000 related to ALS-Midwest. Pursuant to the ALS-Midwest
Restructuring, ALS-Midwest became a wholly-owned subsidiary of the
Company.
O)The following unaudited pro forma condensed combined statement of
operations for Crossings for the year ended December 31, 1995 gives
effect to: (i) the December 1995 sale/leaseback transactions with a real
estate investment trust ("REIT") with respect to 12 residences (the "REIT
Sale/leaseback") and (ii) the December 1995 operating lease entered into
with a related party with respect to the Union Park residence located in
Tacoma, Washington ("Union Park").
24
<PAGE> 25
The unaudited pro forma condensed combined statements of operations of
Crossings are not necessarily indicative of actual results that would
have been achieved had the above transactions been consummated as of
January 1, 1995 or that might be realized in the future. See "History and
Organization -- The Crossings Merger -- Organization and Recent
Restructuring of Crossings."
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------
PRO FORMA CROSSINGS
CROSSINGS ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
Net revenues.......................................................... $21,726 $ 1,737(aa) $23,463
--------- ----------- ---------
Expenses:
Residence operations................................................ 12,444 909(aa) 13,353
Lease expense....................................................... 673 652(aa) 6,139
5,437(ab)
(623)(ab)
General and administrative.......................................... 2,188 -- 2,188
Depreciation and amortization....................................... 1,889 (1,529)(ab) 360
--------- ----------- ---------
Total operating expenses...................................... 17,194 4,846 22,040
--------- ----------- ---------
Income from operations................................................ 4,532 (3,109) 1,423
Interest expense.................................................... (6,362) 5,261(ab) (1,101)
Interest income..................................................... 154 -- 154
Other expense....................................................... (257) -- (257)
--------- ----------- ---------
Other income (expense), net................................... (6,465) 5,261 (1,204)
--------- ----------- ---------
Income (loss) before extraordinary items and minority
interest.................................................... $(1,933) $ 2,152 $ 219
======= ========== ========
</TABLE>
-----------------------
(aa) To record the historical operations of the Union Park residence
prior to Crossings' acquisition of a leasehold interest in such
residence on December 21, 1995 as if such transaction had been
in effect on January 1, 1995 including (i) revenues of
$1,737,000; (ii) residence operating expenses of $909,000; and
(iii) lease expense of $652,000 resulting therefrom.
(ab) To record the effects of the REIT Sale/leaseback transaction as
if such transaction had been in effect on January 1, 1995
including: (i) lease expense of $5,437,000; (ii) the accretion
of deferred gain of $623,000 (based upon the accretion of
deferred gains totalling $11.1 million over the initial lease
periods ranging from 17 to 19 years); (iii) the elimination of
depreciation of $1,529,000; and (iv) the elimination of
interest of $5,261,000 (interest rate of 10%) relating to the
debt repaid at the time of the transaction.
P)To record the effects of the Crossings Merger, including: (i) the
elimination of annual deferred gain accretion of $623,000 (based upon the
accretion of deferred gains over the initial lease periods ranging from
17 to 19 years); (ii) additional depreciation and amortization of
$150,000 attributable to the increase in the carrying value of property,
plant and equipment (depreciated over the estimated average remaining
useful life of 30 years); and (iii) the recognition of goodwill
amortization of $79,000 (amortized over 40 years).
Q)To record the reduction in interest expense resulting from the
application by the Company of the estimated net proceeds from the
Offering to repay indebtedness. The related reduction in interest
includes: (i) $867,000 (average interest rate of 10%) relating to the
Heartland Bridge Financing; (ii) $216,000 (average interest rate of 10%)
relating to the ALS-Midwest Construction Loans; and (iii) $261,000
(interest rate of 9%) and $64,000 (interest rate of 8%), respectively,
relating to the ALS-Midwest Notes.
R)The weighted average number of shares of Common Stock outstanding does
not include 153,846 shares, the net proceeds from the issuance and sale
of which have been designated for general corporate purposes.
25
<PAGE> 26
ALTERNATIVE LIVING SERVICES,INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ALS-MIDWEST CROSSINGS THE
THE PRO FORMA PRO FORMA COMPANY
COMPANY ALS-MIDWEST ADJUSTMENTS CROSSINGS ADJUSTMENTS(X) PRO FORMA
------- ----------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Resident service fees................. $ 4,033 $ 1,142 $ -- $ 5,942 $ -- $11,117
Other................................. 292 200 -- -- -- 492
------- ----------- ----- --------- ------ ---------
Operating revenue................... 4,325 1,342 -- 5,942 -- 11,609
Operating expenses:
Residences operations................. 3,241 869 -- 3,477 -- 7,587
Lease expense......................... 488 51 -- 1,421 122 2,082
General and administrative............ 1,583 114 -- 704 -- 2,401
Depreciation and amortization......... 365 120 24(U) 83 37 649
20
------- ----------- ----- --------- ------ ---------
Total operating expenses............ 5,677 1,154 24 5,685 179 12,719
------- ----------- ----- --------- ------ ---------
Operating income (loss)................. (1,352) 188 (24) 257 (179) (1,110)
Other income (expense), net:
Interest expense...................... (530) (239) (58)(V) (247) -- (1,092)
(18)(V)
Interest income....................... 139 3 (13)(V) 42 -- 171
Loss on sale of land.................. (21) -- -- -- -- (21)
Equity in losses (income) of
unconsolidated affiliates........... (85) -- 57(W) -- -- (28)
Other income.......................... -- -- -- 9 -- 9
Minority interest..................... 45 11 (11)(W) -- -- 45
------- ----------- ----- --------- ------ ---------
Total other income (expense), net... (452) (225) (43) (196) -- (916)
------- ----------- ----- --------- ------ ---------
Income (loss) before extraordinary
items................................. $(1,804) $ (37) $ (67) $ 61 $ (179) $(2,026)
======== =========== =========== ======= ============= ========
Loss before extraordinary item per
share................................. $ (0.22) $ (0.20)
======== ========
Weighted average shares outstanding..... 8,060(S)(T) 10,240
======== ========
<CAPTION>
THE COMPANY
OFFERING PRO FORMA
ADJUSTMENTS(Y) AS ADJUSTED
-------------- -----------
<S> <C> <C>
Revenue:
Resident service fees................. $ -- $11,117
Other................................. -- 492
----- -----------
Operating revenue................... -- 11,609
Operating expenses:
Residences operations................. -- 7,587
Lease expense......................... -- 2,082
General and administrative............ -- 2,401
Depreciation and amortization......... -- 649
----- -----------
Total operating expenses............ -- 12,719
----- -----------
Operating income (loss)................. -- (1,110)
Other income (expense), net:
Interest expense...................... 217 (745)
54
58
18
Interest income....................... -- 171
Loss on sale of land.................. -- (21)
Equity in losses (income) of
unconsolidated affiliates........... -- (28)
Other income.......................... -- 9
Minority interest..................... -- 45
----- -----------
Total other income (expense), net... 347 (569)
----- -----------
Income (loss) before extraordinary
items................................. $347 $(1,679)
============= =========
Loss before extraordinary item per
share................................. $ (0.12)
=========
Weighted average shares outstanding..... 13,529(Z)
=========
</TABLE>
26
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
S) The weighted average shares outstanding includes the effect of the Recent
Equity Transactions which resulted in the issuance of 430,281 shares of
Common Stock.
T) For purposes of calculating loss before extraordinary items per share,
Common Stock issued and Common Stock options granted subsequent to May 1995
at per share amounts less than the initial public offering price of $13.00
per share have been reflected as outstanding for the period presented.
Accordingly, weighted average shares outstanding was increased by 1,146,928
shares for the effect of such Common Stock and Common Stock options.
U) To record additional depreciation and amortization of $24,000 attributable
to the increase in the carrying value of property, plant and equipment as a
result of the ALS-Midwest Restructuring (depreciated over the estimated
average remaining useful life of 30 years).
V) To record interest expense for ALS-Midwest of $58,000 (interest rate of 8%)
and $18,000 (interest rate of 9%), respectively, relating to the
ALS-Midwest Notes and elimination of interest income of $13,000 (assumed
interest rate of 5%) resulting from reduced cash balances.
W) To eliminate the Company's equity in losses of unconsolidated affiliates of
$57,000 related to ALS-Midwest and minority interest of $11,000 related to
ALS-Midwest. Pursuant to the ALS-Midwest Restructuring, ALS-Midwest became
a wholly-owned subsidiary of the Company.
X) To record the effects of the Crossings Merger, including: (i) the
elimination of deferred gain accretion of $122,000 (based upon the
accretion of deferred gains over the initial lease periods ranging from 17
to 19 years); (ii) additional depreciation and amortization of $37,000
attributable to the increase in carrying value of property, plant and
equipment (depreciated over the estimated average remaining useful life of
30 years); and (iii) the recognition of goodwill amortization of $20,000
(amortized over 40 years).
Y) To record the reduction in interest expense resulting from the application
by the Company of the estimated net proceeds from the Offering to repay
indebtedness. The related reduction in interest includes: (i) $217,000
(interest rate of 10%) relating to the Heartland Bridge Financing; (ii)
$54,000 (average interest rate of 10%) relating to the ALS-Midwest
Construction Loans; and (iii) $58,000 (interest rate of 8%) and $18,000
(interest rate of 9%), respectively, relating to the ALS-Midwest Notes. See
"Use of Proceeds."
Z) The weighted average number of shares of Common Stock outstanding does not
include 153,846 shares, the net proceeds from the issuance and sales of
which have been designated for general corporate purposes.
27
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated historical financial data presented below as of
and for the three years ended December 31, 1993, 1994 and 1995 are derived from
the Company's audited consolidated financial statements appearing elsewhere in
this Prospectus and should be read in conjunction with those financial
statements and related notes appearing elsewhere in this Prospectus. The
selected consolidated historical financial data presented below for the years
ended December 31, 1991 and 1992 are derived from the unaudited consolidated
financial statements of the Company's Predecessor for those years. The selected
consolidated historical financial data for the three months ended March 31, 1995
and 1996 are derived from the unaudited consolidated financial statements of the
Company. The pro forma data are unaudited. The selected consolidated financial
data presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and pro forma financial information and related notes included
elsewhere in this Prospectus. See "Pro Forma Financial Information" and "Index
to Consolidated Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------------------------------------- ---------------------------
PREDECESSOR THE COMPANY THE COMPANY
--------------------------- -------------------------- PRO FORMA ---------------- PRO FORMA
1991(1) 1992(1) 1993(1) 1993(1) 1994 1995 1995(2) 1995 1996(3) 1996(4)
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Resident service fees........ $ 602 $2,537 $2,636 $ 130 $4,506 $ 9,684 $36,793 $1,983 $ 4,033 $11,117
Other revenue................ -- 7 5 17 451 780 1,360 98 292 492
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Operating revenue...... 602 2,544 2,641 147 4,957 10,464 38,153 2,081 4,325 11,609
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Operating expenses:
Residence operations......... 556 1,596 1,672 87 2,934 7,207 24,999 1,348 3,241 7,587
Lease expense................ 165 547 563 19 697 890 7,754 426 488 2,082
General and administrative... 262 421 423 41 1,458 2,599 5,969 582 1,583 2,401
Depreciation and
amortization............... 30 83 101 6 258 814 2,074 145 365 649
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Total operating
expenses............. 1,013 2,647 2,759 153 5,347 11,510 40,796 2,501 5,677 12,719
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Operating loss......... (411 ) (103 ) (118 ) (6 ) (390) (1,046) (2,643) (420) (1,352) (1,110)
Other income (expense):
Interest expense, net........ (1 ) (27 ) (48 ) (8 ) (301) (812) (3,595) (180) (391) (921)
Equity in income (losses) of
unconsolidated
affiliates................. -- -- -- -- (1) (438) (47) 39 (85) (28)
Minority interest in losses
of consolidated
subsidiaries............... -- -- -- -- 49 112 125 23 45 45
Other, net................... -- -- -- -- -- 438 182 -- (21) (12)
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Total other expenses,
net.................. (1 ) (27 ) (48 ) (8 ) (253) (700) (3,335) (118) (452) (916)
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Net loss before extraordinary
items...................... $ (412 ) $ (130 ) $ (166 ) $ (14 ) $ (643) $(1,746) $(5,978) $ (538) $(1,804) $(2,026)
====== ====== ====== ====== ====== ======= ======== ====== ======= ========
Net loss..................... $ (412 ) $ (130 ) $ (166 ) $ (14 ) $ (643) $(1,746) $ (538) $(1,804)
====== ====== ====== ====== ====== ======= ====== =======
Net loss before extraordinary
items per share............ -- $(0.22) $ (0.30) $ (0.72) $(0.18) $ (0.22) $(0.20)
====== ====== ======= ======== ====== ======= ========
Net loss per share........... -- $(0.22) $ (0.30) $(0.18) $ (0.22)
====== ====== ======= ====== =======
Weighted average shares
outstanding................ 2,959 2,959 5,863 8,304 2,959 8,060 10,240
====== ====== ======= ======== ====== ======= ========
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
PREDECESSOR COMPANY AT MARCH 31, 1996
------------- -------------------------- -------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(3)(4)
----- ----- ------ ------- ------- ------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 2 $ -- $ 196 $ 311 $ 2,948 $ 6,816 $ 10,449
Working capital (deficit)........................... (152) (369) (338) (1,212) 1,207 5,672 (4,657)
Total assets........................................ 525 759 2,543 14,424 39,357 53,824 93,048
Long-term debt, less current installments........... -- 134 57 6,356 17,101 30,632 41,624
Redeemable common stock............................. -- -- -- -- -- 1,500 3,000
Stockholders' equity................................ 300 349 325 4,559 19,343 17,850 29,179
</TABLE>
- ---------------
(1) The Company was organized in December 1993. Statement of operations data for
periods prior to December 14, 1993 reflect the results of operations of the
Predecessor. Statement of operations data for the Company for 1993 are for
the period from December 14, 1993 (inception) through December 31, 1993. Per
share amounts for the Predecessor, for periods prior to the inception of the
Company, are not presented as they would not provide comparable or
meaningful information. See "History and Organization -- The Company and its
Predecessor."
(2) Gives effect to the 1996 Transactions as if such transactions had occurred
on January 1, 1995 with respect to statement of operations data for the year
ended December 31, 1995.
(3) The results of the Company for the three months ended March 31, 1996 include
the operations of Heartland, which was acquired effective as of January 1,
1996. See "History and Organization -- Acquisition of Heartland Retirement
Services, Inc."
(4) Gives effect to the Recent Equity Transactions, the ALS-Midwest
Restructuring and the Crossings Merger as if such transactions had occurred
on January 1, 1996 with respect to statement of operations data for the
quarter ended March 31, 1996 and as of March 31, 1996 with respect to
balance sheet data. See "Pro Forma Financial Information."
29
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company currently operates 57 assisted living residences with an
aggregate capacity of approximately 2,500 residents. Of these total residences,
the Company owns 17, leases 23, holds interests in eight and manages an
additional nine on behalf of third parties. In addition, the Company is
currently constructing or developing 43 residences, 15 to 21 of which are
expected to open during 1996. The Company's rapid growth since 1993 has had a
significant impact on the Company's results of operations and accounts for most
of the changes in results between the first three months of 1995 and 1996 and
the years ended 1993, 1994 and 1995. As of December 31, 1993, 1994 and 1995, and
March 31, 1996, the Company operated 12, 13, 19 and 42 residences, respectively.
Since its organization in December 1993, the Company has achieved
significant growth in operating revenue resulting from its aggressive
development program and several strategic acquisitions, but to date has not
realized operating income or net income. For the year ended December 31, 1995,
the Company generated operating revenue of $10.5 million and incurred an
operating loss of $1.0 million and a net loss of $1.7 million. For the three
months ended March 31, 1996, the Company generated operating revenue of $4.3
million and incurred an operating loss of $1.4 million and a net loss of $1.8
million. On a pro forma basis, after giving effect to the 1996 Transactions as
if such transactions had occurred on January 1, 1995, the Company would have
generated operating revenue of $38.2 million and incurred an operating loss of
$2.6 million and a loss before extraordinary items of $6.0 million for 1995. On
a pro forma basis, after giving effect to the Recent Equity Transactions, the
ALS-Midwest Restructuring and the Crossings Merger as if such transactions had
occurred on January 1, 1996, the Company would have generated operating revenue
of $11.6 million and incurred an operating loss of $1.1 million and a loss
before extraordinary items of $2.0 million for the first quarter of 1996.
The Company intends to continue to pursue its growth strategy by developing
and constructing additional assisted living residences and, as appropriate
opportunities arise, acquiring assisted living operations. Newly opened assisted
living residences typically operate at a loss during the first six to 12 months
of operation, primarily due to the incurrence of certain fixed and variable
expenses in advance of the achievement of targeted rent and service fees from
the lease-up of such residences (referred to as lease-up expenses). In addition,
the development and construction of residences involve the commitment of
substantial capital over a typical six to 12 month construction period, the
consequence of which may be an adverse impact on the Company's liquidity. In the
case of acquired residences, resident turnover and increased marketing
expenditures which may be required to reposition such residences, together with
the possible disruption of operations resulting from the implementation of
renovations, may adversely impact the financial performance of such residences
for a period of time after acquisition. As a result, the Company anticipates
that it will incur additional operating and net losses for at least the next 12
to 18 months of operations as the operating expenses associated with developing,
renovating and operating residences and supporting the corporate infrastructure
necessary to manage the Company's growth strategy will be only partially offset
by operating profits generated by stabilized residences. See "-- Liquidity and
Capital Resources," "Risk Factors -- Development and Construction Risks" and
"Risk Factors -- Need for Additional Financing; Risk of Rising Interest Rates."
For purposes of this discussion, amounts for the year ended December 31,
1993 represent the sum of the results of operations of the Predecessor for the
period from January 1, 1993 through December 13, 1993 and the results of
operations of the Company for the period from December 14, 1993 through December
31, 1993. The following discussion and analysis should be read in conjunction
with the information under "Pro Forma Financial Information," "Selected
Consolidated Financial Data" and the consolidated financial statements and
related notes thereto, which appear elsewhere in this Prospectus.
30
<PAGE> 31
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995.
Operating Revenue. Resident service fees for the three months ended March
31, 1996 were $4.0 million, representing an increase of $2.0 million, or 103%,
from $2.0 million for the comparable 1995 period, due to the increased number of
residences operated during the 1996 period. Of this increase, $900,000 resulted
from the addition of the Heartland residences acquired in January 1996, $390,000
resulted from the acquisition of one residence in April 1995 and $310,000
resulted from the opening of two residences during the last quarter of 1995 and
one residence during the first quarter of 1996. Other revenue, which consists of
management and development fees from unconsolidated joint venture entities,
increased to $292,000 in 1996 from $98,000 for the comparable 1995 period
primarily as a result of fees received from the five ALS-Midwest residences. As
a result of the ALS-Midwest Restructuring, the Company acquired all of the
remaining interests not already held by the Company in these five residences.
Consequently, in subsequent periods, the operations of ALS-Midwest will be
consolidated with those of the Company.
Residence Operations. Residence operating expenses for the three months
ended March 31, 1996 were $3.2 million, representing a $1.9 million, or 141%,
increase from $1.3 million for the comparable 1995 period, due to the increased
number of residences operated during the 1996 period. Of this increase, $880,000
resulted from the addition of the Heartland residences, $380,000 from the
acquisition of one residence in April 1995 and $445,000 resulted from the
opening of two residences during the last quarter of 1995 and one residence
during the first quarter of 1996.
Lease Expense. Lease expense for the three months ended March 31, 1996 was
$488,000, representing an increase of $61,000, or 14.4%, from $426,000 for the
comparable period in 1995. Such increase is primarily attributable to two leases
related to the Heartland residences and the Florida Sale/leaseback in January
1996.
General and Administrative. General and administrative expenses for the
three months ended March 31, 1996 were $1.6 million, representing an increase of
$1.0 million, or 172%, from $583,000 for the comparable period in 1995. The
increase in expenses was partially attributable to salaries, related payroll
taxes and employee benefits relating to additional corporate personnel retained
to support the Company's actual and anticipated growth strategy, increased
accounting costs, corporate office space rental and other expenses related to
the Company's growth strategy and increased marketing expenses associated with
new residences. The Company expects that its general and administrative expenses
will decrease as a percentage of operating revenue as the Company grows and
achieves certain economies of scale.
Depreciation and Amortization. Depreciation and amortization for the three
months ended March 31, 1996 was $365,000, representing an increase of $220,000,
or 151%, from $145,000 for the comparable period in 1995. This increase resulted
primarily from the addition of the Heartland residences, the acquisition of one
residence in April 1995 and a new residence opened during 1996.
Interest Expense. Interest expense for the three months ended March 31,
1996 was $530,000, representing an increase of $349,000, or 193%, from $181,000
for the comparable period in 1995. This increase in interest expense was
primarily due to the incurrence of indebtedness in the amount of $4.2 million
related to the acquisition of one residence in April 1995.
Equity in Losses (Income) of Unconsolidated Affiliates. Equity in losses
of unconsolidated affiliates was $85,000 for the three months ended March 31,
1996, representing an increase of $124,000, or 318%, from equity in income of
unconsolidated affiliates of $39,000 for the comparable period in 1995. These
losses were primarily attributable to the Company's investment in ALS-Midwest.
As a result of the ALS-Midwest Restructuring, the Company will cease to record
an equity in net losses with regard to ALS-Midwest but will continue to record
an equity in losses (income) from other unconsolidated affiliates.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the three months ended March
31, 1996 was $45,000, representing an increase of $22,000, or 99%, from $22,000
for the comparable period in 1995. The increase was attributable to the share of
start-up losses allocated to the minority interest in one residence, which
opened in January 1996.
31
<PAGE> 32
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Operating Revenue. Resident service fees for the year ended December 31,
1995 were $9.7 million, representing an increase of $5.2 million, or 115%, from
$4.5 million for 1994, due to the increased number of residences operated during
1995. Of this increase, $3.5 million resulted from the full year of operation of
two residences, including one which was opened in March 1994 and one which was
acquired in November 1994, and $1.2 million from the acquisition of one
residence in April 1995. In addition, the expansion of one residence and the
opening in the fourth quarter of 1995 of two residences contributed to the
increase. The remaining increase of $330,000 in operating revenue resulted from
an increase in other revenue.
Residence Operations. Residence operating expenses for the year ended
December 31, 1995 were $7.2 million representing an increase of $4.3 million, or
146%, from $2.9 million for 1994, due to the incurrence of lease-up expenses
related to residences acquired and opened in 1995. Specifically, $2.7 million of
such increase resulted from a full year of operations of two residences, one of
which was acquired in September 1994 and the other of which was opened in March
1994 and $1.0 million resulted from the residence acquired in April 1995.
Lease Expense. Lease expense for the year ended December 31, 1995 was
$890,000, representing an increase of $192,000, or 28%, from $697,000 for 1994.
Such increase is primarily attributable to the full year of lease expense in
1995 for the residence that opened in March 1994 and the increase in lease
expense associated with the residence expansion discussed above.
General and Administrative. General and administrative expenses for year
ended December 31, 1995 were $2.6 million, representing an increase of $1.1
million, or 78%, from $1.5 million for 1994. The increase in expenses was
partially attributable to salaries, related payroll taxes and employee benefits
relating to additional corporate personnel retained to support the Company's
actual and anticipated growth strategy, increased accounting costs, increased
marketing expenses associated with new residences, increased rent due to the
expansion of existing corporate office space and other expenses related to the
Company's growth strategy, and increased marketing expenses associated with new
residences.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1995 was $815,000, representing an increase of $556,000, or
215%, from $258,000 for 1994. This increase resulted primarily from the full
year of operations of the residence that opened in September 1994 and the
residence acquired in April 1995.
Interest Expense. Interest expense for 1995 was $1.0 million, representing
an increase of $725,000, or 225%, from $322,000 for 1994. The increased interest
expense was primarily the result of a full year of interest expense associated
with indebtedness of $1.1 million on the residence that opened in March 1994 and
the incurrence of indebtedness in the amount of $4.2 million related to the
acquisition of one residence in April 1995.
Gain on Sale of Land. Two parcels of land adjacent to one of the Company's
residences were sold in the last quarter of 1995 resulting in a gain of
$439,000. Since the Company has not engaged in other land sales, a similar gain
does not appear in other periods in the financial statements.
Equity in Losses of Unconsolidated Affiliates. Equity in net losses from
investments in unconsolidated affiliates was $438,000 for 1995. These losses
were attributable to the start-up losses incurred by several of the ALS-Midwest
residences during the year. The Company did not have any significant investments
in unconsolidated affiliates in 1994.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the year ended December 31,
1995 was $112,000, representing an increase of $64,000, or 131%, from $49,000
for the comparable 1994 period. The increase was attributable to the losses
allocated to the minority interest in two residences and the costs associated
with identifying development opportunities in the Eastern United States.
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Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Operating Revenue. Resident service fees for the year ended December 31,
1994 were $4.5 million, representing an increase of $1.7 million, or 63% from
$2.8 million for 1993 due to the opening of one residence and the acquisition of
another. Other revenues increased to $451,000 in 1994 from $22,000 for 1993
primarily as a result of management contracts entered into in December 1993 for
the management of seven residences (six of which are still managed by the
Company) previously operated by the Predecessor.
Residence Operations. Residence operating expenses for the year ended
December 31, 1994 were $2.9 million, representing an increase of $1.2 million,
or 69%, from $1.8 million for 1993 due to the acquisition of one residence and
the opening of another residence.
Lease Expense. Lease expense for 1994 was $697,000, representing an
increase of $115,000, or 20%, from $582,000, for 1993. This increase is
primarily attributable to the opening of one residence in March 1994.
General and Administrative. General and administrative expenses for 1994
were $1.5 million, representing an increase of $994,000, or 214%, from $464,000
for 1993. The increase is related to the expansion of the Company's corporate
staff and related office expenses to accommodate the Company's growth strategy.
Depreciation and Amortization. Depreciation and amortization for 1994 was
$258,000, representing an increase of $151,000, or 142%, compared to $107,000
for 1993. Such increase was attributable to the acquisition of one residence in
September 1994 and the furniture, fixtures and equipment associated with the
opening of one residence in March 1994.
Interest Expense. Interest expense for the year ended 1994 was $322,000,
representing an increase of $266,000 from $56,000 for 1993. This increase is
attributable to the incurrence of $6.3 million of additional indebtedness in
connection with the acquisition of one residence in September 1994.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries was $49,000 for 1994. These
losses were attributable to the losses allocated to the minority partners'
interest in one residence. The Company did not have minority partners in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations, its aggressive
development program and acquisitions through a combination of various forms of
real estate financing, capital contributions from joint venture partners, loans
from Evergreen and net proceeds from private placements of shares of Common
Stock.
The Company has operated from time to time with significant working capital
deficits primarily as a consequence of the financing of its residence
development and acquisitions and, to a lesser extent, the operating losses its
assisted living residences have sustained. At December 31, 1995, the Company's
working capital was $1.2 million compared to a working capital deficit of $1.2
million at December 31, 1994. Working capital at March 31, 1996 was $5.7
million, an increase of $4.5 million from December 31, 1995, primarily as a
result of the Florida Sale/leaseback. On a pro forma basis giving effect to the
Recent Equity Transactions, the ALS-Midwest Restructuring and the Crossings
Merger, the Company would have had a working capital deficit of $4.7 million at
March 31, 1996, primarily attributable to the additional short-term debt
incurred in connection with the ALS-Midwest Restructuring, which debt will be
repaid with a portion of the net proceeds from the Offering. See "Use of
Proceeds." Net cash used by operating activities totaled $357,000, $1.1 million
and $1.2 million for the years ended 1994 and 1995 and the three months ended
March 31, 1996, respectively. Net cash used in investing activities totaled $3.4
million, $17.1 million and $3.0 million for the years ended 1994 and 1995 and
the three months ended March 31, 1996, respectively. Substantially all these
expenditures were used for development and acquisition of residences. Net cash
provided by financing activities totaled $3.9 million, $20.9 million and $2.1
million for the years ended 1994 and 1995 and the three months ended March 31,
1996, respectively.
As of March 31, 1996, on a pro forma basis giving effect to the Recent
Equity Transactions, the ALS-Midwest Restructuring and the Crossings Merger and
as adjusted to give effect to the application of the net proceeds of the
Offering to the Company, the Company's long-term debt would have been $33.0
million. On a
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pro forma basis giving effect to the 1996 Transactions, the Company had lease
expense for the year ended December 31, 1995 of $7.8 million. Long-term debt and
annual lease expense will increase significantly as the Company pursues its
growth strategy.
To achieve its growth objectives, the Company will need to obtain
sufficient financing to fund its development, construction and acquisition
activities. The estimated cost to complete and lease up the 43 residences under
construction or development during the next 18 months is approximately $145
million, which substantially exceeds the estimated net proceeds of the Offering.
Accordingly, the Company's future growth will depend on its ability to obtain
additional financing on acceptable terms. The Company has executed non-binding
letters of intent with a health care REIT for additional financing commitments
aggregating approximately $250 million which it believes, together with the net
proceeds from the Offering and existing financing commitments, will be
sufficient to fund its development and acquisition programs for at least the
next 18 months. The Company will from time to time seek additional funding
through public or private financing, including equity or debt financing. In
addition, the Company will require sufficient financial resources to meet its
operating and working capital needs. The Company expects negative cash flow to
continue for at least the next 12 to 18 months as it continues to develop and
construct assisted living residences. There can be no assurance that any newly
constructed residences will achieve a stabilized occupancy rate and attain a
resident mix that meet the Company's expectations or generate sufficient
positive cash flow to cover operating and financing costs associated with such
residences. There can be no assurance that the Company will be successful in
securing additional financing or that adequate funding will be available and, if
available, will be on terms that are acceptable to the Company. A lack of funds
may require the Company to delay or eliminate all or some of its development
projects and acquisition plans. In addition, the Company may require additional
financing to enable it to acquire additional residences, to respond to changing
economic conditions, to expand the Company's development program or to account
for changes in assumptions related to its development program.
In addition, within the next 18 months, the Company will become subject to
mandatory purchase options with respect to equity interests held by joint
venture partners in certain of the Company's residences. At such times the
Company may also elect to exercise its rights to purchase such interests for the
same consideration. Based on a number of assumptions, including assumptions as
to the number of residences to be developed with joint venture partners, the
timing of such development, the time at which such options will be exercised and
the fair market value of such residences at the date such purchase options are
exercised, the Company currently estimates that it may require approximately
$7.0 million to satisfy these purchase obligations. The Company also has certain
similar purchase options with respect to such equity interests which the Company
intends to exercise only at such times as it has the financial resources
available (internally or through debt or equity financing) to fund the exercise
of any such options. See "Business -- Joint Ventures and Strategic Alliances."
In May 1995, the Company completed the private placement of 4,302,994
shares of the Company's Common Stock for $20 million. The net proceeds of
approximately $19.0 million from this financing were used to (i) repurchase
380,636 shares of Common Stock and prepay a promissory note held by a co-founder
of the Predecessor for $2.5 million and $40,640, respectively; (ii) repay
advances to the Company made by Evergreen together with interest due thereon in
the amount of approximately $4.1 million; (iii) develop, construct and acquire
assisted living residences; and (iv) fund general corporate purposes, including
the corporate infrastructure necessary to manage the Company's future
operations.
On January 26, 1996 (effective January 1, 1996) the Company acquired all of
the outstanding capital stock of Heartland for a total consideration of
approximately $5.5 million and the issuance of 261,424 shares of Common Stock,
207,899 of which are redeemable. In connection with the Heartland Acquisition,
the Company borrowed approximately $8.7 million pursuant to the Heartland Bridge
Financing provided by RDV Capital Management L.P., a Delaware limited
partnership affiliated with one of the Company's directors. See "Certain
Relationships and Related Transactions." Under the terms to the Heartland Bridge
Financing, the Company borrowed (i) $2.9 million pursuant to a two year note,
which accrues interest at the annual rate of 9.0% for the first six months,
10.5% for the second six months and thereafter the annual interest rate
increases by an additional 2% for each three month period until the final
maturity on January 25, 1998; and (ii) $5.8 million pursuant to a two year note,
which accrues interest at an annual rate of 9.0% per annum for
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the first twelve months, increasing thereafter by an additional 2% for each
three month period until final maturity on January 25, 1998. The loan is secured
by the pledge by the Company of the outstanding shares of common stock of
Heartland. The Company will use a portion of the net proceeds received by it
from the Offering to repay this loan.
In May 1996, the Company guaranteed two loans to two of the ALS-Midwest
partnerships in the aggregate amount of $9.4 million, the proceeds of which are
being used to fund the construction of the Company's residences currently under
construction in Northville and Utica, Michigan. The loans bear interest at a
rate equal to the prime rate plus 1.0% and are payable with respect to interest
only until the maturity date, April 1, 1999.
On May 24, 1996, the Company raised approximately $2.0 million of cash
through the sale of (i) 322,706 shares of Common Stock to a company affiliated
with Pioneer Development Company, the Company's proposed joint venture partner
in New York, Massachusetts, Connecticut and Rhode Island; and (ii) 107,575
shares of Common Stock to Petty, Kneen & Company, a company controlled by
William G. Petty, Jr., the Company's Chairman of the Board, and John W. Kneen,
the Company's Chief Financial Officer. See "Business -- Joint Ventures and
Strategic Alliances -- Proposed Joint Venture with Pioneer Development Company"
and "Management -- Executive Compensation -- Consulting, Employment and Services
Agreements -- Consulting Agreement with Petty, Kneen & Company."
On May 24, 1996, the Company and Crossings consummated the Crossings Merger
pursuant to which Crossings was merged with and into ALS and all of the shares
of Crossings capital stock outstanding prior to the Crossings Merger were
converted into 2,007,049 shares of Common Stock valued at $9.3 million. See
"History and Organization -- Crossing Merger."
On May 24, 1996, the Company acquired the limited partnership interests not
already owned by it in ALS-Midwest for aggregate consideration of 115,024 shares
of redeemable Common Stock valued at $1.0 million and promissory notes in the
aggregate principal amount of $2.9 million. These promissory notes are due and
payable on January 31, 1997 and bear interest at the rate of 8% per annum. See
"Use of Proceeds." The Company also acquired 100% of the outstanding stock of
the corporate general partner of ALS-Midwest ("ALS-Midwest, Inc.") pursuant to a
merger transaction whereby the shareholders of ALS-Midwest Inc. other than the
Company received, in exchange for their shares of ALS-Midwest Inc., $300,000 in
cash and 57,512 shares of redeemable Common Stock valued at $500,000.
Contemporaneously with the merger, the Company refunded advances made to the
ALS-Midwest Partnerships by affiliates of the Damone Group, Inc. ("Damone") by a
cash payment of $700,000 and delivery of a promissory note in the amount of $1.4
million. This promissory note is due and payable on September 21, 1996 and bears
interest at the rate of 9% per annum. See "Use of Proceeds and "History and
Organization -- Acquisition of Remaining Interests in ALS-Midwest."
In June 1996, the Company borrowed $8.5 million, $3.5 million of which was
used to refinance existing indebtedness and the remainder of which will be used
for working capital purposes. This loan is due and payable on October 1, 1996
and bears interest at a rate of 10% per annum. The Company currently intends to
refinance the entire principal amount of this loan at maturity. If, however, the
Company is unable to refinance this loan on acceptable terms the Company expects
to use approximately $8.5 million of the net proceeds to repay such loan.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996 and the effect was
not material to the Company's operations or financial position taken as a whole.
Under Statement 121, property and equipment of the Company are reviewed for
impairment whenever events or circumstances indicate that the asset's
undiscounted expected cash flows are not sufficient to recover its carrying
amount.
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The Company measures an impairment loss by comparing the fair value of the asset
to its carrying amount. Fair value of an asset is calculated as the present
value of expected future cash flows.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value-based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement 123 requires disclosure of the pro
forma effect on net income and earnings per share of its fair value-based
accounting for those arrangements. The Company adopted Statement 123 in the
first quarter of 1996 and has elected to continue to account for stock-based
compensation arrangements under APB Opinion No. 25.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations due to the Company's dependence on its senior resident population,
most of whom rely on relatively fixed incomes to pay for the Company's services.
As a result, the Company may not be able to increase resident service fees to
account fully for increased operating expenses. In structuring its fees, the
Company attempts to anticipate inflation levels, but there can be no assurance
that the Company will be able to anticipate fully or otherwise respond to any
future inflationary pressures.
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BUSINESS
OVERVIEW
The Company is a leading national assisted living company operating 57
residences with an aggregate capacity of approximately 2,500 residents. Of these
total residences, the Company owns 17, leases 23, holds equity interests in and
operates eight and manages an additional nine. The Company provides a full range
of assisted living services in its residences for the frail elderly and
free-standing specialty care residences for individuals with Alzheimer's disease
and other dementias. The Company and its Predecessor have operated assisted
living residences since 1981 including specialty dementia care residences since
1985.
The Company provides a broad continuum of personal care (such as assistance
with bathing, toileting, dressing, eating and ambulation), support services
(such as housekeeping, laundry and transportation) and health care (such as
medication administration and health monitoring) to its residents. In addition,
the Company offers a wide range of specialized services, including behavior
management and environmental adaptation programs, to residents who suffer from
Alzheimer's disease and other dementias. All of these services are provided on a
24-hour basis in "home-like" settings which emphasize privacy, individual choice
and independence. The Company operates four distinct assisted living product
lines (Clare Bridge, Wynwood, Crossings and WovenHearts), each serving a
particular segment of the private pay elderly population. Each assisted living
product line is designed to permit residents to age in place by meeting their
personal and health care needs across a range of pricing options. See
"-- Assisted Living Product Lines."
Since 1993, the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions. During this
period the Company has developed or acquired 48 residences with an aggregate
capacity of approximately 2,400 residents. The Company intends to continue its
development strategy and is currently constructing 19 residences and is
developing an additional 24 residences. Of these residences, 15 to 21 are
expected to open during 1996. The Company also intends to continue to pursue
strategic acquisitions of assisted living operations. In keeping with its
acquisition strategy, in May 1996, the Company acquired Crossings, an assisted
living company which operated 15 residences with a capacity of approximately
1,420 residents throughout the Western United States. This strategic merger
provides the Company with access to several new geographic markets and
complements its existing assisted living product lines with the addition of
apartment-style assisted living residences. In January 1996, the Company
acquired Heartland, an assisted living company which operated 20 WovenHearts
residences throughout Wisconsin. As a result of this transaction, the Company
has broadened its assisted living product lines to serve frail elderly
individuals in moderate income markets and rural communities.
The Company's management team has extensive operational and strategic
experience in the health care industry. The Company's President and Chief
Executive Officer, William F. Lasky, founded the Predecessor and has been
actively involved in the assisted living industry for over 15 years. Mr. Lasky
currently serves as Chairman of ALFAA, the nation's largest dedicated assisted
living trade organization. The Company's Chairman, William G. Petty, Jr., has
held senior management positions and has managed strategic investments in
companies in the long-term care, assisted living and senior living industries.
Mr. Petty served as the Chairman, Chief Executive Officer and President of
Evergreen, a NYSE-listed operator of long-term care facilities, from June 1993
until July 1995, when Evergreen merged with GranCare, for which he now serves as
Vice Chairman. See "Management."
The assisted living industry is a rapidly growing segment within the long
term care industry. The Company's target market, which consists of seniors age
75 and older, is one of the fastest growing segments of the United States
population. According to the United States Census Bureau, this age group is
expected to grow by 33.5% between 1990 and 2000. The Company believes that the
market for assisted living services, including dementia care services, will
continue to grow due to (i) the aging of the U.S. population, (ii) rising public
and private cost containment pressures, (iii) declining availability of
traditional nursing home beds given nursing home operators' increasing focus on
higher acuity patients, (iv) quality of life advantages of assisted living
residences over traditional skilled nursing homes and (v) the decreasing
availability of family care as an option for elderly family members. The Company
believes that it is well positioned to capitalize on
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these trends given its growth and operating strategies and its extensive
experience in the assisted living industry.
BUSINESS STRATEGY
The Company believes that significant growth opportunities exist to provide
personal and health care services to the rapidly growing elderly population. The
Company intends to aggressively expand its operations through the development
and construction, and the selective acquisition, of additional residences. The
Company also intends to seek to improve the operating performance of its
residences through the continued enhancement of its operations.
Growth Strategy. The Company's growth strategy emphasizes growth through
the development and construction of assisting living residences and through
strategic acquisitions of assisted living operations.
Development Strategy. The Company intends to continue to expand its
operations primarily through the development and construction of assisted
living residences in selected markets. The Company has an integrated
internal development approach pursuant to which the Company's management
and other personnel (including designers and architects, market analysts
and construction managers) locate sites for, develop and open its
residences. Personnel experienced in site selection conduct extensive
market and site-specific feasibility studies prior to the Company's
committing significant financial resources to new projects. The Company
believes it can rapidly expand its operations into new markets and
strengthen its presence within its existing markets utilizing its four
residence models.
Since 1981, the Company has developed and constructed 30 residences
(including residences developed by Crossings and Heartland) and is in the
process of developing or constructing 43 additional residences, 15 to 21 of
which are expected to open during 1996. Construction time for new
development generally ranges from seven to 12 months for its Wynwood, Clare
Bridge and Crossings residences and ranges from four to six months for its
WovenHearts residences. Once opened, new residences generally achieve a
stabilized level of occupancy of 95% or higher over periods ranging from 10
to 14 months and six to nine months for these types of residences,
respectively.
To facilitate its development strategy, the Company has formed
strategic alliances with regional real estate development partners which
have enabled the Company to develop and construct additional residences
while reducing the investment of, and associated risk to, the Company. The
Company's development partners generally provide construction management
experience, existing relationships with local contractors, suppliers and
municipal authorities, knowledge of local and state building codes and
zoning laws and assistance with site location for new residences. The
Company contributes operational and industry expertise, has operational
management responsibility for residences owned by joint ventures and, in
most cases, has the right and obligation to acquire the equity interests of
the other joint venture partners at predetermined times. Through March 31,
1996, nine of the Company's residences had been developed pursuant to joint
ventures. Pursuant to the ALS-Midwest Restructuring, the Company acquired
its joint venture partners' equity interests in five of these residences.
The Company intends to continue to evaluate opportunities to acquire
similar interests in the future. See "Business -- Joint Ventures and
Strategic Alliances" and "History and Organization."
Acquisition Strategy. The Company has acquired, and intends to
continue to selectively acquire, assisted living operations. The Company
may acquire one or more residences as a means to enter new markets and may
also seek to acquire residences within its existing regions to gain further
market share and leverage its existing operating infrastructure. In
reviewing acquisition opportunities, the Company considers, among other
things, the competitive climate, the current reputation of the residence(s)
or the operator, the quality of the management, the need to reposition the
residence(s) in the marketplace and costs associated therewith, the
construction quality and any need for renovations to the residence(s) and
the opportunity to improve or enhance operating results.
In keeping with the Company's acquisition strategy, in May 1996 the
Company acquired Crossings, which operated 15 assisted living residences,
and in January 1996 the Company acquired Heartland, which operated 20
WovenHearts residences. The addition of Heartland and Crossings has
increased
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substantially the Company's operations and has provided ALS with additional
development and management expertise to further support its growth
strategy. See "History and Organization."
In support of its growth strategy, the Company maintains an in-house team
of researchers and analysts dedicated to performing market studies in connection
with identifying development and acquisition opportunities. In collaboration
with regional development partners, the Company selects target development
markets based on a number of factors, including demographic profiles of both
potential residents and their adult children, existing competitors and known new
entrants, estimated market demand and zoning prospects. The Company's
development department uses demographic information and demand estimation models
to identify optimal areas within each target market. Potential sites are then
evaluated by the Company's site evaluation committee. Sites are approved or
rejected based on established criteria relating to land cost and conditions,
visibility, accessibility, immediate adjacencies, community perception and
zoning prospects. Full market feasibility studies, including site evaluations of
all potential competitors and extensive interviews of key community sources, are
subsequently conducted on all approved sites. A similar investigative process is
employed when evaluating potential acquisitions within an identified target
market. The Company's residences are currently located in Wisconsin, Oregon,
Michigan, Colorado, Florida, Washington, Pennsylvania, California and Idaho, and
the Company is in the process of constructing or developing residences in
Arizona, Minnesota, New Jersey, North Carolina, South Carolina and New York.
The Company seeks to cluster its full range of assisted living product
lines to further strengthen its presence within existing markets as well as to
effectively penetrate new markets. The Company generally enters larger
metropolitan markets with its Wynwood, Clare Bridge or Crossings product line.
Once established, the Company may supplement its market presence by developing
WovenHearts residences throughout smaller adjacent markets. The Company will
also use its WovenHearts product line to enter into smaller residential markets,
including rural communities, that would otherwise not support its larger upper-
income residential models. This strategy enables the Company to penetrate its
principal markets, provides it access to smaller markets and enables it to
achieve certain regional economies of scale.
Operating Strategy. The Company's operating strategy is to achieve and
sustain a strong competitive position within its chosen markets as well as to
continue to enhance the performance of its operations. The Company believes that
its multiple product lines afford it a significant competitive advantage as they
enable the Company to offer an evolving continuum of care and services,
including specialty care services, and offer such care and services across a
range of pricing options, thereby serving both the upper and moderate income
segments of the elderly population. The Company will also seek to enhance its
current operations by (i) maintaining and improving occupancy rates at its
residences; (ii) opportunistically increasing resident service fees; and (iii)
improving operating efficiencies.
Offer Evolving Continuum of Care and Services. The Company seeks to
continually expand its range of personal and health care and support
services to meet the evolving needs of its residents. The Company's
Wynwood, Crossings and WovenHearts product lines are designed to meet the
needs of frail elderly individuals who require regular assistance with
activities of daily living and have other special care needs. The Company's
Clare Bridge product line is specifically designed to serve the needs of
individuals with Alzheimer's disease and other dementias through the
provision of a variety of specialty care services. The Company intends to
evaluate opportunities to provide additional services, such as home health,
pharmacy and restorative services, to its residents.
Offer Services Across a Range of Pricing Options. By offering a
variety of pricing options, the Company believes it is able to capture a
larger segment of the elderly population. The Company's Wynwood, Clare
Bridge and Crossings product lines are designed to serve frail elderly
residents who can afford access to a broad range of personal and health
care and support services. The Company's WovenHearts product line, on the
other hand, is designed to cater to moderate income elderly who need access
to care but may have more limited financial resources.
Maintain and Improve Occupancy Rates. The Company will also seek to
maintain and improve occupancy rates by continuing to (i) attract new
residents through marketing programs directed towards family decision
makers, namely adult children, and potential residents and (ii) actively
seek referrals
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from hospitals, rehabilitation hospitals, physicians' clinics, home health
care agencies and other acute and sub-acute health care providers in the
markets served by the Company.
Selectively Increase Service Pricing Levels. The Company will
continue to review opportunities to increase resident service fees within
its existing markets, while maintaining competitive market positions. In
keeping with this strategy, the Company will continue to offer both premium
priced and moderately priced assisted living services and generally target
private pay residents. The Company's private pay residents are typically
seniors who can afford to pay for services from their own and their
families' financial resources. Such resources may include social security,
savings, proceeds from the sale of their residence, contributions from
family members and insurance proceeds from long-term insurance care
policies.
Improve Operating Efficiencies. The Company will seek to improve
operating results of its residences by continuing to actively monitor and
manage operating costs. In addition, the Company believes that
concentrating residences within selected geographic regions enables the
Company to achieve operating efficiencies through economies of scale and
reduced corporate overhead and provides for more effective management
supervision and financial controls.
ASSISTED LIVING PRODUCT LINES
The Company operates four distinct assisted living product lines (Clare
Bridge, Wynwood, Crossings, and WovenHearts) designed to meet the increasing
personal and health care needs of the private pay elderly population. Product
lines are defined as consisting of various housing models offering a
predetermined selection of services within a defined price range. Together,
these product lines encompass a full range of assisted living services ranging
from basic support services to specialized care for residents with Alzheimer's
disease and other dementias. Each of the Company's product lines targets a
distinct segment of the elderly population through site selection, building
design, staffing, service and care plans, as well as pricing structures based on
the needs and characteristics of each targeted segment. All of the Company's
residences incorporate its philosophy of preserving residents' privacy,
encouraging individual choice and fostering independence in a "home-like"
setting.
Clare Bridge. These specially designed, free-standing residences
serve the programmatic needs of individuals with Alzheimer's disease and
other dementias. Clare Bridge residents typically require higher levels of
care and services as a result of their progressive decline in cognitive
abilities including impaired memory, thinking and behavior. These residents
require increased supervision because they are typically highly confused,
wander prone and incontinent. Ranging in size from 16,000 to 28,000 square
feet, these single-story residences accommodate 24 to 52 residents and are
primarily located in metropolitan and suburban markets. The Company seeks
to create a "home-like" setting that addresses the resident's cognitive
limitations using internal neighborhoods consisting of rooms which are
scaled to the size typically found in an upper-income, single family home
with the same level of furniture, fixtures and carpeting. Key features
specific to the needs of Clare Bridge residents generally include indoor
wandering paths, a simulated "town-square" area, secure outdoor spaces with
raised gardening beds, directional aids to assist in "wayfinding" such as
signs, color-coded neighborhoods and memory boxes with the resident's
photograph outside of their unit, and specially designed furniture suitable
for incontinent residents. The required level of care in Clare Bridge
residences is typically higher than in the Company's other residences due
to the increased level of supervision and assistance required by residents
with dementias. As a result, these residences have a staffing pattern which
includes a full-time nurse and a care giver to resident ratio of 1 to 6.
Due to the generally high level of care required by residents, a
single-tier pricing structure is used. The Company generally charges
monthly rates per resident ranging from $2,800 for a shared room to $3,300
for a private room.
Wynwood. These multi-story residences are designed to serve primarily
upper-income frail elderly individuals in metropolitan and suburban
markets. Wynwood residents are generally 75 years of age or older, require
assistance with at least two of the five basic activities of daily living
(so-called ADLs (i.e., bathing, toileting, dressing, eating and
ambulation)) and need services due primarily to physical limitations rather
than cognitive impairment. The Wynwood residences typically range in size
from 35,000 to 45,000 square feet and accommodate 50 to 72 residents. To
achieve a more residential
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environment in these larger buildings, each wing or "neighborhood" in the
residence contains design elements scaled to a single-family home and
includes a living room, dining room, patio or enclosed porch, laundry room
and personal care area, as well as a care giver work station. Residents are
offered a choice of private or shared, fully-furnished accommodations with
ongoing health assessments by a nurse, 24-hour assistance with ADLs, three
meals a day plus snacks, organized social activities, housekeeping and
personal laundry service. The Company maintains a minimum care giver to
resident ratio of 1 to 10 at each of these residences and increases
staffing levels to a ratio as high as 1 to 6 to accommodate the care needs
of the resident population. All residents are assessed at admission to
determine the level of care and service required and placed in one of four
levels ranging from basic care to three different levels of advanced care.
The Company customarily charges monthly rates per resident ranging from
$1,800 to $2,400 for a shared room and from $2,500 to $3,100 for a private
room.
Crossings. These apartment-style residences serve the needs of elderly
individuals who may require support services and personal care and are
generally located in metropolitan markets. Apartment-style residences are
favored in certain markets in the United States, particularly throughout
Western states and are required in certain states to meet licensing
requirements. The Company believes this product line enables it to capture
a broader segment of the assisted living market. These multi-story
residences range in size from 45,000 to 65,000 square feet and accommodate
60 to 80 residents, who choose among studio, one-bedroom and two-bedroom
apartments. These apartments typically include a bedroom, a kitchenette, a
full bathroom and a living/dining area and range in size from 280 to 700
square feet. Common space is dispersed throughout the buildings and
includes a central dining room, a library, various activity rooms, laundry
rooms and a beauty shop. The Company maintains care staff to resident
ratios ranging from 1 to 12 to 1 to 16, depending upon the care needs of
the residents. Crossings residences generally offer a three-tier pricing
structure ranging from a basic care package to more advanced care levels.
The Company customarily charges monthly rates per resident ranging from
$1,500 to $3,300. Additional fees ranging from $100 to $450 per month may
be charged for more advanced care levels, including its RISE and ESP
ancillary support programs. See "-- Assisted Living Care and Service
Programs".
WovenHearts. These residences are designed to meet the needs of
elderly individuals who have primarily physical limitations or who may be
experiencing the early stages of Alzheimer's disease. These smaller
residences serve moderate-income frail elderly individuals and are
typically located in small towns or rural markets. WovenHearts residences
range in size from 7,000 to 12,000 square feet, accommodate 20 residents
and are being expanded to accommodate 26 residents. These single-story
residences resemble, and can generally be constructed on a site suitable
for, a single family home. These residences have multiple common areas that
are easily accessible from any resident room and include a living room, a
den, an entertainment room, several personal care areas as well as a large
kitchen area which opens into an adjoining dining room. This design allows
residents to participate in familiar daily activities (such as assisting
with meals, laundry and housekeeping) which promote maintenance of their
functional abilities. Most of the resident units are private and fully
furnished, though shared accommodations are also available. The Company
generally maintains a minimum care giver to resident ratio of 1 to 8 at its
WovenHearts residences. In addition, the Company is able to offer high
quality and cost-effective care and service in a smaller residential
setting by using a centralized professional staff (i.e., registered nurses
and marketing specialists) that performs functions for several WovenHeart
residences. The combination of lower construction and staffing costs
enables the Company to offer affordable care and services to the moderate
income elderly population. The WovenHeart residences currently have a
single-tier pricing structure consisting of a monthly rate ranging from
$1,800 to $2,500. In the future, the Company intends to adapt its
WovenHearts model, services and staffing levels to accommodate the needs of
residents with later stages of Alzheimer's disease.
ASSISTED LIVING CARE AND SERVICE PROGRAMS
The Company offers a full range of assisted living care and services based
upon individual resident needs. Prior to admission, all residents are assessed
by the Company's professional staff to determine the appropriate residence model
and level of care and services required by such residents. Subsequently,
individual care plans are developed by residence staff in conjunction with the
residents, their families and their physicians. These
41
<PAGE> 42
plans are periodically reviewed, typically at six month intervals, or when a
change in medical or cognitive status occurs. Each of the Company's assisted
living product lines is designed to accommodate residents as they age in place
and require increasing levels of care. To oversee the delivery of care and
services, the Company maintains a licensed nurse on staff at each of its
residences. The Company believes that this level of attention to the health care
needs of its residents enables them to remain in the Company's residences, in
many cases, for the rest of their lives. In addition, the Company is also able
to transfer residents to and from its various residence models, where
appropriate, depending upon the evolving care needs of such residents. The
Company has implemented different care and service plans for each of its product
lines. At its Wynwood and Crossings models, for instance, residents are placed
in one of several care levels depending upon their individual needs. At its
Clare Bridge and WovenHearts residences, the Company uses a single care
structure. However, the Company is in the process of implementing at its
WovenHearts residences a multi-tier care plan similar to the plans offered at
its Wynwood residences. The Company's care levels include a basic care program,
several advanced care programs as well as additional ancillary service programs
as further described below.
Basic Care. At this level, residents are provided with a variety of
services, including 24 hour assistance with ADLs, ongoing health
assessments by a professional nurse, three meals per day and snacks,
coordination of special diets planned by a registered dietitian, assistance
with coordination of physician care, physical therapy and other medical
services, social and recreational activities, housekeeping and personal
laundry services.
Advanced Care. The Company also offers higher levels of personal and
health care services to residents who require more frequent or intensive
physical assistance or increased care and supervision due to cognitive
impairments. The Company offers three advanced care levels which provide
residents with increasing levels of care and services dependent on the
residents' changing needs. Rates charged for these services are added to
the rate charged for basic care. The Company generally charges an
additional $300 to $750 per month depending upon the level and frequency of
care required and staffing needs. Residents in the highest care level are
typically very physically frail or experiencing early stages of Alzheimer's
disease or other dementia. Physically frail residents may require complex
medication management, assistance with most or all ADLs, two-person
transfer from a wheelchair or incontinence care. Residents with cognitive
impairment may require frequent staff interaction and intervention due to
confusion.
Alzheimer's Care. The Company believes it is one of the leading
providers of care to residents with cognitive impairments including
Alzheimer's and other dementias, in its free-standing Clare Bridge
residences. The Company's programs provide the attention, care and services
needed to help cognitively impaired residents maintain a higher quality of
life. Specialized services include assistance with ADLs, behavior
management and a life-skills based activities program, the goal of which is
to provide a normalized environment that supports residents' remaining
functional abilities. Whenever possible, residents participate in all
facets of daily life at the residence, such as assisting with meals,
laundry and housekeeping.
RISE (Restoring Independence, Strength and Energy). Crossings
residences offer RISE, a one-on-one exercise program designed to help
residents regain their independence and become healthier, and stronger by
improving flexibility, balance, strength and endurance. The program is
targeted to residents with health concerns related to Parkinson's disease,
strokes, osteoarthritis, osteoporosis, congestive heart disease, hip
fractures and other limitations in ambulation and mobility. Monthly rates
for the program range from $90 to $400 depending on the frequency and
duration of sessions.
ESP (Extended Support Program). ESP, also offered at Crossings
residences, is a program designed to provide additional structure and
personal attention to residents with early stages of dementia. Regularly
scheduled group recreational activities and social events help residents
build self-esteem and decrease anxiety related to confusion and
disorientation. The ESP program has been successful in retaining residents
who, due to their dementia, might otherwise need to relocate to a more
supportive environment. The monthly program rates range from $325 to $450.
42
<PAGE> 43
Supportive Services. These services, which are currently offered at
Crossings residences, are designed for residents who typically do not need
routine assistance with ADLs and who are able to handle the administration
of their own medications. These services typically include three meals per
day, housekeeping, personal laundry service, transportation and social and
recreational programming.
Access to Specialized Medical Services. The Company assists its
residents with the coordination of access to medical services from third
parties including home health care, rehabilitation therapy, pharmacy
services and hospice care. These providers are often reimbursed directly by
the resident or a third party payor, such as Medicare. In the future, the
Company may elect to provide these services directly using its own skilled
employees or through a joint venture agreement with a skilled provider.
Residents requiring greater levels of supervision or more specialized
programming due to Alzheimer's disease or other dementias may be recommended for
transfer to one of the Company's Clare Bridge residences. In the event that a
resident's acuity level reaches a level such that the Company is unable to meet
the resident's needs, the Company maintains relationships with local hospitals
and skilled nursing facilities to facilitate resident transfers.
43
<PAGE> 44
RESIDENCES
The table below sets forth certain information with respect to the
Company's residences which are operated by the Company. The Company owns,
leases, holds equity interest in or manages, on behalf of third parties, these
residences. The Company considers its properties to be in good operating
condition and suitable for the purposes for which they are being used.
OPERATING RESIDENCES
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1996
DATE --------------------
OWNERSHIP RESIDENT OPENED/ RATE PER OCCUPANCY
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY ACQUIRED UNIT(2) RATE(3)
- --------------------------- ------------------ ----------------- --------------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED/LEASED
WISCONSIN
Clare Bridge............. Brookfield Dementia Care Leased 24 Nov-91 $3,307 100%
Clare Bridge............. Middleton Dementia Care Owned 24 Mar-91 3,305 98
Wynwood.................. Madison Frail Elderly Leased 50 Feb-92 2,492 100
Wynwood.................. Brookfield Frail Elderly Leased 60 Mar-94 2,752 99
WovenHearts.............. Clintonville Frail Elderly Owned 19 Jul-95 1,017 87
WovenHearts.............. Edgerton Frail Elderly Owned 16 Oct-95 1,519 71
WovenHearts.............. Janesville Frail Elderly Owned 16 Oct-95 2,581 91
WovenHearts.............. Jefferson Dementia Care Owned 16 Oct-95 2,084 71
WovenHearts.............. Kaukauna Frail Elderly Owned 16 Jul-95 1,619 91
WovenHearts.............. Manitowoc Frail Elderly Owned 20 Dec-95 1,803 31
WovenHearts.............. Neenah Frail Elderly Owned 20 Apr-96 2,100 --
WovenHearts.............. New London Frail Elderly Owned 20 Jul-95 1,406 67
WovenHearts.............. New Richmond Frail Elderly Owned(19.0) 15 Mar-95 2,000 --
WovenHearts.............. Onalaska Frail Elderly Owned 20 Jun-95 1,760 68
WovenHearts.............. Rice Lake Frail Elderly Owned 20 Oct-95 1,800 50
WovenHearts.............. Shawano Frail Elderly Owned 15 Jul-95 1,228 100
WovenHearts.............. Platteville Frail Elderly Owned(72.7) 20 Nov-95 1,454 45
WovenHearts(4)........... Cambridge Frail Elderly Owned(50.0) 15 Jan-96 1,563 27
WovenHearts.............. Jefferson Dementia Care Leased 16 Jan-96 1,726 100
WovenHearts.............. Sun Prairie Frail Elderly Leased 20 Oct-95 1,660 93
WovenHearts.............. Menomonie Frail Elderly Owned(19.0) 20 Mar-95 1,736 64
WovenHearts.............. Plymouth Frail Elderly Owned(19.0) 15 Jun-94 2,155 89
WovenHearts.............. Wisc. Rapids Frail Elderly Owned(19.0) 20 May-95 2,004 92
---------
497
---------
OREGON
Crossings................ Albany Support Services Leased 74 Aug-90 1,132 89
Crossings................ Albany Support Services Leased 63 Jun-89 1,443 100
Crossings................ Forest Grove Support Services/
Frail Elderly Leased 88 Sep-90 1,354 94
Crossings................ McMinnville Support Services/
Frail Elderly Leased 87 May-91 1,512 97
Crossings................ Tualatin Frail Elderly Leased 112 Feb-89 2,163 88
Crossings................ Gresham Frail Elderly Leased 78 Jan-90 1,781 96
Crossings................ Medford Frail Elderly Leased 76 Jan-91 1,707 76
---------
578
---------
MICHIGAN
Clare Bridge............. Ann Arbor Dementia Care Owned 36 Jun-95 3,009 97
Clare Bridge............. Farmington Hills Dementia Care Owned 28 Jul-94 3,258 85
Clare Bridge............. Farmington Hills Dementia Care Owned 32 Oct-95 3,409 63
Clare Bridge............. Lansing Dementia Care Leased 36 Jan-96 2,972 55
Clare Bridge............. Utica Dementia Care Owned 36 Jan-95 3,086 94
---------
168
---------
COLORADO
Crossings................ Boulder Support Services Leased 82 Aug-88 1,600 97
Crossings................ Aurora Support Services Leased 159 Apr-91 1,132 90
Crossings................ Aurora Frail Elderly Leased 60 Apr-91 1,556 80
Crossings................ Boulder Frail Elderly Leased 76 Jun-94 2,290 99
---------
377
---------
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1996
DATE --------------------
OWNERSHIP RESIDENT OPENED/ RATE PER OCCUPANCY
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY ACQUIRED UNIT(2) RATE(3)
- --------------------------- ------------------ ----------------- --------------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FLORIDA
Clare Bridge............. Bradenton Dementia Care Leased 36 Oct-95 $3,179 44%
Clare Bridge............. Sarasota Dementia Care Leased 38 Dec-95 3,237 38
Wynwood.................. Sarasota Frail Elderly Owned 86 Apr-95 2,005 75
---------
160
---------
WASHINGTON
Crossings................ Richland Support Services/
Frail Elderly Leased 128 Jul-88 1,392 84
Crossings................ Tacoma Support Services Leased 119 Jun-87 1,315 94
---------
247
---------
PENNSYLVANIA(5)
Clare Bridge............. Lower Makefield Dementia Care Owned(60.0) 48 Feb-96 2,697 38
Wynwood(6)............... Richboro Frail Elderly/
Dementia Owned(60.0) 110 Nov-94 2,825 90
---------
158
---------
CALIFORNIA
Crossings(7)............. Loma Linda Support Services/
Frail Elderly Leased 140 Jun-91 1,513 76
---------
IDAHO
Crossings................ Boise Frail Elderly Leased 80 Jul-92 2,002 93
---------
MANAGED
WISCONSIN
WovenHearts(8)........... Sussex Frail Elderly Managed 19 -- 1,591 94
WovenHearts(9)........... Lodi Frail Elderly Managed 15 -- 1,696 79
WovenHearts(8)(10)....... Brown Deer Frail Elderly Managed 15 -- 1,966 93
Elm Grove House.......... Elm Grove Dementia Care Managed 8 -- 2,750 100
Finch House.............. Greendale Dementia Care Managed 8 -- 2,741 95
North Shore House........ Fox Point Dementia Care Managed 8 -- 2,750 100
Oak Ridge House.......... Wauwatosa Dementia Care Managed 8 -- 2,542 83
Parkway House............ Milwaukee Dementia Care Managed 8 -- 2,258 98
Ridgefield House......... Madison Dementia Care Managed 8 -- 3,150 100
---------
97
---------
Total.............. 2,502
========
</TABLE>
- ---------------
(1) Substantially all of the residences identified as being owned by the
Company are subject to one or more mortgages or deeds of trust that
typically mature within the next three to 20 years.
(2) Average monthly rate per resident at each residence is calculated by
dividing the residence's total monthly resident service fee revenue by the
average number of occupied beds for the month.
(3) Average monthly occupancy rate for each Clare Bridge, Wynwood and
WovenHearts residence and for each of the managed residences is calculated
by dividing the total number of resident occupied days by the total number
of available bed days of the residence. Average monthly occupancy rates for
each Crossings residence is calculated as the sum of occupied beds at the
end of each week for any one month period divided by the number of weeks in
that month.
(4) ALS shares management responsibility for this residence with its joint
venture partner, Memorial Community Hospital Association, Inc. of Edgerton,
Wisconsin.
(5) The Pennsylvania residences are owned by joint venture entities of which
ALS is the 60% equity owner. See "Business -- Joint Ventures and Strategic
Alliances -- Joint Venture with Continuing Care Concepts, Inc."
(6) ALS's 60% interest in this residence was acquired in September 1994. See
"Business -- Joint Ventures and Strategic Alliances -- Joint Venture with
Continuing Care Concepts, Inc."
(7) This residence is leased under a lease that expires upon the first to occur
of (i) December 1998 or (ii) the achievement of a 95% occupancy rate.
(8) This residence is owned by a franchisee. The Company, however, receives a
management fee equal to 6.0% of the annual gross revenues of this
residence.
(9) The Company holds a 2.5% equity interest in, and has a right of first
refusal to purchase, this residence.
(10) The Company holds a 0.5% equity interest in, and has a right of first
refusal to purchase, this residence.
The Company occupies executive offices located in Brookfield, Wisconsin
under a lease expiring in 2000. The Company also leases office space in Tacoma,
Washington and Madison, Wisconsin.
45
<PAGE> 46
The Company is in various stages of constructing 19 residences and is
developing 24 residences. Set forth below is certain information with respect to
residences in construction and residence sites in development.
RESIDENCES UNDER CONSTRUCTION OR DEVELOPMENT
<TABLE>
<CAPTION>
RESIDENT OPENING
RESIDENCE MODEL LOCATION(1) CARE LEVEL CAPACITY DATE STATUS(2)
- ---------------------------- -------------------- ----------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
MINNESOTA
WovenHearts............... Mankato Frail Elderly 20 3Q 1996 Construction
WovenHearts............... Owatonna Frail Elderly 20 4Q 1996 Construction
WovenHearts............... Austin Frail Elderly 20 4Q 1996 Construction
WovenHearts............... Winona Frail Elderly 20 4Q 1996 Construction
WovenHearts............... Sauk Rapids Frail Elderly 20 1Q 1997 Development
WovenHearts............... Willmar Frail Elderly 20 1Q 1997 Development
WovenHearts............... Faribault Frail Elderly 20 1Q 1997 Development
---------
140
---------
WISCONSIN
WovenHearts............... Whitewater Frail Elderly 20 3Q 1996 Construction
WovenHearts............... Baraboo Frail Elderly 20 3Q 1996 Construction
WovenHearts............... Janesville Frail Elderly 20 3Q 1996 Construction
WovenHearts............... Fond du Lac Frail Elderly 20 4Q 1996 Construction
WovenHearts............... Oshkosh Frail Elderly 20 4Q 1996 Construction
WovenHearts............... River Falls Frail Elderly 20 4Q 1996 Construction
WovenHearts............... Eau Claire Frail Elderly 20 1Q 1997 Development
---------
140
---------
NORTH CAROLINA
Wynwood................... Chapel Hill Frail Elderly 70 4Q 1996 Construction
Clare Bridge.............. Cary Dementia Care 50 1Q 1997 Construction
Clare Bridge.............. Greensboro Dementia Care 38 2Q 1997 Development
Clare Bridge.............. Winston-Salem Dementia Care 38 2Q 1997 Development
Clare Bridge.............. Charlotte Dementia Care 50 3Q 1997 Development
Wynwood................... Charlotte Frail Elderly 72 3Q 1997 Development
Wynwood................... Greensboro Frail Elderly 72 4Q 1997 Development
---------
390
---------
PENNSYLVANIA
Clare Bridge.............. Montgomery Dementia Care 48 3Q 1996 Construction
WovenHearts............... Penn Hills Frail Elderly 26 2Q 1997 Development
Clare Bridge.............. East Hempfield Dementia Care 38 3Q 1997 Development
Clare Bridge.............. Pittsburgh Dementia Care 52 3Q 1997 Development
Clare Bridge.............. York Dementia Care 38 3Q 1997 Development
---------
202
---------
MICHIGAN
Wynwood................... Northville Frail Elderly 72 4Q 1996 Construction
Wynwood................... Utica Frail Elderly 72 1Q 1997 Construction
Wynwood................... Lansing Frail Elderly 72 4Q 1997 Development
---------
216
---------
NEW YORK
Clare Bridge.............. Williamsville Dementia care 52 2Q 1997 Development
Clare Bridge.............. Niskayuna Dementia Care 52 2Q 1997 Development
Clare Bridge.............. Perinton Dementia Care 52 3Q 1997 Development
---------
156
---------
FLORIDA
Clare Bridge.............. Tampa Dementia Care 38 3Q 1996 Construction
Clare Bridge.............. Ft. Meyers Dementia Care 38 4Q 1996 Construction
---------
76
---------
NEW JERSEY
Clare Bridge.............. Westhampton Dementia Care 50 1Q 1997 Construction
Clare Bridge.............. Hamilton Dementia Care 50 2Q 1997 Development
---------
100
---------
WASHINGTON
Crossings................. Tacoma Frail Elderly 70 2Q 1997 Development
Crossings................. Yakima Frail Elderly 70 2Q 1997 Development
---------
140
---------
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
RESIDENT OPENING
RESIDENCE MODEL LOCATION(1) CARE LEVEL CAPACITY DATE STATUS(2)
- ---------------------------- -------------------- ----------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
IDAHO
Crossings................. Boise Support services 78 1Q 1997 Construction
---------
ARIZONA
Clare Bridge.............. Tempe Dementia Care 50 2Q 1997 Development
---------
COLORADO
Crossings................. Colorado Springs Frail Elderly 70 2Q 1997 Development
---------
OREGON
Crossings................. Albany Frail Elderly 70 2Q 1997 Development
---------
SOUTH CAROLINA
Clare Bridge.............. Columbia Dementia Care 50 2Q 1997 Development
---------
Total............... 1,878
========
</TABLE>
- ---------------
(1) Each of the residences located in Michigan, North Carolina, New Jersey, New
York and Pennsylvania may be owned directly by joint venture entities in
which the Company will own varying percentages of equity interests. See
"Business -- Joint Ventures and Strategic Alliances."
(2) "Construction" means that construction activities have occurred (ground
breaking) and are ongoing. "Development" means that the site is under
"control" (pursuant to purchase agreements or options or otherwise) and
development activities with respect to the site have commenced and are
ongoing (such as site permitting, preparation of surveys and architectural
plans, and negotiation of construction contracts). For a summary of certain
risks associated with construction and development activities, see "Risk
Factors -- Ability to Continue Growth; Ability to Manage Rapid Expansion"
and "-- Development and Construction Risks."
Residences under development may not in fact be constructed for a variety
of reasons, including zoning, permitting, health care licensing and cost related
issues. See "Risk Factors -- Development and Construction Risks." Although
opening date information provided in the table is based on current estimates and
is subject to change, the Company expects to open between 15 to 21 residences
during the remainder of 1996. In addition to residences listed in the table
above as "under development," the Company is also engaged in preliminary
development activities with respect to other possible sites for future
residences.
OPERATIONS
The Company centralizes many of its administrative functions to enable its
residence employees to focus their efforts on resident care. The Company
maintains centralized accounting, finance and other operational functions at its
national corporate office in Brookfield, Wisconsin. Employees at the Company's
national corporate office are responsible for (i) establishing Company-wide
policies and procedures relating to, among other things, resident care and
operation, (ii) facilitating billing and collection, accounts payable, finance,
accounting and payroll, (iii) developing employee training materials and
programs and (iv) providing overall strategic direction to the Company. In
addition, all development, construction and acquisition activities, including
feasibility and market studies, residence design, and development and
construction management, are conducted from the Company's national office. The
Company seeks to control operating expenses for each of its residences through
monthly budgeting, standardized management reporting and centralized purchasing.
Residence expenditures are monitored and approved by the Company's regional
directors who are held accountable for achieving budgeted results for each
residence within their respective territory. All of the Company's residences are
divided into geographic regions in order to efficiently allocate the Company's
professional managerial resources. This regional focus permits the Company to
realize certain financial and management economies of scale while reducing much
of the administrative burden typically placed on residence staff. The Company
currently has eight regions under the supervision of six regional directors.
The Residence Director supervises the other members of the residence's
management team (consisting of a Health Care Coordinator, Community Service
Representative, Life Enrichment Coordinator, Resident Assistant Supervisor and
Kitchen Manager) and is responsible for monitoring day-to-day operations and
resident services. Company policy requires the Residence Director to be present
in the residence during normal business hours and the Health Care Coordinator to
be on-call 24 hours a day.
47
<PAGE> 48
The Company has adopted the "care giver" model which differs significantly
from traditional long-term care models. In traditional long-term care settings,
the delivery of care and services is divided into numerous departments typically
consisting of nursing, housekeeping activities and food services all provided by
separate individuals. The Company's resident assistants are responsible for the
personal care, medication administration (when permitted by state law),
housekeeping, laundry, meal service and social activities of the residents. As a
result, the Company believes its staff can deliver comparable levels of care in
a more personalized, efficient and economic manner than that offered in most
long-term care settings. The Company believes that its care giver model enables
its staff to develop a personal approach and, in many instances, become a
significant part of residents' lives.
The Company has attracted, and continues to seek, highly dedicated,
experienced personnel. The Company has created formal training programs
accompanied by review and evaluation procedures to help ensure quality care for
its residents. The Company believes that education, training, and development
enhance the effectiveness of its employees. All employees are required to
complete the Company's training program, which includes a core curriculum
comprised of personal care basics, Alzheimer's disease processes, behavior
management, health care management, life skills programming, first aid, fire
safety, nutrition, infection control, hospitality, customer service, and death
and dying. In addition to classroom training, the Company's residences provide
new employees with on the job training, utilizing experienced staff as trainers
and mentors.
For staff who desire to advance into residence management, a program that
provides additional training in management techniques and budget management is
available. The Company has developed an "Associate in Training" program that
places a residence director trainee in an existing residence to attain "hands
on" experience under the direct supervision of a current Residence Director.
This program is intended to ensure that a sufficient number of Company-trained
professionals will be available to manage newly developed and acquired
residences.
QUALITY ASSURANCE
The Company's quality assurance program is intended to further its goal of
achieving a high degree of resident and family satisfaction with the care and
services it provides. The Company coordinates the implementation of its quality
assurance program at each of its residences through its national and regional
offices. Periodic and annual surveys of residents and their family members are
used to appraise and monitor their level of satisfaction with the Company's
services. The Company also provides a toll-free number so that residents, their
families and professionals may conveniently convey their comments and
observations. In addition, residence inspections are conducted periodically by
regional staff. The scope of these inspections cover the appearance of the
exterior of the buildings and grounds, the appearance and cleanliness of the
interior, the professionalism and friendliness of staff, the quality of resident
care and care documentation, the quality of resident social events and planned
activities, the presentation of meals and appearance of dining areas, the
appearance of residents and overall compliance with government regulations. To
further evaluate customer service, the Company engages a third party service to
periodically "mystery shop" the Company's residences. This independent service
analyzes the Company's performance from the perspective of a customer without
the inherent biases of a Company employee. This service assists the Company in
continually monitoring and improving the level of services offered to its
residents to further ensure maximum customer satisfaction.
MARKETING
The Company's marketing and sales efforts are undertaken on the national,
regional and local levels. This effort is intended to create awareness of the
Company and its services among prospective residents, their families, other key
decision makers and professional referral sources. A national office marketing
staff develops overall strategies to promote the Company's product lines
throughout its markets and assesses continuously the success of its efforts by
monitoring the generation and tracking of leads carried out by the Company's
sales staff. Each regional office also has a marketing specialist, and most
residences have on staff a Community Services Representative, both of whom are
dedicated to sales and marketing activities.
48
<PAGE> 49
Prior to opening new residences, the Company commences an aggressive
marketing campaign by opening a sales office in close proximity to residences
nearing completion. During this launch campaign, the Company's personnel
actively contact local referral sources, which generally account for a majority
of resident referrals. In addition, the Company typically engages in more
traditional types of marketing activities, such as direct mailings and print
advertising, signs and yellow pages advertising. These marketing activities and
media advertisements are directed to the adult children of prospective residents
because they comprise the primary decision makers for placing a frail elderly
relative in an assisted living setting. The Company's "clustering" strategy also
enables the Company to leverage its pre-opening and on-going marketing efforts
in a given area.
The Company's marketing personnel also provide insight into local and
regional demand for assisted living services. The regional and local marketing
staff may be more attuned to local demand for certain services not offered by
the Company. As a result, the Company regularly involves its marketing personnel
in evaluating its development activities and services.
ADVISORY BOARD
The Company has formed an Advisory Board comprised of professionals with
specialized expertise in the delivery of assisted living services. The Advisory
Board meets regularly to review the Company's resident care policies and
procedures and makes recommendations with respect thereto to the Company's
management. The Advisory Board, however, has no authority to act on behalf of
the Company. Each advisory director receives $1,000 for each meeting attended
and is reimbursed for expenses incurred in connection therewith. The Company
estimates that each advisory director devotes approximately 40 hours per year on
the Company's affairs. The current members of the Advisory Board are:
<TABLE>
<CAPTION>
NAME POSITION
- ----------------------------------- ------------------------------------------------
<S> <C>
Kathleen Buckwalter, Ph.D.......... Professor and Associate Director, Office of
Nursing Research Development and Utilization,
University of Iowa
Donna Cohen, Ph.D.................. Chairman, Department of Aging and Mental Health,
University of South Florida
Carly R. Hellen, OTR/L............. Consultant to Rush Alzheimer's Disease Center,
Rush-Presbyterian-St. Luke's Medical Center,
Chicago, Illinois
Thomas Kirk........................ Vice President, Patient Family and Education
Services, National Alzheimer's Association,
Chicago, Illinois
Cynthia Leibrock, MA, ASID,
IFDA............................. Principal, Easy Access Barrier Free Design,
Aurora, Colorado
Nancy Mace, MA..................... Consultant and author of "The 36-Hour Day,"
Walnut, California
Cynthia Schmeichel, Ph.D........... President and Chief Executive Officer, Sage
Disease Management Services, Munster, Indiana.
</TABLE>
JOINT VENTURES AND STRATEGIC ALLIANCES
In further support of its development strategy, the Company has formed
strategic alliances and joint ventures with established real estate development
partners. These alliances and joint ventures have enabled the Company to develop
and construct additional residences while reducing the investment of, and
associated risk to, the Company.
Joint Venture with Continuing Care Concepts, Inc. In 1994, the Company
established a joint venture with Continuing Care Concepts, Inc. ("CCC") to
develop, own and operate assisted living residences in targeted market areas
throughout Pennsylvania, Delaware and New Jersey (the "ALS-East Territory"). CCC
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is a corporation owned and controlled by DeLuca Enterprises, Inc., an Eastern
Pennsylvania-based commercial real estate development and construction company.
In September 1994, the Company commenced its relationship with CCC through the
acquisition of a 60% interest in a partnership that owns the Wynwood residence
located in Richboro, Pennsylvania. CCC retained the remaining 40% of this
partnership. Pursuant to the acquisition agreement entered into by the Company
and CCC in connection with this transaction (the "ALS-East Agreement"), during
the five-year period commencing in September 1994, the Company and CCC have
agreed to develop and construct additional assisted living residences throughout
the ALS-East Territory, with the Company and CCC having a 60% and 40% equity
interests and capital obligations, respectively. Pursuant to this arrangement,
the Company has agreed to contribute a total of $5.2 million of equity to
develop ALS-East residences, $1.0 million of which had been funded as of March
31, 1996. The Company is entitled to receive a priority distribution from the
ALS-East residences in the aggregate amount of $1,680,000 ("Priority
Distribution"), and thereafter the Company and CCC are entitled to receive their
respective share of any incremental distribution. If construction is not
commenced on at least eight new ALS-East residences by September 1998, the above
priority amount will be modified so as to provide the Company with a 27%
internal rate of return on capital contributed to ALS-East residences.
During the five year development term, the Company and CCC have agreed to
develop residences within the ALS-East Territory exclusively with each other,
and have agreed not to independently engage in other competitive activities in
such territory, subject to certain limited exceptions. CCC and its affiliates
have agreed to provide development and construction management services to
ALS-East development projects and the Company has agreed to manage the ALS-East
residences, all pursuant to agreed upon arrangements. Under the ALS-East
Agreement, the approval of both the Company and CCC is generally required for
matters relating to the development, construction, operation and management of
ALS-East residences. In addition to the Richboro residence, the Company and CCC
have constructed and are operating a Clare Bridge residence in Lower Makefield,
Pennsylvania, are constructing Clare Bridge residences in Montgomery,
Pennsylvania and Westhampton, New Jersey and are developing four additional
Clare Bridge residences and one WovenHearts residence in the ALS-East Territory.
Upon the first to occur of (i) September 20, 1998 or (ii) the issuance of
an occupancy permit for eight ALS-East residences, the Company shall have the
option to purchase CCC's interest in all ALS-East entities at an amount based on
a fair market value determination, subject to a minimum purchase price.
The Company and CCC have reached a non-binding agreement in principle
regarding the purchase by the Company of the 40% equity interest held by CCC in
three ALS-East residences as well as the restructuring of the on-going ALS-East
joint venture relationship (the "Pending ALS-East Modification"). Specifically,
pursuant to the Pending ALS-East Modification the Company would acquire CCC's
40% interest in the two operating ALS-East residences (Richboro and Lower
Makefield, Pennsylvania) as well as CCC's 40% interest in the Clare Bridge
residence currently in construction in Montgomery, Pennsylvania for an aggregate
purchase price of $3.2 million. Simultaneously with such purchase, pursuant to
the Pending ALS-East Modification the joint venture arrangement between the
Company and CCC with respect to all other ALS-East residences, including those
currently in construction or development, would be substantially modified such
that: (i) the term of the joint venture would be extended through December 1999;
(ii) CCC's equity opportunity with respect to future ALS-East residences would
be in the form of a right of first refusal to provide 20% (as opposed to 40%) of
the equity for future residences located in the ALS-East Territory; (iii) ALS
would no longer have the Priority Distribution but losses from the operation of
jointly owned ALS-East residences would be disproportionately allocated to CCC
to the extent of its capital account; and (iv) with respect to each
jointly-owned ALS-East residence, upon the six month anniversary of the opening
of such residence, CCC shall have a right to require the Company to purchase
CCC's interest in such residence (put option) and the Company shall have an
option to acquire (call option) CCC's interest in such residence at a purchase
price based upon the appraised fair market value of the residence. Pursuant to
the Pending ALS-East Modification, the Company would use CCC or its affiliates
as its exclusive general contractor in the ALS-East Territory through December
1999 and the Company would continue to manage jointly owned ALS-East residences
pursuant to agreed upon arrangements.
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Although the Company and CCC have reached an agreement in principle with
respect to the Pending ALS-East Modification and are currently negotiating the
terms of a definitive agreement, neither party will have any binding obligation
with respect thereto until such definitive agreement is executed and delivered.
No assurance can be given that the Company and CCC will in fact execute a
definitive agreement with respect to the Pending ALS-East Modification. The
Pending ALS-East Modification would be contingent upon the consummation of the
Offering and a portion of the net proceeds available to the Company from the
Offering would be used to fund the Company's purchase obligations with respect
thereto. The Company does not believe that the acquisition of the 40% equity
interest held by CCC in the three ALS-East residences pursuant to the ALS-East
Modification will be material to the Company's results of operations or
financial condition. See "Use of Proceeds."
Joint Venture with Days Development Company. The Company has established a
joint venture (the "ALS-Carolina J.V.") with Days Development Company, L.C., a
Roanoke, Virginia based commercial real estate development and construction
company ("Days"), to develop, own and operate assisted living residences in
targeted market areas throughout North and South Carolina (the "ALS-Carolina
Territory").
Pursuant to the ALS-Carolina J.V., Days and the Company have agreed to
capitalize and form separate project entities during a five year development
term which commenced in November 1995 to develop, construct, open and operate
residences in the ALS-Carolina Territory, with the Company and Days owning and
funding a 51% and 49% equity interest, respectively, in such project entities.
During the development term, the Company and Days will develop residences
exclusively with each other within the ALS-Carolina Territory, and have agreed
not to independently engage in other competitive activities in such markets,
subject to certain limited exceptions. Days is providing development and
construction management services to the ALS-Carolina J.V. and the Company will
manage the ALS-Carolina residences, all pursuant to agreed upon arrangements.
The Company and Days are currently constructing a Wynwood residence in Chapel
Hill, North Carolina and a Clare Bridge residence in Cary, North Carolina and
developing three Clare Bridge residences and two Wynwood residences in the
ALS-Carolina Territory.
Days and the Company will share decision making with respect to the
development of ALS-Carolina residences. Decision making with respect to the
operation of ALS-Carolina residences is generally determined by majority vote,
and, consequently, the Company may make such decisions without Days' consent by
virtue of its majority equity interest. However, certain major business
decisions require joint approval of the Company and Days, such as any merger,
dissolution or reorganization of any project entity owning an ALS-Carolina
residence, any sale of an equity interest in any such project entity to persons
other than to the Company and Days, any distributions to the Company and Days
other than as contemplated and the election and appointment of officers of such
project entities. The Company has agreed to be solely responsible for any
guarantees required to secure permanent loan financing on an ALS-Carolina
residence after such residence first achieves 75% occupancy.
With respect to each ALS-Carolina residence, upon the second anniversary of
the opening of the residence, Days shall have the right to require the Company
to purchase (put option), and the Company shall have the option to acquire (call
option), Days's ownership interest in such residence. The purchase price payable
upon exercise of the put or call option is based on the appraised fair market
value of the residence at the time such option is exercised and is payable in
cash and/or shares of Common Stock.
The Company and Days are currently engaged in discussions regarding the
purchase by the Company of the equity interest held by Days in the Chapel Hill,
North Carolina residence as well as the restructuring of the ongoing joint
venture relationship in a manner similar to the Pending ALS-East Modification.
These discussions, however, are preliminary, no agreement in principle has yet
been reached and neither party has any binding obligation with respect thereto.
No assurance can be given that the Company will arrive at a satisfactory
understanding with Days with respect to the purchase of its interest in the
Chapel Hill residence or with respect to modifying the terms of the ALS-Carolina
J.V.
Proposed Joint Venture with Pioneer Development Company. The Company has
entered into a non-binding Memorandum of Understanding (the "Memorandum") with
Pioneer Development Company, a Syracuse, New York based commercial real estate
development and construction company ("Pioneer"), which contemplates that the
Company and Pioneer will enter into a joint venture relationship to develop, own
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and operate assisted living residences in targeted market areas throughout New
York, Massachusetts, Connecticut and Rhode Island (the "ALS-Northeast
Territory"). Although the Company and Pioneer are seeking to finalize the terms
of definitive agreements with respect to the joint venture contemplated by the
Memorandum (referred to herein as the "ALS-Northeast J.V."), no assurances can
be given that the Company and Pioneer will successfully complete these
negotiations and enter into definitive joint venture agreements.
The Memorandum contemplates that Pioneer and the Company will capitalize
and form separate project entities during a five-year development term to
develop, construct, open and operate residences in the ALS-Northeast Territory,
with the Company and Pioneer owning and funding a 51% and 49% equity interest,
respectively, in such project entities. During such development term, the
Company and Pioneer will develop residences exclusively with each other within
the ALS-Northeast Territory in the manner contemplated by the Memorandum, and
will agree not to independently engage in other competitive activities in such
markets, subject to certain limited exceptions. Pioneer will provide development
and construction management services to the ALS-Northeast J.V. and ALS will
manage the ALS-Northeast residences, all pursuant to agreed upon arrangements.
With respect to each ALS-Northeast residence, upon the first to occur of
(i) such residence achieving a 75% occupancy or (ii) the second anniversary of
the opening of such residence, Pioneer shall have the right to require the
Company to purchase Pioneer's interest in the residence (put option) and the
Company shall have an option to acquire (call option) Pioneer's interest in such
ALS-Northeast residence. The purchase price payable upon exercise of the put and
call options shall be based on the appraised fair market value of the residence
and shall be payable in cash and/or shares of Common Stock. In addition, the
Company has agreed to be solely responsible for any guarantees required to
secure financing on an ALS-Northeast residence commencing at the time such
residence first achieves 75% occupancy. Pioneer and the Company will share
decision making with respect to the development and operation of each
ALS-Northeast residence until such time as the put option for such residence
shall first become exercisable, at which time the Company, by virtue of its
majority equity interest, will have the right to make most major decisions
without Pioneer's consent.
In contemplation of the ALS-Northeast J.V. described in the Memorandum, in
May 1996 the Company issued to Assisted Living Equity Investors, an affiliate of
Pioneer, 322,706 shares of Common Stock at a price per share of $4.65 (the
"Pioneer Shares"). The Pioneer Shares may be rescinded by the Company, at its
election, if definitive agreements for ALS-Northeast are not executed by the
parties on or before August 21, 1996, at a rescission price equal to the
purchase price for the Pioneer Shares. The Company also has the right to rescind
certain of the Pioneer Shares at the price paid by Pioneer for such shares if
approved building sites for less than four new ALS-Northeast residences have
been acquired or applicable permits have not been obtained for the construction
of ALS-Northeast residences in 1996. The Pioneer Shares are, accordingly,
nontransferable so long as these rescission options are in effect.
Fee Development Relationship with The Damone Group. In connection with the
Michigan Restructuring, the Company and The Damone Group, Inc. ("Damone"), a
Troy, Michigan based commercial real estate development and construction firm
that developed and constructed the Company's Michigan residences and certain of
the Company's Florida residences, have agreed to an exclusive fee development
and construction arrangement with respect to future residences to be developed
and constructed by the Company in Michigan and Florida during the 36 month
period commencing in May 1996. Pursuant to this arrangement, Damone will provide
development and construction management services to the Company pursuant to
agreed upon terms; provided, however, the Company has the right to retain other
developers to provide construction services if Damone's guaranteed maximum price
bid for construction of a new residence exceeds 105% of the guaranteed maximum
price bid of such other developer.
The Company has also granted to Damone a right to invest in the next two
Wynwood or Clare Bridge residences developed and constructed by the Company in
Michigan. Under this investment right, Damone is entitled to acquire an interest
in the limited partnerships to be formed to own such residences, which limited
partnership interest may represent up to a 49% equity interest in each of such
residences, subject, however, to the prior right of Margolick Financial Group
Limited Partnership described below. If Damone elects to invest
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in any such residence, the Company will have the right to acquire the Damone
interest (call option) in such residence, and Damone shall have the right to
require the Company to acquire Damone's interest (put option) in such residence
to the Company, commencing six months following the opening of such residence.
The purchase price payable by the Company under such put and call options is a
formula price based on the fair market value of the residence, except that
during the first ten months that the call option is exercisable, the appraised
value upon exercise of the call option shall be based on the residence's
projected stabilized occupancy.
The Company granted a similar right to invest in the next three Wynwood or
Clare Bridge residences to be developed and constructed by the Company in
Michigan to Margolick Financial Group Limited Partnership of Farmington Hills,
Michigan ("MFG"), which served as placement agent for the private placement of
limited partnership interests in the ALS-Midwest Partnerships. Specifically, MFG
has the right to provide 49% of the equity capital for the next five Wynwood or
Clare Bridge residences constructed by the Company in Michigan prior to December
1998. If MFG or its designees elect to make any such investment, the limited
partnership interest acquired by MFG or its designees will be subject to put and
call options substantially identical to those described above with respect to
the investment right granted to Damone. The Company has also agreed to pay MFG a
fee for all WovenHearts residences developed and constructed by the Company in
Michigan prior to December 1998 equal to one percent (1%) of the capital project
cost of the next fifteen (15) such residences and one-half of one percent
( 1/2%) of the capital project cost of any such residences in excess of fifteen.
The Company estimates that it will construct in excess of 15 WovenHearts
residences in Michigan during this time period, which would result in amounts in
excess of $150,000 being payable to MFG.
Fee Development Relationship with Western Communities Corporation. The
Company has entered into a Pre-Construction Coordination Agreement (the "WCC
Agreement") with Western Communities Corporation, a Tempe, Arizona-based
construction and development firm ("WCC"), pursuant to which WCC is responsible
for (i) locating suitable sites in communities in Arizona designated by the
Company ("Project Areas") for development of the Company's assisted living and
dementia care residences; (ii) assisting the Company in its site selection
process; and (iii) obtaining all required governmental approvals within
specified time periods. WCC is entitled to a project development fee of $50,000
per project site and to reimbursement of 110% of costs and expenses. If WCC does
not obtain the required approvals within the specified time, it must refund the
development fee (but not costs and expenses) for that project site to the
Company; however, the obligation to refund such fee is limited to the first four
Project Areas designated by the Company in each of 1996 and 1997. Upon
acquisition of a project site, the parties intend to enter into a mutually
satisfactory construction management agreement pursuant to which WCC will manage
the construction of the facility. The WCC Agreement provides that, during the
term of the WCC Agreement, the Company and WCC will not enter into a similar
agreement with any other person in Arizona and that WCC will not locate or
develop sites for assisted living or dementia care residences in Arizona without
first offering such sites to the Company.
A Clare Bridge residence in Tempe, Arizona is designated as the first
development project under the WCC Agreement. WCC has this site under contract
and the Company is obligated to reimburse WCC for certain costs incurred,
including substitution of earnest money. The Company is also obligated to
designate at least three additional Project Areas during the term of the WCC
Agreement, which is two years unless terminated earlier pursuant to the terms
thereof.
INDUSTRY BACKGROUND
The long-term care industry encompasses a continuum of housing and personal
and health care options that are provided primarily to the elderly population.
Assisted living residences offer a viable alternative to nursing homes for
elderly individuals requiring less intensive medical services, especially
individuals who may require assistance due to physical or cognitive impairments.
As an elderly person's need for assistance increases, care in an assisted living
residence, where assistance with personal care, support services and health care
services are available, is often preferable to, and less costly than, home-based
or traditional nursing home care. Generally, assisted living residents have
higher acuity levels than those of residents of congregate and retirement living
centers but lower than those of residents in skilled nursing facilities.
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The Company believes there will continue to be significant growth
opportunities in the long-term care market for providing health care and other
services to the elderly, especially the market for assisted living residences.
Factors contributing to this growth potential include the following:
Demographic and Social Trends. The target market for the Company's
services are persons generally 75 years and older, one of the fastest
growing segments of the U.S. population. According to a 1993 industry
report published by ALFAA and Coopers & Lybrand, the average age of male
and female residents of assisted living residences is 83 and 85 years of
age, respectively. According to the U.S. Census Bureau, the portion of the
U.S. population age 75 and older is expected to increase by 33.5%, from
approximately 13.0 million in 1990 to over 17.4 million, by the year 2000
and the number of persons age 85 and older, as a segment of the U.S.
population, is expected to increase 43%, from approximately 3.0 million to
over 4.3 million, by the year 2000.
The number of persons afflicted with Alzheimer's disease is also
expected to grow in the coming years. According to data published by the
Alzheimer's Association, this group will grow from the current 4 million to
14 million, or 250%, by the year 2040. As Alzheimer's disease and other
dementias are more likely to occur as a person ages, the increasing life
expectancy of Americans is expected to result in a greater number of
persons afflicted with Alzheimer's disease and other dementias in future
years.
In addition, as the number of two-income households has increased over
the last decade and as the geographical separation of elderly family
members from their adult children increases with the geographic mobility of
the U.S. population, many families that traditionally would have provided
the type of care and services offered by the Company to elderly family
members will increasingly not be in a position to do so. The Company
believes that these demographic and social trends will result in increased
demand for assisted living services, including dementia care residences,
and have resulted in a substantial increase in the supply of assisted
living beds since 1980 to satisfy a portion of this demand.
Cost Containment Pressures. In response to rapidly rising health care
costs, government and private-pay sources have adopted cost-containment
measures that have encouraged reduced hospital lengths of stays. The
federal government has acted to curtail increases in health care costs
under Medicare by limiting acute care hospital reimbursement for specific
services to pre-establish fixed amounts. Private insurers have begun to
limit reimbursement for medical services in general to predetermined
"reasonable charges," while managed care organizations, such as health
maintenance organizations, are attempting to limit hospitalization costs by
negotiating discounted rates for hospital services and by monitoring and
reducing hospital use. In response, hospitals are discharging patients
earlier and referring elderly who may be too sick or frail to maintain
complete independence, to skilled nursing facilities where the cost of
providing care is lower than in a hospital. As a result, an increased
number of discharged hospital patients are seeking skilled nursing facility
care. At the same time, skilled nursing facility operators continue to
focus on improving occupancy and expanding services to subacute patients
requiring higher levels of skilled nursing care. Given these cost
containment pressures, the Company believes that the less institutional,
less costly assisted living residences will be well positioned to serve an
increasing segment of the long-term care market.
Limited Supply of Long-Term Care Beds. Most of the states in which
the Company currently operates have enacted certificate of need ("CON") or
similar legislation which restricts the supply of licensed nursing facility
beds. These laws generally limit the construction of nursing facilities,
and the addition of beds or services to existing nursing facilities, and
hence tend to limit the available supply of traditional nursing home beds.
In addition, some long-term care facilities have started to convert
traditional nursing home beds into sub-acute beds. The Company also
believes that high construction costs and limits on government
reimbursement for the full cost of construction and start-up expenses also
will constrain the growth and supply of traditional nursing home facilities
and beds. The Company expects that this tightening supply of nursing beds
will tend to shift to assisted living care residences certain elderly who
previously would have resided in a traditional nursing home facility and
has resulted in a substantial increase in the supply of assisted living
beds since 1980 to satisfy a portion of the demand for assisted living
services.
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Quality of Life Advantages of Assisted Living. The Company believes
that, as potential residents and their family members become increasingly
more aware of the assisted living alternative, they will be attracted to
the more residential setting of assisted living residences, which promote
residents' privacy, individual choice and independence and encourage the
involvement of the resident's family, neighbors and friends. The Company
believes that assisted living care, which is based on a residential model
for the care of the frail elderly and others, offers quality of life
advantages over the institutional, medically oriented nursing home model.
These trends may result in increased competition within the assisted living
industry and may contribute to the establishment of competitive alternatives for
elderly care. See "-- Competition."
GOVERNMENT REGULATION
Health care is an area of extensive and frequent regulatory change. The
assisted living industry is relatively new and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels is evolving. See
"Risk Factors -- Government Regulation."
The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities. Although regulatory requirements vary from state to
state, these requirements generally address, among other things: personnel
education, training and records; staffing levels; facility services, including
administration and assistance with self-administration of medication, and
limited nursing services; physical residence specifications; furnishing of
residence units; food and housekeeping services; emergency evacuation plans; and
resident rights and responsibilities. New Jersey also requires each assisted
living residence to obtain a CON prior to its opening. The Company's residences
are also subject to various state or local building codes and other ordinances,
including safety codes. Management anticipates that the states which are
establishing regulatory frameworks for assisted living residences will require
licensing of assisted living residences and will establish varying requirements
with respect to such licensing.
The Company has obtained all required licenses for each of its residences
and expects that it will obtain all required licenses for each new residence.
Each of the Company's licenses must be renewed annually. The Company has also
obtained a CON for each residence under construction or development in New
Jersey.
Like other health care facilities, assisted living residences are subject
to periodic survey or inspection by governmental authorities. From time to time
in the ordinary course of business, the Company receives deficiency reports. The
Company reviews such reports and seeks to take appropriate corrective action.
Although most inspection deficiencies are resolved through a plan of correction,
the reviewing agency typically is authorized to take action against a licensed
facility where deficiencies are noted in the inspection process. Such action may
include imposition of fines, imposition of a provisional or conditional license
or suspension or revocation of a license or other sanctions. Any failure by the
Company to comply with applicable requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that its residences are in substantial compliance with all
applicable regulatory requirements. No actions are currently pending against any
of the Company's residences nor have any of the Company's residences been cited
in the past for any significant non-compliance with regulatory requirements.
Pursuant to recently adopted Wisconsin legislation creating a new category
of residential care facilities for the elderly for state funding purposes,
effective as of July 1, 1996 only those assisted living facilities which are
comprised of independent apartments having an individual lockable entrance, a
full kitchen, an individual full bath and separate sleeping and living areas,
among other requirements, may be designated as an "assisted living facility" in
the State of Wisconsin. The Company's residences located in Wisconsin as well
as, the Company believes, numerous other assisted living residences operating
within the state, would not meet the definitional requirements of this statute.
As administrative guidelines for this legislation have not yet been finalized,
its scope and application are still uncertain. Pending the finalization of
administrative guidelines and further classification by the applicable state
agencies, the Company, as well as other assisted living operators in Wisconsin,
are reviewing their administrative, legislative and judicial options in
responding to this legislation. The Company believes that many operators will
not discontinue their use of the generic trade description
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"assisted living facility" in doing business in the State of Wisconsin until
such time as the scope and enforceability of the legislation as well as the
consequences of noncompliance are clarified. If the Company is ultimately
compelled to discontinue any reference to the generic term "assisted living" in
its sales and marketing materials for its Wisconsin residences, such compliance
could have a material adverse effect on the Company's business, results of
operation or financial condition.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. The Medicare/Medicaid anti-kickback law has been
broadly interpreted to apply to certain contractual relationships between health
care providers and sources of patient referral. Similar state laws vary from
state to state, are sometimes vague and seldom have been interpreted by courts
or regulatory agencies. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or
suppliers from participation in (i.e., furnishing covered items or services to
beneficiaries of) the Medicare and Medicaid programs. Although the Company
receives only a small portion of its total revenues from certain Medicaid waiver
programs and is otherwise not a Medicare or Medicaid provider or supplier, it is
subject to these laws because (i) the state laws typically apply regardless of
whether Medicare or Medicaid payments are at issue and (ii) as required under
some state licensure laws, and for the convenience of its residents, some of the
Company's assisted living residences maintain contracts with certain health care
providers and practitioners, including pharmacies, visiting nurse organizations
and hospices, through which the health care providers made their health care
items or services (some of which may be covered by Medicare or Medicaid)
available to the Company's residents. There can be no assurance that such laws
will be interpreted in a manner consistent with the practices of the Company.
Management is not aware of any non-compliance by the Company with
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.
COMPETITION
The long-term care industry is highly competitive and, given the relatively
low barriers to entry and continuing health care cost containment pressures, the
Company expects that the assisted living segment of such industry will become
increasingly competitive in the future. The Company competes with other
providers of elderly residential care on the basis of the breadth and quality of
its services, the quality of its residences and, with respect to private pay
patients or residents, price. The Company also competes with other providers of
long-term care in the acquisition and development of additional residences. The
Company's current and potential competitors include national, regional and local
operators of long-term care residences, acute care hospitals and rehabilitation
hospitals, extended care centers, assisted/independent living centers,
retirement communities, home health agencies and similar institutions, many of
which have significantly greater financial and other resources than the Company.
In addition, the Company competes with a number of tax-exempt nonprofit
organizations which can finance capital expenditures on a tax-exempt basis or
receive charitable contributions unavailable to the Company and which are
generally exempt from income tax. While the Company's competitive position
varies from market to market, the Company believes that it competes favorably in
substantially all of the markets in which it operates based on key competitive
factors such as the breadth and quality of services offered, residence quality,
recruitment and retention of qualified health care personnel and reputation
among local referral sources. See "Risk Factors -- Competition."
The Company also competes with other providers of long-term care with
respect to attracting and retaining qualified and skilled personnel. In recent
years the health care industry has experienced a shortage of qualified health
care professionals. While the Company has been able to retain the services of an
adequate number of professionals to staff its residences appropriately and
maintain its standards of quality care, there can be no assurance that continued
shortages will not affect the ability of the Company to maintain the desired
staffing levels. See "Risk Factors -- Residence Management, Staffing and Labor
Costs."
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INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. Compared to more institutional long-term care facilities, assisted
living residences (especially its dementia care residences) of the type operated
by the Company offer residents a greater degree of independence in their daily
lives. This increased level of independence, however, may subject the resident
and the Company to certain risks that would be reduced in more institutionalized
settings. The Company currently maintains liability insurance intended to cover
such claims which it believes is adequate based on the nature of the risks, its
historical experience and industry standards. See "Risk Factors -- Liability and
Insurance."
TRADEMARKS
Crossings and WovenHearts are registered service marks of the Company and
the Company claims service mark protection in the marks Wynwood, Hamilton
House(SM) and Clare Bridge.
EMPLOYEES
At March 31, 1996, the Company employed 808 full-time employees and 690
part-time employees. The Company believes it maintains good relationships with
its employees. None of the Company's employees are represented by a collective
bargaining group.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than ordinary
routine proceedings incidental to its business. The Company does not expect
these legal proceedings, either individually or in the aggregate, to have a
material adverse effect on the Company's business, results of operations or
liquidity.
HISTORY AND ORGANIZATION
THE COMPANY AND ITS PREDECESSORS
The Company was organized in December 1993, and was initially capitalized
by Evergreen and CLC. Evergreen, then a NYSE-listed operator of long-term care
facilities, merged with GranCare in July 1995. At the time of the Company's
organization, CLC was owned 25% by William F. Lasky, the Company's President and
Chief Executive Officer, and 75% by two other shareholders. Pursuant to the
terms of an acquisition agreement between Evergreen, CLC and Alternative Living
Services, a Wisconsin general partnership owned 50% by Mr. Lasky and 50% by two
other individuals (the "ALS Partnership"), the Company was initially capitalized
with (i) $2.7 million contributed by Evergreen, of which $330,000 was in cash,
$170,000 was in satisfaction of a short-term advance and $2.2 million was in
Common Stock subscribed in exchange for a 51% interest in the Company and (ii)
certain assets and contractual rights owned by CLC were contributed in exchange
for the remaining 49% interest in the Company issued to CLC. Immediately prior
to the consummation of the transaction (i) Assisted Care, Inc. ("Assisted
Care"), a corporation formed by the shareholders of CLC in 1989 to develop
assisted living facilities outside of the State of Wisconsin, was merged with
and into CLC and (ii) the ALS Partnership conveyed certain of its assets
relating to its assisted living business to CLC. Assisted Care and the ALS
Partnership were under common control through Mr. Lasky and one other
shareholder.
The Company's executive offices are located at 450 North Sunnyslope Road,
Suite 300, Brookfield, Wisconsin 53003, and its telephone number is (414)
789-9565.
1995 RECAPITALIZATION
In May 1995, the Company consummated a recapitalization transaction (the
"1995 Recapitalization") pursuant to which it sold 4,302,994 shares of Common
Stock to Alternative Living Investors, L.L.C. ("ALI"), a newly formed limited
liability investment company, for a total of $20 million and a portion of the
$19.0 million net proceeds from such sale were used (i) to repurchase shares of
the Company held by a former
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<PAGE> 58
stockholder of CLC and (ii) to repay certain loans and advances made to the
Company by this former stockholder and Evergreen. See "Certain Relationships and
Related Transactions." ALI was formed as an investment vehicle for several
investors, the majority of whom was unaffiliated with the Company, who
participated in the 1995 Recapitalization, and ALI will be liquidated following
the Offering. Certain affiliates of the Company serve as managers of, and hold
member interests in, ALI. See "Principal and Selling Stockholders."
ACQUISITION OF HEARTLAND RETIREMENT SERVICES, INC.
Effective on January 1, 1996, the Company acquired all of the outstanding
capital stock of Heartland in consideration of the payment to Heartland's
shareholders of $5.5 million and the issuance of 261,424 shares of Common Stock,
207,899 of which are redeemable, or an aggregate consideration of $7.2 million
(for accounting purposes). In connection with the Heartland acquisition, the
Company borrowed approximately $8.7 million pursuant to the Heartland Bridge
Financing. See "Use of Proceeds," "Management's Discussion and
Analysis -- Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions."
CROSSINGS MERGER
On May 24, 1996, the Company and Crossings consummated the Crossings Merger
pursuant to which the businesses and operations of ALS and Crossings were
combined. Pursuant to the Crossings Merger, on May 24, 1996 Crossings was merged
with and into ALS and all of the shares of Crossings capital stock outstanding
prior to the Crossings Merger were converted into an aggregate of 2,007,049
shares of ALS Common Stock or an aggregate consideration of $9.3 million (for
accounting purposes). Following the Crossings Merger, the ALS-Midwest
Restructuring and the Recent Equity Transactions, there are 9,523,349 shares of
Common Stock outstanding, of which approximately 21% are held by the former
stockholders of Crossings.
Upon consummation of the Crossings Merger, Crossings' three senior
executive officers were elected directors or executive officers of ALS.
Specifically, Richard W. Boehlke, formerly Crossings' President and Chief
Executive Officer, was elected to the Company's Board of Directors as its Vice
Chairman. D. Lee Field, formerly Crossings' Executive Vice President and Chief
Operating Officer, became a Senior Vice President of ALS, and David M. Boitano,
formerly Vice President and Chief Financial Officer of Crossings became a Vice
President of ALS. As a condition to the Crossings Merger, the Company entered
into employment or services agreements with each of Messrs. Boehlke, Field and
Boitano. Pursuant to the services agreement with Mr. Boehlke, the Company has
agreed to nominate Mr. Boehlke to serve as a member of the Board of Directors of
the Company during the three year term of the services agreement. See
"Management -- Executive Compensation -- Employment and Services Agreements."
Organization and Recent Restructuring of Crossings. Crossings was
organized in December 1995 in connection with a restructuring of the assisted
living business of Crossings International Corporation ("Old Crossings"), which
was organized in 1984. The Crossings restructuring, which was effected in
December 1995 and January 1996, involved (i) the roll-up into Old Crossings of
partnerships formerly controlled by Old Crossings and its affiliates, each of
which owned one residence operated by Old Crossings (collectively, "Crossings
Partnership Roll-Up"), (ii) the sale of twelve residences by Old Crossings to a
REIT and the simultaneous leaseback of such residences by Crossings and the
refinancing of an additional residence owned by an affiliated partnership of Old
Crossings and operated by Old Crossings (collectively, the "Crossings REIT
Transactions"), (iii) the issuance of Series A preferred stock of Old Crossings
to CCI, as agent for certain of its clients, in exchange for satisfaction of
indebtedness of Old Crossings, (iv) the exchange by the Old Crossings
shareholders of the common and Series A preferred stock of Old Crossings for
equal numbers of shares of common and Series A preferred stock of Crossings, (v)
the issuance of Crossings Series B preferred stock to CCI in exchange for cash
and (vi) the conveyance by Old Crossings to CCI of an owned residence and the
simultaneous lease of such residence by CCI to Old Crossings pursuant to a lease
expiring upon the first to occur of three years or the achievement of certain
minimum occupancy thresholds. Upon completion of the restructuring transactions,
Old Crossings became a wholly-owned subsidiary of Crossings, Crossings became
the lessee and operator of thirteen of the facilities formerly operated by Old
Crossings, and
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<PAGE> 59
CCI became the holder of Crossings' Series A and Series B preferred stock. Prior
to the Crossings Merger, CCI, as the holder of the Crossings Series A and Series
B preferred stock, exchanged all of its shares of Crossings preferred stock for
shares of Crossings common stock at an exchange ratio determined by CCI and
Crossings.
Crossings Partnership Roll-up Transactions. On December 20, 1995, the
partners (including Messrs. Boehlke, Boitano and Field) of three partnerships
that owned Crossings' Courtyard, Atrium and Ridgepoint residences, all of which
were partially-owned by Old Crossings, conveyed their partnership interests to
Old Crossings and, as a result, Old Crossings held all of the partnership
interests of such partnerships. As a result of these transactions, Old Crossings
assumed the contingent liabilities for the respective partnerships' indebtedness
of each former partner, and made aggregate cash payments of $1.2 million,
$125,000 and $125,000 to Messrs. Boehlke, Field and Boitano, respectively. CCI
conveyed to Old Crossings an 80% partnership interest in the partnership that
owned Crossings' McMinnville, Oregon residence, in return for the assumption by
Old Crossings of CCI's contingent liability for the partnership's indebtedness
and 48,800 shares of Old Crossings Series A preferred stock.
Crossings REIT Transactions. Old Crossings sold twelve of its assisted
living and senior living residences to Nationwide Health Properties, Inc.
("NHP") for aggregate cash consideration of $45,319,273, and assumption of
$9,303,727 of indebtedness to the Oregon Housing Authority related to the
Albany, Forest Grove and McMinnville, Oregon residences. Old Crossings paid
certain costs and expenses from the cash proceeds from NHP in connection with
the sale of its residences. The residences were sold free and clear of all liens
and material encumbrances, except those securing the assumed indebtedness.
Crossings has entered into individual operating leases with NHP with respect to
each of the residences sold to NHP by Old Crossings. These operating leases
typically include initial terms of 17 to 19 years and three renewal terms of 10
years each. The annual rental payments provide for an aggregate minimum rentals
of $5,438,000. Additional rental amounts, if any, are based on increases in
revenues of the leased residences. In addition, NHP made a mortgage loan in the
amount of $6,557,000 to 2010 Union Limited Partnership, a Washington limited
partnership ("2010 Union L.P."), to refinance the secured indebtedness of 2010
Union L.P. This mortgage loan bears interest at a rate of 9.95% per annum and is
due and payable on December 15, 2005 and is otherwise on terms substantially
similar to those of the NHP operating leases. Mr. Boehlke holds a 99% general
partnership interest in 2010 Union L.P. and Old Crossings holds the remaining 1%
limited partnership interest. The proceeds of the NHP loan exceeded the existing
secured indebtedness of 2010 Union L.P., and Mr. Boehlke received a distribution
from 2010 Union L.P. of $250,000 from such proceeds. Crossings has entered into
an operating lease (with terms substantially similar to those of the NHP
operating leases) with 2010 Union L.P. to operate its Union Park at Allenmore
residence, and that lease has been assigned to NHP as security for its loan to
2010 Union L.P.
ACQUISITION OF REMAINING EQUITY INTERESTS IN ALS-MIDWEST
On May 24, 1996, pursuant to the ALS-Midwest Restructuring, the Company
acquired the remaining equity interests not owned by the Company in the five
residences operated by the Company in Michigan. The ALS-Midwest residences are
each owned by a separate Michigan limited partnership, the general partner of
which is Alternative Living Services -- Midwest Inc. ("ALS-Midwest Inc."). Prior
to the ALS-Midwest Restructuring, (i) ALS and Damone each owned 50% of the
common stock of ALS-Midwest, and (ii) the limited partnership interests in the
ALS-Midwest limited partnerships were held by ALS and a small number of
unaffiliated investors (the "ALS-Midwest Investors"). See "Business--Joint
Ventures and Strategic Alliances."
The Company acquired the limited partnership interests in ALS-Midwest held
by the ALS-Midwest Investors for aggregate consideration of 115,024 shares of
redeemable Common Stock and promissory notes in the aggregate principal amount
of $2.9 million or an aggregate consideration of $6.2 million (for accounting
purposes). These promissory notes are due and payable on January 31, 1997 and
bear interest at the rate of 8% per annum. The Company acquired 100% of the
outstanding stock of ALS-Midwest Inc. pursuant to a merger transaction whereby
the shareholders of ALS-Midwest other than ALS received, in exchange for their
shares of ALS-Midwest Inc., $300,000 in cash and 57,512 shares of redeemable
Common Stock or an aggregate
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<PAGE> 60
consideration of $2.9 million (for accounting purposes). Contemporaneously with
the merger transaction, the Company refunded advances made to the ALS-Midwest
Partnerships by affiliates of Damone by a cash payment of $700,000 and delivery
of a promissory note in the amount of $1.4 million. This promissory note bears
interest at the rate of 9% and is due and payable in September 1996. Pursuant to
the ALS-Midwest Restructuring, ALS and Damone established a fee development
relationship relating to the development and construction of future ALS
residences in Michigan and Florida. See "Use of Proceeds" and "Business -- Joint
Ventures and Strategic Alliances -- Fee Development Relationship with The Damone
Group."
RECENT EQUITY TRANSACTIONS
On May 24, 1996, the Company raised $2.0 million of equity capital through
the private placement of 430,281 shares of Common Stock. See
"Management -- Employment and Services Agreements -- Services Agreement with
Petty, Kneen & Company" and "Business -- Joint Ventures and Strategic
Alliances -- Proposed Joint Venture with Pioneer Development Company."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning the executive officers
and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
William G. Petty, Jr....................... 50 Chairman of the Board
William F. Lasky........................... 41 President, Chief Executive Officer and
Director
Richard W. Boehlke......................... 48 Vice Chairman of the Board
John W. Kneen.............................. 43 Vice President, Chief Financial Officer,
Treasurer and Secretary
D. Lee Field............................... 36 Senior Vice President
G. Faye Godwin............................. 54 Senior Vice President
Douglas A. Hennig.......................... 38 Senior Vice President
Thomas E. Komula........................... 41 Senior Vice President
Mary Lou Austin............................ 40 Vice President and Controller
David M. Boitano........................... 35 Vice President
David J. Hoff.............................. 30 Vice President, Construction and
Development
Pamela Edwards Klein....................... 41 Vice President, Corporate Development
Gene E. Burleson........................... 54 Director
Robert Haveman............................. 48 Director
Ronald G. Kenny............................ 40 Director
Jerry L. Tubergen.......................... 42 Director
</TABLE>
William G. Petty, Jr. has served as Chairman of the Board since December
1993 and served as Chief Executive Officer of the Company from December 1993 to
April 1996. Mr. Petty has served as the Vice Chairman of GranCare since July
1995. Mr. Petty also served as the Chairman of the Board, Chief Executive
Officer and President of Evergreen from June 1993 to July 1995 and as Chairman
of the Board, Chief Executive Officer and President of National Heritage, Inc.,
predecessor to Evergreen, from October 1992 to June 1993. Mr. Petty has been a
Managing Director of Omega Capital, Ltd., a private health care investment fund
("Omega Capital"), since 1986. Mr. Petty also served as a member of the Board of
Directors of Forum Group, Inc. ("Forum") and as one of three members of Forum's
Executive Committee from June 1993 to November 1994.
William F. Lasky has served as Chief Executive Officer of the Company since
April 1996 and as President of the Company since December 1993. He served as the
Managing Partner of the ALS Partnership from 1981 to December 1993 and as the
President of CLC from 1989 to December 1993. The ALS Partnership and CLC
developed and operated assisted living residences, six of which are currently
managed by the Company. Mr. Lasky served as a regional director of Unicare
Health Residences, a national operator of nursing homes, from 1981 to 1985. Mr.
Lasky is a member of the Board of Directors and the Chairman of ALFAA and is a
licensed nursing home administrator.
Richard W. Boehlke has served as the Vice Chairman of the Board of the
Company since May 1996. Mr. Boehlke served as President and Chief Executive
Officer of Crossings, which he founded in 1984, until Crossings merged with the
Company in May 1996. From 1980 to 1984, Mr. Boehlke was employed by National
Medical Enterprises, Inc. as Vice President -- Development responsible for all
new development within its long-term care group of companies.
John W. Kneen has served as the Chief Financial Officer and Treasurer of
the Company since April 1996 and as Vice President and Secretary of the Company
since December 1993. He served as Vice President of Corporate Development and
Assistant Secretary of Evergreen from December 1993 to July 1995, and as Vice
President and Chief Financial Officer of Evergreen Housing Partners, Inc. from
1991 to 1993. Mr. Kneen served as President of Premier Lifestyles, Inc., a
senior housing management company, from 1989 to 1991. Mr. Kneen is a Certified
Public Accountant.
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<PAGE> 62
D. Lee Field has served as Senior Vice President of the Company since May
1996. Prior to joining the Company, he was employed from 1984 by Crossings,
where he held a succession of executive positions including Executive Vice
President and Chief Operating Officer from 1993 until the Crossings Merger, and
Vice President of Operations from 1989 to 1993. Mr. Field is a member of the
Board of Directors for the American Senior Housing Association and a member of
the Task Force for Assisted Living of the American Health Care Association.
G. Faye Godwin has served as Senior Vice President of the Company since
April 1996. From May 1995 to April 1996, Ms. Godwin served as the Vice President
of Operations of the Company. Previously, Ms. Godwin served as the Chief
Operating Officer of Standish Care, Inc., a publicly-held assisted living
company, from February 1994 to May 1995. From April 1989 to January 1994, Ms.
Godwin was Senior Vice President of Operations at Sunrise Assisted Living, an
assisted living company.
Douglas A. Hennig has served as Senior Vice President of the Company since
January 1996. From January 1993 to January 1996, Mr. Hennig served as the
President of Heartland. From 1991 to 1993, he was President of Hennig &
Associates, a consulting firm in Madison, Wisconsin involved in retirement
housing consulting and the development and management of assisted living
residences. From 1986 to 1991, he was Vice President of the Meridian Group in
Madison, Wisconsin, a market research company, with responsibility for market
research, marketing, operations management and development consulting for
retirement housing and assisted living.
Thomas E. Komula has served as a Senior Vice President of the Company since
July 1996. Prior to joining the Company, he served as the Chief Financial
Officer of MedRehab, Inc., a privately-held rehabilitation company, from March
1994 to April 1996. From September 1993 to March 1994, he was a partner at
Arthur Andersen & Co., and from September 1991 to September 1993, he was a
Senior Manager with Arthur Andersen & Co. Mr. Komula is a Certified Public
Accountant. The Company intends to appoint Mr. Komula as its Chief Financial
Officer following the completion of the Offering.
Mary Lou Austin has served as Vice President of the Company since April
1996 and as Controller since September 1995. Prior to joining the Company, she
was employed as Controller of the Social Development Commission of Milwaukee
from 1993 to 1995. From 1990 to 1993, Ms. Austin was Assistant Controller at
Time Insurance Company, a health insurance company. Ms. Austin is a Certified
Public Accountant.
David M. Boitano has served as Vice President of the Company since May
1996. Prior to joining the Company, he was employed from 1994 as Vice President
and Chief Financial Officer of Crossings. From 1986 to 1994, Mr. Boitano served
as Vice President and Controller of Exvere, Inc., a merger and acquisition
consulting firm, and of Franklin Holdings, Ltd., a multi-state holding company.
From 1983 to 1985, Mr. Boitano was employed by Ernst & Young. Mr. Boitano is a
Certified Public Accountant.
David J. Hoff has served as Vice President, Construction and Development,
since April 1996. From February 1995 to April 1996, Mr. Hoff served as the
Director of Construction and Development of the Company. From 1990 to 1995, Mr.
Hoff owned and operated a subcontracting firm which provided building
inspection, zoning administration and land planning services to the Town of
Brookfield, Wisconsin. Prior to 1990, Mr. Hoff was employed as an architect by
an architectural firm located in Milwaukee, Wisconsin which specialized in
institutional and retirement health care design. Mr. Hoff is a Registered
Architect and Certified Building Inspector in the State of Wisconsin.
Pamela Edwards Klein has served as Vice President of Corporate Development
since August 1995. Previously, Ms. Klein served as the Director of Market
Development for the Company from December 1993 to August 1995 and for the ALS
Partnership from March 1992 to December 1993. Ms. Klein was principal of her own
marketing consulting business from January 1991 to March 1992. From December
1987 to August 1989, Ms. Klein was a grants administrator with the Medical
College of Wisconsin.
Gene E. Burleson has served as a director of the Company since July 1995.
He became Chairman of the Board of GranCare in January 1994 and has served as
Chief Executive Officer of GranCare since December 1990. Previously, Mr.
Burleson served as President of American Medical International, Inc., a provider
of health care services, where from early 1988 to March 1989 he served as
President while continuing his role as
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<PAGE> 63
Chief Operating Officer, a position he assumed in 1986. Prior to serving as
President of the parent company, Mr. Burleson served for nine years as President
and Chief Executive Officer of American Medical International -- European
Operations. Mr. Burleson currently serves on the board of directors of Deckers
Outdoor Corporation and Integrated Voice Solutions, Inc.
Robert Haveman has served as a director of the Company since May 1995. He
has served as the Secretary/Treasurer of the Prince Corporation, an automotive
interior trim manufacturer, since 1987 and served as a director of Evergreen
from June 1993 to July 1995.
Ronald G. Kenny has served as a director of the Company since May 1995. He
has served as Vice President-Finance of Huizenga Capital Management, Inc., a
privately held investment management company, since 1990. Mr. Kenny has served
as a director of GranCare since July 1995. Mr. Kenny also served as a director
of Evergreen from June 1993 to July 1995 and as director of National Heritage,
Inc. from October 1992 to June 1993.
Jerry L. Tubergen has served as a director of the Company since May 1995.
He has served as President and Chief Operating Officer of RDV Corporation, a
private financial management firm, since its formation in 1991. Mr. Tubergen
served as Managing Partner of Deloitte & Touche in Grand Rapids, Michigan from
1987 to 1991. Mr. Tubergen also serves as a director of the Orlando Magic, Ltd.,
a NBA franchise, and Genmar Holdings, Inc., a manufacturer and marketer of
motorized pleasure boats.
There are no family relationships among any of the executive officers or
directors of the Company. Each director of the Company other than Mr. Boehlke
was elected to the Board of Directors of the Company pursuant to the terms of
the Company's Amended and Restated Stockholders' Agreement dated as of January
15, 1996, which agreement will terminate and be of no further force and effect
upon the consummation of the Offering. Pursuant to the merger agreement entered
into by the Company and Crossings in connection with the Crossings Merger, Mr.
Boehlke was elected to the Board of Directors as its Vice Chairman and Messrs.
Field and Boitano were elected as executive officers of the Company. Pursuant to
a services agreement between Mr. Boehlke and the Company, the Company has agreed
to nominate Mr. Boehlke as a director of the Company during the three year term
of the services agreement. See "History and Organization -- Crossings Merger"
and "Management -- Executive Compensation -- Employment and Services Agreement."
No other arrangement or understanding exists between any executive officer or
any other person pursuant to which any executive officer was selected as an
executive officer of the Company. Subject to the terms of employment agreements,
executive officers of the Company are elected or appointed by the Board of
Directors and hold office until their successors are elected or until their
death, resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an audit committee (the "Audit
Committee") and a compensation committee (the "Compensation Committee"). The
Company does not have a nominating committee.
The Audit Committee is comprised of Messrs. Burleson, Haveman and Tubergen
with Mr. Tubergen serving as Chairman. The Audit Committee convenes when deemed
appropriate or necessary by its members. The primary functions of the Audit
Committee are to: (i) recommend an accounting firm to be appointed by the
Company as its independent auditors; (ii) consult with the Company's independent
auditors regarding the audit plan; and (iii) determine that management places no
restrictions on the scope or implementation of the independent auditors'
examination.
The Compensation Committee is comprised of Messrs. Boehlke, Kenny, Petty
and Tubergen, with Mr. Kenny serving as Chairman. The Compensation Committee:
(i) sets and approves the compensation (including salary, deferred compensation,
bonuses, incentive compensation and all other types of compensation or
remuneration) of the Company's executive officers; and (ii) administers the
Company's 1995 Plan.
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<PAGE> 64
EXECUTIVE COMPENSATION
Compensation of Directors. Directors of the Company who are not parties to
services agreements with the Company and are not employees of the Company are
entitled to an annual retainer of $12,000, payable in quarterly installments. In
lieu of their retainer for the twelve month period commencing June 1, 1995, each
of Messrs. Burleson, Haveman, Kenny and Tubergen were granted a non-qualified
stock option pursuant to the 1995 Plan to purchase up to 7,745 shares of the
Common Stock at an exercise price of $4.65 per share, such options becoming
exercisable on June 1, 1996 and expiring on June 1, 2005. In lieu of their
annual retainer for the 36 month period commencing June 1, 1996, each of Messrs.
Burleson, Haveman, Kenny and Tubergen were granted a non-qualified stock option
pursuant to the 1995 Plan to purchase up to 12,422 shares of the Common Stock at
an exercise price of $8.69 per share, such options vesting one-third on June 1,
1997, one-third on June 1, 1998 and one-third on June 1, 1999, and expiring on
May 8, 2006. Directors are also entitled to reimbursement of reasonable
out-of-pocket expenses incurred by them in attending meetings of the Board of
Directors. See also "-- Employment and Services Agreement."
Summary of Compensation of Executive Officers. The following table sets
forth information as to all compensation paid or accrued during the last fiscal
year to the Company's chief executive officer and to each other executive
officer of the Company whose total salary and bonus exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS
- ------------------------------------------- ---- -------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William G. Petty, Jr....................... 1995 $ -- -- $48,650 90,628
Chairman of the Board and
Chief Executive Officer(1)
William F. Lasky........................... 1995 $166,600 $30,000 -- 128,691
President and Director(2)
</TABLE>
- ---------------
(1) Mr. Petty is not an employee and was not an employee of the Company during
1995. Mr. Petty served as the Company's Chief Executive Officer until May
1996. The Company paid Mr. Petty fees aggregating $48,650 for his services
during the year ended December 31, 1995.
(2) Mr. Lasky became the Company's Chief Executive Officer in May 1996.
Stock Options Granted During Fiscal Year Ended December 31, 1995. The
following table sets forth information regarding the grant of stock options to
each of the Named Executive Officers. Neither of the Named Executive Officers
received SARs.
STOCK OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL 1995 ($/SHARE) DATE 5% 10%
- -------------------------- ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William G. Petty,
Jr.(1).................. 90,628(1) 26.2% $4.65 6/27/2005 $264,922 $671,364
William F. Lasky.......... 128,691 37.2% $4.65 6/27/2005 $376,189 $953,337
</TABLE>
- ---------------
(1) These options were granted subsequent to December 31, 1995 but were
committed to be granted by the Company in 1995 in connection with services
performed by Mr. Petty during 1995. These options vest at a rate of 25% per
year and first become exercisable on June 28, 1996.
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<PAGE> 65
STOCK OPTION YEAR-END VALUES
The following table sets forth information with respect to the number and
value of unexercised options held as of the end of the last fiscal year for each
of the Named Executive Officers. Neither of the Named Executive Officers
exercised stock options during 1995 or holds SARs.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END (#) AT FY-END ($)(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William G. Petty, Jr. ................... -- 90,628(1) $ -- $ 0
William F. Lasky......................... 54,377 128,691 0 0
</TABLE>
- ---------------
(1) Includes options granted subsequent to December 31, 1995 but which were
committed to be granted by the Company in 1995 in connection with service
performed during 1995.
(2) There was no public trading market for the Common Stock at December 31,
1995. These values have been calculated based on the value of the Common
Stock determined by the Company's Board of Directors as of December 31,
1995. Based upon an initial public offering price of $13.00 per share, the
value of Mr. Petty's options, all of which were unexercisable, was $756,744
and the value of Mr. Lasky's options, 54,377 and 128,691 of which were
exercisable and unexercisable, respectively, was $454,048 and $1,074,570,
respectively.
EMPLOYMENT AND SERVICES AGREEMENTS
Services Agreement with Petty, Kneen & Company. The Company has entered
into a services agreement with Petty, Kneen & Company ("PK & Co."), a limited
liability company controlled by Messrs. Petty and Kneen. Pursuant to the
services agreement, PK & Co. has agreed to provide management, financial and
strategic planning services to the Company on a fee basis, including without
limitation, the services of Mr. Petty as Chairman and the services of Mr. Kneen
as Chief Financial Officer of the Company. The Company has agreed to pay an
annual fee of $320,000 to PK & Co. for such services; provided, however, such
fee shall be reduced to $200,000 if Mr. Kneen is not called upon to serve as
Chief Financial Officer of the Company. Pursuant to the services agreement, the
Company also has agreed to reimburse PK & Co. for certain out of pocket
expenses. In consideration of this service agreement, each of Messrs. Petty and
Kneen have agreed to provide the Company with a right of first refusal with
respect to certain acquisition opportunities relating to assisted living
residences or operations which come to their attention during the term of the
services agreement. This services agreement expires on April 30, 1998 and may be
extended on a quarter to quarter basis thereafter, subject to earlier
termination at the election of the Company upon 30 days notice. In consideration
of this services agreement, PK & Co. purchased 107,575 shares of Common Stock in
May 1996 at a price per share of $4.65.
Services Agreement with Richard W. Boehlke. As a condition of and
effective upon the Crossings Merger, the Company entered into a services
agreement with Mr. Boehlke, formerly Crossings' President and Chief Executive
Officer, pursuant to which he has agreed to provide general, policy-making
services to the Company and to undertake special projects designated from time
to time by the Board of Directors for the three year period ending May 1999. In
consideration of these services, the Company has agreed to pay Mr. Boehlke
$200,000 per year and has agreed to provide Mr. Boehlke certain other benefits,
including use of a company car and life and medical insurance coverage similar
to that provided to the Company's executive officers. During the term of the
agreement, the Company has agreed to nominate Mr. Boehlke to serve as a director
of the Company.
Employment Agreement with William F. Lasky. The Company has entered into
an employment agreement with Mr. Lasky with a term that expires on May 31, 1997,
unless earlier terminated pursuant to the terms thereof. The agreement is
automatically renewed for additional consecutive one-year terms unless timely
notice of nonrenewal is given by either the Company or Mr. Lasky. The employment
agreement provides that Mr. Lasky shall receive a base salary in an amount
determined by the Company's Board of Directors; provided, however, that in no
event may such base salary be less than $150,000. In addition, the
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<PAGE> 66
employment agreement provides that Mr. Lasky is entitled to receive incentive
bonuses of up to 35% of his base salary if the Company's earnings before
interest, taxes and depreciation are within ten percent of the earnings targeted
in the Company's annual business plan approved by the Board of Directors.
Pursuant to the employment agreement, the Company loaned $150,000 to Mr. Lasky
in June 1995, which loan is repayable in three annual installments of $50,000
beginning on June 30, 1996 plus interest at 6% per annum; provided, however,
that if Mr. Lasky is employed by the Company on any such repayment date, the
principal and interest then due shall be forgiven by the Company. The employment
agreement also provides for the granting of certain stock options described
above and certain other benefits typical in employment agreements with a senior
executive officer. Finally, the employment agreement provides that Mr. Lasky
will not disclose certain proprietary information belonging to the Company or
otherwise compete with the Company for a period of eighteen months following his
termination of employment except where such termination is by the Company
without "cause."
Employment Agreements with G. Faye Godwin, Douglas A. Hennig and Thomas E.
Komula. The Company has entered into employment agreements with each of Ms.
Godwin and Messrs. Hennig and Komula. These employment agreements are annual
agreements that automatically renew for consecutive one year terms unless timely
notice of nonrenewal is given either by the Company or the applicable officer.
These agreements provide that these officers shall receive a base salary in an
amount determined by the Company's Board of Directors, provided, however, that
in no event may such base salary be less than $110,000 in the case of Ms.
Godwin, $130,000 in the case of Mr. Hennig and $170,000 in the case of Mr.
Komula. Pursuant to these agreements, Ms. Godwin and Messrs. Hennig and Komula
are entitled to receive incentive bonuses payable, at the sole discretion of the
Board of Directors, if certain target earnings are achieved. These employment
agreements also provide for the granting of certain stock options and certain
other benefits typical in employment agreements with senior executive officers.
Pursuant to these employment agreements, each of Ms. Godwin and Messrs. Hennig
and Komula have agreed not to disclose certain proprietary information belonging
to the Company or otherwise to compete with the Company for a period of 12
months in the cases of Ms. Godwin and Mr. Komula and 18 months in the case of
Mr. Hennig following their respective termination of employment, except where
such termination is by the Company without "cause."
The employment agreement with Mr. Hennig was entered in connection with the
acquisition of Heartland (of which Mr. Hennig was the founder and president) and
afforded Mr. Hennig the right to purchase 53,525 shares of Common Stock at a per
share price of $4.65 (the "Hennig Stock"). The Hennig Stock is nontransferable
and is subject to the Company's right to repurchase such shares at the price
paid by Mr. Hennig for the Hennig Stock until such time as such shares become
vested, with vesting occurring 50% on the first anniversary of Mr. Hennig's
employment by the Company, 30% on the second anniversary and 20% on the third
anniversary. Pursuant to the employment agreement with Mr. Hennig, Mr. Hennig
also has the right to purchase an additional 41,589 shares of Common Stock at a
per share price of $7.21 at any time during the 30 day period commencing
December 1, 1996.
In addition, pursuant to his employment agreement, Mr. Hennig is entitled
to borrow up to $100,000 from the Company during the initial annual term of the
agreement, which loan shall bear interest at the rate of 6% per annum and shall
be repayable on the third anniversary of the date of the loan. In addition, if
the employment agreement with Mr. Hennig is renewed for a second annual term,
Mr. Hennig is entitled to borrow an additional $100,000 from the Company on
similar terms. Pursuant to these provisions, Mr. Hennig borrowed $60,000 from
the Company in May 1996. This loan is secured by Mr. Hennig's pledge of certain
shares of Common Stock owned by Mr. Hennig.
Employment Agreements with D. Lee Field and David M. Boitano. As a
condition of and effective upon the Crossings Merger, the Company entered into
employment agreements with each of Messrs. Field and Boitano. These agreements
provide for a one year term, and are automatically renewed for an additional one
year term unless timely notice of nonrenewal is given by the Company or the
applicable officer. The employment agreements provide that Messrs. Field and
Boitano shall receive a base salary in an amount (not less than $140,000)
determined by the Company's Board of Directors or President. Pursuant to these
employment agreements, Messrs. Field and Boitano are entitled to receive
incentive bonuses of up to 25% and 20% of their base salary, respectively,
payable at the discretion of the Board of Directors if certain targeted
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earnings are achieved. The employment agreements also provide for the granting
of certain stock options and certain other benefits typical in employment
agreements with senior executive officers. Finally, pursuant to these employment
agreements, each of Messrs. Field and Boitano have agreed not to disclose
certain proprietary information belonging to the Company or otherwise to compete
with the Company for a period of twelve months following their respective
termination of employment, except where such termination is by the Company
without "cause."
1995 INCENTIVE COMPENSATION PLAN
The 1995 Plan provides key employees (who may also be directors) of the
Company and its subsidiaries performance incentives and also provides a means of
encouraging stock ownership in the Company by such persons. Under the 1995 Plan,
key employees of the Company or its affiliates are eligible to receive stock
options to purchase shares of the Company's Common Stock. The 1995 Plan allows a
maximum number of shares to be subject to options of 1,425,000. Options are
granted under the 1995 Plan on the basis of the optionee's contribution to the
Company, and no option may exceed a term of ten years. Options granted under the
1995 Plan may be either incentive stock options or options that do not qualify
as incentive stock options. The Company's Compensation Committee is authorized
to designate the recipients of options, the dates of grants, the number of
shares subject to options, the option price, the terms of payment on exercise of
the options, and the time during which the options may be exercised. The price
of incentive stock options granted under the 1995 Plan cannot be less than the
fair market value of the shares at the time the options are granted.
At June 30, 1996, options to purchase an aggregate of 789,149 shares of
Common Stock were granted and outstanding at a weighted average exercise price
of $6.08 per share, of which options to purchase 182,192 shares were exercisable
at such date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has appointed Messrs. Boehlke, Kenny, Petty and Tubergen as
members of the Compensation Committee. The Company has no compensation committee
interlocks.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1996 by: (i)
each person or entity known to the Company to own more than 5% of the
outstanding shares of the Common Stock; (ii) each of the Company's directors;
(iii) each of the Named Executive Officers; (iv) other Selling Stockholders; and
(v) all of the Company's directors and executive officers as a group. Except as
otherwise noted, the person or entity named has sole voting and investment power
over the shares indicated.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THE NUMBER OF OWNED AFTER THE
OFFERING SHARES OFFERING
------------------- BEING -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SOLD NUMBER PERCENT
- ---------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Alternative Living Investors, L.L.C.(1)....... 4,302,994 45.2% -- -- --
184 Shuman Boulevard,
Suite 200
Naperville, Illinois 60563
GranCare, Inc.(2)............................. 1,892,302 19.9 1,892,302 -- --
One Ravinia Drive,
Suite 1500
Atlanta, Georgia 30346
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THE NUMBER OF OWNED AFTER THE
OFFERING SHARES OFFERING
------------------- BEING -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SOLD NUMBER PERCENT
- ---------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Gene E. Burleson*(2)(3)....................... 1,900,047 19.9% 1,892,302 7,745 **
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Capital Consultants, Inc.(4).................. 1,003,524 10.5 461,539 541,985 4.2%
2300 SW First Avenue
Portland, Oregon 97201
Richard W. Boehlke*........................... 781,711 8.2 -- 781,711 6.1
1201 Pacific Avenue
Suite 1800
Tacoma, Washington 98335
Peter H. Huizenga(5)(6)....................... 753,024 7.9 -- 753,024 5.8
2215 York Road, Suite 500
Oakbrook, Illinois 60521
Jerry L. Tubergen(1)(5)(7)*................... 717,741 7.5 -- 717,741 5.5
126 Ottawa Ave., Suite 500
Grand Rapids, Michigan 49503
Robert Haveman(1)(5)(8)*...................... 653,194 6.9 -- 653,194 5.0
One Prince Center
Holland, Michigan 49423
William F. Lasky(9)*.......................... 543,313 5.7 -- 543,313 4.2
450 North Sunnyslope Road, Suite 200
Brookfield, Wisconsin 53003
Heartland Development Corporation(10)......... 198,547 2.1 198,547 -- --
William G. Petty, Jr.(1)(11)*................. 130,232 1.4 -- 130,232 1.0
Ronald G. Kenny(1)(5)(12)*.................... 29,260 ** -- 29,260 **
Merton J. and Beverly Segal................... 4,406 ** 4,406 -- --
All Officers and Directors 5,118,742 52.9% 1,892,302 3,226,441 24.6%
as a Group (15 Persons)(13).................
</TABLE>
- ---------------
* See "Management" for position with the Company.
** Less than 1%
(1) ALI is a limited liability company that was formed in May 1995 as an
investment vehicle for a $20 million investment in the Company. See
"History and Organization -- 1995 Recapitalization Transaction." Messrs.
Haveman, Kenny, Petty and Tubergen serve as managers of ALI, but disclaim
beneficial ownership of the shares held by ALI. Immediately prior to the
closing of the Offering, ALI intends to liquidate and distribute to its
members their respective pro-rata interest in the shares of Common Stock
held by ALI. See note (5) below. Certain members of ALI have agreed to sell
up to 700,000 shares of Common Stock to the Underwriters if the
Underwriters' over-allotment option is exercised.
(2) Represents shares held by Evergreen, which merged with GranCare in July
1995. Gene E. Burleson, a director of the Company, is the Chairman of the
Board, President and Chief Executive Officer of GranCare and may be deemed
to beneficially own the shares of Common Stock held by it.
(3) Includes 1,892,302 shares (all of which are being sold in the Offering)
held by Evergreen and options to acquire 7,745 shares exercisable within
the next 60 days.
(4) Represents shares held by CCI as agent for clients for whom it holds
discretionary authority. Pursuant to the Agreement and Plan of Merger
entered into between the Company and Crossings in connection with the
Crossings Merger, the Company has granted certain registration rights to
CCI whereby CCI is entitled to include, as a Selling Stockholder, up to
742,602 shares of Common Stock in the Offering.
(5) Represents shares of Common Stock to which the beneficial owner is entitled
to receive upon the distribution of the Common Stock from ALI based upon
such person's ownership of the membership units thereof. See note (1)
above.
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<PAGE> 69
(6) Includes 365,754 shares of Common Stock held by the Peter H. Huizenga
Testamentary Trust, 43,030 shares of Common Stock held by the Betsy
Huizenga Trust, 43,030 shares of Common Stock held by the Greta Huizenga
Trust, 43,030 shares of Common Stock held by the Peter H. Huizenga, Jr.
Trust and 43,030 shares of Common Stock held by the Timothy Dean Huizenga
Trust, all of which Mr. Huizenga may be deemed to beneficially own by
virtue of his role as a trustee. Of the shares subject to the over-
allotment option, 82,109 are owned by Mr. Huizenga. Accordingly, if the
Underwriters' over-allotment option is exercised in full, the number of
shares of Common Stock beneficially owned by Mr. Huizenga will be 670,915.
(7) Includes (i) 258,180 shares attributable to member interests in ALI held by
Mr. Tubergen or trusts for which he serves as trustee (the "Trusts") and
(ii) options to acquire 7,745 shares exercisable within the next 60 days.
The co-trustees of the Trusts also serve as trustees to a trust holding
member interests in ALI representing an additional 65,545 shares. Of the
shares subject to the Underwriters' over-allotment option, 23,571 are owned
by Mr. Tubergen and 45,000 are owned by the Trusts. Accordingly, if the
Underwriters' over-allotment option is exercised in full, the number of
shares of Common Stock beneficially owned by Mr. Tubergen will be 648,990.
(8) Of these shares, 537,874 shares represent membership interests in ALI held
by two nonprofit corporations (the "Nonprofit Corporation") of which Mr.
Haveman serves as an officer. Mr. Haveman disclaims beneficial ownership of
the shares held by these corporations. Also includes options to acquire
7,745 shares exercisable within the next 60 days. Of the shares subject to
the Underwriters' over-allotment option, 125,000 are beneficially owned by
the Nonprofit Corporations. Accordingly, if the Underwriters'
over-allotment option is exercised in full, the number of shares of Common
Stock beneficially owned by the Nonprofit Corporations will be 412,874.
(9) Mr. Lasky's beneficial ownership includes shares held by CLC by virtue of
his position as an officer and majority shareholder of CLC and options to
acquire 86,550 shares within the next 60 days. CLC is a Wisconsin
corporation owned by Mr. Lasky and David Burr. CLC will sell up to 35,567
shares of its Common Stock in the Offering if and to the extent that the
Underwriters' over-allotment option is exercised. Of the proceeds from the
sale of Common Stock held by CLC, only so much as is necessary to satisfy
the income tax liability resulting from such sale will be distributed by
CLC to Messrs. Lasky and Burr. The remainder of the proceeds of such sale
will be used by CLC to redeem a portion of the shares of capital stock of
CLC held by Mr. Burr. If the Underwriters' over-allotment option is
exercised in full, Mr. Lasky will beneficially own 507,746 shares of Common
Stock.
(10) Pursuant to the Heartland Acquisition, Heartland Development Corporation
was granted certain registration rights whereby it is entitled to include,
as a Selling Stockholder, all of its shares of Common Stock in the
Offering.
(11) Represents 107,575 shares held by Petty, Kneen & Company, L.L.C., a company
owned and controlled by Mr. Petty and John W. Kneen and options to acquire
22,657 shares within the next 60 days. See "Management -- Employment and
Services Agreements -- Services Agreement with Petty, Kneen & Company."
(12) Includes options to acquire 7,745 shares exercisable within the next 60
days. Mr. Kenny is a management employee of Huizenga Capital Management, a
sole proprietorship of Peter H. Huizenga. Mr. Kenny disclaims beneficial
ownership of any shares held by Mr. Huizenga and his affiliates. Of the
shares subject to the Underwriters' over-allotment option, 2,346 are owned
by Mr. Kenny. Accordingly, if the Underwriters' over-allotment option is
exercised in full, Mr. Kenny will beneficially own 26,914 shares of Common
Stock.
(13) Also includes options to acquire 159,265 shares exercisable within the next
60 days.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the Company was organized and capitalized in December 1993, Evergreen
had from time to time advanced funds to the Company, either pursuant to
additional capital investments or in the form of interest bearing advances.
During 1994, Evergreen advanced $2.7 million to the Company pursuant to a
capital call and $216,658 in the form of an interest bearing advance. During
1995, Evergreen made $3.8 million of additional interest bearing advances to the
Company to fund its growth and operations. Interest bearing advances made by
Evergreen bore interest at a rate of 9% per annum. The aggregate outstanding
advances from Evergreen of $4.0 million and accrued and unpaid interest thereon
of $55,400 were repaid with a portion of the net proceeds from the 1995
Recapitalization. See "History and Organization -- 1995 Recapitalization
Transaction."
In connection with the purchase by the Company of the Wynwood residence in
Sarasota, Florida, the Company gave the seller a note in the amount of $4.2
million which was payable on or before May 31, 1995. Evergreen guaranteed the
payment of this note made by the Company. Subsequently in June 1995, the Company
refinanced this note with permanent financing and released Evergreen from its
guarantee.
Evergreen granted bank lenders to two ALS-Midwest Partnerships a put option
entitling such bank lenders to sell to Evergreen loans made to such ALS-Midwest
Partnerships aggregating $4.0 million in the event either of the respective
partnerships as borrower, is in default in repaying such loans. These borrowings
were used by these partnerships to construct two Clare Bridge residences in
Michigan. In June 1996, the Company borrowed $8.5 million, a portion of which
was used to repay these borrowings, and pursuant thereto the Company secured the
release of the put options granted by Evergreen.
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<PAGE> 70
The Company manages six dementia care residences in Wisconsin for the ALS
Partnership, which is 50% owned and controlled by Mr. Lasky, the Company's
President and Chief Executive Officer, pursuant to management agreements
providing for a management fee of 13% of gross operating revenues (until August
1996 when the fee will decrease to 11% for the remainder of the term). The
management agreements expire in December 1998, but may be terminated by the
Company upon 90 days notice to the ALS Partnership. The ALS Partnership paid the
Company management fees of $252,000, $290,000 and $14,400 for 1995, 1994 and
1993, respectively. The Company also manages a WovenHearts residence in Lodi,
Wisconsin owned by a partnership of which Douglas A. Hennig, the Company's
Senior Vice President, is a 25% general partner. The Company expects to receive
management fees of approximately $25,000 from this agreement in 1996. The
Company leases a Crossings residence (in Tacoma, Washington) from the 2010 Union
L.P. of which Richard W. Boehlke, the Vice Chairman of the Board of the Company
is the 99% general partner. The Company expects to pay aggregate annual lease
payments of approximately $652,000 pursuant to this lease in 1996. The lease
payments are equal to the periodic debt service and lease obligations of the
partnership with respect to the property. See "Risk Factors -- Potential
Conflicts of Interest of Certain Executive Officers and Directors" and "History
and Organization -- Crossings Merger -- Crossings REIT Transactions."
In connection with the Heartland acquisition, the Company borrowed an
aggregate of $8.7 million from RDV Capital Management L.P., a Delaware limited
partnership, the general partner of which is RDV Corporation. Jerry L. Tubergen,
a director of the Company, is the President and Chief Operating Officer of RDV
Corporation. See "Use of Proceeds," "History and Organization -- Acquisition of
Heartland Retirement Services, Inc." and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company conducted site evaluations and market feasibility studies for
GranCare in 1995 and expected to continue to provide such services during 1996.
The Company has billed GranCare approximately $75,000 and $63,000 for fees
relating to these services in 1995 and 1996, respectively. In addition, GranCare
provides pharmacy services to certain of the Company's residences. The Company
estimates that the aggregate fees to be paid by the Company to GranCare for such
service during 1996 will be approximately $60,000.
For certain additional background information regarding transactions
involving the Company and Crossings and their respective officers, directors and
stockholders, see "History and Organization."
The Company believes that each of the foregoing transactions was on terms
substantially similar to those that it could have obtained from unaffiliated
third parties. In the case of related party transactions, it is the Company's
policy to enter into such agreements on terms, which in the opinion of the
Company, are substantially similar to those that could otherwise be obtained
from unrelated third parties, and that all such transactions be approved by a
majority of the disinterested members of the Company's Board of Directors.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $0.01 par value, and 5,000,000 shares of $0.01 par value
preferred stock (the "Preferred Stock"). As of June 30, 1996, there were
9,523,349 shares of Common Stock outstanding held by 68 record holders and no
shares of Preferred Stock outstanding. Upon completion of the Offering,
12,966,555 shares of Common Stock will be issued and outstanding, 789,149 shares
of Common Stock will be reserved for issuance upon the exercise of stock options
previously granted, 1,425,000 shares of Common Stock will be reserved for
issuance upon the exercise of stock options which may be granted under the 1995
Plan and no Preferred Stock will be issued and outstanding. The following
summary does not purport to be complete and is subject to the detailed
provisions of, and qualified in its entirety by reference to, the Company's
Restated Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part, and to the applicable provisions of the Delaware General Corporation Law
(the "DGCL").
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<PAGE> 71
COMMON STOCK
Voting Rights. Each share of Common Stock entitles the holder thereof to
one vote in all matters submitted to a vote of stockholders. The Common Stock
does not have cumulative voting rights, which means that holders of a majority
of the outstanding shares of Common Stock voting for the election of directors
can elect all directors then being elected.
Dividends. Each share of Common Stock has an equal and ratable right to
receive dividends to be paid from the Company's assets legally available
therefor when, as and if declared by the Board of Directors but subject to
rights of holders of any series of Preferred Stock. Delaware law generally
requires that dividends are payable only out of the Company's surplus or current
net profits in accordance with the DGCL. See "Dividend Policy".
Liquidation. In the event of the dissolution, liquidation or winding up of
the Company, the holders of Common Stock are entitled to share equally and
ratably in the assets available for distribution after payments are made to the
Company's creditors, but subject to the preferred liquidation rights of any
holders of any series of Preferred Stock of the Company.
Other. The holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights and are not liable for further
call or assessment. All of the outstanding shares of Common Stock are, and the
Common Stock offered hereby by the Company will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without stockholder approval, to
issue from time to time up to 5,000,000 shares of Preferred Stock in one or more
series, and with respect to each series, to determine, subject to limitations
prescribed by law, any dividend rights and rates, any conversion or exchange
rights, any rights, terms and prices of redemption (including sinking fund
provisions), any liquidation preferences, any voting rights, and generally any
other rights, preferences, privileges, qualifications, limitations and
restrictions not in conflict with the Company's Restated Certificate of
Incorporation. To date, no series of Preferred Stock has been authorized or
issued. The Company has no present plans to issue any shares of Preferred Stock.
The issuance of shares of Preferred Stock by action of the Board of
Directors could adversely affect the voting power, dividend rights and other
rights of holders of the Common Stock. Issuance of shares of a series of
Preferred Stock also could, depending on the terms such series, either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
Although the Board of Directors is required to make a determination as to the
best interests of the Company's stockholders when issuing shares of Preferred
Stock, the Board of Directors could act in a manner that would discourage an
acquisition attempt or other transaction that some or a majority of the
stockholders might believe to be in the best interests of the Company or in
which stockholders might receive a premium for their Common Stock over the
then-prevailing market price. Although there are currently no plans to issue
shares of Preferred Stock or rights to purchase such shares, the Company
believes that the availability of the Preferred Stock will provide the Company
with increased flexibility in structuring future financings and acquisitions and
in meeting other corporate needs that might arise. The authorized shares of
Preferred Stock are available for issuance without further action by the
Company's stockholders, unless such action is required by applicable law or the
rules of any stock exchange on which the Common Stock may then be listed.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Restated Certificate of Incorporation provides that no
director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock purchases
or redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. The effect of these provisions is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of fiduciary duty
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as a director (including breaches resulting from grossly negligent behavior),
except in the situations described above. These provisions do not limit the
liability of directors under federal securities laws and do not affect the
availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW AND CERTAIN ANTI-TAKEOVER
MATTERS
Section 203 of the DGCL prohibits certain transactions between a publicly
held Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates and/or associates of such person,
beneficially owns, directly or indirectly, 15 percent or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
business combinations (defined broadly to include mergers, consolidations, sales
or other dispositions of assets having an aggregate value of 10 percent or more
of the consolidated assets of the corporation, and certain transactions that
would increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder acquired its stock, unless
(i) the business combination or the transaction whereby the person became an
interested stockholder is approved by the corporation's board of directors prior
to the date of such transaction; (ii) the interested stockholder acquired at
least 85 percent of the voting stock of the corporation in the transaction in
which it became an interested stockholder; or (iii) the business combination is
approved by a majority of the board of directors and by the affirmative vote of
two-thirds of the outstanding voting stock owned by disinterested stockholders
at an annual or special meeting.
Upon completion of the Offering, the Corporation's Restated Certificate of
Incorporation will provide that any action required or permitted to be taken by
the stockholders must be effected at a duly called annual or special meeting of
such holders and may not be affected by any consent in writing by such holders,
unless such consent is unanimous.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company will act as the transfer agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
12,966,555 shares of Common Stock, without taking into account any outstanding
stock options. Of these shares, all of the shares of Common Stock offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act, except for shares acquired by "affiliates" of the Company (as
defined in Rule 144 under the Securities Act).
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities,"
as defined in Rule 144, for at least two years, including "affiliates" of the
Company, would be entitled to sell within any three-month period that number of
shares that does not exceed the greater of (i) 1% of the number of shares of
Common Stock then outstanding or (ii) the average weekly trading volume of the
Common Stock during the four calendar weeks preceding such sale. Sales pursuant
to Rule 144 are subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Affiliates may sell shares not constituting restricted securities only
in accordance with the foregoing volume limitations and other restrictions but
without regard to the two year holding period. A person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. The Commission has proposed but has not yet adopted amendments to Rule
144 which would shorten the required holding period for "restricted securities"
to one year (two years in the case of Rule 144(k)). The Company is unable to
estimate the number of shares that will be sold under Rule 144 since this will
depend in part on the market price for the
72
<PAGE> 73
Common Stock, the personal circumstances of the holders of such shares and other
factors (including any amendments to Rule 144).
The Company, the Selling Stockholders, all directors and officers of the
Company and all other holders of 5% or more of the shares of Common Stock and
options to purchase shares of Common Stock outstanding after the Offering have
agreed that, for a period of 180 days following the Offering, they will not
offer to sell, sell, contract to sell, grant any option to purchase or otherwise
dispose (or announce any offer, sale, grant of any option to purchase or other
disposition) of any shares of Common Stock held by them or any securities held
by them that are convertible into or exchangeable or exercisable for shares of
Common Stock, without the prior written consent of NatWest Securities Limited
(except that the Company may grant options to purchase shares of Common Stock
and issue shares upon the exercise thereof under the 1995 Plan.) Beginning 90
days after the date of this Prospectus, 456,763 restricted shares will first
become eligible for sale in the public market pursuant to Rule 144, subject to
the volume, resale and other limitations of such rule. All of these shares will
be subject to lock-up agreements with the Underwriters.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of Common Stock for future sale will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock in the public market following the
Offering, or the perception that such sales might occur, could adversely affect
the prevailing market price of the Common Stock.
73
<PAGE> 74
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company and the Selling Stockholders the number of shares of Common
Stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
NatWest Securities Limited................................................... 2,400,000
McDonald & Company Securities, Inc........................................... 1,800,000
The Chicago Corporation...................................................... 1,800,000
----------------
Total.............................................................. 6,000,000
=============
</TABLE>
The Underwriters are obligated to purchase all the shares of Common Stock
offered hereby, if any such shares are purchased.
The Underwriters propose to offer the shares directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession
not in excess of $.54 per share of Common Stock. Such dealers may re-allow a
concession not in excess of $.10 per share of Common Stock to certain other
brokers and dealers. After the public offering, the per share price and such
concessions may be changed by the Underwriters. The Underwriters have informed
the Company and the Selling Stockholders that they do not intend to confirm
sales of shares of Common Stock to any accounts over which they exercise
discretionary authority.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including liabilities under the federal securities laws, or will
contribute to payments that the Underwriters may be required to make in respect
thereof.
The Company and certain Selling Stockholders have granted an option to the
Underwriters, exercisable for 30 days from the date of this Prospectus, to
purchase up to 900,000 additional shares of Common Stock at the initial public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriters may exercise such option only to cover
over-allotments in the sale of the shares of Common Stock offered hereby. This
option shall be exercised first with respect to the shares offered by the
Selling Stockholders and then with respect to the shares offered by the Company.
See "Principal and Selling Stockholders."
The Chicago Corporation owns membership units in ALI which represent
beneficial ownership of approximately 64,545 shares of Common Stock (less than
1.0% of the shares of Common Stock to be outstanding after the Offering). In
addition, officers of NatWest Securities Limited, McDonald & Company Securities,
Inc. and The Chicago Corporation own membership units in ALI which represent, in
the aggregate, approximately 193,635 shares of Common Stock (1.5% of the shares
of Common Stock to be outstanding after the Offering). Immediately prior to the
closing of the Offering, ALI intends to liquidate and distribute to its members
their respective pro-rata interest in the shares of Common Stock held by ALI.
The Chicago Corporation may transfer shares of Common Stock it receives upon
such liquidation to its officers and employees as compensation.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United States,
its territories or possessions, or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit sales of the Common
Stock offered hereby outside of the United States.
National Westminster Bank Plc, New York Branch, an affiliate of NatWest
Securities Limited, will receive from the Company a $680,000 success fee for
financial advisory services rendered on behalf of Crossings in connection with
the Crossings Merger. This fee is payable upon the closing of the Offering.
NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose
74
<PAGE> 75
ordinary activities involve them in acquiring, holding, managing or disposing of
investments (whether as principal or agent) for the purposes of their businesses
or otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom; and (c) it has only
issued or passed on and will only issue or pass on, in the United Kingdom, any
document that consists of or any part of listing particulars, supplementary
listing particulars, or any other document required or permitted to be published
by listing rules under Part IV of the Act, to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock was determined by
negotiation between the Company and the Underwriters. Among the factors that
were considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, were the history of, and
prospects for, the industry in which the Company operates, the ability of the
Company's management, the Company's past and present operations, the Company's
historical results of operations, the Company's earnings prospects, the prices
of similar securities of comparable companies and other relative factors. There
can be no assurance, however, that the price at which the Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is sold by the Underwriters. See "Risk Factors -- No Prior Public
Trading Market."
The Company, the Selling Stockholders, all directors and officers of the
Company and all other holders of 5% or more of the shares of Common Stock and
options to purchase Common Stock outstanding after the Offering have agreed with
the Underwriters that, for a period of 180 days following the Offering, they
will not offer to sell, sell, contract to sell, grant an option to purchase or
otherwise dispose (or announce any offer, sale, grant of any option or other
distribution) of any shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock without the prior written consent of
NatWest Securities Limited (except that the Company may grant options to
purchase shares of Common Stock under the 1995 Plan, issue shares upon the
exercise of outstanding stock options and issue privately placed shares in
connection with acquisitions). See "Principal and Selling Stockholders" and
"Management -- 1995 Incentive Compensation Plan."
At the request of the Company, up to 600,000 shares of Common Stock have
been reserved for sale to certain individuals, including directors and employees
of the Company and other entities with whom directors of the Company are
affiliated, members of their families and other persons having business
relationships with the Company. The price of such shares to such persons will be
the initial public offering price set forth on the cover of this prospectus. The
number of shares available for sale to the general public will be reduced to the
extent these persons purchase such reserved shares. Any reserved shares not
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
LEGAL MATTERS
Certain legal matters with respect to the shares offered hereby will be
passed upon for the Company by Rogers & Hardin, Atlanta, Georgia. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Jones, Day, Reavis & Pogue, Cleveland, Ohio.
EXPERTS
The consolidated financial statements of Alternative Living Services, Inc.
and subsidiaries as of December 31, 1994 and 1995 and for the period January 1,
1993 to December 13, 1993 for the Predecessor to the Company and for the period
December 14, 1993 to December 31, 1993 and the years ended December 31, 1994 and
1995 for the Company have been included herein and in the registration statement
of which this prospectus is a part in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein and in the registration statement upon the authority of said firm as
experts in accounting and auditing.
75
<PAGE> 76
The consolidated financial statements of Heartland Retirement Services,
Inc. and subsidiaries as of December 31, 1994 and 1995 and for each of the years
in the period from January 11, 1993 (inception) through December 31, 1995 have
been included herein and in the registration statement of which this prospectus
is a part in reliance upon the report of Arthur Andersen LLP, independent
certified public accountants, appearing elsewhere herein and in the registration
statement upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of Alternative Living Services-Midwest
Inc. and affiliates as of and for the year ended December 31, 1995 have been
included herein and in the registration statement of which this prospectus is a
part in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein and in the registration statement
upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of New Crossings International
Corporation and subsidiaries as of December 31, 1994 and 1995 and for each of
the years in the three-year period ended December 31, 1995, have been included
herein and in the registration statement of which this prospectus is a part in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and in the registration statement upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (herein, together with all
amendments thereto, called the "Registration Statement"), of which this
Prospectus constitutes a part, under the Securities Act and the rules and
regulations promulgated thereunder, with respect to the Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement, including the
exhibits thereto, for further information with respect to the Company and the
securities offered hereby. Statements contained herein concerning the provisions
of documents are necessarily summaries of such documents; when any such document
is an exhibit to the Registration Statement, each such statement is qualified in
its entirety by reference to the copy of such document filed with the
Commission. The Registration Statement and the exhibits and schedules thereto
may be reviewed without charge at the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at the New York Regional
Office located at Seven World Trade Center, New York, New York 10048 and at the
Chicago Regional Office located at 500 Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained, upon payment of the
fee prescribed by the Commission, at the Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, registration statements and
certain other documents filed with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
76
<PAGE> 77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES:
Independent Auditors' Report....................................................... F-3
Consolidated Balance Sheets, as of December 31, 1994 and 1995...................... F-4
Consolidated Statements of Operations, periods January 1, 1993 to December 13, 1993
and December 14, 1993 to December 31, 1993, and the years ended December 31,
1994 and 1995................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity, periods January 1, 1993
to December 13, 1993 and December 14, 1993 to December 31, 1993, and the years
ended December 31, 1994 and 1995................................................ F-6
Consolidated Statements of Cash Flows, periods January 1, 1993 to December 13, 1993
and December 14, 1993 to December 31, 1993, and the years ended December 31,
1994 and 1995................................................................... F-7
Notes to Consolidated Financial Statements......................................... F-8
Condensed Consolidated Balance Sheet, as of March 31, 1996 (unaudited)............. F-19
Condensed Consolidated Statements of Operations, three months ended March 31, 1995
and 1996 (unaudited)............................................................ F-20
Condensed Consolidated Statements of Cash Flows, three months ended March 31, 1995
and 1996 (unaudited)............................................................ F-21
Notes to Condensed Consolidated Financial Statements (unaudited)................... F-22
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants........................................... F-24
Consolidated Balance Sheets, as of December 31, 1994 and 1995...................... F-25
Consolidated Statements of Income, period from January 11, 1993 (inception) to
December 31, 1993 and the years ended December 31, 1994 and 1995................ F-26
Consolidated Statements of Changes in Shareholders' Equity, period from January 11,
1993 (inception) to December 31, 1993 and the years ended December 31, 1994 and
1995............................................................................ F-27
Consolidated Statements of Cash Flows, period from January 11, 1993 (inception) to
December 31, 1993 and the years ended December 31, 1994 and 1995................ F-28
Notes to Consolidated Financial Statements......................................... F-29
NEW CROSSINGS INTERNATIONAL CORPORATION:
Independent Auditors' Report....................................................... F-37
Combined Balance Sheets, as of December 31, 1994 and 1995.......................... F-38
Combined Statements of Operations, years ended December 31, 1993, 1994 and 1995.... F-39
Combined Statements of Shareholders' Deficit, years ended December 31, 1993, 1994
and 1995........................................................................ F-40
Combined Statements of Cash Flows, years ended December 31, 1993, 1994 and 1995.... F-41
Notes to Combined Financial Statements............................................. F-42
Condensed Consolidated Balance Sheet, as of March 31, 1996 (unaudited)............. F-52
Condensed Combined and Consolidated Statements of Operations, three months ended
March 31, 1995 and 1996 (unaudited)............................................. F-53
Condensed Combined and Consolidated Statements of Cash Flows, three months ended
March 31, 1995 and 1996 (unaudited)............................................. F-54
Notes to Condensed Consolidated Financial Statements............................... F-55
</TABLE>
F-1
<PAGE> 78
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES:
Independent Auditors' Report....................................................... F-56
Combined Balance Sheet, December 31, 1995.......................................... F-57
Combined Statement of Operations, year ended December 31, 1995..................... F-58
Combined Statement of Changes in Stockholders' Equity, year ended December 31,
1995............................................................................ F-59
Combined Statement of Cash Flows, year ended December 31, 1995..................... F-60
Notes to Combined Financial Statements............................................. F-61
Condensed Combined Balance Sheet, as of March 31, 1996 (unaudited)................. F-65
Condensed Combined Statements of Operations, three months ended March 31, 1995 and
1996 (unaudited)................................................................ F-66
Condensed Combined Statements of Cash Flows, three months ended March 31, 1995 and
1996 (unaudited)................................................................ F-67
Notes to Condensed Combined Financial Statements (unaudited)....................... F-68
</TABLE>
F-2
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alternative Living Services, Inc.:
We have audited the accompanying consolidated balance sheets of Alternative
Living Services, Inc. and subsidiaries (the Company) as of December 31, 1994 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the Predecessor for the period January
1, 1993 to December 13, 1993 and for the Company for the period December 14,
1993 (date of inception) to December 31, 1993 and the years ended December 31,
1994 and 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1994 and 1995, and the results of operations and cash flows for
the Predecessor for the period January 1, 1993 to December 13, 1993 and for the
Company for the period December 14, 1993 (date of inception) to December 31,
1993 and the years ended December 31, 1994 and 1995 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
February 12, 1996,
except as to note 2(j),
which is as of May 17, 1996
F-3
<PAGE> 80
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 310,814 $ 2,947,964
Short-term investments.......................................... 50,000 50,000
Resident receivables, net....................................... 70,409 55,276
Other current assets............................................ 188,449 282,505
----------- -----------
Total current assets.................................... 619,672 3,335,745
----------- -----------
Property, plant and equipment, net................................ 9,167,085 27,289,291
Minority interest................................................. 553,368 --
Long-term investments............................................. -- 1,183,105
Investments in and advances to unconsolidated affiliates.......... 1,601,536 4,788,148
Other assets...................................................... 2,482,293 2,760,323
----------- -----------
Total assets............................................ $14,423,954 $39,356,612
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.......................... $ 191,814 $ 162,419
Accounts payable................................................ 443,476 786,169
Accrued expenses................................................ 911,949 1,180,129
Advances from and notes payable to unconsolidated affiliates.... 284,356 --
----------- -----------
Total current liabilities............................... 1,831,595 2,128,717
----------- -----------
Long-term debt, less current installments......................... 6,356,260 17,100,996
Advances from and notes payable to unconsolidated affiliates...... 1,550,000 --
Other long-term liabilities....................................... 126,859 174,419
Minority interest................................................. -- 609,745
Stockholders' equity:
Common stock and additional paid-in capital..................... 5,216,527 21,745,607
Accumulated deficit............................................. (657,287) (2,402,872)
----------- -----------
Total stockholders' equity.............................. 4,559,240 19,342,735
----------- -----------
Total liabilities and stockholders' equity.............. $14,423,954 $39,356,612
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 81
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS JANUARY 1, 1993 TO DECEMBER 13, 1993 AND DECEMBER 14, 1993 TO
DECEMBER 31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
PREDECESSOR
TO THE
COMPANY THE COMPANY
---------- ------------------------------------
1993 1993 1994 1995
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Resident service fees......................... $2,636,329 $ 129,659 $4,505,884 $ 9,683,756
Other......................................... 4,500 17,420 450,556 780,378
---------- --------- ---------- -----------
Operating revenue............................... 2,640,829 147,079 4,956,440 10,464,134
---------- --------- ---------- -----------
Operating expenses:
Residence operations.......................... 1,671,957 86,697 2,933,549 7,206,988
Lease expense................................. 563,211 18,870 697,126 889,514
General and administrative.................... 423,262 40,823 1,457,719 2,599,170
Depreciation and amortization................. 100,438 6,330 258,247 814,571
---------- --------- ---------- -----------
Total operating expenses.............. 2,758,868 152,720 5,346,641 11,510,243
---------- --------- ---------- -----------
Operating loss.................................. (118,039) (5,641) (390,201) (1,046,109)
Other income (expense):
Interest expense.............................. (47,841) (8,571) (322,393) (1,047,031)
Interest income............................... -- -- 21,483 234,495
Gain on sale of land.......................... -- -- -- 438,659
Equity in losses of unconsolidated
affiliates................................. -- -- (500) (437,736)
Minority interest in losses of consolidated
subsidiaries............................... -- -- 48,536 112,137
---------- --------- ---------- -----------
Total other expense, net.............. (47,841) (8,571) (252,874) (699,476)
---------- --------- ---------- -----------
Net loss.............................. $ (165,880) $ (14,212) $ (643,075) $(1,745,585)
========= ======== ========= ==========
Net loss per share.............................. $ -- $ (0.22) $ (0.30)
======== ========= ==========
Weighted average shares outstanding............. 2,959,478 2,959,478 5,863,183
======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 82
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PERIODS JANUARY 1, 1993 TO DECEMBER 13, 1993 AND DECEMBER 14, 1993 TO
DECEMBER 31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL STOCK
-------------------- ACCUMULATED SUBSCRIPTION
PREDECESSOR TO THE COMPANY SHARES AMOUNTS DEFICIT RECEIVABLE TOTAL
- ----------------------------------------------- ------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992.................. 6,155 $ 980,266 $ (616,059) $ (200,000) $ 164,207
Asset contribution in exchange for stock..... 199 50,000 -- -- 50,000
Adjustment to contributed capital............ -- (152,427) -- -- (152,427)
Receipt of stock subscription................ -- -- -- 200,000 200,000
Net loss..................................... -- -- (165,880) -- (165,880)
------ ----------- ----------- ------------ -----------
Balances at December 13, 1993.................. 6,354 $ 877,839 $ (781,939) $ -- $ 95,900
====== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL STOCK
----------------------- ACCUMULATED SUBSCRIPTION
THE COMPANY SHARES AMOUNTS DEFICIT RECEIVABLE TOTAL
- -------------------------------------------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Initial capitalization at December 14, 1993:
Common stock issued for cash.............. 112,378 $ 330,000 $ -- $ -- $ 330,000
Satisfaction of payment of short-term
advance................................. 58,002 170,000 -- -- 170,000
Common stock subscribed................... 754,021 2,200,000 -- (2,200,000) --
Liabilities assumed in excess of assets
transferred to the Company from the
Predecessor............................. 888,150 (160,815) -- -- (160,815)
Net loss.................................. -- -- (14,212) -- (14,212)
--------- ----------- ----------- ------------ -----------
Balances at December 31, 1993............... 1,812,551 2,539,185 (14,212) (2,200,000) 324,973
--------- ----------- ----------- ------------ -----------
Receipt of stock subscription............. -- -- -- 2,200,000 2,200,000
Contributed capital from majority
stockholder............................. -- 2,677,342 -- -- 2,677,342
Net loss.................................. -- -- (643,075) -- (643,075)
--------- ----------- ----------- ------------ -----------
Balances at December 31, 1994............... 1,812,551 5,216,527 (657,287) -- 4,559,240
--------- ----------- ----------- ------------ -----------
Net proceeds from private offering........ 4,302,994 19,029,080 -- -- 19,029,080
Retirement of stock held by minority
stockholder............................. (380,636) (2,500,000) -- -- (2,500,000)
Common stock issued for contributed
capital................................. 917,150 -- -- -- --
Net loss.................................. -- -- (1,745,585) -- (1,745,585)
--------- ----------- ----------- ------------ -----------
Balances at December 31, 1995............... 6,652,059 $21,745,607 $(2,402,872) $ -- $19,342,735
========= ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 83
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS JANUARY 1, 1993 TO DECEMBER 13, 1993 AND DECEMBER 14, 1993 TO
DECEMBER 31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
PREDECESSOR
TO THE
COMPANY THE COMPANY
----------- --------------------------------------
1993 1993 1994 1995
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (165,880) $ (14,212) $ (643,075) $ (1,745,585)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 100,438 6,330 258,247 814,571
Gain on sale of land.............................. -- -- -- (438,659)
Minority interest in losses of consolidated
subsidiaries.................................... -- -- (48,536) (112,137)
(Increase) decrease in net resident receivables... (23,150) 12,350 (93,491) 15,133
(Increase) decrease in other current assets....... 21,878 -- (172,300) (92,618)
Increase (decrease) in accounts payable........... 5,792 (4,673) 57,741 342,693
Increase in accrued expenses...................... 299,038 42,646 168,170 223,093
Changes in other assets and liabilities and other
adjustments..................................... -- -- 116,338 (102,440)
----------- --------- ----------- ------------
Net cash provided by (used in) operating activities... 238,116 42,441 (356,906) (1,095,949)
----------- --------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments.................. -- -- (50,000) --
Net proceeds from sale of land...................... -- -- -- 972,249
Acquisitions of affiliate and facility.............. -- -- (66,930) (850,000)
Payments for property, plant and equipment and
project development costs......................... (1,692,502) (10,184) (1,772,173) (12,667,187)
Investments in and advances to unconsolidated
affiliates........................................ (291,084) 74,641 (1,485,574) (3,186,612)
Increase in long-term investments................... -- -- -- (1,183,105)
Due from minority stockholder....................... -- (100,521) -- --
Payments for deferred costs......................... (18,470) (1,201) (30,274) (208,291)
----------- --------- ----------- ------------
Net cash used in investing activities................. (2,002,056) (37,265) (3,404,951) (17,122,946)
----------- --------- ----------- ------------
Cash flows from financing activities:
Contributions by minority partner and minority
stockholder....................................... -- -- 745,000 1,275,250
Purchase of remaining limited partners.............. -- -- (605,000) --
Payments for financing costs........................ -- (7,179) (36,579) (221,104)
Repayment of line of credit and short-term note
payable........................................... -- (25,000) -- (4,208,166)
Repayments of long-term debt........................ (136,041) (107,244) (1,320,503) (6,575,095)
Proceeds from issuance of long-term debt............ 1,650,000 -- -- 15,890,436
Changes in advances from and notes payable to
unconsolidated affiliates......................... 170,000 330,000 216,658 (1,834,356)
Issuance of common stock and other capital
contributions..................................... (102,427) -- 2,677,342 19,029,080
Retirement of stock held by minority stockholder.... -- -- -- (2,500,000)
Stock subscription received......................... 200,000 -- 2,200,000 --
----------- --------- ----------- ------------
Net cash provided by financing activities............. 1,781,532 190,577 3,876,918 20,856,045
----------- --------- ----------- ------------
Net increase in cash and cash equivalents............. 17,592 195,753 115,061 2,637,150
Cash and cash equivalents:
Beginning of period................................. -- -- 195,753 310,814
----------- --------- ----------- ------------
End of period....................................... $ 17,592 $ 195,753 $ 310,814 $ 2,947,964
============ ========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 84
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) BUSINESS
Alternative Living Services, Inc. (the Company) develops, owns and operates
assisted living residences. As of December 31, 1995, the Company operated and
consolidated in its financial statements eight residences totaling 428 living
units located in Wisconsin, Pennsylvania and Florida. As of the same date, the
Company had two residences in construction and two in different stages of
pre-construction development. In addition, the Company is a 50% owner of the
corporation which is the general partner of limited partnerships formed to
develop and operate seven residences in Michigan.
The Company was organized in December 1993, and was initially capitalized
by Evergreen Healthcare, Inc. ("Evergreen") and Care Living Centers, Inc.
("CLC"), two unrelated companies. Evergreen, then a NYSE-listed operator of
long-term care facilities, became a wholly-owned subsidiary of GranCare in July
1995. At the time of the Company's organization, CLC was owned 25% by William F.
Lasky, the Company's President and Chief Executive Officer, and 75% by two other
shareholders. Pursuant to the terms of an acquisition agreement between
Evergreen, CLC and Alternative Living Services, a Wisconsin general partnership
owned 50% by Mr. Lasky and 50% by two other individuals (the "ALS Partnership"),
the Company was initially capitalized with (i) $2.7 million contributed by
Evergreen, of which $330,000 was in cash, $170,000 was in satisfaction of a
short-term advance and $2.2 million was in common stock subscribed in exchange
for a 51% interest in the Company and (ii) certain assets and contractual rights
owned by CLC were contributed in exchange for the remaining 49% interest in the
Company issued to CLC. Immediately prior to the consummation of the transaction
(i) Assisted Care, Inc. ("Assisted Care"), a corporation formed by the
shareholder of CLC in 1989 to develop assisted living facilities outside of the
State of Wisconsin, was merged with and into CLC and (ii) the ALS Partnership
conveyed certain of its assets relating to its assisted living business to CLC.
Assisted Care and the ALS Partnership were under common control through Mr.
Lasky and one other shareholder. The combined financial statements of these two
affiliated companies (Assisted Care and the ALS-Partnership) for all periods
prior to December 14, 1993 are referred to in the Company's financial statements
as the "Predecessor." Liabilities assumed in excess of fair value of assets
transferred to the Company from the Predecessor totalled $160,815. The
Predecessor's remaining assets, primarily intercompany receivables, payables and
intangible assets totalling $256,715, were not transferred to the Company.
Subsequent to the issuance of stock in May 1995, the Company was no longer
a majority-owned subsidiary of Evergreen. (See note 11.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are as follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Results of operations of the
majority-owned subsidiaries are included from the date of acquisition. All
significant intercompany accounts and transactions with such subsidiaries
have been eliminated in the consolidation.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of
the consolidated statements of cash flows.
F-8
<PAGE> 85
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Property, Plant and Equipment
Property, plant and equipment is carried at cost, net of accumulated
depreciation. Depreciation is computed over the estimated lives of the
assets using the straight-line method. Buildings and improvements are
depreciated over 20 to 40 years, and furniture, fixtures and equipment are
depreciated over seven years. Maintenance and repairs are expensed as
incurred.
As of each balance sheet date, the Company's management evaluates the
carrying value of property, plant and equipment for possible impairment
based upon the expectations of undiscounted operating cash flows derived
from the use of the assets.
(d) Intangible Assets and Project Development Costs
Intangible Assets and Project Development Costs, which are included in
Other Assets, are composed of organization costs, pre-opening costs,
deferred financing costs, and project development costs. Organization costs
are amortized on a straight-line basis over five years. Pre-opening costs
are amortized on a straight-line basis over twelve months. Deferred
financing costs are amortized on a straight-line basis over the term of the
debt.
(e) Goodwill
Goodwill represents the cost of acquired net assets in excess of their
fair market values. Amortization of goodwill is computed using the
straight-line method over a period of forty years. The Company's management
periodically evaluates goodwill for impairment based upon expectations of
nondiscounted operating cash flows in relation to the net capital
investment in the subsidiary.
(f) Revenue
Revenue, which is recorded primarily when services are rendered,
consists primarily of resident service fees which are reported at net
realizable amounts. Other revenue consists primarily of management and
development fees from unconsolidated affiliates. Management fees are
recognized as earned in accordance with signed management agreements, and
reported at net realizable amounts. Development fees are deferred and
recognized as earned over the life of the development period.
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(h) Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents and short-term
investments approximate fair value due to the short-term nature of the
accounts and due to the accounts earning interest at current market rates.
The carrying amount of the Company's debt approximates fair value due to
the interest rates approximating the current rates available to the Company
for similar borrowing arrangements.
F-9
<PAGE> 86
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Use of Estimates
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The preparation
of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(j) Net Loss Per Share
Net loss per share is based upon the weighted average number of the
Company's common and common equivalent shares outstanding during each
period. Per share amounts for the Predecessor for the period in 1993 prior
to the inception of the Company is not presented as they would not provide
comparable or meaningful information. Common equivalent shares include
stock options, which have been included using the treasury stock method
only when their effect is dilutive.
On May 17, 1996, the Board of Directors authorized and the
stockholders approved the filing of a Restated Certificate of Incorporation
that provides for (a) the authorization of 5 million shares of preferred
stock, $0.01 par value, the terms of which may be determined by the Board
of Directors from time to time, (b) the authorization of 30 million shares
of common stock, $0.01 par value, and (c) a 1,812.55 for 1 stock split of
its common stock. Accordingly, the stock split and the changes in preferred
and common stock have been given retroactive effect in the accompanying
consolidated financial statements.
In connection with an anticipated initial public offering (IPO), on
May 28, 1996 the Company has filed a registration statement with the
Securities and Exchange Commission (SEC). Pursuant to the requirements of
the SEC, for purposes of net loss per share, common stock issued and common
stock options granted at per share amounts less than the anticipated IPO
price per share subsequent to May 1995 have been reflected as outstanding
for all periods presented. Accordingly, weighted average shares outstanding
was increased by 1,146,928 shares for the effect of such common stock and
stock options.
(k) New Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1996. The effect
of adoption of Statement 121 is not expected to be material to the
Company's financial statements.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No.
25, Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value-
based method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for
stock-based compensation arrangements under Opinion No. 25, Statement 123
requires disclosure of the pro forma effect on net income and earnings per
share of its fair value-based accounting for those arrangements. The
Company will adopt Statement 123 in the first quarter of 1996 and has
elected to continue to account for stock-based compensation arrangements
under APB Opinion No. 25.
F-10
<PAGE> 87
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31, follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land........................................................ $ 1,439,854 $ 4,591,898
Land improvements........................................... -- 529,440
Buildings................................................... 7,253,844 16,562,595
Furniture, fixtures and equipment........................... 1,578,776 3,274,576
Construction in progress.................................... -- 4,088,424
----------- -----------
Total property, plant and equipment......................... 10,272,474 29,046,933
Less accumulated depreciation............................... 1,105,389 1,757,642
----------- -----------
Property, plant and equipment, net.......................... $ 9,167,085 $27,289,291
========== ==========
</TABLE>
Interest is capitalized in connection with the construction of residences
and is amortized over the estimated useful lives of the residences. Interest
capitalized in 1995 was approximately $62,000.
Construction in process at December 31, 1995 consisted principally of costs
related to the development of assisted living residences, with outstanding
construction commitments totaling approximately $10,702,000.
(4) ACQUISITIONS
The Company acquired a 60% partnership interest in CCCI/Northampton Limited
Partnership (the Northampton Partnership) on September 19, 1994, which operates
Northampton Manor, an assisted living residence located in Pennsylvania. The
total purchase cost of $1,266,930, including acquisition costs of $66,930, was
paid in cash.
The total purchase cost of the Northampton Partnership was allocated to the
acquired assets and assumed or incurred liabilities as follows:
<TABLE>
<S> <C>
Current assets.......................................................... $ 1,318,425
Property, plant and equipment........................................... 6,854,997
Minority interest in accumulated deficit................................ 504,832
Goodwill................................................................ 969,347
Other assets............................................................ 17,372
Current liabilities..................................................... (215,196)
Long-term debt.......................................................... (8,182,847)
-----------
$ 1,266,930
==========
</TABLE>
As of December 31, 1995, the Company had a 60% ownership interest in three
development projects and a 51% ownership interest in another development
project. The 40% and 49% interests in these consolidated affiliates not held by
the Company and the losses therefrom have been reflected as minority interest in
the consolidated balance sheets and as minority interest in losses of
consolidated subsidiaries in the consolidated statements of operations.
The Company acquired the Palmer Ranch, an 86-unit assisted living residence
in Sarasota, Florida on March 31, 1995. The total purchase cost of $850,000,
including acquisition costs of $51,815, was paid in cash.
F-11
<PAGE> 88
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total purchase cost of the Palmer Ranch was allocated to the acquired
assets and assumed or incurred liabilities as follows:
<TABLE>
<S> <C>
Current assets........................................................... $ 1,438
Property, plant and equipment............................................ 6,550,000
Goodwill................................................................. 50,000
Other assets............................................................. 51,815
Short-term note payable.................................................. (4,208,166)
Other current liabilities................................................ (45,087)
Long-term debt........................................................... (1,400,000)
Other liabilities........................................................ (150,000)
----------
$ 850,000
=========
</TABLE>
Consolidated pro forma operating revenue, net loss and net loss per share
of the Company for 1994 and 1995 as if the Northampton Partnership and the
Palmer Ranch had been acquired as of January 1, 1994, are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Operating revenue........................................... $ 8,813,000 $10,946,000
========== ==========
Net loss.................................................... (1,012,000) (1,727,000)
========== ==========
Net loss per weighted average outstanding share............. $ (0.34) $ (0.29)
========== ==========
</TABLE>
(5) LONG-TERM INVESTMENTS
Long-term investments are comprised of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Collateral reserve fund, $1,000,000 certificate of deposit and
accrued interest required to be maintained until July 10,
2000........................................................ $ -- $1,015,677
Debt reserve fund, $112,000 certificate of deposit and accrued
interest required to be maintained until July 10, 2000...... -- 113,756
Debt reserve fund, $53,000 certificate of deposit and accrued
interest required to be maintained until August 15, 2002.... -- 53,672
---------- ----------
Total long-term investments................................... $ -- $1,183,105
========= =========
</TABLE>
F-12
<PAGE> 89
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Investments in and advances to unconsolidated affiliates consist of the
following at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Investments in unconsolidated affiliates:
ALS-Midwest Inc. ........................................... $ -- $ 514,349
North Schoenherr Limited Partnership........................ 515,233 434,864
Marsh/Tihart Limited Partnership............................ 100,000 200,000
Eisenhower/State Limited Partnership........................ 425,000 432,070
---------- ----------
Total investments in unconsolidated affiliates................ 1,040,233 1,581,283
---------- ----------
Advances to unconsolidated affiliates:
Partnerships................................................ 454,582 2,539,860
Notes receivable............................................ 75,000 382,761
Other....................................................... 31,721 284,244
---------- ----------
Total advances to unconsolidated affiliates................... 561,303 3,206,865
---------- ----------
Total investments in and advances to unconsolidated
affiliates.................................................. $1,601,536 $4,788,148
========= =========
</TABLE>
The investment in ALS-Midwest Inc. (ALS-Midwest) represents a 50% ownership
in a corporation formed in 1991 to develop assisted living residences. The
investment in ALS-Midwest is recorded using the equity method. Projects
developed to fund these residences have been organized as separate limited
partnerships, with ALS-Midwest as the sole general partner, and the Company as a
limited partner. Other limited partners are unrelated investors.
Summarized financial information for ALS-Midwest as of and for the years
ended December 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Current assets....................................................... $ 551,740 $ 839,481
Noncurrent assets.................................................... 2,970,388 13,936,115
---------- -----------
$3,522,128 $14,775,596
========= ==========
Current liabilities.................................................. $2,837,241 $10,975,280
Minority interest.................................................... -- 2,634,367
Stockholders' equity................................................. 684,887 1,165,949
---------- -----------
$3,522,128 $14,775,596
========= ==========
Operating revenue.................................................... $ 801,817 $ 2,802,540
========= ==========
Operating income (loss).............................................. $ 23,108 $ (622,663)
========= ==========
Net loss............................................................. $ (58,887) $ (724,563)
========= ==========
</TABLE>
North Schoenherr Limited Partnership was formed to develop the Hamilton
House I residence in Utica, Michigan, which opened January 16, 1995. ALS Midwest
owns a 50% interest in North Schoenherr Limited Partnership. The Company's
investment interest (through ALS-Midwest) is recorded using the equity method.
Marsh/Tihart Limited Partnership was formed to develop the Hamilton House I
residence in Lansing, Michigan, which was under construction at December 31,
1995. ALS Midwest owns a 73% interest in Marsh/
F-13
<PAGE> 90
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tihart Limited Partnership. The Company's investment interest (through
ALS-Midwest) is recorded using the equity method.
Eisenhower/State Limited Partnership was formed to develop the Hamilton
House I residence in Ann Arbor, Michigan, which opened June 8, 1995. ALS Midwest
owns a 50% interest in Eisenhower/State Limited Partnership. The Company's
investment interest (through ALS-Midwest) is recorded using the equity method.
Advances to unconsolidated affiliates also includes management fees
pursuant to an agreement with ALS Partnership (Partnership), which is 50% owned
and controlled by an officer and a shareholder. Under the terms of the
agreement, the Partnership is obligated to pay a monthly management fee of up to
12% to 15% of gross operating revenue. During 1994 and 1995, the management
fees, included in other revenue, were $290,000 and $252,000, respectively.
Notes receivable at December 31, 1995 includes $150,000 due from an officer
and a shareholder of the Company, which is repayable in three annual
installments of $50,000 plus interest at 6%, beginning June 30, 1996.
(7) OTHER ASSETS
Other assets are comprised of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Project development costs..................................... $1,365,325 $1,170,914
Goodwill, net................................................. 957,990 954,522
Organizational and other costs, net........................... 110,099 88,692
Deferred financing costs, net................................. 36,579 273,079
Deposits and other............................................ 12,300 273,116
---------- ----------
Total other assets............................................ $2,482,293 $2,760,323
========= =========
</TABLE>
(8) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Note payable, due April 20, 1995, interest at 9.5%........... $ 56,572 $ --
Mortgage payable, interest at 8.8%, refinanced in 1995....... 5,451,937 --
Mortgage payable, interest at 8.1%, refinanced in 1995....... 1,039,565 --
Mortgage payable, due in 20 quarterly installments, the first
four quarterly installments represent interest only,
interest at 8% through June 30, 1996, thereafter interest
at the prime rate plus 1% not to exceed 10% (9.5% at
December 31, 1995), outstanding principal balance of
approximately $954,000 due on March 31, 2000............... -- 1,000,000
Mortgage payable, due in 20 quarterly installments, the first
four quarterly installments represent interest only,
interest at the prime rate plus 1% not to exceed 10% (9.5%
at December 31, 1995), outstanding principal balance of
approximately $380,000 due on April 2, 2000................ -- 400,000
</TABLE>
F-14
<PAGE> 91
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Mortgage payable, due in 60 monthly installments including
interest at 9.21%, outstanding principal balance of
approximately $4,027,000 due on July 10, 2000.............. -- 4,279,064
Mortgage payable, due in 72 monthly installments including
interest at 9.985%, outstanding principal balance of
approximately $1,751,000 due on August 15, 2002............ -- 1,913,915
Mortgage payable, due in 120 monthly installments including
interest at 8.46% through June 30, 2000, thereafter at the
five-year U.S. Treasury rate plus 2.5% (7.88% at December
31, 1995), outstanding principal balance of approximately
$5,046,000 due on June 1, 2005............................. -- 6,567,357
Note payable, due November 20, 2020, first twelve monthly
payments represent interest only, interest at the prime
rate plus 1% (9.5% at December 31, 1995), secured by the
Clare Bridge project of Lower Makefield and all rents,
income and furniture and equipment......................... -- 3,103,079
---------- -----------
Total long-term debt......................................... 6,548,074 17,263,415
Less current installments.................................... 191,814 162,419
---------- -----------
Total long-term debt, less current installments.............. $6,356,260 $17,100,996
========= ==========
</TABLE>
The Company is required to maintain letters of credit aggregating
$1,000,000 under terms of the mortgage payable due June 1, 2005, until such time
as Northampton Manor can maintain a certain minimum debt service coverage ratio
for twelve consecutive months or until certain performance criteria are met.
The mortgages payable are secured by security agreements and guarantees by
the Company. In addition, certain security agreements require the Company to
maintain collateral and debt reserve funds (see Notes 5 and 14).
Interest paid for the years ended December 31, 1994 and 1995 was $142,270
and $1,044,863, respectively.
Principal payments on long-term debt for the next five years and thereafter
are as follows:
<TABLE>
<S> <C>
1996.................................................................... $ 162,419
1997.................................................................... 217,732
1998.................................................................... 235,332
1999.................................................................... 257,716
2000.................................................................... 282,228
Thereafter.............................................................. 16,107,988
-----------
Total long-term debt.................................................... $17,263,415
==========
</TABLE>
(9) ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Accrued salaries and wages................................... $255,935 $ 332,097
Advance rents and deposits................................... 520,133 545,584
Other........................................................ 135,881 302,448
-------- ----------
Total accrued expenses....................................... $911,949 $1,180,129
======== =========
</TABLE>
F-15
<PAGE> 92
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) ADVANCES FROM AND NOTES PAYABLE TO UNCONSOLIDATED AFFILIATES
Advances from and notes payable to unconsolidated affiliates consist of the
following at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Advances -- Evergreen....................................... $ 216,658 --
Note payable -- Evergreen................................... 1,550,000 --
Note payable -- minority stockholder........................ 67,698 --
---------- ----------
Total advances from and notes payable to unconsolidated
affiliates................................................ 1,834,356 --
Less current installments................................... 284,356 --
---------- ----------
Total advances from and notes payable to unconsolidated
affiliates, less current installments..................... $1,550,000 --
========= =========
</TABLE>
The advances and notes payable to Evergreen, interest at 9%, were paid in
full in May 1995. See Note 11.
(11) STOCKHOLDERS' EQUITY
The Company completed a private placement equity offering on May 26, 1995,
resulting in net proceeds of $19,029,080, for 4,302,994 shares of its common
stock. Simultaneously, the Company issued 917,150 shares of its stock to
Evergreen as consideration for $2,677,342 cash received during 1994, which is
reflected as common stock and additional paid-in capital in the accompanying
balance sheet.
The authorized capital stock of the Company consists of 30,000,000 shares
of common stock, $.01 par value, and 5,000,000 shares of $.01 par value
preferred stock. At December 31, 1994 and 1995, there were 1,812,551 and
6,652,059 shares of common stock issued and outstanding, respectively, and no
shares of preferred stock were issued and outstanding at such dates.
(12) STOCK OPTION PLAN
The Company adopted an incentive compensation plan (the 1995 Plan) during
1995, which provides key employees of the Company performance incentives, and
also provides a means of encouraging stock ownership in the Company by officers,
directors, and key employees through the issuance of stock options.
The Compensation Committee is authorized to designate recipients of the
options, date of grants, the number of shares subject to options, and the time
during which the options may be exercised. The price of stock options granted
under the plan cannot be less than the fair market value of the shares at the
time the options are granted.
Options to purchase an aggregate of 459,902 shares of common stock were
issued and outstanding at December 31, 1995, at a weighted average exercise
price of $4.38 per share, of which options to purchase 103,483 shares were
exercisable at such date.
F-16
<PAGE> 93
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES
Deferred tax assets and liabilities consist of the following at December
31:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $228,600 $ 800,200
Investment in unconsolidated affiliates.................... 1,400 105,100
Other...................................................... 56,000 104,100
-------- ----------
Total deferred tax assets.................................... 286,000 1,009,400
Less valuation allowance..................................... 259,500 917,500
-------- ----------
Deferred tax assets, net of valuation allowance.............. $ 26,500 $ 91,900
-------- ----------
Deferred tax liability -- tax versus book depreciation....... $ 26,500 $ 91,900
======== =========
</TABLE>
The Company has approximately $2,030,000 of net operating loss
carryforwards for income tax purposes at December 31, 1995, which will begin to
expire, if unused, beginning in the year 2008. The loss may be further limited
as to future use due to the change in control provisions in the Internal Revenue
Code which apply because of the issuance of stock in the private placement in
May 1995.
(14) COMMITMENTS AND CONTINGENCIES
The Company leases certain properties under non-cancelable operating leases
that expire at various dates through the year 2014.
Future annual minimum operating lease payments at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.................................................................... $ 1,088,249
1997.................................................................... 1,109,970
1998.................................................................... 1,137,957
1999.................................................................... 1,167,482
2000.................................................................... 1,077,870
Thereafter.............................................................. 15,514,590
-----------
$21,096,118
==========
</TABLE>
The Company has guaranteed specific obligations of several unconsolidated
affiliates, totaling $5,680,000 at December 31, 1995. These obligations consist
primarily of construction financing and lease agreements entered into by
partially-owned limited partnerships. The Company anticipates that its
unconsolidated affiliates will be able to perform under their respective
financings and other obligations, and that no payments will be required and no
losses will be incurred under such guarantees.
(15) SUBSEQUENT EVENTS
The Company sold two assisted living residences for approximately
$7,022,000 on January 22, 1996 and leased them back under a ten-year sale and
lease-back agreement. The transaction produced a gain of approximately
$1,083,000, which will be deferred and amortized over the lease period.
On January 26, 1996 the Company acquired Heartland Retirement Services,
Inc. (Heartland) for $5,500,000 cash plus 261,424 shares of the Company's common
stock with an estimated market value of $1,749,000. The acquisition was
effective as of January 1, 1996. This acquisition was financed with bridge
financing of approximately $8,700,000 which was obtained from a private
financial management firm whose president is a director of the Company. As of
January 1, 1996, Heartland operated 20 assisted living residences.
F-17
<PAGE> 94
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 24, 1996, the Company acquired New Crossings International
Corporation, a company which operates 15 assisted living residences as of May,
1996. The total purchase consideration was 2,007,049 shares of the Company's
common stock with an estimated market value of $9,281,000. (unaudited)
On May 24, 1996, the Company acquired the limited partnership interest in
five Michigan limited partnerships owned by unrelated investors for aggregate
consideration of 115,024 shares of redeemable common stock valued at $1,000,000
for accounting purposes and promissory notes in the aggregate principal amount
of $2,900,000. These promissory notes are due and payable on January 31, 1997
and bear interest at the rate of 8% per annum. The Company also acquired 100% of
the outstanding stock of ALS-Midwest pursuant to a merger transaction whereby
the shareholders of ALS-Midwest, other than the Company, received, in exchange
for their shares of ALS-Midwest, $300,000 in cash and 57,512 shares of the
Company's redeemable common stock valued at $500,000 for accounting purposes.
The shares of the Company's redeemable common stock issued in these transactions
are entitled to certain rights to cause the Company to repurchase such shares in
November 1997. The shares were not issued in contemplation of an initial public
offering and were valued for accounting purposes at the $8.69 put price
applicable to these shares. Contemporaneously with the merger, the Company
refunded certain advances made to the Partnership (see note 6) by a cash payment
of $700,000 and delivery of a promissory note in the amount of $1.4 million.
This promissory note is due and payable on September 21, 1996 and bears interest
at the rate of 9% per annum. (unaudited)
On May 24, 1996, the Company raised approximately $2 million of equity
capital through the private placement of 430,281 shares of the Company's common
stock. (unaudited)
F-18
<PAGE> 95
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 6,816,266
Short-term investments....................................................... 50,000
Resident receivables, net.................................................... 235,647
Other current assets......................................................... 424,323
------------
Total current assets................................................. 7,526,236
------------
Property, plant and equipment, net............................................. 35,029,600
Long-term investments.......................................................... 1,167,658
Investments in and advances to unconsolidated affiliates....................... 6,754,273
Other assets................................................................... 3,346,086
------------
Total assets......................................................... $ 53,823,853
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt....................................... $ 104,991
Accounts payable............................................................. 388,917
Accrued expenses............................................................. 1,360,067
------------
Total current liabilities............................................ 1,853,975
------------
Long-term debt, less current installments...................................... 30,631,646
Other long-term liabilities.................................................... 1,350,504
Minority interest.............................................................. 637,088
Redeemable common stock........................................................ 1,500,000
Stockholders' equity:
Common stock and additional paid-in capital.................................. 22,243,238
Accumulated deficit.......................................................... (4,392,598)
------------
Total stockholders' equity........................................... 17,850,640
------------
Total liabilities and stockholders' equity........................... $ 53,823,853
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE> 96
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1995 1996
---------- -----------
<S> <C> <C>
Revenue:
Resident service fees.......................................... $1,982,928 $4,033,003
Other.......................................................... 98,352 292,115
---------- -----------
Operating revenue................................................ 2,081,280 4,325,118
---------- -----------
Operating expenses:
Residence operations........................................... 1,347,562 3,241,020
Lease expense.................................................. 426,158 487,532
General and administrative..................................... 582,620 1,583,452
Depreciation and amortization.................................. 145,257 365,237
---------- -----------
Total operating expenses............................... 2,501,597 5,677,241
---------- -----------
Operating loss................................................... (420,317) (1,352,123)
---------- -----------
Other income (expense):
Interest expense............................................... (180,858) (530,051)
Interest income................................................ 1,352 139,223
Loss on sale of land........................................... -- (20,766)
Equity in (losses) income of unconsolidated affiliates......... 38,913 (84,809)
Minority interest in losses of consolidated subsidiaries....... 22,413 44,699
---------- -----------
Total other expense, net............................... (118,180) (451,704)
---------- -----------
Net loss......................................................... $(538,497) $(1,803,827)
========= ==========
Net loss per share............................................... $(0.18) $(0.22)
========= ==========
Weighted average shares outstanding.............................. 2,959,478 8,060,411
========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE> 97
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (538,497) $(1,803,827)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 145,257 365,237
(Increase) decrease in net resident receivables.............. 14,678 (439,480)
(Increase) decrease in other current assets.................. (32,079) 85,750
Decrease in accounts payable................................. (76,365) (515,886)
Increase in accrued expenses................................. 890,265 56,258
Changes in other assets and liabilities and other
adjustments................................................. (1,494,090) 1,048,059
----------- -----------
Net cash used in operating activities............................. (1,090,831) (1,203,887)
----------- -----------
Cash flows from investing activities:
Sale of property under lease.................................... -- 5,975,101
Payments for property, plant and equipment and project
development costs............................................ (6,831,962) (2,406,859)
Changes in investments in and advances to unconsolidated
affiliates................................................... 658,016 (1,683,548)
Increase in long-term investments............................... -- 15,447
Cash from acquisition........................................... -- 1,100,100
----------- -----------
Net cash provided by (used in) investing activities............... (6,173,946) 3,000,241
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt.................................... (1,491,323) (8,203,331)
Proceeds from issuance of long-term debt........................ 11,050,000 10,026,464
Changes in advances from and notes payable to unconsolidated
affiliates................................................... (1,834,356) --
Issuance of common stock and other capital contribution......... -- 248,815
----------- -----------
Net cash provided by financing activities......................... 7,724,321 2,071,948
----------- -----------
Net increase in cash and cash equivalents......................... 459,544 3,868,302
Cash and cash equivalents:
Beginning of period............................................. 310,814 2,947,964
----------- -----------
End of period................................................... $ 770,358 $ 6,816,266
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE> 98
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 1996 and condensed
consolidated statements of operations and cash flows for the three months ended
March 31, 1995 and 1996 contained herein, which are unaudited, include the
accounts of the Company and its affiliates which are under the common financial
control of the Company. All significant intercompany accounts have been
eliminated in consolidation. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included. Adjustments consist only of normal recurring items. The results of
operations for the three months ended March 31, 1995 and 1996, are not
necessarily indicative of the results to be expected for the full fiscal year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Reference is made to the Company's audited
financial statements and the related notes as of December 31, 1994 and 1995 and
for each of the years then ended, which provide additional disclosures and a
further description of accounting policies.
(2) BUSINESS COMBINATION
On January 26, 1996 the Company acquired Heartland Retirement Services,
Inc. (Heartland) for $5,500,000 cash plus 261,424 shares of the Company's common
stock with an estimated market value of $1,749,000. The shares of the Company's
common stock issued are entitled to certain rights to cause the Company to
repurchase such shares in March 1997. These shares were not issued in
contemplation of an initial public offering and were valued for accounting
purposes at the $8.69 put price applicable to these shares. The pro forma effect
of the Heartland acquisition as if the acquisition had been effective as of
January 1, 1995 is not included as it is not material to the March 31, 1995
results due to Heartland's limited operations during such period. The
acquisition was effective as of January 1, 1996. This acquisition was financed
by a bridge loan of approximately $8,700,000 which was obtained from a private
financial management firm whose president is a director of the Company. As of
January 1, 1996, Heartland operated 20 assisted living residences.
(3) NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The effect of adopting Statement 121 was not material to the
Company's financial statements.
Effective January 1, 1996, the Company adopted FASB Statement No. 123,
Accounting for Stock-Based Compensation, which provides an alternative to APB
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based compensation issued to employees. The Company has elected to
continue to account for stock-based compensation arrangements under APB Opinion
No. 25. However the Company will begin to disclose the pro forma effect on net
income and earnings per share of the fair value-based accounting for those
arrangements, as required by Statement 123, beginning with its 1996 annual
report.
(4) SUBSEQUENT EVENTS
On May 24, 1996, the Company acquired New Crossings International
Corporation a company which operates 15 assisted living facilities as of May,
1996. The total purchase consideration was 2,007,049 shares of the Company's
common stock with an estimated value of $9,281,000. The shares of the Company's
common stock were not issued in contemplation of an initial public offering and
were valued for accounting purposes at
F-22
<PAGE> 99
the estimated fair value of the common stock at the time of the transaction
(fair value determined based on recent, arm's length sale transactions).
On May 24, 1996, the Company acquired the limited partnership interest in
five Michigan limited partnerships owned by unrelated investors for aggregate
consideration of 115,024 shares of redeemable common stock valued at $1,000,000
for accounting purposes and promissory notes in the aggregate principal amount
of $2,900,000. These promissory notes are due and payable on January 31, 1997
and bear interest at the rate of 8% per annum. The Company also acquired 100% of
the outstanding stock of ALS-Midwest pursuant to a merger transaction whereby
the shareholders of ALS-Midwest, other than the Company, received, in exchange
for their shares of ALS-Midwest, $300,000 in cash and 57,512 shares of the
Company's redeemable common stock valued at $500,000 for accounting purposes.
The shares of the Company's redeemable common stock issued in these transactions
are entitled to certain rights to cause the Company to repurchase such shares in
November 1997. The shares were not issued in contemplation of an initial public
offering and were valued for accounting purposes at the $8.69 put price
applicable to these shares. Contemporaneously with the merger, the Company
refunded certain advances made to the Partnership by a cash payment of $700,000
and delivery of a promissory note in the amount of $1.4 million. This promissory
note is due and payable on September 21, 1996 and bears interest at the rate of
9% per annum.
On May 24, 1996, the Company raised approximately $2 million of equity
capital through the private placement of 430,281 shares of the Company's common
stock. The shares of the Company's common stock issued were not issued in
contemplation of an initial public offering.
On May 17, 1996, the Board of Directors authorized and the stockholders
approved the filing of a Restated Certificate of Incorporation that provides for
(a) the authorization of 5 million shares of preferred stock, $0.01 par value,
the terms of which may be determined by the Board of Directors from time to
time, (b) the authorization of 30 million shares of common stock, $0.01 par
value, and (c) 1,812.55 for 1 stock split of its common stock. Accordingly, the
stock split and the changes in preferred and common stock have been given
retroactive effect in the accompanying condensed consolidated financial
statements.
In connection with an anticipated initial public offering (IPO), the
Company intends to file a registration statement with the Securities and
Exchange Commission (SEC). Pursuant to the requirements of the SEC, for purposes
of net loss per share, common stock issued and common stock options granted at
per share amounts less than the anticipated IPO price per share subsequent to
May 1995 have been reflected as outstanding for all periods presented.
Accordingly, weighted average shares outstanding was increased by 1,146,928
shares for the effect of such common stock and stock options.
The Company has granted stock options to officers, directors and employees
of the Company in 1996 for an aggregate of 329,246 shares of the Company's
common stock at exercise prices ranging between $7.21 to $8.69 per share. None
of these stock options were granted in contemplation of an initial public
offering. The exercise price for each of these options exceeded the $4.65 per
share estimated fair value of the underlying shares of common stock at the time
of grant (fair value determined based on recent, arm's length sale
transactions). Accordingly, no compensation expense was recognized in connection
with these option grants.
F-23
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heartland Retirement Services, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland
Retirement Services, Inc. (a majority owned subsidiary of Heartland Development
Corporation) and Subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for the period from inception, January 11, 1993, through December 31,
1993, and for each of the years ended December 31, 1994 and 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 9 to the financial statements, on January 26, 1996,
the shareholders of Heartland Retirement Services, Inc. sold all of their stock
to Alternative Living Services, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heartland Retirement
Services, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
results of its operations and its cash flows for the period from inception,
January 11, 1993, through December 31, 1993, and for the years ended December
31, 1994 and 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 26, 1996.
F-24
<PAGE> 101
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 122,209 $1,100,100
Resident receivables.............................................. 131,748 185,617
Due from related party............................................ 584,317 --
Food inventory.................................................... -- 18,606
Prepaids and other current assets................................. 2,423 71,641
---------- ----------
Total current assets...................................... 840,697 1,375,964
Property and equipment:
Land.............................................................. 76,045 743,519
Land improvements................................................. -- 27,355
Buildings......................................................... -- 6,307,150
Furniture and fixtures............................................ 38,779 555,167
Computers and equipment........................................... 20,290 108,230
Construction in progress.......................................... 24,698 180,042
---------- ----------
159,812 7,921,463
Less -- Accumulated depreciation.................................. (3,667) (77,592)
---------- ----------
156,145 7,843,871
---------- ----------
Investments and other assets:
Investments....................................................... 57,586 282,577
Goodwill.......................................................... -- 12,771
Other assets, net of amortization................................. 118,017 94,230
Deferred income taxes............................................. 48,466 137,323
---------- ----------
224,069 526,901
---------- ----------
Total assets.............................................. $1,220,911 $9,746,736
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 33,274 $ 161,680
Real estate taxes payable......................................... 1,040 80,453
Other accrued expenses............................................ 71,424 109,887
Deferred revenue.................................................. 144,761 120,820
Construction note payable......................................... 97,369 --
Income taxes payable.............................................. 1,782 --
Due to related party.............................................. -- 4,433,878
Current maturities of mortgage note payable....................... -- 41,454
---------- ----------
Total current liabilities................................. 349,650 4,948,172
Mortgage notes payable.............................................. -- 3,556,192
Minority interest................................................... -- 32,042
Common Stock subject to repurchase.................................. 28,000 150,000
Shareholders' equity
Common stock, $1 par value; authorized 9,000 shares; issued and
outstanding 100 shares......................................... 98 97
Additional paid-in capital........................................ 1,376,760 2,482,628
Accumulated deficit............................................... (533,597) (1,422,395)
---------- ----------
Total shareholders' equity................................ 843,261 1,060,330
---------- ----------
Total liabilities and shareholders' equity................ $1,220,911 $9,746,736
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-25
<PAGE> 102
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIOD FROM INCEPTION (JANUARY 11, 1993) TO DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Revenue:
Resident service fees.................................... $ -- $ -- $ 1,140,779
Other.................................................... 260,834 359,062 281,951
--------- --------- -----------
Operating revenue.......................................... 260,834 359,062 1,422,730
Operating expenses:
Operating and maintenance................................ -- -- 207,443
Salary and related costs................................. 146,817 308,665 1,413,796
General and administrative............................... 430,659 648,325 861,387
Real estate taxes and insurance.......................... -- 2,915 54,111
Depreciation and amortization............................ 16,307 9,188 108,486
--------- --------- -----------
Total operating expenses......................... 593,783 969,093 (2,645,223)
Operating loss........................................... (332,949) (610,031) (1,222,493)
Other income (expense):
Equity in losses of unconsolidated affiliates............ -- (1,617) (47,496)
Interest expense......................................... -- -- (226,807)
Interest income.......................................... 9,366 52,175 8,901
Minority interest in losses of consolidated subsidiary... -- -- 12,958
--------- --------- -----------
Net loss before income taxes..................... (323,583) (559,473) (1,474,937)
Income tax benefit......................................... 129,838 219,621 586,139
--------- --------- -----------
Net loss......................................... $(193,745) $(339,852) $ (888,798)
========= ========= ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-26
<PAGE> 103
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 11, 1993) TO DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balances at January 11, 1993...................... $100 $ 2,758 $ -- $ 2,858
Net loss........................................ -- -- (193,745) (193,745)
Reclassification to common stock subject to
repurchase................................... (1) (18,999) -- (19,000)
Capital contribution from Parent................ -- 1,402,000 -- 1,402,000
------ ---------- ----------- ----------
Balances at December 31, 1993..................... 99 1,385,759 (193,745) 1,192,113
Net loss........................................ -- -- (339,852) (339,852)
Reclassification to common stock subject to
repurchase................................... (1) (8,999) -- (9,000)
------ ---------- ----------- ----------
Balances at December 31, 1994..................... 98 1,376,760 (533,597) 843,261
Net loss........................................ -- -- (888,798) (888,798)
Reclassification to common stock subject to
repurchase................................... (1) (121,999) -- (122,000)
Capital contribution from Parent................ -- 1,227,867 -- 1,227,867
------ ---------- ----------- ----------
Balances at December 31, 1995..................... $ 97 $2,482,628 $(1,422,395) $1,060,330
====== ========= ========== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-27
<PAGE> 104
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 11, 1993) TO DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (193,745) $(339,852) $ (888,798)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization....................... 27,566 9,188 108,486
Deferred income taxes............................... (19,836) (28,630) (85,857)
Changes in operating assets and liabilities --
Increase in accounts receivable................... (113,854) (12,243) (53,869)
(Increase) decrease in due from related party..... 11,341 (273,401) 584,317
(Increase) decrease in prepaids and other current
assets......................................... (12,630) 5,958 (87,824)
Increase in other noncurrent assets............... -- (15,420) (23,545)
Increase in accounts payable and accrued
expenses....................................... 47,848 47,596 166,869
Increase (decrease) in deferred revenue........... 22,325 122,436 (23,941)
Increase (decrease) in taxes payable.............. 5,273 (3,491) 77,631
----------- --------- -----------
Cash used in operations........................ (225,712) (487,859) (229,531)
Cash flows from investing activities:
Loan to Parent......................................... (1,145,000) -- --
Parent loan repayment.................................. -- 698,000 447,000
Purchase of equity investments......................... (8,770) (46,842) (224,991)
Payments for property and equipment.................... -- (159,812) (6,874,642)
----------- --------- -----------
Cash provided by (used in) investing
activities................................... (1,153,770) 491,346 (6,652,633)
Cash flows from financing activities:
Net proceeds from mortgage notes payable............... -- 97,369 3,500,277
Capital contribution from Parent....................... 1,402,000 -- 340,858
Net contribution of minority interest in subsidiary.... -- -- 32,042
Loans from related parties............................. -- -- 3,986,878
Financing costs........................................ -- (2,050) --
----------- --------- -----------
Cash provided by financing activities.......... 1,402,000 95,319 7,860,055
Net increase in cash................................... 22,518 98,806 977,891
Cash at beginning of period............................ 885 23,403 122,209
----------- --------- -----------
Cash at end of period.................................. $ 23,403 $ 122,209 $ 1,100,100
========== ========= ==========
Cash paid during the year for interest................. -- -- $ 181,551
Cash received during the year for taxes................ -- -- $ 366,359
Direct purchase of property by Parent.................. -- -- $ 887,009
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-28
<PAGE> 105
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Heartland Retirement Services, Inc. ("Heartland"), a 95.5% owned subsidiary
of Heartland Development Corporation ("HDC" or "Parent") was incorporated on
January 11, 1993, to provide assisted-living products and services to older
adults. Heartland has developed an assisted-living trademark, known as
WovenHearts(R), which is marketed and franchised in Wisconsin and the
continental United States. Heartland develops, owns and operates a number of
community based residential facilities operating under the WovenHearts name.
Residents require assistance with the activities of daily living and, thus, are
no longer able to live independently. Each resident pays a monthly fee that
covers the use of an individual living unit and common areas, as well as
utilities, meals, housekeeping and assistance with the routine activities of
daily living such as bathing and dressing. Heartland also provides retirement
housing consulting services.
WovenCare Systems, Inc. ("WovenCare"), formerly Hennig & Associates, Inc.,
is a wholly owned subsidiary of Heartland which provides property management
services for various assisted living residences.
As of December 31, 1995, the Company owned, and consolidated in its
financial statements, 12 assisted living facilities with 15 to 20 units each, as
follows:
<TABLE>
<CAPTION>
PERCENT COMMENCED
LEGAL ENTITY LOCATION OWNED OPERATIONS
------------------------------------ ---------------------- -------- ----------------
<S> <C> <C> <C>
Heartland Retirement Services Clintonville,
Clintonville Associates, LLC Wisconsin 100% July, 1995
Heartland Retirement Services
Edgerton Associates, LLC Edgerton, Wisconsin 100 October, 1995
Heartland Retirement Services
Janesville Associates, LLC Janesville, Wisconsin 100 October, 1995
Heartland Retirement Services
Jefferson I Associates, LLC Jefferson, Wisconsin 100 October, 1995
Heartland Retirement Services
Kaukauna Associates, LLC Kaukauna, Wisconsin 100 July, 1995
Heartland Retirement Services
Manitowoc Associates, LLC Manitowoc, Wisconsin 100 December, 1995
Heartland Retirement Services
Neenah Associates, LLC Neenah, Wisconsin 100 Anticipated
February, 1996
Heartland Retirement Services
New London Associates, LLC New London, Wisconsin 100 April, 1995
Heartland Retirement Services
Onalaska Associates, LLC Onalaska, Wisconsin 100 June, 1995
Heartland Retirement Services
Platteville Associates, LLC Platteville, Wisconsin 72.7 November, 1995
Heartland Retirement Services
Rice Lake Associates, LLC Rice Lake, Wisconsin 100 October, 1995
Heartland Retirement Services
Shawano Associates, LLC Shawano, Wisconsin 100 July, 1995
</TABLE>
F-29
<PAGE> 106
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidation policy
The consolidated financial statements include the accounts of Heartland and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts are eliminated in consolidation. The 1993 accounting period covered by
the accompanying financial statements is from January 11, 1993 (commencement of
operations) through December 31, 1993.
Investments
Heartland and its subsidiaries are general partners in three limited
partnerships and members in four limited liability companies that each own a
single community based retirement facility. The Company's investment in each of
these entities at December 31, 1995 is between .5% and 50%. These investments
are accounted for under the equity method in which Heartland records its
proportionate share of the partnership's or limited liability company's net
income or loss.
Cash and cash equivalents
Cash and cash equivalents include cash on deposit held at financial
institutions with original maturities of three months or less.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the following estimated useful lives of the
assets:
<TABLE>
<CAPTION>
YEARS
----
<S> <C>
Buildings..................................................................... 40
Furniture and fixtures........................................................ 12
Computers and equipment....................................................... 3-5
</TABLE>
Interest incurred during construction periods is capitalized as part of the
building costs. Capitalized interest was $46,490 in the year ended December 31,
1995. There was no interest capitalized during the years ended December 31, 1993
and 1994. Capitalized interest costs are computed using the borrowing rate for
construction expenditures (9.75% for 1995).
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements are added to property.
As of each balance sheet date, the Company's management evaluates the
carrying value of property, plant and equipment for possible impairment based
upon the expectation of undiscounted operating cash flows derived from the use
of the assets.
Construction in progress
Construction in progress at December 31, 1994 and 1995 relates to one
project and 14 projects, respectively. The 1995 projects are scheduled for
completion in 1996 and are at various stages of development. Construction in
progress on these projects include earnest money deposits on land purchases,
building permits, architecture plans, site analysis and other development costs
associated with the facilities. The 1994 project has been completed.
F-30
<PAGE> 107
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other noncurrent assets
Other noncurrent assets consist of the following as of December 31:
<TABLE>
<CAPTION>
AMORTIZATION
1994 1995 LIFE
-------- ------- ---------------
<S> <C> <C> <C>
Trademark costs................................. $ 7,123 $ 6,013 7 years
Financing costs................................. 2,050 43,209 Term of debt
Franchise costs................................. 36,896 36,052 5 years
Brochures....................................... 71,948 -- As used
Other........................................... -- 8,956 1 year or less
-------- -------
$118,017 $94,230
======== =======
</TABLE>
Revenue recognition
Revenues are recorded when services are rendered and consist primarily of
residents' fees for basic housing and support services including routine
nursing, and optional personalized assistance on a fee for service basis. The
residency agreements are on a month to month basis. Heartland may adjust the
monthly charge with 30 days advance notice.
The Company charges its new residents an upfront, nonrefundable admission
fee which is charged to residents to cover estimated costs of processing and
evaluating new residents. Such admission fee revenues are included in residents'
fees and are recorded when the fees are received and totaled approximately $0,
$0 and $136,000 for the periods ended December 31, 1993, 1994, and 1995,
respectively. The costs of processing and evaluating prospective new residents
are expensed as incurred.
Heartland also derives revenue from retirement housing consulting services
and franchise sales. Consulting service revenue is recognized as services are
performed and initial franchise fee revenue is recognized when all related
franchise services have been performed. A monthly franchise fee based on a
percentage of gross receipts is charged to the Company's three franchisees and
is recognized as earned. Consulting service revenues were approximately
$227,000, $115,000, and $45,000 for the periods ended December 31, 1993, 1994
and 1995, respectively. Franchise fee revenues were approximately $0, $72,500,
and $47,500 for the periods ended December 31, 1993, 1994, and 1995,
respectively. Consulting service and franchise fee revenues are included in
other revenues in the financial statements.
Heartland receives a development fee for services related to facility
start-up costs. These services include, but are not limited to governmental
approvals, facility design, construction management, financing negotiation,
licensing, and initial resident lease-up. Revenues are recognized over the
construction period and totaled approximately $0, $139,500, and $80,500 for the
periods ended December 31, 1993, 1994 and 1995, respectively.
The deferred revenue represents that portion of franchise revenues and
development fee revenues that have been billed, but for which services have not
yet been provided.
Income taxes
Deferred income taxes are provided for differences in the financial
reporting and income tax basis of assets and liabilities.
F-31
<PAGE> 108
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Costs in excess of fair market value at date of acquisition have been
recorded as goodwill and amortized over fifteen years on a straight-line basis.
The Company's management periodically evaluates goodwill for impairment based
upon the future economic benefit of the recorded balance.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents approximate fair value
because of the short-term nature of these accounts and because they are invested
in accounts earning market rates of interest. The carrying amount of the
Company's debt approximates fair value because the interest rates approximate
the current rates available to the Company.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) ACQUISITION OF ASSISTED LIVING FACILITIES
In 1995, the Company purchased nine assisted living facilities for
$5,295,739 (including closing costs of $12,489). The acquisitions have been
accounted for as a purchase and, accordingly, the purchase price was allocated
to the assets acquired based on the estimated fair value of such assets at date
of acquisition. Allocation of the cash purchase price is summarized as follows:
<TABLE>
<S> <C>
Land..................................................................... $ 310,600
Building................................................................. 4,755,807
Furniture and equipment.................................................. 287,000
Construction in progress................................................. 65,129
Goodwill................................................................. 15,871
Liabilities assumed...................................................... (138,668)
----------
Total cash purchase price................................................ $5,295,739
=========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The following is a summary of related party balances:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Due from related parties:
Parent..................................................... $ 805,674 $ 158,482
Other...................................................... 17,712 286,244
--------- -----------
823,386 444,726
--------- -----------
Due (to) related parties:
Parent..................................................... (232,437) (3,263,269)
Other...................................................... (6,632) (1,615,335)
--------- -----------
(239,069) (4,878,604)
--------- -----------
Net due (to) from related parties............................ $ 584,317 $(4,433,878)
========= ==========
</TABLE>
F-32
<PAGE> 109
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the amount due from related parties at December 31, 1994 and
1995, is $447,000 and $277,744, respectively, for a related party loan. This
loan is due on demand and bears interest based on the prime interest rate. The
rate on this loan was 8.50% and 8.65% at December 31, 1994 and 1995,
respectively. In addition, the amount due from Parent at December 31, 1994 and
1995, includes $306,692 and $158,482, respectively, for income taxes receivable
(see Note 6).
During 1993, 1994 and 1995, Heartland incurred approximately $228,000,
$114,000 and $117,100, respectively, in allocated expenses from its sister
company, which included office rent and vehicle mileage.
Included in the amount due to Parent at December 31, 1994 and 1995 is $0
and $2,919,000, respectively, of 8.25% to 8.75% mortgage notes payable and $0
and $299,014, respectively of an 8.25% intercompany revolving credit agreement.
Included in due to other at December 31, 1995, is a $1,583,000 8.25% note
payable due to a sister company (see Note 9).
Management and partnership fees
WovenCare receives a 6% management fee and Heartland receives a 2%
partnership management fee based on the gross receipts for certain of the
entities in which they have investments. Heartland recognized management fees
and partnership management fee service revenues of approximately $34,000,
$32,000 and $109,000 in 1993, 1994, and 1995, respectively, from these related
entities.
(4) MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following as of December 31, 1995:
<TABLE>
<S> <C>
Mortgage notes payable to a financial institution; with varying annual
payments including interest at 9.75% through 1997 and at 1% above prime
thereafter; due March through November, 2000; secured by specific
residence properties................................................... $3,597,646
----------
Total.................................................................... 3,597,646
Less -- Current maturities............................................... 41,454
----------
Mortgage notes payable................................................... $3,556,192
==========
</TABLE>
As of December 31, 1995, the following principal payments are scheduled:
<TABLE>
<S> <C>
1996..................................................................... $ 41,454
1997..................................................................... 50,812
1998..................................................................... 52,189
1999..................................................................... 57,627
2000..................................................................... 3,395,564
----------
$3,597,646
==========
</TABLE>
(5) COMMON STOCK
In 1993, Heartland issued 4.5 shares of its common stock to the minority
shareholder in exchange for 100% of the minority shareholder's common stock in
WovenCare. As a result of this transaction, WovenCare became a wholly owned
subsidiary of Heartland.
As part of this transaction, Heartland entered into a shareholder agreement
with the minority shareholder. This agreement allows the minority shareholder to
put any or all of his Heartland common stock to the Company during a 30-day
period each year beginning in 1997 at the greater of 1.5 times book value or its
fair market value, as defined. In addition, the agreement allows Heartland to
purchase the stock from the minority
F-33
<PAGE> 110
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shareholder at 1.5 times book value or fair value upon the occurrence of certain
events. The amounts classified as common stock subject to repurchase at each
balance sheet date is based on an accretion to the earliest redemption date from
the carrying value of the shares in the shareholders' equity to the redemption
value at year end. As discussed in Note 9, the minority shareholder sold these
shares on January 26, 1996.
(6) STOCK APPRECIATION RIGHTS
A 1993 stock appreciation rights agreement between Heartland and its 4.5%
minority shareholder was cancelled in January 1996, in connection with the sale
of Heartland stock by the shareholders as discussed in Note 9. As none of the
financial performance targets had been met, no provision has been recorded in
the financial statements for these rights.
(7) INCOME TAXES
Heartland has an agreement with its Parent for the apportionment of Federal
income tax liabilities and benefits. The Parent calculates Federal taxes on a
with and without Heartland basis and charges Heartland for its portion of any
incremental Federal income tax liability. Conversely, the Parent will reimburse
Heartland for any reduction of its Federal income tax liability related to the
operations of Heartland. The income tax benefit receivable is included in due
from related party.
The income tax (provision) benefit consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $115,275 $192,773 $497,232
State................................................ (5,273) (1,782) 50
Deferred
19,836 28,630 88,857
-------- -------- --------
Total.................................................. $129,838 $219,621 $586,139
======== ======== ========
</TABLE>
A reconciliation between taxes computed at the federal statutory rate and
the consolidated effective rate is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax benefit based on statutory rate.......... $(110,018) $(190,221) $(501,478)
Additional benefit resulting from:
State income taxes................................ (17,312) (28,729) (75,738)
Other, net........................................ (2,508) (671) (8,923)
--------- --------- ---------
Total income tax benefit.................. $(129,838) $(219,621) $(586,139)
========= ========= =========
</TABLE>
F-34
<PAGE> 111
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Deferred tax asset:
Net state income tax operating loss carryforwards............... $44,991 $120,228
Other........................................................... 7,455 33,828
------- --------
Total deferred tax assets............................... 52,446 154,116
Deferred tax liabilities:
Property and equipment.......................................... 2,797 16,311
Other........................................................... 1,183 482
------- --------
Total deferred tax liabilities.......................... 3,980 16,793
------- --------
Net deferred tax asset.................................. $48,466 $137,323
======= ========
</TABLE>
A valuation allowance has not been established for deferred tax assets as
management has a qualifying tax planning strategy that relies on the Parent's
resources that would result in the realization of the deferred tax assets.
The net deferred income tax asset in the accompanying balance sheets
include the following amounts of deferred income tax assets and liabilities:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Deferred income tax asset......................................... $52,446 $154,116
Deferred income tax liability..................................... (3,980) (16,793)
------- --------
Net deferred income tax asset..................................... $48,466 $137,323
======= ========
</TABLE>
At December 31, 1995, the Company has recorded a deferred income tax asset
related to the State of Wisconsin net operating loss carryforwards:
<TABLE>
<CAPTION>
NET OPERATING
EXPIRE AT CLOSE OF TAX YEARS YEAR LOSS
ENDED DECEMBER 31, GENERATED CARRYFORWARD
- ------------------------------ --------- --------------
<S> <C> <C>
2008 1993 $ 335,199
2009 1994 540,971
2010 1995 1,466,351
--------------
$2,342,521
===========
</TABLE>
Pro forma impact of income taxes computed on a separate return basis
The accompanying financial statements reflect tax provisions that consider
the benefits of including Heartland operations in a consolidated Federal tax
return. Had the Heartland tax provisions been computed on a separate return
basis, (a) Heartland would not reflect a benefit for the current tax
reimbursements from the Parent, and (b) without a Parent company, Heartland
management would not have been able to employ a qualified tax planning strategy
and a valuation allowance would have been required for its net deferred tax
assets. Accordingly, Heartland would not have recorded a tax benefit for any
period under the separate return method. Net income on a pro forma basis
assuming income taxes were computed on a separate return basis would have been
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Heartland pro forma net loss(a)......................... $(323,583) $(559,473) $(1,474,937)
</TABLE>
- ---------------
(a) No adjustment has been made to consider the impact of interest income or
expense that would have resulted from eliminating the cash payments from the
Parent for reimbursement of income taxes.
F-35
<PAGE> 112
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) COMMITMENTS
As the general partner for Hennig Lodi Limited Partnership, WovenCare has
guaranteed a mortgage note of $319,000 and a business note of $35,600. These
notes are secured by the property of the limited partnership.
Heartland has guaranteed its share of mortgage notes on behalf of several
unconsolidated limited partnerships and limited liability companies in which the
company has an ownership interest. The Heartland obligation is limited to its
investment percentage in each development multiplied times the mortgage note
balance due, or an aggregate of $3,864,642. These notes are secured by the
property of each limited partnership or limited liability company. The mortgage
note obligation of one of these entities is a $2.5 million Wisconsin Health and
Educational Facilities Authority (WHEFA) revenue bond issue that the Parent has
partially guaranteed with a letter of credit of $500,000. See Note 9.
Heartland has entered into certain contracts for the construction of
residential assisted-living residences in Minnesota and Wisconsin. Completion of
the residences is scheduled throughout 1996. At December 31, 1995, approximately
$17,000 is still to be incurred under the terms of these contracts.
Heartland has also entered into agreements to purchase certain land and
buildings during 1996, with the intention of constructing and operating
assisted-living residences. At December 31, 1995, Heartland has approximately
$1,292,000 net of earnest money deposits of outstanding commitments under these
agreements.
Heartland has also entered into development agreements to engage an outside
party to locate and develop assisted-living residences within Wisconsin and
Minnesota. Terms of these agreements specify that payments will be made upon
completion of certain services including, among other things, site control and
construction. At December 31, 1995, approximately $266,000 is still to be
incurred assuming all terms of these contracts have been met.
Heartland has entered into three franchise agreements which contain a
provision whereby the franchisee has the right to terminate the franchise
agreement upon a change in the controlling majority ownership of the Company. As
indicated in Note 9, a change in ownership occurred in January 1996. Assuming
these residences are leased up, if the franchisees terminate these agreements,
the Company will forfeit approximately $35,000 of annual ongoing revenues.
(9) SALE OF HEARTLAND
On January 26, 1996, the Heartland shareholders sold all of their stock to
Alternative Living Services, Inc., an unrelated party. Heartland, at that time,
became a wholly owned subsidiary of Alternative Living Services, Inc. Just prior
to closing, the Parent made a capital contribution to Heartland, effective
January 1, 1996, consisting of the $1,583,000 note payable to its sister
company. In connection with the sale, all amounts due to or from related parties
were repaid on January 26, 1996. Other than these amounts due to or from related
parties, all other mortgage notes payable of Heartland continue to be
obligations of Heartland after the sale. In addition, Alternative Living
Services, Inc. provided a $500,000 cash deposit replacing the Parent letter of
credit under the WHEFA bond facility.
F-36
<PAGE> 113
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New Crossings International Corporation:
We have audited the accompanying combined balance sheets of New Crossings
International Corporation as of December 31, 1994 and 1995, and the related
combined statements of operations, shareholders' deficit, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of New
Crossings International Corporation as of December 31, 1994 and 1995, and the
combined results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Seattle, Washington
February 5, 1996
F-37
<PAGE> 114
NEW CROSSINGS INTERNATIONAL CORPORATION
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 838,565 $ 2,931,507
Accounts receivable............................................. 98,036 219,481
Notes receivable................................................ 30,000 --
Inventory....................................................... 52,690 56,225
Prepaid rent.................................................... 53,197 526,186
Prepaid expenses................................................ 158,848 150,930
------------ ------------
Total current assets.................................... 1,231,336 3,884,329
Property and equipment, net....................................... 57,143,327 10,323,996
Notes receivable from related party............................... 741,257 --
Loan fees, net of accumulated amortization of $611,918 and $30,696
in 1994 and 1995, respectively.................................. 1,063,796 36,278
Lease deposits.................................................... 22,059 1,560,065
Other assets, net................................................. 654,682 375,437
------------ ------------
$ 60,856,457 $ 16,180,105
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt, capital leases and
financing obligation......................................... $ 25,712,440 $ 189,418
Notes payable to related party.................................. 53,075 --
Accounts payable................................................ 438,911 602,626
Accrued payroll and payroll taxes............................... 303,778 426,315
Accrued interest payable........................................ 1,185,628 1,016,631
Other accrued expenses.......................................... 345,340 615,852
Property taxes.................................................. 614,888 310,203
Unearned revenue................................................ 228,760 157,578
------------ ------------
Total current liabilities............................... 28,882,820 3,318,623
Security deposits................................................. 116,724 96,628
Deferred gain on sale............................................. -- 11,101,712
Long-term debt, capital leases and financing obligation........... 50,488,023 13,124,700
------------ ------------
Total liabilities....................................... 79,487,567 27,641,663
------------ ------------
Mandatorily redeemable preferred stock -- Series A preferred, par
value $.001, 240,000 shares issued and outstanding in 1995
(liquidation preference of $25.00 per share).................... -- 6,000,000
Commitments and contingencies
Minority interest................................................. 1,148,724 --
Shareholders' deficit:
Preferred stock, $.001 par value. Authorized 5,000,000
shares -- Series B preferred stock, 260,000 shares issued and
outstanding in 1995 (liquidation preference of $25.00 per
share)....................................................... -- 260
Common stock, $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 150,000 and 192,563 shares in 1994 and
1995,
respectively................................................. 150 193
Additional paid-in capital...................................... 36,903 6,831,145
Accumulated deficit............................................. (19,816,887) (24,293,156)
------------ ------------
Total shareholders' deficit............................. (19,779,834) (17,461,558)
------------ ------------
$ 60,856,457 $ 16,180,105
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-38
<PAGE> 115
NEW CROSSINGS INTERNATIONAL CORPORATION
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues.................................... $17,977,881 $19,760,802 $21,725,841
----------- ----------- -----------
Expenses:
Residence operations.......................... 10,432,107 11,183,617 12,444,171
Lease expense................................. 301,987 322,000 673,475
General and administrative.................... 2,464,637 1,536,630 2,188,158
Depreciation and amortization................. 1,795,595 2,047,608 1,888,446
Provision for writedown of development
projects................................... -- 258,000 --
----------- ----------- -----------
Total operating expenses.............. 14,994,326 15,347,855 17,194,250
----------- ----------- -----------
Income from operations................ 2,983,555 4,412,947 4,531,591
----------- ----------- -----------
Other income (expense):
Interest expense.............................. (6,705,690) (6,020,798) (6,361,595)
Interest income............................... 131,181 89,835 153,721
Other expense................................. -- -- (256,686)
----------- ----------- -----------
Other expense, net.................... (6,574,509) (5,930,963) (6,464,560)
----------- ----------- -----------
Loss before extraordinary items and
minority interest................... (3,590,954) (1,518,016) (1,932,969)
Extraordinary items:
Gains from extinguishment of debt............. 699,176 -- 499,769
Losses from extinguishment of debt............ -- -- (879,045)
----------- ----------- -----------
Loss before minority interest......... (2,891,778) (1,518,016) (2,312,245)
Minority interest............................... 2,794 49,000 84,381
----------- ----------- -----------
Net loss.............................. $(2,894,572) $(1,567,016) $(2,396,626)
========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-39
<PAGE> 116
NEW CROSSINGS INTERNATIONAL CORPORATION
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK --
SERIES B COMMON STOCK ADDITIONAL
------------------ ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1992............. -- $ -- 150,000 $150 $ 36,903 $(15,138,442) $(15,101,389)
Distributions.......... -- -- -- -- -- (80,342) (80,342)
Net loss............... -- -- -- -- -- (2,894,572) (2,894,572)
------- ------ ------- ------ ---------- ------------ ------------
Balances at December
31, 1993............. -- -- 150,000 150 36,903 (18,113,356) (18,076,303)
------- ------ ------- ------ ---------- ------------ ------------
Distributions.......... -- -- -- -- -- (136,515) (136,515)
Net loss............... -- -- -- -- -- (1,567,016) (1,567,016)
------- ------ ------- ------ ---------- ------------ ------------
Balances at December
31, 1994............. -- -- 150,000 150 36,903 (19,816,887) (19,779,834)
------- ------ ------- ------ ---------- ------------ ------------
Distributions.......... -- -- -- -- -- (2,079,643) (2,079,643)
Contribution -- transfer
of development
project to a
shareholder.......... -- -- -- -- 290,289 -- 290,289
Issuance of Series B
preferred stock...... 260,000 260 -- -- 6,499,740 -- 6,500,000
Stock bonus grants..... -- -- 42,563 43 4,213 -- 4,256
Net loss............... -- -- -- -- -- (2,396,626) (2,396,626)
------- ------ ------- ------ ---------- ------------ ------------
Balances at December
31, 1995............. 260,000 $260 192,563 $193 $6,831,145 $(24,293,156) $(17,461,558)
======= ====== ======= ====== ========= =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-40
<PAGE> 117
NEW CROSSINGS INTERNATIONAL CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(2,894,572) $ (1,567,016) $ (2,396,626)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gains from extinguishment of debt........................... (699,176) -- (499,769)
Losses from extinguishment of debt.......................... -- -- 879,045
Provision for writedown of development projects............. -- 258,000 --
Depreciation and amortization............................... 1,795,595 2,047,608 1,888,446
Amortization of deferred gain............................... -- -- (186)
Amortization of discount on participation notes............. -- (21,000) (36,000)
Stock bonus grants.......................................... -- -- 43
Write-off of note receivable from related party............. -- -- 107,870
Loss (gain) on disposal of assets........................... -- 53,557 25,707
Minority interest........................................... 2,794 49,000 84,381
Reclassification from stockholder receivable to
compensation.............................................. 314,239 69,393 49,135
Note payable issued for legal settlement.................... 150,000 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................... 95,018 9,406 (121,445)
Inventory................................................. (3,534) 226 (3,535)
Prepaid rent.............................................. (1,073) (7,476) (472,989)
Prepaid expenses.......................................... 4,571 (52,124) 7,918
Lease deposits............................................ (22,704) 16,592 (1,538,006)
Other assets.............................................. 354,768 13,956 279,245
Accounts payable.......................................... 190,178 (244,344) 163,715
Accrued payroll and payroll taxes......................... 95,733 (44,471) 122,537
Accrued interest payable.................................. (118,256) (630,921) (147,434)
Other accrued expenses.................................... (103,577) 146,790 270,512
Property taxes............................................ 590,746 24,142 (304,685)
Unearned revenue.......................................... 7,111 104,786 (71,182)
Security deposits......................................... (50,062) (27,441) (20,096)
----------- ------------ ------------
Net cash provided by (used in) operating activities.... (292,201) 198,663 (1,733,399)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment........................... (1,324,392) (4,346,356) (700,162)
Sales of property and equipment............................... 7,312 90,430 44,770,804
Investment in partnership..................................... (1,000) -- --
Decrease in notes receivable.................................. 235,758 -- 30,000
Decrease in notes receivable from related parties............. -- -- 584,252
Purchase of minority interest................................. -- -- (1,233,105)
Issuance of note receivable to related party.................. (80,000) (472,941) --
----------- ------------ ------------
Net cash provided by (used in) investing activities.... (1,162,322) (4,728,867) 43,451,789
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from debt............................................ 8,307,112 14,973,734 100,000
Principal payments on debt.................................... (6,628,835) (10,249,229) (45,603,730)
Increase in participation obligation.......................... -- (276,000) --
Discount on restructured notes payable........................ -- 599,142 --
Issuance of preferred stock................................... -- -- 6,500,000
Payment of loan fees.......................................... (102,138) -- (11,500)
Advances from related parties................................. 31,200 -- --
Payments to related parties................................... -- (43,833) (53,075)
Distribution to partners...................................... (80,342) (56,515) (557,143)
----------- ------------ ------------
Net cash provided by (used in) financing activities.... 1,526,997 4,947,299 (39,625,448)
----------- ------------ ------------
Net increase in cash................................... 72,474 417,095 2,092,942
Cash at beginning of year....................................... 348,996 421,470 838,565
----------- ------------ ------------
Cash at end of year............................................. $ 421,470 $ 838,565 $ 2,931,507
============ ============= =============
</TABLE>
See accompanying notes to combined financial statements.
F-41
<PAGE> 118
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Crossings International Corporation (Old Crossings), based in Tacoma,
Washington, was organized in 1984 to own, operate, develop and acquire assisted
living and related senior living residences located primarily in the western
United States. In connection with a restructuring of the assisted living and
related senior living businesses of Old Crossings (the "Capital Restructuring"),
New Crossings International Corporation (Crossings) was formed on December 21,
1995, and issued 192,563 shares of common stock for all of the outstanding
shares of Old Crossings, which became a wholly-owned subsidiary of Crossings.
The operations of Crossings are essentially the same as Old Crossings and,
therefore, the financial statements essentially represent the operations of
Crossings for all periods.
The Capital Restructuring, which was effected in December 1995 (and January
1996, see Note 14), involved (i) the roll-up into Old Crossings of partnerships
formerly controlled by Old Crossings and its affiliates, each of which owned one
residence operated by Old Crossings, (ii) the sale of twelve residences by Old
Crossings to a REIT and the simultaneous leaseback of such residences by
Crossings and the refinancing of an additional residence owned by an affiliated
partnership of Old Crossings and operated by Old Crossings, (iii) the issuance
of Series A preferred stock of Old Crossings in exchange for satisfaction of
indebtedness of Old Crossings, (iv) the exchange by the Old Crossings
shareholders of the common and Series A preferred stock of Old Crossings for
equal numbers of shares of common and Series A preferred stock of Crossings, (v)
the issuance of Crossings Series B preferred stock in exchange for cash and (vi)
the conveyance by Old Crossings of an owned residence and simultaneous lease of
such residence to Old Crossings. Upon completion of the restructuring
transactions, Crossings became the lessee and operator of fourteen of the
facilities formerly operated by Old Crossings. For additional information
related to the Capital Restructuring see Notes 4, 5, 6, 10 and 11.
(b) Principles of Combination
The accompanying combined financial statements reflect the combined
operating results and financial position of the following assisted living and
senior living residences all of which have common ownership, management and
control through Old Crossings and, subsequent to December 21, 1995, Crossings
(collectively referred to as the "Company"):
<TABLE>
<CAPTION>
NUMBER OF
NAME UNITS LOCATION
---------------------------------------------- --------- --------------------------
<S> <C> <C>
Inn at Canterbury............................. 60 Aurora, Colorado
Canterbury Gardens............................ 159 Aurora, Colorado
The Palms at Loma Linda....................... 140 Loma Linda, California
Columbia Edgewater Properties................. 128 Richland, Washington
Heritage at Meridian Park..................... 112 Tualatin, Oregon
Forest Grove Residential Center............... 88 Forest Grove, Oregon
McMinnville Residential Center................ 87 McMinnville, Oregon
Atrium Associates............................. 82 Boulder, Colorado
RiverPlace.................................... 80 Boise, Idaho
Ridge Point................................... 76 Boulder, Colorado
Heritage at Rogue Valley...................... 76 Medford, Oregon
Heritage at Mount Hood........................ 78 Gresham, Oregon
Albany Residential Center..................... 74 Albany, Oregon
Valley Park Associates........................ 63 Albany, Oregon
---------
1,303
========
</TABLE>
F-42
<PAGE> 119
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The investors interest in all residences that are not wholly owned by the
Company are recorded as minority interests.
In addition, the Company owns a 1% interest in 2010 Union Limited
Partnership (2010) a partnership which operates a 119 unit senior living
residence. Effective December 21, 1995, the Company began leasing the residence.
The operating results subsequent to this date are included in the combined
financial statements. The investment in the 2010 partnership is accounted for on
the cost basis since the Company is a limited partner and does not maintain
control over partnership operations.
All significant intercompany accounts and transactions have been eliminated
in the accompanying combined financial statements.
(c) Revenue Recognition
Resident units are rented on a month-to-month basis and rent is recognized
in the month the units are occupied.
(d) Inventory
Inventory consists of food and supplies and is stated at the lower of cost
(first-in, first-out) or market.
(e) Property Acquisition and Development Costs
The Company capitalizes all costs incurred directly in acquiring and
developing real estate. Among those costs are feasibility studies, land
acquisition costs, construction and development period interest and real estate
taxes, construction costs, and other direct project costs. These costs are
capitalized only to the extent that they are incurred prior to the date of
substantial completion or when a certificate of occupancy is issued and to the
extent considered recoverable through future operating cash flows of the
facility.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets
which range from five to seven years for fixtures and equipment and forty years
for buildings. Leasehold improvements are amortized over the lesser of the
useful life of the improvement or the lease term.
As of each balance sheet date, the Company's management evaluates the
carrying value of property, plant and equipment for possible impairment based
upon the expectations of undiscounted operating cash flows derived from the use
of the assets.
(g) Loan Fees
Deferred loan fees are amortized using the straight-line method over the
term of the related debt which ranges from four to forty years.
(h) Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes
F-43
<PAGE> 120
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the enactment date. Valuation allowances are recorded for deferred tax assets
when it is more likely than not that such deferred tax assets will not be
realized.
The combined deferred income taxes reflect income taxes as if all combined
residences were C-corporations.
(i) Use of Estimates
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(j) Reclassifications
Certain 1993, 1994 and 1995 amounts have been reclassified from amounts
previously reported.
(2) STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid...................................... $6,386,946 $5,659,142 $5,961,595
Interest capitalized............................... 288,953 347,338 --
</TABLE>
The following is a summary of noncash investing and financing activities:
- Debt of $2,512,500 was relieved as a result of a statutory Warrant
Deed for the property in lieu of foreclosure in 1994.
- The Company purchased equipment under capital leases totaling $25,130,
$108,067 and $70,966 for the years ended December 31, 1993, 1994 and
1995, respectively.
- In 1994, a note receivable from a partner of an affiliate for $80,000
was charged against the capital interest in one of the partnership
accounts as a result of litigation.
- In 1995, notes payable of $62,500 were issued to former partners as
part of an equity distribution.
- In 1995, fixed assets, other assets, interest payable and debt of
approximately $2,775,000, $74,000, $21,000 and $3,100,000,
respectively, related to the Legends condominium project were
transferred to a corporation owned by the president of the Company
(note 4). As the liabilities assumed exceeded the assets transferred, a
contribution of $290,000 was recorded by the Company.
- In 1995, mortgage notes payable of approximately $9,304,000 were
assumed by Nationwide Health Properties, Inc. (NHP), a real estate
investment trust, in conjunction with a sale/leaseback transaction.
- In 1995, $6,000,000 of Series A Preferred Stock was issued in
satisfaction of certain mortgage debt as part of the restructuring.
F-44
<PAGE> 121
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land.................................................... $ 4,922,407 $ 750,748
Buildings and improvements.............................. 55,020,996 10,608,904
Fixtures and equipment.................................. 2,883,669 1,140,899
Leasehold improvements.................................. 45,601 47,720
----------- -----------
62,872,673 12,548,271
Less accumulated depreciation and amortization.......... 7,744,691 2,245,975
Construction in progress................................ 2,015,345 21,700
----------- -----------
$57,143,327 $10,323,996
========== ==========
</TABLE>
Depreciation and amortization expense related to property and equipment was
$1,604,973, $1,708,961 and $1,780,530 in 1993, 1994 and 1995, respectively.
At December 31, 1994 and 1995, property and equipment includes $4,199,799
of buildings and improvements and $475,514 and $505,204, respectively, of
fixtures and equipment held under capital leases and related financing
obligations. Related accumulated amortization totaled $860,146 and $966,140,
respectively.
Substantially all property and equipment serve as collateral for long-term
debt (note 5). On December 21, 1995, most of this property and equipment was
included in the sales/leaseback transaction more fully described in note 6.
The Legends condominium project was originally planned to be a senior
living co-op community. During 1994, the Company finalized the redefinition of
this project as a senior condominium project. In conjunction with the re-defined
nature of the project, the Company expensed $258,000 in 1994 for costs,
including design, architectural and legal fees, associated with the original
business purpose which had no future benefit. In June 1995, the Company
transferred all assets and liabilities related to the Legends condominium,
including the first mortgage, to a corporation that is owned by the Company's
president. The transaction resulted in a contribution of $290,289 as the
liabilities assumed exceeded the assets.
(4) RELATED-PARTY TRANSACTIONS
At December 31, 1994, the Company had an unsecured interest only
stockholder note receivable, due January 1, 2024 with a balance of $633,387. The
Company also had a note receivable of $107,870 with 2010, interest and principal
both due upon maturity. Both notes had interest rates of 8.50%. The stockholder
note was repaid to the Company during 1995 and the note receivable with 2010 was
written off.
At December 31, 1994, the Company also owed an officer and a former officer
of Crossings $32,475 and $20,600, respectively. Officers notes payable had
matured December 12, 1993. The officer and former officer agreed to extend the
payments on a month-to-month basis provided the Company paid an extension fee
totaling $1,250 each per month. The amounts were paid during 1995.
Crossings Aviation, Inc. is wholly owned by the president of the Company.
During 1993, 1994 and 1995, the Company paid approximately $121,859, $42,500 and
$31,000, respectively, to the aviation company for travel services.
Prior to 1993, the Company invested $500,836 in 2010 in which the Company's
president maintains a 99% general partnership interest. Subsequently, in
December 1993, the Company determined that, due to the impaired financial
condition of the 2010 partnership, the probability of realizing other than a de
minimus value from the investment was remote, and the investment was written
off. The write-off has been included in
F-45
<PAGE> 122
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
general and administrative expense in 1993. On December 21, 1995, in conjunction
with 2010's mortgage financing transaction with a real estate investment trust,
the Company entered into an operating lease with 2010. The Company retains a 1%
limited partnership interest in 2010.
(5) LONG-TERM DEBT, CAPITAL LEASE AND FINANCING OBLIGATIONS
Long-term debt, capital lease and financing obligations consist of the
following at December 31:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Mortgage notes payable, fixed interest rates of 8% to
10.9%..................................................... $45,221,624 $ --
Mortgage notes payable, variable interest rates of 6.9% to
9.75%..................................................... 6,985,599 --
Project development notes payable, interest rates of 10% to
12%....................................................... 4,648,816 --
Project development notes, non interest bearing............. 205,000 --
Equity participation notes, including contingent
participation
obligations............................................... 13,263,279 --
Sale/leaseback financing obligation, variable interest at
the 11th District FHLB rate plus 2 3/4%, payable in
monthly installments, due 2001............................ 5,678,600 5,562,173
Capital lease obligations, interest at rates between 3.4%
and 23% payable in monthly installments, due through
2000...................................................... 197,545 178,870
----------- -----------
76,200,463 5,741,043
Debt refinanced long-term through a sale/leaseback financing
transaction (see note 14):
Mortgage notes payable, fixed interest rates of 8% to
10.9%.................................................. -- 6,085,900
Equity participation notes, including contingent
participation
obligations............................................ -- 1,487,175
----------- -----------
76,200,463 13,314,118
Less current portion........................................ 25,712,440 189,418
----------- -----------
Total long-term debt, capital lease and financing
obligations, excluding current portion.......... $50,488,023 $13,124,700
========== ==========
</TABLE>
Equity Participation Notes Payable
At December 31, 1994, the Company had ten equity participation notes
payable administered through Capital Consultants, Inc. (CCI), as agent for
pension funds with equity participation rights ranging from 30% to 90%. The
aggregate outstanding loan balances for each individual facility were
periodically compared to the estimated fair value of the underlying property.
Prior to fiscal year 1993, an obligation for a contingent equity participation
(participation obligation) of approximately $977,000 was expensed related to two
of the participation notes in the period that it was determined that the fair
value of the properties exceeded the aggregate outstanding loan balances at
those facilities. The contingent obligation is included in the outstanding
balance of equity participation notes.
During 1994, the Company modified the loan terms whereby the equity
participation percentages payable to the lender upon sale or refinance of the
residences or maturity of the notes was increased by 5% to 40%. The new equity
participation percentages ranged from 76.5% to 95% of agreed-upon net sale
proceeds or residual fair market value. The Company also agreed to pay 17% of
future development fees to CCI until the notes were repaid. Past due interest of
approximately $599,000 was forgiven. The increased equity participation
percentages resulted in an addition to the participation obligation of
approximately $276,000.
The restructuring qualifies as a troubled debt restructuring in accordance
with generally accepted accounting principles and as such, the interest forgiven
and the increase in participation obligation was being recognized over the
remaining terms of the underlying participation notes until they were paid off
in December 1995 and January 1996 at which time the participation obligation and
interest forgiven was written off and
F-46
<PAGE> 123
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
included in the calculation of the deferred gain on sale (see notes 6 and 14).
The net reduction in interest expense attributable to the deferred amortization
items was $21,000 and $36,000 in 1994 and 1995, respectively.
(6) SALES/LEASEBACKS OF FACILITIES AND DEFERRED GAIN
In January 1991, the Company entered into a sale/leaseback transaction for
Heritage at Meridian Park located in Tualatin, Oregon. The buyer received the
building and personal property, and assumed the first mortgage of $4.6 million
and the underlying land lease. However, the Company remains obligated under the
first mortgage on the property which matures on December 1, 1999. Due to this
continuing involvement, which does not allow for recognition of the sale, the
transaction has been accounted for as a financing.
The Company received $1.3 million in cash, which is included in the
sale/leaseback financing obligation along with the first mortgage for which the
Company is still liable, and entered into a ten-year lease with two five-year
renewal options. At December 31, 1994 and 1995, the mortgage balance serviced by
the purchaser, but for which the Company remains liable, was $4,351,600 and
$4,247,173, respectively.
In December 1995, the Company entered into a series of sale/leaseback
transactions with respect to twelve properties with annual rent payments
approximately $5.4 million, initial lease terms ranging from 17 to 19 years and
three ten-year renewal options. In conjunction with these transactions, the
Company purchased the partnership interests related to three properties prior to
entering into the sale/leaseback transactions with NHP. The only residence
controlled by the Company that was not included in the above transactions was
The Palms at Loma Linda (The Palms). The Company completed a sale/leaseback
transaction with respect to The Palms in January 1996 (see note 14).
The Company received approximately $44.5 million in cash and entered into
various lease agreements with initial terms ranging between seventeen and
nineteen years with three ten-year renewal options. The Company realized a gain
of approximately $11.1 million which is recorded as a deferred gain because of
the Company's continuing involvement with the facilities through the associated
operating leases. The deferred gain will be amortized into income as an offset
to lease expense over the initial lease term using the straight-line method.
The extinguishment of approximately $23.5 million of debt, which included
$13.3 million of equity participation notes, was accomplished through the
issuance of 240,000 shares of Mandatorily Redeemable Series A Preferred Stock
and 260,000 shares of Series B Preferred Stock and the application of proceeds
from the sale/leaseback transaction with NHP.
F-47
<PAGE> 124
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
The provision for income taxes differs from the amount of income taxes
determined by applying the applicable U.S. statutory Federal rate of 35% to
pretax income primarily as a result of limitations on the Company's ability to
utilize net operating losses.
The tax effect of temporary differences that give rise to significant
portions of Federal deferred tax assets (liabilities) are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $3,732,000 $4,477,000 $2,307,000
Deferred loan fees............................. 432,000 373,000 13,000
Deferred gain.................................. 736,000 719,000 4,107,000
---------- ---------- ----------
Total gross deferred tax asset......... 4,900,000 5,569,000 6,427,000
Less valuation allowance....................... 4,343,000 4,951,000 5,756,000
---------- ---------- ----------
Deferred tax asset, net................ 557,000 618,000 671,000
Deferred tax liability -- property and equipment
principally due to differences in depreciation
and amortization............................... 557,000 618,000 671,000
---------- ---------- ----------
Net deferred tax asset................. $ -- $ -- $ --
========= ========= =========
</TABLE>
The net increase in the total valuation allowance was $510,000, $608,000
and $805,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
The increases were primarily due to increases in the amount of net operating
loss carryforwards and deferred gain for which the Company is not assured of
utilization.
As of December 31, 1995, the Company has net operating loss carryforwards
of approximately $6,600,000. Unused net operating loss carryforwards will expire
commencing in the years 2002 through 2010. Suspended Passive Activity Losses of
approximately $1,041,000 do not have an expiration date. These carryforwards may
result in a tax benefit when the Company has future taxable income. If
substantial changes in the Company's ownership should occur, there could be an
annual limitation on the amount of the net operating loss carryforwards which
could be utilized.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases land and buildings for residences and corporate
operations under various long-term rental agreements expiring in varying years
through approximately 2014. All of these leases represent operating leases and,
accordingly, rental payments are recorded as rent expense when incurred.
As of December 31, 1995, substantially all of the Company's operating
leases, except for 2010, are leased from NHP, an unrelated third party, as a
result of the sale/leaseback transactions that occurred in December 1995.
F-48
<PAGE> 125
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum lease payments under noncancelable leases at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
---------- ------------
<S> <C> <C>
1996........................................................ $ 780,845 $ 5,805,499
1997........................................................ 738,403 5,817,944
1998........................................................ 738,783 5,835,777
1999........................................................ 4,561,251 5,836,274
2000........................................................ 733,471 5,862,895
Thereafter.................................................. -- 73,262,365
---------- ------------
Total minimum lease payments...................... 7,552,753 $102,420,754
===========
Less amount representing interest........................... 1,811,710
----------
Present value of net minimum lease payments....... 5,741,043
Less current portion........................................ 189,418
----------
Long-term capital lease obligations............... $5,930,461
=========
</TABLE>
(9) EXTRAORDINARY GAINS AND LOSSES
During 1993 a note for approximately $354,000 and related accrued interest
of approximately $345,000 was extinguished which resulted in a gain of
approximately $699,000. As discussed in note 6, 1995 sales/leaseback
transactions resulted in extraordinary gains of $499,769 related to debt
extinguished and extraordinary losses of $879,045 resulting from the write-off
of deferred loan fees associated with loans held on sold facilities.
(10) REDEEMABLE PREFERRED STOCK
In December 1995, the Company issued 240,000 shares of Series A Preferred
Stock (Series A) valued at $25 per share to CCI in conjunction with the payoff
of all outstanding debt to CCI, including the participating notes and all
respective obligations thereunder, and the buyout of CCI's interest in
McMinnville Residential Center. Holders of Series A preferred stock are entitled
to cumulative cash dividends beginning January 15, 1997 in the amount of
$2.08 1/3 per annum, per share, due and payable before January 15 of the
following year.
Series A is redeemable at the option of the Company under certain
circumstances at $25 plus accrued dividends whether declared or not.
Shareholders have the right to redeem shares if the Company fails to pay the
required dividends. Furthermore, the Series A holders may exercise their options
to redeem all (but not less than all) of the outstanding preferred shares, given
proper notice for such action, at an amount of $25.00 per share.
Any shares not redeemed prior to an initial public offering ("IPO") meeting
certain minimum requirements, are convertible into common stock based on a
conversion formula dependent on the IPO price but, in general, at the value of
the preferred shares divided by the IPO price. Upon liquidation, the Series A
holders would receive an amount equal to $25 per share up to $6,000,000 and
would not participate in any other equity.
(11) SHAREHOLDERS' DEFICIT
In December 1995, the Company changed the par value of common stock from
$.10 per share to $.001 per share and increased the number of authorized shares
of common stock and preferred stock to 40,000,000 and 5,000,000, respectively.
Common stock and additional paid-in capital have been adjusted for all years to
reflect the change in par value.
F-49
<PAGE> 126
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, the Company issued 260,000 shares of Series B Preferred
Stock (Series B) to CCI in exchange for $6,500,0000 in cash which was primarily
used in conjunction with the payoff of all outstanding obligations to CCI. The
Series B Preferred Stock is redeemable in part at the option of the Company
under certain circumstances at the greater of $32.50 per share or a conversion
ratio pursuant to an IPO. Any shares not redeemed prior to an IPO meeting
certain minimum requirements are convertible into common stock based on a
conversion formula dependent on the IPO price. Holders of Series B are not
entitled to receive any dividends; however, the Series B holders, as a class,
have the right to elect one director. Subsequent to January 15, 1997, the
holders of the majority of Series B have the right to remove any and all
directors.
(12) STOCK BONUS AND OPTION PLAN
In June 1995, the Company established a Stock Bonus and Option Plan (Plan)
in which stock can be granted to employees as bonus shares or options. The
options may be granted as either incentive or nonqualified stock options. The
Plan is administered by the Board of Directors or an administrative committee if
the Board of Directors so desires. Incentive options may be granted only to
officers or other employees of the Company while nonqualified options may be
granted to employees and other persons as the plan administrator selects. The
Company has reserved 42,563 shares of common stock for issuance under this Plan.
In July 1995, the Company granted a stock bonus of 42,563 shares of common
stock to employees in recognition of past performance. Consequently, there are
no shares available for grant under the Plan. Compensation expense of $4,256 has
been recognized based upon an estimated value of $.10 at the time of the grant.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation. This pronouncement establishes
the accounting and reporting standards for stock-based employee compensation
plans, including stock purchase plans, stock options and stock appreciation
rights. This new standard defines a fair value-based method of accounting for
these equity instruments. This method measures compensation cost based on the
value of the award and recognizes that cost over the service period. Companies
may elect to adopt this standard or to continue accounting for these types of
equity instruments under current guidance, APB Opinion No. 25, Accounting for
Stock Issued to Employees. Companies which elect to continue using the guidance
of Opinion 25 must make pro forma disclosures of net earnings and earnings per
share as if this new statement had been applied. This new standard is applicable
to financial statements for fiscal years beginning after December 15, 1995.
The Company anticipates that it will continue to use the rules of APB
Opinion No. 25 and make the pro forma disclosures required under the new
standard.
(13) LIQUIDITY
The Company has incurred recurring losses and has a net capital deficiency.
In December 1995, the Company began restructuring its long-term obligations
through sale/leaseback transactions more fully described in note 6. The
restructuring was completed in January 1996 as described in note 14. Although
debt service reductions will be replaced in part by increased lease payments,
management believes that the restructured operations will allow the Company to
obtain additional borrowings and generate additional cash from operations. As
part of the restructuring, a $14,280,000 financing commitment for new
developments was obtained from NHP and the Company obtained approximately
$8,900,000 in construction loan financing.
(14) SUBSEQUENT EVENTS
(a) The Palms Financing
In January 1996, the Company completed a sale/leaseback arrangement related
to The Palms with an initial lease term expiring when the facility reaches 95%
occupancy or in three years, whichever occurs first,
F-50
<PAGE> 127
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and annual lease payments of approximately $640,000. The buyer received the
building and personal property and assumed the underlying mortgage indebtedness
of $6.0 million. However, the Company remains obligated under the mortgage
indebtedness on the property which matures on January 1, 1999. Due to this
continuing involvement, which does not allow for recognition of the sale, the
transaction has been accounted for as a financing.
The buyer assumed $630,000 of obligations related to the property and
forgave the $1.4 million second mortgage, all of which will be accounted for as
a financing obligation along with the mortgage indebtedness for which the
Company is still liable.
(b) Acquisition by Alternative Living Services, Inc. (Unaudited)
On May 24, 1996, the Company merged with Alternative Living Services, Inc.,
a company which operates assisted living residences primarily in the midwest and
eastern United States. Immediately prior to, and in connection with, the merger,
the Series A and Series B Preferred Stock was converted into Crossings common
stock. The total purchase consideration paid by Alternative Living Services,
Inc. was 2,007,049 shares of Alternative Living Services, Inc.'s common stock
with an estimated market value of $9,329,000.
F-51
<PAGE> 128
NEW CROSSINGS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 1,787,785
Accounts receivable.......................................................... 257,496
Inventory.................................................................... 46,193
Prepaid rent................................................................. 546,511
Prepaid expenses............................................................. 97,915
------------
Total current assets................................................. 2,735,900
Property and equipment, net.................................................... 10,822,250
Lease deposits................................................................. 1,623,064
Other assets, net.............................................................. 739,048
------------
$ 15,920,262
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt, capital leases and financing
obligations............................................................... $ 172,311
Accounts payable............................................................. 804,536
Accrued payroll and payroll taxes............................................ 441,169
Accrued interest payable..................................................... 67,500
Other accrued expenses....................................................... 480,787
Property taxes............................................................... 280,413
Unearned revenue............................................................. 208,337
------------
Total current liabilities............................................ 2,455,053
Security deposits.............................................................. 91,278
Deferred gain on sale.......................................................... 10,979,789
Long-term debt, capital leases and financing obligations....................... 13,662,211
------------
Total liabilities.................................................... 27,188,331
------------
Mandatorily redeemable preferred stock -- Series A preferred, par value $.001;
240,000 shares issued and outstanding (liquidation preference of $25.00 per
share)....................................................................... 6,000,000
Commitments and contingencies
Shareholders' deficit:
Preferred stock, $.001 par value. Authorized 5,000,000 shares -- Series B
preferred stock, 260,000 shares issued and outstanding (liquidation
preference of $25.00 per share)........................................... 260
Common stock, $.001 par value. Authorized 40,000,000 shares; issued and
outstanding 192,563 shares................................................ 193
Additional paid-in capital................................................... 6,831,145
Accumulated deficit.......................................................... (24,099,667)
------------
Total shareholders' deficit.......................................... (17,268,069)
------------
$ 15,920,262
===========
</TABLE>
See accompanying notes to condensed combined and consolidated financial
statements.
F-52
<PAGE> 129
NEW CROSSINGS INTERNATIONAL CORPORATION
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Net revenues......................................................... $ 5,374,200 $5,942,095
----------- ----------
Expenses:
Residence operations............................................... 2,921,460 3,476,951
Lease expense...................................................... 44,550 1,420,541
General and administrative......................................... 519,196 704,137
Depreciation and amortization...................................... 468,122 83,436
----------- ----------
Total operating expenses................................... 3,953,328 5,685,065
----------- ----------
Income from operations..................................... 1,420,872 257,030
----------- ----------
Other income (expense):
Interest expense................................................... (1,533,046) (246,998)
Interest income.................................................... 39,100 42,380
Other income....................................................... -- 8,453
----------- ----------
Other income (expense), net..................................... (1,493,946) (196,165)
----------- ----------
Income (loss) before extraordinary item......................... (73,074) 60,865
Extraordinary item -- gain from extinguishment of debt............. -- 132,624
----------- ----------
Net income (loss).......................................... $ (73,074) $ 193,489
========== =========
</TABLE>
See accompanying notes to condensed combined and consolidated financial
statements.
F-53
<PAGE> 130
NEW CROSSINGS INTERNATIONAL CORPORATION
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995, AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities (including
changes in all operating assets and liabilities)................... $ 80,871 $ (549,947)
--------- -----------
Cash used in investing activities -- purchases of property and
equipment.......................................................... (197,635) (532,159)
--------- -----------
Cash flows from financing activities:
Proceeds from debt................................................. 145,091 --
Principal payments on debt......................................... (179,916) (61,616)
Payments to related parties........................................ (22,094) --
Distribution to partners........................................... (134,661) --
--------- -----------
Net cash used in financing activities...................... (191,580) (61,616)
--------- -----------
Net decrease in cash....................................... (308,344) (1,143,722)
Cash at beginning of period.......................................... 838,565 2,931,507
--------- -----------
Cash at end of period................................................ $ 530,221 $ 1,787,785
========= ==========
</TABLE>
See accompanying notes to condensed combined and consolidated financial
statements.
F-54
<PAGE> 131
NEW CROSSINGS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed combined and consolidated financial statements
reflect the operating results and financial position of certain assisted living
and senior living residences under the common ownership, management and control
of Crossings International Corporation and subsequent to December 21, 1995 New
Crossings International Corporation (collectively referred to as the "Company").
The unaudited interim condensed combined and consolidated financial statements
and related notes have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the results for the interim periods presented. Interim results
are not necessarily indicative of results for a full year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Reference is made to the Company's audited
financial statements and the related notes as of December 31, 1994 and 1995 and
for each of the years in the three-year period ended December 31, 1995, which
provide additional disclosures and a further description of accounting policies.
(2) THE PALMS FINANCING
In January 1996, the Company completed a sale/leaseback arrangement related
to The Palms with an initial lease term expiring when the facility reaches 95%
occupancy or in three years, whichever occurs first, and annual lease payments
of approximately $640,000. The buyer received the building and personal property
and assumed the underlying mortgage indebtedness of $6.0 million. However, the
Company remains obligated under the mortgage indebtedness on the property which
matures on January 1, 1999. Due to this continuing involvement, which does not
allow for recognition of the sale, the transaction has been accounted for as a
financing.
The buyer assumed $630,000 of obligations related to the property and
forgave the $1.4 million second mortgage, all of which will be accounted for as
a financing obligation along with the mortgage indebtedness for which the
Company is still liable.
(3) SUBSEQUENT EVENTS
On May 24, 1996, the Company merged with Alternative Living Services, Inc.,
a company which operates assisted living residences primarily in the midwest and
eastern United States. Immediately prior to, and in connection with, the merger,
the Series A and Series B Preferred Stock was converted into Crossings common
stock. The total purchase consideration paid by Alternative Living Services,
Inc. was 2,007,049 shares of Alternative Living Services, Inc.'s common stock
with an estimated market value of $9,281,000.
(4) NEW ACCOUNTING STANDARDS
Effective January 1, 1995, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The effect of adopting Statement 121 was not material to the
Company's financial statements.
F-55
<PAGE> 132
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alternative Living Services -- Midwest Inc.:
We have audited the accompanying combined balance sheet of Alternative
Living Services -- Midwest Inc. and Affiliates (the Company) as of December 31,
1995, and the related combined statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Alternative Living
Services -- Midwest Inc. and Affiliates at December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
April 18, 1996
F-56
<PAGE> 133
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
COMBINED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 577,205
Resident receivables, net........................................... 134,336
Other current assets................................................ 127,940
-----------
Total current assets........................................ 839,481
-----------
Property, plant and equipment, net.................................... 10,496,005
Other assets.......................................................... 3,440,110
-----------
Total assets................................................ $14,775,596
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 1,635,033
Accrued expenses.................................................... 455,436
Notes payable to banks.............................................. 5,679,865
Advances from and notes payable to related entities................. 3,204,946
-----------
Total current liabilities................................... 10,975,280
-----------
Minority interest..................................................... 2,634,367
Stockholders' equity:
Common stock and additional paid-in capital......................... 2,017,437
Accumulated deficit................................................. (851,488)
-----------
Total stockholders' equity.................................. 1,165,949
-----------
Total liabilities and stockholders' equity.................. $14,775,596
==========
</TABLE>
See accompanying notes to combined financial statements.
F-57
<PAGE> 134
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenue:
Resident service fees................................................ $2,504,388
Other................................................................ 298,152
----------
Operating revenue...................................................... 2,802,540
----------
Operating expenses:
Residence operations................................................. 2,765,644
General and administrative........................................... 319,711
Depreciation and amortization........................................ 379,848
----------
Total operating expenses..................................... 3,465,203
----------
Operating loss......................................................... (622,663)
----------
Other income (expense):
Interest expense..................................................... (542,913)
Interest income...................................................... 57,067
Minority interest in losses of combined affiliates................... 423,946
----------
Total other expense, net..................................... (61,900)
----------
Net loss............................................................... $ (724,563)
=========
</TABLE>
See accompanying notes to combined financial statements.
F-58
<PAGE> 135
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL
------------------- ACCUMULATED
SHARES AMOUNTS DEFICIT TOTAL
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1994...................... 20,000 $ 747,612 $ (62,725) $ 684,887
------ ---------- ----------- ----------
Contributed capital.............................. 1,269,825 -- 1,269,825
Distribution of dividends........................ -- (64,200) (64,200)
Net loss......................................... -- (724,563) (724,563)
------ ---------- ----------- ----------
Balances at December 31, 1995...................... 20,000 $2,017,437 $(851,488) $1,165,949
====== ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-59
<PAGE> 136
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (724,563)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................. 379,848
Minority interest in losses of combined affiliates........................ (423,946)
Increase in other current assets.......................................... (101,393)
Increase in accounts payable.............................................. 1,529,068
Increase in accrued expenses.............................................. 329,208
Changes in other assets and liabilities and other adjustments............. (701,969)
------------
Net cash provided by operating activities...................................... 286,253
------------
Cash flows from investing activities --
payments for property, plant and equipment and project development costs..... (10,745,698)
------------
Cash flows from financing activities:
Proceeds from notes payable to bank.......................................... 5,651,717
Payments on notes payable to bank............................................ (1,807,897)
Changes in advances from and notes payable to related entities............... 2,786,019
Contributed capital.......................................................... 1,269,825
Contributions by minority partners........................................... 3,058,313
Distribution of dividends.................................................... (64,200)
------------
Net cash provided by financing activities...................................... 10,893,777
------------
Net increase in cash and cash equivalents...................................... 434,332
Cash and cash equivalents:
Beginning of period.......................................................... 142,873
------------
End of period................................................................ $ 577,205
===========
</TABLE>
See accompanying notes to combined financial statements.
F-60
<PAGE> 137
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) BUSINESS
Alternative Living Services -- Midwest Inc. (the Company) was incorporated
in 1991 to develop assisted living residences in Michigan and other midwest
states.
Limited partnerships are formed for each Michigan facility developed. The
Company serves as the sole general partner and holds approximately 45% to 73% of
each partnership formed. Limited partnerships formed to date and the Company's
respective ownership percentage are as follows:
Hamilton House (45% interest), formed to develop the Hamilton House-I
residence in Farmington Hills, Michigan, which opened July 18, 1994.
North Schoenherr (50% interest), formed to develop the Hamilton
House-I residence in Utica, Michigan, which opened January 16, 1995.
Eisenhower/State (50% interest), formed to develop the Hamilton
House-I residence in Ann Arbor, Michigan, which opened June 8, 1995.
Twelve Mile Drake (45% interest), formed to develop the Hamilton
House-II residence in Farmington Hills, Michigan, which opened October 1,
1995.
Marsh/Tihart (73% interest), formed to develop the Hamilton House-I
residence in Lansing, Michigan, which was under construction at December
31, 1995.
Six Mile Abbey (50% interest), formed to develop the Hamilton House-II
residence in Northville, Michigan, which was under construction at December
31, 1995.
Northpointe Utica (50% interest), formed to develop the Hamilton
House-II residence in Utica, Michigan, which was under construction at
December 31, 1995.
Residences owned by these limited partnerships are operated and managed by
Alternative Living Services, Inc., (ALS, Inc.) which develops, owns and operates
assisted living residences, including residences for the frail elderly and
specialty care residences for individuals with Alzheimer's disease and other
dementia. ALS, Inc. is paid management fees of approximately 8% of monthly
revenues by the limited partnerships in exchange for the management services
performed. Additionally, ALS, Inc. participates as a limited partner in several
of the limited partnerships.
The Company has authorized, issued and outstanding 20,000 shares of no par
common stock at December 31, 1995, of which ALS, Inc. holds 10,000 shares.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are as follows:
(a) Combined Financial Statements
The combined financial statements include the accounts of the Company
and its affiliates which are under the common financial control of the
Company. Results of operations of the affiliates are included from the date
of acquisition. All significant intercompany accounts and transactions with
its affiliates have been eliminated in the combined financial statements.
Minority interest represents the ownership percentage of accumulated
losses and capital contributions made by the limited partners other than
ALS, Inc. The ownership interests of the Company and its affiliates and
ALS, Inc. have been included in total stockholders' equity.
F-61
<PAGE> 138
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of
the combined statement of cash flows.
(c) Property, Plant and Equipment
Property, plant and equipment is carried at cost, net of accumulated
depreciation. Depreciation is computed over the estimated lives of the
assets using the straight-line method. Buildings are depreciated over 20 to
40 years, and furniture, fixtures and equipment are depreciated over five
to seven years. Maintenance and repairs are expensed as incurred.
As of each balance sheet date, the Company's management evaluates the
carrying value of property, plant and equipment for possible impairment
based upon the expectations of operating cash flows derived from the use of
the assets.
(d) Other Assets
Other assets includes organizational and other costs which are
amortized on a straight-line basis over five years. Also included in other
assets are land acquisition and project development costs incurred in the
initial development of new residences, and capital contributions receivable
from unaffiliated limited partners. Land acquisition and project
development costs will become a component of the total cost of the new
residences, and will be amortized over their respective useful lives.
(e) Income Taxes
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. 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.
(f) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair
value due to the short-term nature of the accounts and due to the accounts
earning interest at current market rates. The carrying amount of the
Company's note payable to bank and advances from and notes payable to
related entities approximates fair value due to the interest rates
approximating the current rates available to the Company for similar
borrowing arrangements.
(g) Use of Estimates
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The preparation
of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-62
<PAGE> 139
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31, 1995 follows:
<TABLE>
<S> <C>
Land and land improvements.............................................. $ 1,544,603
Buildings............................................................... 7,512,810
Furniture and fixtures.................................................. 1,392,588
Construction in progress................................................ 347,421
-----------
Total property, plant and equipment..................................... 10,797,422
Less accumulated depreciation........................................... 301,417
-----------
Property, plant and equipment, net...................................... $10,496,005
==========
</TABLE>
Interest is capitalized in connection with the construction of facilities
and is amortized over the estimated useful lives of the facilities. Interest
capitalized during 1995 was approximately $280,000.
(4) OTHER ASSETS
Other assets are comprised of the following at December 31, 1995:
<TABLE>
<S> <C>
Land acquisition and project development costs........................... $2,926,893
Organization, finance and other costs.................................... 377,946
Capital contribution receivable.......................................... 135,271
----------
Total other assets............................................. $3,440,110
=========
</TABLE>
(5) NOTES PAYABLE TO BANKS
Notes payable to banks consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Mortgage notes payable, interest at the prime rate plus 1.25% to 2.5%
(10.25% at December 31, 1995), payable on demand....................... $4,209,761
Mortgage note payable, interest at 10.75%, payable on demand............. 1,470,104
----------
Total notes payable to banks................................... $5,679,865
=========
</TABLE>
(6) ADVANCES FROM AND NOTES PAYABLE TO RELATED ENTITIES
Advances from and notes payable to related entities consist of the
following at December 31, 1995:
<TABLE>
<S> <C>
Advances and notes payable -- The Damone Group, Inc...................... $1,029,700
Advances and notes payable -- ALS, Inc................................... 2,063,389
Advances and notes payable -- other related entities..................... 111,857
----------
Total advances from and notes payable to related entities...... $3,204,946
=========
</TABLE>
These advances from and notes payable to related entities are payable on
demand, with interest at 9%.
F-63
<PAGE> 140
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
Deferred tax assets and liabilities consist of the following at December
31, 1995:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards........................................ $ 72,700
Investment in affiliates................................................ 184,700
--------
Total deferred tax assets................................................. 257,400
Less valuation allowance.................................................. 257,400
--------
Deferred tax assets, net of valuation allowance........................... $ --
========
</TABLE>
The Company has approximately $204,600 of net operating loss carryforwards
for income tax purposes at December 31, 1995, which will begin to expire, if
unused, beginning in the year 2005.
(8) COMMITMENTS AND CONTINGENCIES
At December 31, 1995, capital expenditure commitments for the construction
of two Michigan facilities developed by Six Mile Abbey and Northpointe Utica
limited partnerships were approximately $13,300,000. Costs incurred through
December 31, 1995 of approximately $2,908,000 are included in land acquisition
and project development costs. Both facilities are expected to become
operational in 1996.
F-64
<PAGE> 141
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 845,200
Resident receivables, net..................................................... 308,801
Other current assets.......................................................... 92,859
-----------
Total current assets.................................................. 1,246,860
-----------
Property, plant and equipment, net.............................................. 15,189,408
Other assets.................................................................... 407,600
-----------
Total assets.......................................................... $16,843,868
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 2,214,848
Accrued expenses.............................................................. 596,537
Notes payable to banks........................................................ 5,660,259
Advances from and notes payable to related entities........................... 3,958,936
-----------
Total current liabilities............................................. 12,430,580
-----------
Minority interest............................................................... 2,623,236
Stockholders' equity:
Common stock and additional paid-in capital................................... 2,679,060
Accumulated deficit........................................................... (889,008)
-----------
Total stockholders' equity............................................ 1,790,052
-----------
Total liabilities and stockholders' equity............................ $16,843,868
==========
</TABLE>
See accompanying notes to condensed combined financial statements.
F-65
<PAGE> 142
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- ----------
<S> <C> <C>
Revenue:
Resident service fees................................................ $414,041 $1,141,481
Other................................................................ -- 200,324
-------- ----------
Operating revenue............................................ 414,041 1,341,805
-------- ----------
Operating expenses:
Residence operations................................................. 334,843 868,821
Lease expense........................................................ 3,342 50,678
General and administrative........................................... 18,947 114,414
Depreciation and amortization........................................ 51,878 119,776
-------- ----------
Total operating expenses..................................... 409,010 1,153,689
-------- ----------
Operating income....................................................... 5,031 188,116
-------- ----------
Other income (expense):
Interest expense..................................................... (82,160) (239,452)
Interest income...................................................... 2,717 2,675
Minority interest in losses of combined affiliates................... -- 11,131
-------- ----------
Total other expense, net..................................... (79,443) (225,646)
-------- ----------
Net loss............................................................... $(74,412) $ (37,530)
======== =========
</TABLE>
See accompanying notes to condensed combined financial statements.
F-66
<PAGE> 143
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (74,412) $ (37,530)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization................................... 51,878 119,776
Minority interest in losses of combined affiliates.............. -- (11,131)
Increase in resident receivables................................ (12,990) (174,465)
Decrease (increase) in other current assets..................... (76,519) 35,081
Increase in accounts payable.................................... 18,110 579,815
Increase in accrued expenses.................................... 69,864 141,101
Changes in other assets and liabilities and other adjustments... 320,901 124,209
--------- -----------
Net cash provided by operating activities............................ 296,832 776,856
--------- -----------
Cash flows from investing activities --
payments for property, plant and equipment and project development
costs........................................................... (26,432) (1,904,875)
--------- -----------
Cash flows from financing activities:
Proceeds from notes payable to bank................................ 21,000 --
Payments on notes payable to bank.................................. (209,564) (19,606)
Changes in advances from and notes payable to related entities..... 150,203 753,990
Contributed capital................................................ -- 661,630
--------- -----------
Net cash provided by (used in) financing activities.................. (38,361) 1,396,014
--------- -----------
Net increase in cash and cash equivalents............................ 232,039 267,995
Cash and cash equivalents:
Beginning of period................................................ 142,894 577,205
--------- -----------
End of period...................................................... $ 374,933 $ 845,200
========= ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
F-67
<PAGE> 144
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed combined balance sheet as of March 31, 1996 and related
condensed combined statements of operations and cash flows for the three months
ended March 31, 1995 and 1996 contained herein, which are unaudited, include the
accounts of Alternative Living Services -- Midwest Inc. (ALS-Midwest) and its
affiliates which are under the common financial control of ALS-Midwest. All
significant intercompany accounts have been eliminated in the combination. In
the opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included. Adjustments consist only of normal
recurring items. The results of operations for the three months ended March 31,
1995 and 1996, are not necessarily indicative of the results to be expected for
the full fiscal year.
The condensed combined financial statements do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. Reference is made to ALS-Midwest's audited financial
statements and the related notes as of December 31, 1995 and for the year then
ended, which provide additional disclosures and a further description of
accounting policies.
(2) NEW ACCOUNTING STANDARD
Effective January 1, 1995, ALS-Midwest adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The effect of adopting Statement 121 was not material to
ALS-Midwest's financial statements.
F-68
<PAGE> 145
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NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 16
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Pro Forma Financial Information....... 20
Selected Consolidated Financial
Data................................ 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
Business.............................. 37
History and Organization.............. 57
Management............................ 61
Principal and Selling Stockholders.... 67
Certain Relationships and Related
Transactions........................ 69
Description of Capital Stock.......... 70
Shares Eligible for Future Sale....... 72
Underwriting.......................... 74
Legal Matters......................... 75
Experts............................... 75
Additional Information................ 76
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------
UNTIL AUGUST 31, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS CONTAINING
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND AN OPINION THEREON EXPRESSED BY AN
INDEPENDENT PUBLIC ACCOUNTING FIRM AND WITH QUARTERLY REPORTS FOR THE FIRST
THREE QUARTERS OF EACH YEAR CONTAINING UNAUDITED CONSOLIDATED FINANCIAL
INFORMATION.
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6,000,000 SHARES
(LOGO)ALTERNATIVE LIVING SERVICES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
NATWEST SECURITIES LIMITED
MCDONALD & COMPANY
SECURITIES, INC.
THE CHICAGO CORPORATION
AUGUST 6, 1996
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