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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: September 23, 1997
(Date of earliest event reported)
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ALTERNATIVE LIVING SERVICES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 1-11999 39-1771281
(State or other jurisdiction of (Commission file number) (I.R.S. Employer
incorporation or organization) Identification No.)
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450 N. SUNNYSLOPE ROAD, SUITE 300
BROOKFIELD, WISCONSIN 53005
(Address of principal executive offices)
(414) 789-9565
(Registrant's telephone number, including area code)
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Explanatory Note: This Form 8-K/A, in addition to providing the information
required by Item 2, amends and restates in its entirety the Form 8-K dated
September 23, 1997 (the "Original Form 8-K") filed by Alternative Living
Services, Inc. (the "Company" or "ALS") and provides certain information
regarding the Company as a result of the consummation of the Sterling Merger (as
defined below).
TABLE OF CONTENTS
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Item 2. Acquisition or Disposition of Assets........................ 3
Item 5. Other Information........................................... 3
Introduction.............................................. 3
Business.................................................. 4
Management................................................ 28
Security Ownership of Management and Certain Beneficial
Owners.................................................... 31
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.................................................... 32
Index to Financial Statements........................................ 33
Signatures........................................................... 34
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 30, 1997, the Company, Tango Merger Corporation, a Kansas
corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and
Sterling House Corporation, a Kansas corporation ("Sterling"), entered into an
Agreement and Plan of Merger, which agreement was amended September 2, 1997 (as
so amended, the "Merger Agreement"), and which provided for, among other things:
(i) the merger of Merger Sub with and into Sterling with Sterling becoming a
wholly owned subsidiary of ALS (the "Sterling Merger"), (ii) the conversion of
each outstanding share of Sterling common stock, no par value (the "Sterling
Common Stock"), together with the associated Series A Junior Participating
Preferred Stock Purchase Right, into the right to receive 1.1 shares (the
"Exchange Ratio") of ALS common stock, $.01 par value per share (the "ALS Common
Stock"), (iii) the assumption by ALS of all outstanding options under the
Sterling House Corporation 1995 Stock Option Plan, as amended (the "Sterling
Option Plan"), and all other outstanding Sterling options (collectively, the
"Sterling Options"), which Sterling Options would be converted into options to
acquire 1.1 shares of ALS Common Stock for each share of Sterling Common Stock
underlying the Sterling Options (the "Merger Options"), and (iv) the assumption
by ALS of the 6.75% Convertible Subordinated Debentures due 2006 of Sterling the
"Sterling Debentures") pursuant to a supplemental indenture, which Sterling
Debentures would become convertible into a number of shares of ALS Common Stock
equal to the product of the Exchange Ratio and the number of shares of Sterling
Common Stock issuable upon conversion of the Sterling Debentures. The Exchange
Ratio was the result of arm's-length negotiation between the Company and
Sterling.
On October 23, 1997, special meetings of the stockholders of the Company
and Sterling were held at which their respective stockholders were asked,
pursuant to the Joint Proxy Statement of ALS and Sterling and the Prospectus of
ALS dated September 22, 1997 (the "Joint Proxy Statement/Prospectus")
constituting part of the Company's Registration Statement on Form S-4 (No.
333-34851) declared effective on September 22, 1997 (the "Registration
Statement"), to consider and vote upon, among other things, the Sterling Merger.
The stockholders of each of the Company and Sterling approved the Sterling
Merger at their respective meetings. Following receipt of the stockholder
approvals, Articles of Merger were filed with the Secretary of State of the
State of Kansas on October 23, 1997 and Sterling became a wholly owned
subsidiary of the Company on such date.
The Sterling Merger was structured as a strategic business combination and
did not involve the sale of either the Company or Sterling. No cash
consideration was paid by the Company (other than with respect to fractional
shares) and, consequently, there was no source of funds.
The ALS Common Stock is listed on the American Stock Exchange and trades
under the symbol "ALI".
The business of the Company consists of the businesses conducted by the
Company and Sterling and their respective subsidiaries immediately prior to the
Sterling Merger. The Company intends to continue to devote the assets associated
with these businesses to generally the same purposes as these assets were
devoted prior to the Sterling Merger.
The foregoing description of the Sterling Merger and the consideration
therefor does not purport to be complete and is qualified in its entirety by
reference to the Joint Proxy Statement/Prospectus which has been filed as
Exhibit 99.1 to the Original Form 8-K and which is incorporated herein by
reference. Notwithstanding the foregoing, any statement or information contained
in the Joint Proxy Statement/Prospectus shall be modified or superseded to the
extent that a statement or information contained herein modifies or supersedes
such statement or information. Any such statement or information shall not be
deemed, except as so modified or superseded, to constitute a part of this
Current Report.
ITEM 5. OTHER EVENTS
INTRODUCTION
On September 23, 1997, the Company and Sterling mailed to their respective
stockholders Joint Proxy Statement/Prospectus relating to the Merger Agreement
and the transactions contemplated thereby. As noted
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in Item 2 above, the Sterling Merger was consummated on October 23, 1997. As a
result of the Sterling Merger, the business of the Company now consists of the
combined operations of the Company and Sterling and certain of the former
executive officers and directors of Sterling are now executive officers and
directors of the Company.
The following is (i) a description of the business of the Company; (ii)
certain information regarding the directors and executive officers of the
Company; and (iii) certain information regarding the beneficial ownership of the
ALS Common Stock:
BUSINESS
OVERVIEW
The Company is a leading national assisted living company operating 219
residences with an aggregate capacity to accommodate approximately 9,200
residents as of November 1, 1997. Of these total residences, the Company owns
48, leases 101, holds majority interests in 34 (22 of which are owned and 12 are
leased), holds minority interests in 20 (11 of which are owned and 9 are leased)
and manages 16. 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, incontinence care 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 five distinct
assisted living product lines (Clare Bridge, Wynwood, Sterling House, 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. In October
1997, the Company completed the merger with of Sterling, which, at the time,
operated 104 residences with an aggregate capacity to accommodate 3,892
residents. As a result of the Sterling Merger, the Company added significant
depth to its experienced management team, acquired a fifth product line in the
Sterling House residence model and significantly expanded its presence in the
Mid West and Southeast. In 1996, the Company acquired New Crossings
International Corporation, an assisted living company which operated 15
residences with a capacity of approximately 1,420 residents throughout the
Western United States, and Heartland Retirement Services, Inc., an assisted
living company which operated 20 WovenHearts residences throughout Wisconsin. As
a result of these transactions, the Company expanded into several new geographic
markets and broadened its assisted living product lines through the addition of
the Crossings apartment style residence model and the WovenHearts residence
model designed to serve frail elderly individuals in moderate income markets and
smaller communities. The Company has also significantly expanded its operations
through the development of free-standing residences. Through November 1, 1997,
the Company has developed 203 residences with an aggregate capacity to
accommodate approximately 8,700 residents. The Company intends to continue its
development strategy and, at November 1, 1997, is constructing 99 residences and
is developing an additional 74 residences. Of these residences, 110 to 130 are
expected to open during 1998.
Combining the executive talent of both ALS and Sterling, the Company's
management team has extensive operational and strategic experience in the health
care industry. The Company's three senior executives are each pioneers in the
assisted living industry. The Company's Chief Executive Officer, William F.
Lasky, founded the Company's predecessor and has been actively involved in the
assisted living industry for
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over 15 years. The Company's President, Timothy J. Buchanan, and Chief Operating
Officer, Steven L. Vick, were the co-founders of Sterling in 1991. Messrs. Lasky
and Buchanan have each served in leadership positions for The Assisted Living
Federation of America ("ALFA"), the nation's largest dedicated assisted living
trade organization, which Mr. Lasky currently serves as Chairman.
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 and operating strategies and its extensive experience in the assisted
living industry.
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, through
strategic acquisitions of assisted living operations and, in the appropriate
circumstances, through expansion into complementary ancillary service areas.
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 multiple
product lines.
Through November 1, 1997, the Company has developed and constructed
161 residences (including residences developed by Sterling, Crossings and
Heartland) and, at November 1, 1997, is in the process of developing or
constructing 173 additional residences, 110 to 130 of which are expected to
open during 1998. Construction time for new development generally ranges
from seven to 12 months for its Wynwood, Clare Bridge, Sterling House 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 six to 14
months.
As a result of the Sterling Merger, the Company added BCI
Construction, Inc. ("BCI"), a construction company, which was previously a
wholly owned subsidiary of Sterling. The Company believes that BCI provides
it with the internal resources necessary to efficiently manage and execute
all aspects of residence development and construction.
To supplement its internal construction and development capabilities,
the Company has formed strategic alliances with established regional real
estate development partners which enable 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
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Company contributes operational and industry expertise, has operational
management responsibility for residences owned by joint ventures and has
the right and obligation to acquire the equity interests of the other joint
venture partners at predetermined times. As of November 1, 1997, 53 of the
Company's residences were operated under joint venture arrangements. See
"Business -- Joint Ventures and Strategic Alliances."
Acquisition Strategy. The Company has acquired, and intends to
continue to selectively acquire, assisted living operations. The Company
may continue to 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 growth strategy, in October 1997, the
Company merged with Sterling, which at the time operated 104 Sterling
residences. In addition, in May 1996 the Company acquired Crossings, which
operated 15 Crossings residences, and in January 1996, the Company acquired
Heartland, which operated 20 WovenHearts residences. In addition to these
three strategic transactions, the Company has acquired approximately 17
residences with an aggregate capacity to accommodate 1,200 residents
through November 1, 1997.
Ancillary Services Strategy. As the Company continues to expand its
assisted living operations through the execution of its development and
acquisition strategies, the Company intends to review and, in appropriate
circumstances, pursue opportunities for development and expansion into
complementary service areas. Such services may include home health care,
rehabilitation and pharmacy services among others. The Company intends to
assess various approaches to entering these new business lines, including
acquisitions, de novo business development and joint ventures.
In support of its growth strategy, the Company maintains an in-house team
of research 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 potential
competitors and extensive interviews of key community sources, are subsequently
conducted on approved sites. A similar investigative process is employed when
evaluating potential acquisitions within an identified target market. As of
November 1, 1997, the Company's residences are located in 20 states: Arizona,
California, Colorado, Florida, Idaho, Kansas, Massachusetts, Michigan,
Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Oklahoma,
Pennsylvania, Texas, Washington and Wisconsin. The Company has residences under
construction and development in many of its existing markets as well as in
Connecticut, Delaware, Indiana, South Carolina and Tennessee.
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, Sterling House or Crossings
product lines. The Company may supplement its market presence in selected areas
by developing WovenHearts residences throughout smaller adjacent markets. The
Company also uses its Sterling House and WovenHearts product lines to enter into
smaller residential markets that would otherwise not support its larger upper
income residential models. This strategy enables the Company to maximize its
penetration of its principal markets, while providing it access to smaller
markets and to achieve regional economies of scale.
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Operating Strategy. The Company's operating strategy is to achieve and
sustain a strong competitive position within its targeted 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) increasing revenues through levels of care as residents age in
place; 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, Sterling House 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 special health 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 product lines are
designed to serve frail elderly residents with a broad range of personal
and health care and support services across a broad spectrum of pricing
levels.
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 from general and specialty hospitals, physicians' clinics,
home health care agencies, social service agencies, senior trade
associations and other acute and sub-acute health care providers in the
markets served by the Company.
Manage 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, pensions,
proceeds from the sale of their residence and contributions from family
members.
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 clustering
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. With its well established corporate infrastructure,
the Company plans to continue to expand its recruiting, training, quality
assurance, purchasing, management information systems and employee services
capabilities in order to better serve its residents.
ASSISTED LIVING PRODUCT LINES
The Company operates five distinct assisted living product lines (Clare
Bridge, Wynwood, Sterling House, 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
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
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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
approximately one to six. 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 $3,700 for a private room.
Wynwood. These multi-story residences are designed to serve primarily
upper-income frail elderly individuals in metropolitan and suburban
markets. The Wynwood residences typically range in size from 35,000 to
45,000 square feet and accommodate 50 to 72 residents. To achieve a more
residential 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 one to 10 at each of
these residences and increases staffing levels to a ratio as high as one to
six to accommodate the care needs of the resident population. 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
base rates per resident ranging from $1,800 to $2,700 for a shared room and
from $2,500 to $3,100 for a private room.
Sterling House. These apartment-style residences serve the needs of
elderly individuals who may require support services and personal care
services but are generally located in select suburban communities and in
small or medium sized towns with populations of 10,000 or more persons.
These residences range in size from 20,000 to 30,000 square feet and
usually contain from 33 to 50 private apartments, offering residents a
choice of studio, one-bedroom and one-bedroom deluxe apartments. These
apartments typically include a bedroom area, private bath, living area,
individual temperature control and kitchenettes and range in size from 320
to 420 square feet. Like the Crossings model, common space is dispersed
throughout the building and is residentially scaled. The Company maintains
care staff to resident ratios ranging from one to eight to one to 16,
depending on the care needs of the residents. The Sterling House residences
offer a three-tier pricing structure ranging from basic care to more
advanced care and each resident is given a personalized service plan
designed to such resident's individual needs and preferences. The Company
customarily charges monthly rates per resident from $1,600 to $3,500
depending on the apartment type, level of services required, resident
acuity and the geographic location of the residence. The Company's Sterling
House model can be expanded to serve the needs of individuals with
Alzheimer's disease and other more severe dementias through the addition of
a Sterling Cottage. The Sterling Cottage is typically a 12 apartment
modular addition to a Sterling House
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residence that includes separate entrances, an internal wandering path and
generally require higher care giver staffing. The Company customarily
charges monthly rates per resident from $2,800 to $3,500 for services
delivered in the Sterling Cottage setting.
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. Like the Sterling House residence model,
common space is dispersed throughout the buildings and includes a central
dining room, a library, various activity rooms, laundry rooms and a beauty
shop. The Company maintains care staff to resident ratios ranging from one
to 12 to one 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 in smaller markets who have primarily physical
limitations or who may be experiencing the early stages of Alzheimer's
disease. WovenHearts residences range in size from 7,000 to 12,000 square
feet, accommodate 20 residents and are being expanded to accommodate 36
residents. These single-story residences resemble, and can generally be
constructed on a site suitable for, a single family home. These residences
have multiple common areas that are easily accessible from any resident
room and include a living room, a den, an entertainment room, several
personal care areas as well as a large kitchen area which opens into an
adjoining dining room. This design allows residents to participate in
familiar daily activities (such as assisting with meals, laundry and
housekeeping) which promote maintenance of their functional abilities. Most
of the resident units are private and fully furnished, though shared
accommodations are also available. The Company generally maintains a
minimum care giver to resident ratio of approximately one to 12 at its
WovenHearts residences. 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
$1,700 to $2,200.
ASSISTED LIVING CARE AND SERVICE PROGRAMS
The Company offers a full range of assisted living care and services based
upon individual resident needs. Prior to admission, all residents are assessed
by the Company's professional staff to determine the appropriate residence model
and level of care and services required by such residents. Subsequently,
individual care plans are developed by residence staff in conjunction with the
residents, their families and their physicians. These plans are periodically
reviewed, typically at six month intervals, or when a change in medical or
cognitive status occurs. Each of the Company's assisted living 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. The Company has implemented different care and service plans for
each of its product lines. At its Wynwood, Sterling House, Crossings and
WovenHearts models, residents are placed in one of several care levels depending
upon their individual needs. At its Clare Bridge residences, the
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Company currently uses a single care structure. The Company's care levels
include a basic care program, several advanced care programs as well as
additional ancillary service programs as further described below.
Basic Care. At this level, residents are provided with a variety of
services, including 24 hour assistance with ADLs, ongoing health
assessments by a professional nurse, three meals per day and snacks,
coordination of special diets 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.
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.
10
<PAGE> 11
RESIDENCES
The table below sets forth certain information with respect to the
Company's residences which were operated by the Company as of November 1, 1997.
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>
OWNERSHIP RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
OWNED/LEASED
WISCONSIN
Clare Bridge......... Brookfield Dementia Care Leased 24 November 1991
Clare Bridge......... Middleton Dementia Care Owned 28 March 1991
Wynwood.............. Madison Frail Elderly Leased 54 February 1992
Wynwood.............. Brookfield Frail Elderly Leased 61 March 1994
WovenHearts.......... Baraboo Frail Elderly Owned 20 September 1996
WovenHearts.......... Brown Deer Frail Elderly Leased 15 April 1995
WovenHearts.......... Cambridge Frail Elderly Owned(50.0) 15 January 1996
WovenHearts.......... Clintonville Frail Elderly Owned 18 November 1994
WovenHearts.......... Edgerton Frail Elderly Owned 16 November 1988
WovenHearts.......... Eau Claire Frail Elderly Owned 20 February 1997
WovenHearts.......... Fond du Lac Frail Elderly Owned 19 November 1996
WovenHearts.......... Janesville Dementia Care Owned 16 March 1992
WovenHearts.......... Janesville II Frail Elderly Owned(50.0) 20 November 1996
WovenHearts.......... Jefferson Dementia Care Owned 16 November 1996
WovenHearts.......... Jefferson II Frail Elderly Owned 16 October 1995
WovenHearts.......... Kaukauna Frail Elderly Owned 16 July 1995
WovenHearts.......... Kenosha Frail Elderly Owned 20 July 1997
WovenHearts.......... Manitowoc Frail Elderly Owned 20 December 1995
WovenHearts.......... Medford Frail Elderly Owned 19 June 1990
WovenHearts.......... Menomonie Frail Elderly Leased 19 March 1995
WovenHearts.......... Middleton Frail Elderly Owned 20 April 1997
WovenHearts.......... Neenah Frail Elderly Owned 20 April 1996
WovenHearts.......... New London Frail Elderly Owned 18 July 1995
WovenHearts.......... New Richmond Frail Elderly Leased 15 March 1995
WovenHearts.......... Onalaska Frail Elderly Leased 19 June 1995
WovenHearts.......... Oshkosh Frail Elderly Owned 20 August 1996
WovenHearts.......... Platteville Frail Elderly Owned(72.7) 20 November 1995
WovenHearts.......... Plover Frail Elderly Owned 37 June 1992
WovenHearts.......... Plymouth Frail Elderly Leased 15 June 1994
WovenHearts.......... Rice Lake Frail Elderly Owned 19 October 1995
WovenHearts.......... River Falls Frail Elderly Owned 20 December 1996
WovenHearts.......... Shawano Frail Elderly Owned 15 October 1993
WovenHearts.......... Sun Prairie Frail Elderly Owned 20 May 1994
WovenHearts.......... Sussex Frail Elderly Leased 20 August 1995
WovenHearts.......... Wausau Frail Elderly Owned 40 June 1992
WovenHearts.......... Whitewater Frail Elderly Owned(50.0) 20 November 1996
WovenHearts.......... Wisconsin Rapids Frail Elderly Owned 20 December 1995
WovenHearts.......... Wisconsin Rapids Frail Elderly Leased 19 May 1995
-----
829
-----
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
OWNERSHIP RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
TEXAS
Sterling House....... Denton Frail Elderly Leased 37 July 1996
Sterling House....... Ennis Frail Elderly Leased 33 July 1996
Sterling House....... Corsicana Frail Elderly Leased 33 July 1996
Sterling House....... Waxahachie Frail Elderly Leased 37 August 1996
Sterling House....... Palestine Frail Elderly Leased 37 August 1996
Sterling House....... Paris Frail Elderly Leased 37 September 1996
Sterling House....... Texarkana Frail Elderly Leased 37 November 1996
Sterling House....... Wichita Falls Frail Elderly Leased 42 December 1996
Sterling House....... Tyler Frail Elderly Leased 42 December 1996
Sterling House....... DeSoto Frail Elderly Leased 37 December 1996
Sterling House....... Mansfield Frail Elderly Leased 37 December 1996
Sterling House....... Richland Hills Frail Elderly Leased 37 December 1996
Sterling House....... Weatherford Frail Elderly Leased 37 December 1996
Sterling House....... Kerrville Frail Elderly Leased 37 December 1996
Sterling House....... Cedar Hill Frail Elderly Leased 37 December 1996
Sterling House....... Lancaster Frail Elderly Leased 37 December 1996
Sterling House....... Temple Frail Elderly Leased 42 January 1997
Sterling House....... Carrolton Frail Elderly Leased 42 January 1997
Sterling House....... Lewisville Frail Elderly Leased 42 January 1997
Sterling House....... San Antonio Frail Elderly Leased 37 March 1997
(Nacogdoches)
Sterling House....... Georgetown Frail Elderly Leased(51.0) 42 March 1997
Sterling House....... San Antonio Frail Elderly Leased(9.8) 37 March 1997
(Maltsberger)
Sterling House....... Waco Frail Elderly Leased(9.8) 42 March 1997
Sterling House....... San Antonio Frail Elderly Leased(9.8) 50 March 1997
(Whitby)
Sterling House....... New Braunfels Frail Elderly Leased(9.8) 37 May 1997
-----
965
-----
OKLAHOMA
Sterling House....... Bethany Frail Elderly Leased 26 January 1994
Sterling House....... Ponca City Frail Elderly Leased 33 March 1995
Sterling House....... Bartlesville Frail Elderly Leased 33 July 1995
Sterling House....... Midwest City Frail Elderly Leased 33 October 1995
Sterling House....... Enid Frail Elderly Leased 33 October 1995
Sterling House....... Shawnee Frail Elderly Leased 33 December 1995
Sterling House....... Stillwater Frail Elderly Leased 33 December 1995
Sterling House....... SW Oklahoma City Frail Elderly Leased 33 January 1996
Sterling House....... Chickasha Frail Elderly Leased 33 February 1996
Sterling House....... Edmond Frail Elderly Leased 37 April 1996
Sterling House....... Norman Frail Elderly Leased 33 April 1996
Sterling House....... Duncan Frail Elderly Leased 33 May 1996
Sterling House....... Lawton Frail Elderly Leased 37 June 1996
Sterling House....... Broken Arrow Frail Elderly Leased 37 June 1996
Sterling House....... Muskogee Frail Elderly Leased 37 August 1996
Sterling House....... Claremore Frail Elderly Leased 37 August 1996
Sterling House....... NW Oklahoma City Frail Elderly Leased 37 September 1996
Sterling House....... Ada Frail Elderly Leased 37 October 1996
Sterling House....... Owasso Frail Elderly Leased 37 October 1996
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
OWNERSHIP RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
Sterling House....... Oklahoma City Frail Elderly Leased 37 December 1996
(Hefner)
Sterling House....... Tulsa (Mingo) Frail Elderly Leased 37 January 1997
Sterling House....... Durant Frail Elderly Leased(51.0) 37 February 1997
Sterling House....... Tulsa (71st) Frail Elderly Leased(9.8) 46 May 1997
Sterling House....... Bartlesville II Frail Elderly Owned 33 September 1997
-----
842
-----
FLORIDA
Clare Bridge......... Bradenton Dementia Care Leased 36 October 1995
Clare Bridge......... Ft. Myers Dementia Care Leased 38 December 1996
Clare Bridge......... Sarasota Dementia Care Leased 38 December 1995
Clare Bridge......... Tallahassee Dementia Care Owned 38 September 1997
Wynwood.............. Sarasota Frail Elderly Owned 86 June 1990
Clare Bridge......... Tampa Dementia Care Leased 38 October 1996
Sterling House....... Stuart Frail Elderly Leased 42 September 1996
Sterling House....... Vero Beach Frail Elderly Leased 42 September 1996
Sterling House....... W. Melbourne Frail Elderly Leased 42 November 1996
Sterling House....... Tequesta Frail Elderly Leased 42 December 1996
Sterling House....... Leesburg Frail Elderly Leased 42 December 1996
Sterling House....... Jacksonville Frail Elderly Leased 42 December 1996
(St. Augustine)
Sterling House....... Tavares Frail Elderly Leased 42 March 1997
Sterling House....... Port Orange Frail Elderly Leased(51.0) 42 March 1997
Sterling House....... Ocala Frail Elderly Leased(51.0) 42 March 1997
Sterling House....... Punta Gorda Frail Elderly Leased(51.0) 42 June 1997
Sterling House....... Gainesville Frail Elderly Leased(51.0) 50 June 1997
Sterling House....... Port Charlotte Frail Elderly Leased(9.8) 42 June 1997
Sterling House....... DeLand Frail Elderly Leased(51.0) 42 June 1997
Sterling House....... Jacksonville Frail Elderly Leased(9.8) 42 July 1997
(Merrimac)
Sterling House....... Ormond Beach Frail Elderly Owned(9.8) 42 September 1997
Sterling House....... Winterhaven Frail Elderly Owned(9.8) 42 September 1997
Sterling House....... Venice Frail Elderly Owned(9.8) 42 September 1997
Sterling House....... Lehigh Acres Frail Elderly Owned(9.8) 42 September 1997
-----
1,038
-----
KANSAS
Sterling House....... Augusta Frail Elderly Owned 21 October 1991
Sterling House....... Wichita Frail Elderly Leased 26 September 1993
Sterling House....... Abilene Frail Elderly Owned 26 November 1993
Sterling House....... Junction City Frail Elderly Owned 26 March 1994
Sterling House....... Derby Frail Elderly Leased 26 April 1994
Sterling House....... McPherson Frail Elderly Leased 33 June 1994
Sterling House....... Emporia Frail Elderly Owned 26 July 1994
Sterling House....... Salina Frail Elderly Leased 33 August 1994
Sterling House....... Wellington Frail Elderly Leased 26 September 1994
Sterling House....... Arkansas City Frail Elderly Owned 33 October 1994
Sterling House....... Great Bend Frail Elderly Leased 33 January 1995
Sterling House....... Hays Frail Elderly Leased 33 June 1995
Sterling House....... Dodge City Frail Elderly Leased 35 July 1995
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
OWNERSHIP RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
Sterling House....... Liberal Frail Elderly Owned 44 August 1996
Sterling House....... Coffeyville Frail Elderly Leased 37 December 1996
Sterling House....... Salina II Frail Elderly Leased 42 December 1996
Sterling House....... Abilene II Frail Elderly Owned 33 September 1997
-----
533
-----
COLORADO
Crossings............ Aurora Support Services Leased 159 April 1991
Crossings............ Aurora Frail Elderly Leased 60 April 1991
Crossings............ Boulder Support Services Leased 82 August 1988
Crossings............ Boulder Frail Elderly Leased 76 June 1994
Crossings............ Colorado Springs Frail Elderly Owned(60.0) 76 June 1997
Crossings............ Pueblo Frail Elderly Owned(60.0) 65 August 1997
Sterling House....... Colorado Springs Frail Elderly Owned 37 September 1996
Sterling House....... Colorado Springs II Frail Elderly Owned 37 April 1997
Sterling House....... Brighton Frail Elderly Leased 42 May 1997
-----
634
-----
OHIO
Sterling House....... Findlay Frail Elderly Leased(51.0) 37 March 1997
Sterling House....... Troy Frail Elderly Leased(51.0) 37 March 1997
Sterling House....... Newark Frail Elderly Leased(51.0) 42 May 1997
Sterling House....... Greenville Frail Elderly Leased(9.8) 42 June 1997
Sterling House....... Fairfield Frail Elderly Leased(9.8) 42 June 1997
Sterling House....... Springdale Frail Elderly Owned(9.8) 42 August 1997
Sterling House....... Bowling Green Frail Elderly Owned(51.0) 37 September 1997
Sterling House....... Piqua Frail Elderly Owned(9.8) 37 September 1997
Sterling House....... Urbana Frail Elderly Owned(9.8) 37 September 1997
Sterling House....... Washington Frail Elderly Owned(9.8) 42 September 1997
Township
Sterling House....... Englewood Frail Elderly Owned(51.0) 42 September 1997
-----
437
-----
MINNESOTA
WovenHearts.......... Austin Frail Elderly Owned 20 December 1996
WovenHearts.......... Fairibauit Frail Elderly Owned 20 April 1997
WovenHearts.......... Sauk Rapids Frail Elderly Owned 20 April 1997
WovenHearts.......... Mankato Frail Elderly Owned 20 October 1996
WovenHearts.......... Owatonna Frail Elderly Owned 20 December 1996
WovenHearts.......... Winona Frail Elderly Owned 20 January 1997
WovenHearts.......... Wilmar Frail Elderly Owned 20 April 1997
WovenHearts.......... Iowa Grove Heights Frail Elderly Owned(60.0) 20 July 1997
WovenHearts.......... Blaine Frail Elderly Owned(60.0) 20 July 1997
WovenHearts.......... Moorhead Frail Elderly Leased 63 June 1992
WovenHearts.......... Brooklyn Center Frail Elderly Leased 103 June 1993
-----
346
-----
MICHIGAN
Clare Bridge......... Ann Arbor Dementia Care Leased 36 June 1995
Clare Bridge......... Farmington Hills Dementia Care Leased 28 July 1994
Clare Bridge......... Farmington Hills II Dementia Care Leased 32 October 1995
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
OWNERSHIP RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
Clare Bridge......... Lansing Dementia Care Leased 36 January 1996
Wynwood.............. Northville Frail Elderly Owned(75.0) 72 October 1996
Clare Bridge......... Utica I Dementia Care Leased 36 January 1995
Wynwood.............. Utica II Frail Elderly Owned(75.0) 72 December 1996
WovenHearts.......... Davison Frail Elderly Owned 20 August 1997
WovenHearts.......... Swartz Creek Frail Elderly Owned 20 September 1997
-----
352
-----
OREGON
Crossings............ Albany Support Services Leased 74 August 1990
Crossings............ Albany Support Services Leased 63 June 1989
Crossings............ Forest Grove Support Services/ Leased 88 September 1990
Frail Elderly
Crossings............ Gresham Frail Elderly Leased 78 January 1990
Crossings............ McMinnville Support Services/ Leased 87 May 1991
Frail Elderly
Crossings............ Medford Frail Elderly Leased 76 January 1991
Crossings............ Tualatin Frail Elderly Leased 112 February 1989
Crossings............ Albany II Frail Elderly Leased(60.0) 70 August 1997
-----
648
-----
NEW YORK
Wynwood.............. Buffalo Frail Elderly Owned(51.0) 119 October 1995
Wynwood.............. Albany Frail Elderly Owned(51.0) 110 January 1996
Wynwood.............. Manlius Frail Elderly Leased 84 April 1994
Clare Bridge......... Williamsville Dementia Care Owned(51.0) 52 June 1997
Clare Bridge......... Niskayuna Dementia Care Owned(51.0) 52 June 1997
Clare Bridge......... Perinton Dementia Care Owned(51.0) 52 October 1997
Crossings............ Sommerfield Support Services/ Owned(80.0) 75 June 1991
Frail Elderly
Crossings............ Sherman Brook Support Services/ Owned(80.0) 84 June 1991
Frail Elderly 628
-----
IDAHO
Crossings............ Boise Frail Elderly Leased 80 July 1992
Crossings............ Boise Support Services Leased 78 November 1996
Crossings............ Twin Falls Frail Elderly Owned(60.0) 76 June 1997
-----
234
-----
WASHINGTON
Crossings............ Richland Support Services/ Leased 128 July 1988
Frail Elderly
Crossings............ Tacoma Support Services Leased 119 June 1987
Crossings............ Tacoma II Frail Elderly Leased(60.0) 76 June 1997
-----
323
-----
NORTH CAROLINA
Wynwood.............. Chapel Hill Frail Elderly Owned(51.0) 70 December 1996
Clare Bridge......... Cary Dementia Care Owned(51.0) 50 July 1997
Clare Bridge......... Greensboro Dementia Care Owned(80.0) 38 September 1997
-----
158
-----
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
OWNERSHIP RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
ARIZONA
Clare Bridge......... Tempe Dementia Care Owned(60.0) 52 June 1997
WovenHearts.......... Mesa Dementia Care Owned 27 April 1997
-----
79
-----
NEVADA
Crossings............ Wetwood Frail Elderly Owned 91 June 1987
Crossings............ Silverwood Frail Elderly Owned 64 June 1991
-----
155
-----
NEW JERSEY
Clare Bridge......... Westampton Dementia Care Owned(80.0) 50 March 1997
-----
PENNSYLVANIA
Clare Bridge......... Lower Makefield Dementia Care Leased 48 February 1996
Clare Bridge......... Montgomery Dementia Care Leased 48 September 1996
Wynwood.............. Richboro Frail Elderly/ Leased 113 June 1990
Dementia Care
-----
209
-----
NORTH DAKOTA
WovenHearts.......... Fargo Frail Elderly Leased 63 June 1990
-----
CALIFORNIA
Crossings(3)......... Loma Linda Support Services/ Leased 140 June 1991
Frail Elderly -----
MANAGED OR FRANCHISED
KANSAS
Sterling House....... Olathe Frail Elderly Franchised 37 November 1992
Sterling House....... Topeka Frail Elderly Franchised 37 April 1994
Sterling House....... Pratt Frail Elderly Managed 43 September 1994
Sterling House....... Lenexa Frail Elderly Franchised 38 November 1994
Sterling House....... Lawrence Frail Elderly Franchised 37 April 1995
Sterling House....... Leawood Frail Elderly Franchised 37 September 1995
Sterling House....... Olathe II Frail Elderly Franchised 42 December 1995
Sterling House....... Lenexa II Frail Elderly Franchised 37 April 1997
-----
308
-----
WISCONSIN
Elm Grove House...... Elm Grove Dementia Care Managed 8 --
Finch House.......... Greendale Dementia Care Managed 8 --
North Shore House.... Fox Point Dementia Care Managed 8 --
Oak Ridge House...... Wauwatosa Dementia Care Managed 8 --
Parkway House........ Milwaukee Dementia Care Managed 8 --
Ridgefield House..... Madison Dementia Care Managed 8 --
-----
48
-----
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
OWNERSHIP RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% OWNED)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
COLORADO
Sterling House(4).... Greeley Frail Elderly Managed 42 June 1997
Sterling House(4).... Loveland Frail Elderly Managed 50 July 1997
Sterling House(4).... Arvada Frail Elderly Managed 50 July 1997
-----
142
-----
OKLAHOMA
Sterling House(4).... Edmond Frail Elderly Managed 29 August 1997
Sterling House(4).... Weatherford Frail Elderly Managed 35 August 1997
Sterling House(4).... Watauga Frail Elderly Managed 35 August 1997
-----
99
-----
OHIO
Sterling House(4).... Springfield Frail Elderly Managed 42 June 1997
-----
IOWA
Sterling House....... Sioux City Frail Elderly Franchised 36 October 1997
-----
MASSACHUSETTS
Wynwood.............. Leominster Frail Elderly Managed 72 May 1996
-----
MINNESOTA
WovenHearts.......... Apple Valley Frail Elderly Managed 72 June 1995
-----
</TABLE>
- ---------------
(1) Approximately 60% of the residences identified as being owned by the Company
are subject to one or more mortgages deeds of trust or other secured
financing that typically mature within the next three to 20 years.
(2) The dates in this table represent the dates the residences were originally
opened by either ALS or an acquired company.
(3) 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.
(4) Facility owned by a development partner. The Company has an operating lease
commitment letter with LTC Properties, Inc. to lease the facility in 30 to
180 days after November 1, 1997.
The Company occupies executive offices located in Brookfield, Wisconsin
under a lease expiring in 2000. The Company also leases office space in Wichita,
Kansas, Tacoma, Washington, Madison, Wisconsin, Nokomis, Florida, Yardly,
Pennsylvania and Chapel Hill, North Carolina.
The Company is in various stages of constructing 99 residences and is
developing 74 residences. Set forth below is certain information with respect to
residences in construction and residence sites in development.
17
<PAGE> 18
RESIDENCES UNDER CONSTRUCTION OR DEVELOPMENT
<TABLE>
<CAPTION>
UNDER CONSTRUCTION UNDER DEVELOPMENT
------------------ ------------------
RESIDENCES UNITS RESIDENCES UNITS
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Arizona..................................................... 3 142 7 322
Colorado.................................................... 2 92 4 200
Connecticut................................................. -- -- 2 130
Delaware.................................................... 1 72 -- --
Florida..................................................... 18 776 11 434
Indiana..................................................... 4 210 9 382
Michigan.................................................... 22 780 1 20
Minnesota................................................... 6 248 2 62
New Jersey.................................................. 3 102 6 292
New York.................................................... 2 104 4 192
North Carolina.............................................. 11 554 8 284
Ohio........................................................ 5 211 6 253
Oregon...................................................... 1 54 -- --
Pennsylvania................................................ 10 414 2 78
South Carolina.............................................. 11 435 2 84
Tennessee................................................... -- -- 6 258
Washington.................................................. -- -- 2 104
Wisconsin................................................... -- -- 2 62
-- ----- -- -----
99 4,194 74 3,157
-- ----- -- -----
</TABLE>
- ---------------
(1) Various of the residences under construction or development may be owned
directly by joint venture entities in which the Company will own varying
percentages of equity interests. See "Business -- Joint Ventures and
Strategic Alliances."
(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. 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, with
the exception of the activities of the Company's construction subsidiary which
operates out of the Company's Wichita 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
18
<PAGE> 19
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 Residence Director supervises the other members of the residence's
management team (which may include 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.
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 its ongoing education, training, and
development efforts 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
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monitoring and improving the level of services offered to its residents to
further ensure maximum customer satisfaction.
Since 1995, the Company has benefited from the recommendations of 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. 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, Iowa City,
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>
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 many
residences have on staff a Community Services Representative, both of whom are
dedicated to sales and marketing activities.
Prior to opening new residences, the Company commences an aggressive
marketing campaign in close proximity to residences nearing completion. During
this 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.
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<PAGE> 21
JOINT VENTURES AND STRATEGIC ALLIANCE
In further support of its development strategy, the Company has formed
strategic alliances and joint ventures with established real estate development
partners. These alliances and joint ventures have enabled the Company to develop
and construct additional residences while reducing the investment of, and
associated risk to, the Company.
Joint Venture with Continuing Care Concepts, Inc. In 1994, the Company
established a joint venture with Continuing Care Concepts, Inc. ("CCC") to
develop, own and operate assisted living residences in target market areas
throughout Pennsylvania, Delaware and New Jersey (the "ALS-East Territory"). CCC
is a corporation owned and controlled by DeLuca Enterprises, Inc., an eastern
Pennsylvania-based commercial real estate development and construction company.
The joint venture arrangement between ALS and CCC contemplates the joint
development of residences in the ALS-East Territory, and CCC will have a right
of first refusal to provide 20% of the equity for any future residences
developed by ALS in the ALS-East Territory. Losses from the operation of
residences jointly owned by ALS and CCC are disproportionately allocated to CCC
to the extent of its capital account. Upon the six month anniversary of the
opening of a residence jointly owned by ALS and CCC, CCC shall have the right to
require the Company to purchase CCC's interest in such residence (put option)
and the Company shall have an option to acquire (call option) CCC's interest in
such residence at a purchase price based upon the appraised fair market value of
the residence.
Joint Venture with Days Development Company. The Company has established a
joint venture (the "ALS-Carolina J.V.") with Days Development Company, L.C. a
Roanoke, Virginia-based commercial real estate development and construction
company ("Days") to develop, own and operate assisted living residences in
target market areas throughout North and South Carolina (the "ALS-Carolina
Territory"). The joint venture arrangement between ALS and Days contemplates the
joint development of residences in the ALS-Carolina Territory through November
2000. Days or its affiliates will serve as ALS's exclusive general contractor in
the ALS-Carolina Territory, and Days will have a right of first refusal to
provide 20% of the equity for any future residences developed by ALS in the
ALS-Carolina Territory. Losses from the operation of residences jointly owned by
ALS and Days are disproportionately allocated to Days to the extent of its
capital account. Upon the six month anniversary of the opening of a residence
jointly owned by ALS and Days, Days shall have the right to require the Company
to purchase Days' interest in such residence (put option) and the Company shall
have an option to acquire (call option) Days' interest in such residence at a
purchase price based upon the appraised fair market value of the residence.
Joint Venture with Pioneer Development Company. The Company has entered
into a joint venture relationship (the "ALS-Northwest J.V.") with Pioneer
Development Company, a Syracuse, New York-based commercial real estate
development and construction company ("Pioneer"), to develop, own and operate
assisted living residences in targeted market areas throughout New York,
Massachusetts, Connecticut and Rhode Island (the "ALS-Northeast Territory").
Pioneer and the Company agreed to capitalize and form separate project entities
during a five-year development term commencing in September 1996 to develop,
construct, open and operate residences in the ALS-Northeast Territory, with the
Company and Pioneer owning and funding either a 51% and 49% equity interest, or
an 80% and 20% equity interest, respectively, in such project entities. During
such development term, the Company and Pioneer have agreed not to independently
engage in other competitive activities in the ALS-Northeast Territory, subject
to certain limited exceptions. Pioneer will provide development and construction
management services to the ALS Northeast J.V. and ALS will manage the
ALS-Northeast residences, all pursuant to agreed upon arrangements. Losses from
the operation of residences jointly owned by ALS and Pioneer are
disproportionately allocated to Pioneer to the extent of its capital account.
With respect to each ALS Northeast Territory residence, upon the first to
occur (i) such residence achieving a 75% occupancy or (ii) the six-month
anniversary of the opening of such residence, Pioneer shall have the right to
require the Company to purchase Pioneer's interest in the residence (put option)
and the Company shall have an option to acquire (call option) Pioneer's interest
in such ALS-Northeast residence. The purchase price payable upon exercise of the
put and call options are based on the appraised fair market value of the
residence and shall be payable in cash and/or shares of Common Stock.
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<PAGE> 22
Fee Development Relationship with The Damone Group. The Company and The
Damone Group, Inc. ("Damone"), a Troy, Michigan-based commercial real estate
development and construction firm that has 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 a 36 month period commencing in May 1996.
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 in an 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, 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.
The Company granted a similar right to invest in the next three Wynwood and
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 partnerships formed to develop and operate
certain of the Company's Michigan residences. Two of the Company's Michigan
residences are owned by limited partnerships in which investors identified by
MFG own a minority interest. MFG has the right to provide 49% of the equity
capital for the next three 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. In May
1996, the Company entered into a Pre-Construction Coordination Agreement (the
"WCC Agreement"), with Western Communities Corporation, a Tempe, Arizona-based
construction and development firm ("WCC"), pursuant to which WCC is responsible
for (i) locating suitable sites in communities in Arizona designated by the
Company ("Project Areas") for development of the Company's assisted living and
dementia care residences; (ii) assisting the Company in its site selection
process; and (iii) obtaining all required governmental approvals within a
specified time period. WCC is entitled to a project development fee of $50,000
per project site and to reimbursement of 110% of costs and expenses. If WCC does
not obtain the required approvals within the specified time, it must refund the
development fee (but not costs and expenses) for that project site to the
Company; however, the obligation to refund such fee is limited to the first four
Project Areas designated by the Company in each of 1996 and 1997. Upon
acquisition of a project site, the parties intend to enter into a mutually
satisfactory construction management agreement pursuant to which WCC will manage
the construction of the facility. The WCC Agreement provides that during the two
year term of the WCC Agreement, the Company and WCC will not enter into a
similar agreement with any other person and that WCC will not locate or develop
sites for assisted living or dementia care residences in Arizona without first
offering such sites to the Company.
Sterling Development Partnerships. In February 1997. Sterling formed a
wholly owned subsidiary, Coventry Corporation ("Coventry"), to enter into joint
venture agreements with certain development partners. Pursuant to the applicable
joint venture agreements, Coventry holds interests in various limited liability
companies and limited partnerships (the "Development Partnerships") formed to
develop Sterling
22
<PAGE> 23
House residences. The Company's development partners generally provide
construction management expertise, access to existing relationships with local
contractors, suppliers and municipal authorities, knowledge of local and state
building codes and zoning laws and assistance with site location for new
residences while investing capital and sharing in the development risk of new
properties. Sterling participates in financing residences, contributes
operational and industry expertise and has management responsibility for the
residences. The Company has both the option, at its election, and an obligation,
at the election of its development partners, to acquire the equity interests of
the other partners at predetermined prices and times. At September 30, 1997,
unconsolidated affiliates operated 17 Sterling House residences. The Company
holds a majority interest in 11 Development Partnerships. The allocation of
profits and losses among the Company and its development partners provides for
changes in the allocations at specified times or on the occurrence of specified
events which reflect the economic substance of the joint venture arrangement;
thus the allocation of profits and losses to the Company may be significantly
different than its stated ownership interests in the Development Partnerships.
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.
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 ALFA 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.
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. 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.
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
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<PAGE> 24
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 individuals 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 and
ancillary services. 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-Terms 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 home
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.
Quality of Life Advantages of Assisted Living. The Company believes
that, as potential residents and their family members increasingly become
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.
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<PAGE> 25
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 "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.
In order to comply with the terms of the revenue bonds used to finance
eight of the Company's residences, the Company is required to lease a minimum of
20% of the apartments in each such residence to low or moderate income persons
as defined pursuant to the Internal Revenue Code of 1986, as amended.
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. A portion of the
Company's personnel is paid at rates related to the
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<PAGE> 26
federal minimum wage and accordingly, increases in the minimum wage will result
in an increase in the Company's labor costs.
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
the Company currently operates. Principally, these regulations require that
certain written disclosures be made prior to the offer for sale of a franchise.
The disclosure documents are subject to state review and registration
requirements and must be periodically updated, not less frequently than
annually. In addition, some states have relationship laws which prescribe the
basis for terminating a franchisee's rights and regulate both the Company's and
its franchisee's post-termination rights and obligations.
Management is not aware of any non-compliance by the Company with
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.
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 providers, many of
which have significantly greater financial and other resources than the Company.
In addition, the Company competes with a number of tax-exempt nonprofit
organizations which can finance capital expenditures on a tax-exempt basis or
receive charitable contributions unavailable to the Company and which are
generally exempt from income tax. While the Company's competitive position
varies from market to market, the Company believes that it competes favorably in
substantially all of the markets in which it operates based on key competitive
factors such as the breadth and quality of services offered, residence quality,
recruitment and retention of qualified health care personnel and reputation
among local referral sources. 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."
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, Sterling House and WovenHearts are registered service marks of
the Company and the Company claims service mark protection in the marks Wynwood,
Hamilton House and Clare Bridge.
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EMPLOYEES
At October 23, 1997, the Company employed approximately 3,100 full-time
employees and approximately 2,600 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.
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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......................... 52 Chairman of the Board
William F. Lasky............................. 43 Chief Executive Officer and Director
Timothy J. Buchanan.......................... 43 President and Director
Steven L. Vick............................... 39 Chief Operating Officer and Director
G. Faye Godwin............................... 54 Executive Vice President
Gary Anderson................................ 47 Senior Vice President -- Southern Operations
D. Lee Field................................. 36 Senior Vice President
Douglas A. Hennig............................ 38 Senior Vice President
Thomas E. Komula............................. 42 Senior Vice President, Treasurer and Secretary
Mark W. Ohlendorf............................ 37 Senior Vice President
Richard W. Boehlke........................... 49 Vice Chairman of the Board
Gene E. Burleson............................. 56 Director
D. Ray Cook.................................. 53 Director
Robert Haveman............................... 49 Director
Ronald G. Kenny.............................. 41 Director
Jerry L. Tubergen............................ 44 Director
</TABLE>
William G. Petty, Jr. has served as Chairman of the Board of ALS since
December 1993 and served as Chief Executive Officer of the Company from December
1993 to April 1996. He has served as a Managing Director of Beecken, Petty &
Company, the general partner of a private health care investment fund, since
September 1996. Mr. Petty served as the Vice Chairman of GranCare, Inc.
("GranCare") from July 1995 to November 1997. Mr. Petty also served as Chairman
of the Board, Chief Executive Officer and President of Evergreen Healthcare,
Inc. ("Evergreen") from June 1993 to July 1995, the date of its merger with
GranCare, 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 also serves on the Board of Directors of Paragon Health Network,
Inc. ("Paragon"), a diversified provider of long-term and specialty health care
services.
William F. Lasky has served as Chief Executive Officer of the Company since
April 1996 and served as President of the Company from December 1993 to October
1997. He served as the Managing Partner of Alternative Living Services, a
Wisconsin general partnership (the "ALS Partnership"), from 1981 to December
1993 and as the President of Care Living Centers, Inc. ("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
is a member of the National Governing Board and the Chairman of The Assisted
Living Federation of America ("ALFA") and is a licensed nursing home
administrator.
Timothy J. Buchanan has served as the President and a director of the
Company since October 1997. Mr. Buchanan served as the Chairman of the Board,
Chief Executive Officer, and a director of Sterling since he co-founded Sterling
with Mr. Vick in 1991. Mr. Buchanan founded BCI Construction, Inc. in 1984 and
served as its President until February 1997. BCI Construction, Inc. was wholly
owned by Mr. Buchanan prior to its acquisition by Sterling in 1994. Mr. Buchanan
serves on the Oklahoma Assisted Living Task Force -- Department of Human
Resources, Aging Division. He is also a former member of the National Governing
Board of ALFA.
Steven L. Vick has served as the Chief Operating Officer and a director of
the Company since October 1997. He has served as the President and a director of
Sterling since he co-founded Sterling with Mr. Buchanan in 1991. Mr. Vick
previously practiced as a Certified Public Accountant specializing in health
care consulting.
28
<PAGE> 29
G. Faye Godwin has served as Executive Vice President of the Company since
October 1997. From April 1996 to October 1997, Ms. Godwin served as Senior Vice
President of the Company and 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.
Gary Anderson has served as Senior Vice President of the Company since
October 1997. Mr. Anderson served as Senior Vice President -- Operations of
Sterling from May 1995 to October 1997. From February 1992 until March 1995, he
was employed in various capacities by Marriott International, Inc. -- Senior
Living Services Division.
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 with
the Company, 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.
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, an assisted living company that was acquired by the
Company in January 1996. 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.
Thomas E. Komula has served as a Senior Vice President of the Company since
July 1996, as Secretary of the Company since October 1997 and as Chief Financial
Officer and Treasurer of the Company since August 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.
Mark W. Ohlendorf has served as Senior Vice President of the Company since
October 1997. He served as the Chief Financial Officer of Sterling from April
1997 to October 1997. Mr. Ohlendorf served as Vice President, Chief Financial
Officer and Treasurer of Vitas Healthcare Corporation from December 1990 to
April 1997. Mr. Ohlendorf is a Certified Public Accountant and a former
instructor on long-term care for the American Institute of Certified Public
Accountants.
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, an assisted living company which he founded in 1984, until
Crossings merged with ALS in May 1996.
Gene E. Burleson has served as a director of the Company since July 1995.
Mr. Burleson served as the Chief Executive Officer and a director of Vitalink
Pharmacy Services, Inc. from February 1997 to August 1997. He served as Chairman
of the Board of GranCare from January 1994 to November 1997 and as Chief
Executive Officer of GranCare from December 1990 to February 1997. Mr. Burleson
also currently serves on the Board of Directors of Paragon, Deckers Outdoor
Corporation, a shoe manufacturer, and Walnut Financial Services, a small
business investment company.
D. Ray Cook, M.D. has served as a director of the Company since October
1997. He served as a director of Sterling from 1991 to October 1997. For the
past 22 years, Dr. Cook has been a family practice physician in private practice
in Wichita, Kansas. From 1986 to July 1994, he was a director of Physician
Corporation of America, a publicly-held health maintenance organization. He is a
member and elected fellow of the American Academy of Family Physicians, and is a
past President of the Kansas Academy. Dr. Cook is also an Assistant Professor in
the Department of Family Practice at the Kansas University College of Medicine.
Dr. Cook is a member of the General Board of the Church of the Nazarene.
29
<PAGE> 30
Robert Haveman has served as a director of the Company since May 1995. Mr.
Haveman has served as Treasurer of EDP Management Corp., a privately held
investment management firm, since April 1997 and as the Secretary/Treasurer of
the Prince Corporation, an automotive interior trim manufacturer, since 1987.
Ronald G. Kenny has served as a director of the Company since May 1995. He
has served as Executive Vice President of Huizenga Capital Management, a
privately held investment management company, since 1990.
Jerry L. Tubergen has served as a director of the Company since May 1995.
He has served as President and Chief Executive 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 currently serves on the Board of Directors of
the Orlando Magic, Ltd., an 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. Following the effective time of the Sterling Merger
and continuing through the 1999 Annual Meeting of Stockholders of the Company,
any vacancy on the Board of Directors arising among Messrs. Buchanan, Cook or
Vick and any nominee selected to fill a director position occupied by any of the
foregoing individuals in accordance with the provisions of the merger agreement
entered into by ALS and Sterling (each a "Sterling Representative") shall be
nominated on behalf of the Board of Directors, filled or selected by a majority
vote of the remaining Sterling Representatives and approved by the Board of
Directors of ALS. Pursuant to the merger agreement entered into by the Company
and Crossings in connection with the merger of the Company and Crossings, 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 director of the Company during the three year term of
the services agreement (expiring in May 1999). 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"), a compensation committee (the "Compensation Committee") and an
executive committee (the "Executive 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, Cook, 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 Incentive Compensation Plan.
The Executive Committee is comprised of Messrs. Buchanan, Lasky and Petty,
with Mr. Petty serving as Chairman. The Executive Committee convenes when deemed
appropriate or necessary by its members. The Executive Committee has been
delegated the authority of the Board of Directors to: (i) approve development,
acquisition and financing transactions, without separate approval of the Board
of Directors, of up to $15 million; (ii) review and formulate recommendations on
matters to be submitted to the Board of Directors;
30
<PAGE> 31
(iii) approve and manage the consolidation of the operations of Sterling and its
subsidiaries and the Company and its subsidiaries; and (iv) perform such other
functions as may be assigned to it by the Board of Directors.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of November 1, 1997 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 Company's named executive officers determined in accordance
with Item 402(a)(3) of Regulation S-K; and (iv) 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
STOCK BENEFICIALLY
OWNED
--------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------ --------- -------
<S> <C> <C>
Timothy J. Buchanan(1)(2)+ ++............................... 1,059,047 5.7%
Peter H. Huizenga(1)(3)..................................... 957,571 5.1
Steven L. Vick(4)+ ++....................................... 829,495 4.5
Richard W. Boehlke+......................................... 781,711 4.2
D. Ray Cook, M.D.(5)+....................................... 702,901 3.8
Jerry L. Tubergen(6)+....................................... 688,813 3.7
William F. Lasky(7)+ ++..................................... 587,642 3.2
Robert Haveman(8)+.......................................... 581,233 3.1
William G. Petty, Jr.(9)+ ++................................ 152,889 *
Douglas A. Hennig(10)++..................................... 112,666 *
Ronald G. Kenny(11)+........................................ 32,708 *
Gene E. Burleson(11)+....................................... 12,885 *
G. Faye Godwin(12)++........................................ 15,999 *
Thomas E. Komula++.......................................... 4,000 *
All Executive Officers and Directors as a Group (16
Persons)(13).............................................. 5,791,243 30.5
</TABLE>
- ---------------
+ Director of the Company.
++ Executive Officer of the Company. See "Management".
* Less than 1%.
(1) The business address of Mr. Buchanan is 450 N. Sunnyslope Road, Suite 300,
Brookfield, Wisconsin 53005. The business address of Mr. Huizenga is 2215
York Road, Suite 500, Oakbrook, Illinois 60521.
(2) Includes (i) 506,000 shares owned beneficially by Mr. Buchanan's spouse,
Meredith Gail Buchanan; (ii) 22,000 shares held in trust for Mr. Buchanan's
children for which trusts Mr. Buchanan is sole trustee; (iii) 11,000 shares
beneficially owned by The Buchanan Family Foundation of which Mr. Buchanan
is the sole trustee; and (iv) 22,000 shares issuable upon the exercise of
options that are or will become exercisable on or within 60 days of
November 1, 1997.
(3) Includes 358,597 shares of Common Stock held by the Peter H. Huizenga
Testamentary Trust, 39,247 shares of Common Stock held by the Betsy
Huizenga Trust, 43,030 shares of Common Stock held by the Greta Huizenga
Trust, 39,247 shares of Common Stock held by the Peter H. Huizenga, Jr.
Trust and 39,247 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.
(4) Includes (i) 697,495 shares owned jointly with Mr. Vick's spouse, Susan C.
Vick; (ii) 22,000 shares held in trust for Mr. Vick's children for which
trusts Mr. Vick is the sole trustee; (iii) 11,000 shares beneficially owned
by The Vick of which Mr. Vick is the sole trustee; and (iv) 20,000 shares
issuable upon the exercise of options that are or will become exercisable
on or within 60 days of November 1, 1997.
(5) Includes 19,800 shares issuable upon the exercise of options that are or
will become exercisable on or within 60 days of November 1, 1997.
31
<PAGE> 32
(6) Includes (i) 415,532 shares held by trusts for which he serves as trustee
(the "Trusts") and (ii) options to acquire 11,880 shares exercisable within
60 days of November 1, 1997. The co-trustees of the Trust also serve as
trustee of a trust holding 59,361 shares. Also includes 22,222 shares of
Common Stock, issuable upon conversion of the 7% Convertible Subordinated
Debentures due 2004 held by RDV Corporation Supplemental Executive
Retirement Plan of which Mr. Tubergen is a beneficiary.
(7) 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 59,362 shares within 60 days of November 1, 1997. CLC is a
Wisconsin corporation owned by Mr. Lasky and David Burr.
(8) Includes (i) 437,082 shares held by two non-profit corporations (the
"Non-profit Corporation") of which Mr. Haveman serves as officer and (ii)
options to acquire 11,880 shares exercisable within 60 days of November 1,
1997. Mr. Haveman disclaims beneficial ownership of the shares held by the
Non-profit Corporation. Also includes 24,691 shares of Common Stock,
issuable upon conversion of the 7% Convertible Subordinated Debentures due
2004.
(9) Represents 107,575 shares held by Petty, Kneen & Company, a company owned
and controlled by Mr. Petty and John W. Kneen, and options to acquire
22,657 shares exercisable within 60 days of November 1, 1997.
(10) Includes options to acquire 8,206 shares exercisable within 60 days of
November 1, 1997.
(11) Includes options to acquire 11,880 shares exercisable within 60 days of
November 1, 1997.
(12) Includes options to acquire 11,560 shares exercisable within 60 days of
November 1, 1997.
(13) Includes options to acquire 453,022 shares exercisable within 60 days of
November 1, 1997.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
(1) The consolidated financial statements of Sterling as of December
31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996
and the interim consolidated financial statements of Sterling as of June
30, 1996 and 1997 and for the periods ended June 30, 1995 and 1996 are
incorporated herein by reference to the Joint Proxy Statement/Prospectus.
(2) Supplemental Consolidated Financial Statements of the Company as
described on the attached Index to Financial Statements are filed herewith.
(b) Pro Forma Financial Information.
(1) The pro forma financial information is incorporated herein by
reference to the Joint Proxy Statement/Prospectus.
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2 -- The Agreement and Plan of Merger, dated as of July 30, 1997,
as amended as of September 2, 1997, by and among the
Company, Merger Sub and Sterling is incorporated herein by
reference to Appendix A to the Joint Proxy
Statement/Prospectus.
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Ernst & Young LLP
99.1 -- Joint Proxy Statement and Prospectus Dated September 22,
1997*
</TABLE>
- ---------------
* Previously filed
32
<PAGE> 33
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-1
Supplemental Consolidated Balance Sheets as of December 31,
1996 and 1995............................................. F-2
Supplemental Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994.............. F-3
Supplemental Consolidated Statements of Cash Flows for years
ended December 31, 1996, 1995 and 1994.................... F-5
Notes to Supplemental Consolidated Financial Statements..... F-6
</TABLE>
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this Amendment No. 1 to the report to be signed on
its behalf by the undersigned thereunto duly authorized.
ALTERNATIVE LIVING SERVICES, INC.
--------------------------------------
(Registrant)
By: /s/ THOMAS E. KOMULA
-----------------------------------
Thomas E. Komula
Senior Vice President,
Treasurer and Chief Financial
Officer
Dated: November 6, 1997
34
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alternative Living Services, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of Alternative Living Services, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related supplemental consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. We did not audit the financial
statements of Sterling House Corporation, which statements reflect total assets
constituting 38% for 1996 and 52% for 1995 of the related supplemental
consolidated totals, and which reflect operating revenue constituting 29% for
1996 and 31% for 1995 and 1994 of the related supplemental consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion as it relates to the amounts included for Sterling House
Corporation, is based solely on the report of the other auditors.
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.
The supplemental consolidated financial statements give retroactive effect
to the merger of Alternative Living Services, Inc. and Sterling House
Corporation on October 23, 1997, which has been accounted for as a
pooling-of-interests as described in note 1 to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the date
of consummation. These financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of Alternative Living Services, Inc. and subsidiaries after financial
statements covering the date of consummation of the business combination are
issued.
In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alternative Living
Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 21, 1997, except for note 1,
which is as of November 3, 1997
F-1
<PAGE> 36
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 39,455 $20,394
Accounts receivable:
Construction due from REIT............................. 3,848 --
Trade.................................................. 2,032 213
Other.................................................. 143 400
Note receivable from affiliate............................ -- --
Deferred income taxes..................................... -- 138
Other current assets...................................... 6,886 1,108
-------- -------
Total current assets.............................. 52,364 22,253
-------- -------
Property, plant, and equipment, net......................... 132,922 51,542
Long-term investments....................................... 2,835 1,183
Investments in and advances to unconsolidated affiliates.... 1,649 4,788
Goodwill, net............................................... 5,216 955
Other assets................................................ 9,367 1,729
-------- -------
Total assets...................................... $204,353 $82,450
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations............. $ 985 $ 441
Short-term notes payable.................................. 8,335 6,726
Accounts payable.......................................... 11,771 2,618
Accrued expenses.......................................... 10,333 1,853
Deferred rent and refundable deposits..................... 408 190
-------- -------
Total current liabilities................................... 31,832 11,828
Long-term obligations, less current installments............ 68,238 23,663
Deferred income taxes....................................... -- 297
Accrued stock option compensation........................... 387 412
Deferred gain............................................... 6,944 174
Minority interest........................................... 5,888 610
Stockholders' equity:
Common stock and additional paid-in capital............... 104,324 49,930
Accumulated deficit....................................... (13,260) (4,464)
-------- -------
Total stockholders' equity........................ 91,064 45,466
-------- -------
Total liabilities and stockholders' equity........ $204,353 $82,450
======== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-2
<PAGE> 37
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenue:
Resident service fees..................................... $54,210 $11,981 $ 4,866
Other..................................................... 1,427 3,080 2,362
------- ------- -------
Operating revenue........................................... 55,637 15,061 7,228
------- ------- -------
Operating expenses:
Residence operations...................................... 35,977 8,717 3,185
Lease expense............................................. 9,035 944 697
General and administrative................................ 11,080 4,409 2,620
Depreciation and amortization............................. 4,223 1,275 346
Nonrecurring charge....................................... 976 -- --
Cost of construction expense.............................. 63 1,069 869
Stock compensation expense -- 412 --
------- ------- -------
Total operating expenses.......................... 61,354 16,826 7,717
------- ------- -------
Operating loss.............................................. (5,717) (1,765) (489)
Other income (expense):
Interest expense, net..................................... (3,231) (984) (397)
Equity in losses of unconsolidated affiliates............. (52) (716) (299)
Other expense............................................. (31) 40 --
Minority interest in losses of consolidated
subsidiaries........................................... 76 160 48
Gain on sale of land -- 439 --
------- ------- -------
Total other expense, net.......................... (3,238) (1,061) (648)
------- ------- -------
Income (loss) before income taxes........................... (8,955) (2,826) (1,137)
Income taxes (benefit) (159) (991) --
------- ------- -------
Income (loss) before extraordinary item..................... (8,796) (1,835) (1,137)
Extraordinary item -- loss from early retirement of
financing agreements -- (1,176) --
------- ------- -------
Net income (loss)................................. $(8,796) $(3,011) $(1,137)
======= ======= =======
Net income (loss) per common share:
Loss before extraordinary item............................ $ (0.57) $ (0.21) $ (0.21)
Extraordinary item -- (0.13) --
------- ------- -------
Net income (loss) per share................................. $ (0.57) $ (0.34) $ (0.21)
======= ======= =======
Weighted average shares outstanding......................... 15,429 8,929 5,469
======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-3
<PAGE> 38
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL STOCK
----------------- ACCUMULATED SUBSCRIPTION
SHARES AMOUNTS DEFICIT RECEIVABLE TOTAL
------ -------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993................ 4,094 $ 2,541 $ (316) $(2,200) $ 25
Receipt of stock subscription................ -- -- -- 2,200 2,200
Contributed capital from majority
stocholder................................. -- 2,678 -- -- 2,678
Net loss..................................... -- -- (1,137) -- (1,137)
------ -------- -------- ------- -------
Balances at December 31, 1994................ 4,094 5,219 (1,453) -- 3,766
Shares issued -- public offering............. 2,185 21,786 -- -- 21,786
Shares issued -- acquisitions................ 481 5,408 -- -- 5,408
Shares issued -- termination fee............. 88 988 -- -- 988
Net proceeds from private offering........... 4,303 19,029 -- -- 19,029
Retirement of stock held by minority
stockholder................................ (381) (2,500) -- -- (2,500)
Common stock issued for contributed
capital.................................... 917 -- -- -- --
Net loss..................................... -- -- (3,011) -- (3,011)
------ -------- -------- ------- -------
Balances at December 31, 1995................ 11,687 49,930 (4,464) -- 45,466
Proceeds from issuance of common stock....... 3,873 41,648 -- -- 41,648
Shares issued in connection with
acquisitions............................... 2,483 12,877 -- -- 12,877
Purchase and retirement of common stock...... (12) (163) -- -- (163)
Shares issued -- 1995 options exercised...... 4 43 -- -- 43
Tax effect of options exercised.............. -- (11) -- -- (11)
Net loss..................................... -- -- (8,796) -- (8,796)
------ -------- -------- ------- -------
Balances at December 31, 1996................ 18,035 $104,324 $(13,260) $ -- $91,064
====== ======== ======== ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<PAGE> 39
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (8,796) $ (3,011) $(1,137)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 4,223 1,275 346
Gain on sale of land...................................... -- (439) --
Amortized rent and interest expense....................... 157 -- --
Income taxes (benefit).................................... (159) (991) --
Equity in net loss from investments in unconsolidated
affiliates.............................................. 52 716 299
Minority interest in losses of consolidated
subsidiaries............................................ (76) (160) (48)
Loss on early retirement of financing agreement, excluding
cash paid............................................... -- 676 --
Stock option compensation................................. -- 412 --
(Increase) decrease in accounts receivables............... (1,293) 170 171
Increase in other current assets.......................... (1,742) (93) (172)
Increase (decrease) in accounts payable................... (344) 1,054 (100)
Increase in accrued expenses.............................. 4,206 83 244
Deferred rent and refundable deposits..................... 191 42 (6)
Earnings in excess of billings on uncompleted contracts... -- 144 (103)
Increase in prerental costs............................... (1,728) (266) (3)
Other..................................................... (51) (539) 237
--------- -------- -------
Net cash used in operating activities....................... (5,360) (927) (272)
--------- -------- -------
Cash flows from investing activities:
Construction receivable due from REIT..................... (3,848) -- --
Net proceeds from sale of property and equipment.......... -- 1,102 --
Acquisitions of affiliates and facilities, net of cash.... (9,998) (1,011) (67)
Payments for property, plant, and equipment and project
development costs....................................... (115,711) (24,616) (2,652)
Investments in and advances to unconsolidated
affiliates.............................................. (252) (3,060) (1,613)
Increase in long-term investments......................... (1,663) (1,183) (50)
Payments for deferred costs............................... -- (208) (30)
Changes in other long-term assets and liabilities......... 3,836 (92) 112
--------- -------- -------
Net cash used in investing activities....................... (127,636) (29,068) (4,300)
--------- -------- -------
Cash flows from financing activities:
Proceeds from short term borrowings....................... 5,749 7,526 596
Payments of short term borrowings......................... (13,844) (5,782) --
Contributions by minority partner and minority
stockholder............................................. -- 1,275 1,415
Purchase of remaining limited partnership interests....... -- -- (605)
Payments for financing costs.............................. (1,602) (221) (37)
Repayments of long-term obligations....................... (39,626) (14,020) (1,498)
Proceeds from issuance of long-term obligations........... 33,863 16,174 276
Proceeds from issuance of convertible debt................ 35,000 -- --
Changes in advances from and notes payable to
unconsolidated affiliates............................... -- (1,834) 218
Proceeds from sale/leaseback transactions................. 91,034 8,118 --
Issuance of common stock and other capital
contributions........................................... 41,648 40,815 2,678
Retirement of stock held by minority stockholder.......... -- (2,500) --
Stock subscription received............................... -- -- 2,200
Other..................................................... (165) (58) (99)
--------- -------- -------
Net cash provided by financing activities................... 152,057 49,493 5,144
--------- -------- -------
Net increase in cash and cash equivalents................... 19,061 19,498 572
--------- -------- -------
Cash and cash equivalents:
Beginning of period....................................... 20,394 896 324
--------- -------- -------
End of period............................................. $ 39,455 $ 20,394 $ 896
========= ======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized..... $ 6,086 $ 1,494 $ 277
Cash paid (received) during year for income taxes......... -- (13) 15
========= ======== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-5
<PAGE> 40
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) BASIS OF PRESENTATION
Alternative Living Services, Inc. (the Company) merged with Sterling House
Corporation on October 23, 1997 (the Merger). On that date, the Company issued
approximately 5,550,000 shares of its common stock in exchange for approximately
5,045,000 shares of Sterling House Corporation's common stock then outstanding
based on an exchange ratio of 1.1 shares of its common stock for each share of
Sterling House Corporation's common stock (the Exchange Ratio).
The supplemental consolidated financial statements give retroactive effect
to the Merger, which has been accounted for using the pooling-of-interests
method; and as a result, the financial position, results of operations and cash
flows are presented as if the combining companies had been consolidated for all
periods presented. The supplemental consolidated statements of stockholders'
equity also reflect retroactive combination of the accounts of the Company and
Sterling House Corporation for all periods presented, with adjustments to
outstanding shares based upon the Exchange Ratio. As required by generally
accepted accounting principles, the supplemental consolidated financial
statements will become the historical financial statements upon issuance of the
financial statements for the period that includes the date of the Merger.
The supplemental consolidated financial statements, including the notes
thereto, should be read in conjunction with the historical consolidated
financial statements of the Company and Sterling House Corporation included in
their respective Annual Reports on Forms 10-K for the year ended December 31,
1996.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying supplemental consolidated
financial statements are summarized below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Operating revenue:
Alternative Living Services, Inc........................ $39,599 $10,464 $ 4,957
Sterling House Corporation.............................. 16,038 4,597 2,271
------- ------- -------
Combined........................................ $55,637 $15,061 $ 7,228
======= ======= =======
Extraordinary loss:
Alternative Living Services, Inc........................ $ -- $ -- $ --
Sterling House Corporation.............................. -- (1,176) --
------- ------- -------
Combined........................................ $ -- $(1,176) $ --
======= ======= =======
Net loss:
Alternative Living Services, Inc........................ $(7,811) $(1,746) $ (643)
Sterling House Corporation.............................. (726) (2,183) (494)
Effect of restated income (taxes) benefit............... (259) 918 --
------- ------- -------
Combined.................................................. $(8,796) $(3,011) $(1,137)
======= ======= =======
Net loss per share:
Alternative Living Services, Inc........................ $ (0.79) $ (0.30) $ (0.22)
Sterling House Corporation.............................. (0.14) (0.78) (0.22)
------- ------- -------
Combined........................................ $ (0.57) $ (0.34) $ (0.21)
======= ======= =======
</TABLE>
There were no transactions between Alternative Living Services, Inc. and
Sterling House Corporation prior to the combination.
F-6
<PAGE> 41
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT BUSINESS AND ACCOUNTING POLICIES
(A) BUSINESS
The Company (including Sterling House Corporation) develops, owns, and
operates assisted living residences. As of December 31, 1996, the Company
operated 100 residences totaling 3,947 living units located throughout the
United States.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Results of operations of the majority-owned
subsidiaries are included from the date of acquisition. All significant
intercompany balances and transactions with such subsidiaries have been
eliminated in the consolidation. Investments in other affiliated companies in
which the Company has at least 20% ownership and does not have management
control are accounted for on the equity method.
(C) USE OF ESTIMATES
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles. The preparation of 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.
(D) RECENT ACCOUNTING PRONOUNCEMENTS
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the Company
adopted the disclosure provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which provides for pro
forma net income and earnings per share disclosures for employee stock option
grants made since 1995 as if the fair-value-based method defined in SFAS No. 123
had been applied.
(E) 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) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company determines fair value of financial assets based on quoted
market values. The fair value of debt is estimated based on current rates
offered to the Company for debt of the same maturities. At December 31, 1996 and
1995, the fair values of financial instruments were not materially different
from the carrying amounts.
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash. The Company places its funds into high credit
quality financial institutions and, at times, such funds may be in excess of the
Federal Depository Insurance Corporation limits.
F-7
<PAGE> 42
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(G) LONG-LIVED ASSETS
Property, plant, and equipment are stated at cost, net of accumulated
depreciation. Plant and equipment under capital leases are stated at the present
value of minimum lease payments. Depreciation is computed over the estimated
lives of the assets using the straight-line method. Buildings and improvements
are depreciated over 20 to 40 years, and furniture, fixtures, and equipment are
depreciated over three to 12 years. Maintenance and repairs are expensed as
incurred.
Goodwill represents the costs of acquired net assets in excess of their
fair market values. Amortization of goodwill is computed using the straight-line
method over the expected periods to be benefited, generally 40 years. The
Company's management periodically evaluates goodwill for impairment based upon
expectations of nondiscounted operating cash flows in relation to the net
capital investment in the subsidiary. Accumulated amortization of goodwill was
$163,000 and $1,000 as of December 31, 1996 and 1995, respectively.
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(H) DEFERRED COSTS
Deferred costs, which are included in other assets, are composed of
organization costs, deferred financing costs, and prerental costs (preopening,
marketing, employee recruitment and training, and other startup expenditures).
Organization costs are amortized on a straight-line basis over five years.
Deferred financing costs are amortized on the effective-interest method over the
term of the related debt. Prerental costs, included in other current assets, are
amortized over 12 months from the date a residence is available for occupancy.
(I) REVENUE
Revenue, which is recorded when services are rendered, consists primarily
of resident service fees which are reported at net realizable amounts. Other
revenue consists primarily of management 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.
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
F-8
<PAGE> 43
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(K) NET LOSS PER SHARE
Net loss per share has been computed by dividing net loss by the weighted
average number of the Company's common and common equivalent shares outstanding
during each period. Common equivalent shares include stock options, which have
been included using the treasury stock method only when their effect is
dilutive. The weighted average number of common shares does not include any
common stock equivalents because (1) stock options outstanding are not
materially dilutive and (2) common stock equivalents associated with the
convertible debentures would be antidilutive.
In connection with a public offering of common shares which became
effective on August 9, 1996 and pursuant to the requirements of the Securities
and Exchange Commission, for purposes of net loss per share, common stock issued
and common stock options granted at per share amounts less than the public
offering price per share subsequent to May 1995 have been reflected as
outstanding for all periods prior to the effective date of the public offering.
Accordingly, weighted average shares outstanding was increased by 1,146,928
shares for the effect of such common stock and stock options.
(3) ACQUISITIONS
In 1995 and 1996, the Company made the following acquisitions:
- Palmer Ranch, an 86-unit assisted living residence in Sarasota, Florida
in March 1995;
- The remaining ownership interests of certain affiliates located in Kansas
and Texas in October 1995;
- Heartland Retirement Services, Inc., an operator of 20 assisted living
residences in Wisconsin in January 1996;
- New Crossings International Corporation, a company which operated 15
assisted living facilities in Washington, California, Oregon and Colorado
in May 1996;
- The general and limited partnership interests not owned by the Company in
five Michigan limited partnerships owned by unrelated investors in May
1996;
- The minority interests in three partnerships in May 1996;
- A residence the Company had previously leased in August 1996;
- A 45-unit assisted living facility located in Liberal, Kansas in August
1996;
- Two residences the Company managed located in Brown Deer and Sussex,
Wisconsin in September 1996; and
- Six assisted living residences located in northern Wisconsin in December
1996.
The cost of the acquisitions totaled $4,750,000 in 1995 and $21,800,000 in
1996. The acquisitions were accounted for using the purchase method. In addition
to cash, the Company issued 2,441,009 shares of common stock with an estimated
fair value of $12,530,000, and incurred $11,600,000 of debt to effect the
acquisitions. Goodwill related to the acquisitions of $1,019,000 in 1995 and
$4,292,183 in 1996 is being amortized over 40 years.
F-9
<PAGE> 44
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On the basis of an unaudited pro forma consolidation of the results of
operations as if the acquisitions had taken place at the beginning of the year,
the following amounts would have been reported (in thousands):
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Revenue..................................................... $ 67,397
Loss before extraordinary item.............................. (10,367)
Net loss.................................................... (10,367)
Net loss per common share................................... (0.55)
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of the results of operations that would have occurred had the
acquisitions occurred at the beginning of the year, or of future results of
operations.
As of December 31, 1996, the Company had an 80% ownership interest in four
development projects and a 51% ownership interest in ten development projects.
The 20% and 49% interests in these consolidated affiliates not held by the
Company and the losses therefrom have been reflected as minority interest in the
supplemental consolidated balance sheets and as minority interest in losses of
consolidated subsidiaries in the supplemental consolidated statements of
operations.
(4) PROPERTY, PLANT, AND EQUIPMENT
A summary of property, plant, and equipment at December 31, follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Land and improvements....................................... $ 11,389 $ 8,836
Buildings and leasehold improvements........................ 64,573 31,567
Vehicles, furniture, fixtures, and equipment................ 9,143 4,942
Construction in progress.................................... 53,127 8,361
-------- -------
Total property, plant, and equipment........................ 138,232 53,706
Less accumulated depreciation............................... 5,310 2,164
-------- -------
Property, plant, and equipment, net............... $132,922 $51,542
======== =======
</TABLE>
At December 31, 1996, property and equipment includes $10,608,000 of
buildings and improvements and $592,000 of fixtures and equipment held under
capital leases and related financing obligations. Related accumulated
amortization totaled $2,078,000.
Interest is capitalized in connection with the construction of residences
and is amortized over the estimated useful lives of the residences. Interest
capitalized in 1996 and 1995 was approximately $1,926,000 and $407,000,
respectively.
Construction in progress at December 31, 1996 consisted principally of
costs related to the construction of assisted living residences with outstanding
construction commitments totaling approximately $72.8 million.
F-10
<PAGE> 45
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Investments in and advances to unconsolidated affiliates consist of the
following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Investments in unconsolidated affiliates.................... $ 285 $1,581
------ ------
Advances to unconsolidated affiliates:
Partnerships.............................................. 1,089 2,540
Notes receivable.......................................... 275 383
Other..................................................... -- 284
------ ------
Total advances to unconsolidated affiliates....... 1,364 3,207
------ ------
Total investments in and advances to
unconsolidated affiliates....................... $1,649 $4,788
====== ======
</TABLE>
Advances to unconsolidated affiliates also includes management fees
pursuant to an agreement with an affiliate, which is 50% owned and controlled by
an officer and a shareholder. Under the terms of the agreement, this affiliate
is obligated to pay a monthly management fee of 11% of gross operating revenue.
During 1996 and 1995, the management fees, included in other revenue, were
$175,000 and $252,000, respectively.
The Company was retained by certain of its affiliates as the general
contractor for the construction of their alternative living residences for which
the Company received a fee for construction services. Revenues earned by the
Company from such affiliates for the years ended December 31, 1996, 1995, and
1994, were $-0-, $803,000, and $602,000, respectively.
Notes receivable at December 31, 1996 includes $200,000 due from an officer
and a shareholder of the Company, which accrues interest at 6% and is payable in
full on December 30, 1999. Notes receivable at December 31, 1995 included
$150,000 due from an officer and a shareholder of the Company, which was repaid
on December 31, 1996.
(6) OTHER ASSETS
Other assets are comprised of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred financing costs, net............................... $2,443 $ 416
Organizational and other costs, net......................... 1,982 89
Deposits and other.......................................... 4,942 1,224
------ ------
Total other assets.......................................... $9,367 $1,729
====== ======
</TABLE>
F-11
<PAGE> 46
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT, CAPITAL LEASES, AND FINANCING OBLIGATIONS
Long-term debt, capital leases, and financing obligations consist of the
following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
6.75% Convertible subordinate debentures due June 30, 2006,
callable by the Company anytime on or after July 15,
1999...................................................... $35,000 $ --
Mortgages payable, due from 1999 through 2021; interest
rates ranging from 8% to 10%.............................. 18,571 14,160
Sale/leaseback financing obligation, due 2000, variable
interest at the 11th District FHLB rate plus 2 3/4%,
payable in monthly installments, due 2000................. 5,316 -
Serial and term revenue bonds maturing serially from 1995
through 2013, interest ranging from 4.0% to 9.5%.......... 4,710 6,718
Debt refinanced long-term through a sale/leaseback financing
transaction:
Mortgage notes payable, fixed interest rates of 8% to
10.9%.................................................. 3,290 --
Equity participation notes, including contingent
participation obligations.............................. 2,127 --
Other....................................................... 209 122
Note payable, due November 20, 2020, first 12 monthly
payments represent interest only, interest at the prime
rate plus 1%.............................................. -- 3,104
------- -------
Total long-term obligations....................... 69,223 24,104
Less current installments................................... 985 441
------- -------
Total long-term obligations, less current
installments.................................... $68,238 $23,663
======= =======
</TABLE>
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. These funds, which are recorded as
Long-term investments, consist of certificates of deposit required to be
maintained from 1998 through 2002.
Principal payments on long-term debt, capital leases, and financing
obligations for the next five years and thereafter are as follows (in
thousands):
<TABLE>
<S> <C>
1997........................................................ $ 985
1998........................................................ 992
1999........................................................ 12,355
2000........................................................ 14,137
2001........................................................ 265
Thereafter.................................................. 40,489
-------
Total long-term debt, capital leases, and
financing obligations............................ $69,223
=======
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Accrued salaries and wages.................................. $ 2,995 $ 587
Advance rents and deposits.................................. 2,754 546
Other....................................................... 4,584 720
------- ------
Total accrued expenses............................ $10,333 $1,853
======= ======
</TABLE>
F-12
<PAGE> 47
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) 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 Healthcare, Inc. as consideration for $2,677,342 cash received during
1994, which is reflected as common stock and additional paid-in capital in the
accompanying supplemental consolidated balance sheets. Subsequent to the
issuance of stock in May 1995, the Company was no longer a majority-owned
subsidiary of Evergreen.
In August 1996, the Company completed a public offering of 6,000,000 shares
of common stock, of which 3,443,206 shares were sold by the Company and
2,556,794 shares were sold by existing stockholders. Net proceeds to the Company
were approximately $40 million.
In October 1996, the Company (through Sterling House Corporation) completed
a public offering of 2,404,000 shares of common stock. Net proceeds to the
Company were approximately $22 million.
The authorized capital stock of the Company consists of 30,000,000 shares
of common stock, $.01 par value, and 5,000,000 shares of $.01 par value
preferred stock. At December 31, 1996, there were 18,550,855 shares of common
stock issued, of which 18,539,216 were outstanding. 11,639 shares were held in
treasury. At December 31, 1995 there were 11,687,059 shares of common stock
issued and outstanding. At December 31, 1996 and 1995, no shares of preferred
stock were issued and outstanding.
(10) STOCK OPTION PLAN
In 1995, the Company adopted a stock option plan (the 1995 Plan), pursuant
to which the Compensation Committee of the Company's Board of Directors may
grant stock options to officers and key employees. The Plan authorizes grants of
options to purchase up to 1,425,00 shares of authorized but unissued common
stock. Generally, stock options are granted with an exercise price equal to the
stock's fair market value at the date of grant. Generally, stock options have
10-year terms, vest 25% per year, and become fully exercisable after 4 years
from the date of grant.
At December 31, 1996, 786,821 additional shares were available for grant
under the 1995 Plan. The per share weighted-average fair value of stock options
granted during 1996 and 1995 was $3.49 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
1996 - expected dividend yield 0.0%, risk free interest rate of 6.5%, and an
expected life of 7 years; 1995 - expected dividend yield 0.0%, risk-free
interest rate of 6.5%, and an expected life of 7 years.
In conjunction with the Merger, Sterling House Corporation common stock
options that remained outstanding were exchanged for options to purchase Company
common stock, adjusted for the Exchange Ratio. Under the terms of the Sterling
House Corporation 1995 Incentive Stock Option Plan, all options become vested
and immediately exercisable as a result of the Merger. The weighted-average fair
value of stock options granted during 1996 and 1995 was $9.11 and $8.00,
respectively, on the date of grant using a Black Scholes option pricing model
with the following weighted-average assumptions for 1996 and 1995: risk-free
interest rates of 5.1%, a dividend yield of 0%, volatility factors of the
expected market price of the common stock of .541, and a weighted-average
expected life of the option of five years.
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, compensation cost has been recognized for stock options granted
below fair market value in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
F-13
<PAGE> 48
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock options under SFAS No. 123, the Company's net loss and net loss per share
would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
LOSS NET OF
EXTRAORDINARY ITEM NET LOSS NET LOSS PER SHARE
------------------- ----------------- -------------------
1996 1995 1996 1995 1996 1995
-------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
As reported........................ $(8,796) $(1,835) $(8,796) $(3,011) $(0.57) $(0.34)
Pro forma.......................... (9,391) (2,011) (9,391) (3,187) (0.61) (0.36)
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1994................................ -- $ --
Granted................................................... 550,783 5.13
Exercised................................................. -- --
Forfeited................................................. -- --
Expired................................................... -- --
------- -------
Balance at December 31, 1995................................ 550,783 5.13
Granted................................................... 444,194 11.29
Exercised................................................. (4,219) (0.09)
Forfeited................................................. (9,545) (13.88)
Expired................................................... -- --
------- -------
Balance at December 31, 1996...................... 981,213 $ 7.74
======= =======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------- -----------------------
RANGE OF NUMBER AVERAGE WTD.-AVG. NUMBER WTD.-AVG.
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
- -------------- ----------- ---------------- --------- ----------- ---------
<C> <C> <C> <C> <C> <C>
$2.92 - $13.00 708,508 8.0 years $ 6.31 145,922 $ 4.22
0.09 36,480 8.8 years 0.09 14,592 0.09
7.50 - 17.50 236,225 9.3 years 13.23 23,857 11.31
------- --------- ------ ------- ------
Total 981,213 184,371
======= =======
</TABLE>
(11) SAVINGS PLAN
In 1995, the Company initiated an employee savings plan under Section
401(k) of the Internal Revenue Code. The plan covers eligible full-time
employees and allows employees to contribute up to 15% of their salary to the
plan. The Company matched employee contributions up to a maximum of 3% of the
employee's salary. Amounts expensed for matching contributions during 1995 and
1996 were $40,000 and $43,000, respectively.
F-14
<PAGE> 49
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Income tax expense (benefit):
Current:
Federal................................................ $ -- $ -- $(6)
State.................................................. -- -- (1)
----- ----- ---
Total current..................................... -- -- (7)
----- ----- ---
Deferred:
Federal................................................ (141) (882) 6
State.................................................. (18) (109) 1
----- ----- ---
Total deferred.................................... (159) (991) 7
----- ----- ---
Total............................................. $(159) $(991) $--
===== ===== ===
</TABLE>
Deferred tax assets and liabilities consist of the following at December 31
(in thousands):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 2,397 $1,248
Investment in unconsolidated affiliates................... 104 105
Deferred gain sale/leaseback.............................. 2,887 --
Accrued expenses.......................................... 619 162
Investment in consolidated affiliates..................... 1,566 --
Other..................................................... 303 104
------- ------
Total deferred tax assets................................... 7,876 1,619
Less valuation allowance.................................. (4,879) --
------- ------
Deferred tax assets, net of valuation allowance............. $ 2,997 $1,619
------- ------
Deferred tax liabilities:
Acquisition basis......................................... $ 1,736 $ --
Depreciation.............................................. 789 1,754
Deferred costs............................................ 472 24
------- ------
Deferred tax liabilities.................................... $ 2,997 $1,778
======= ======
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 and
1995 was $0 and $917,000, respectively. During 1996, the valuation allowance was
increased by $4,879,000 because the Company was uncertain that such deferred tax
assets in excess of the applicable reversing deferred tax liabilities would be
realized in future years. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not some portion of all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. As a result of acquisitions during 1996, subsequent recognition of
$537,000 of tax benefits relating to the valuation allowance for deferred tax
assets will be allocated to goodwill.
F-15
<PAGE> 50
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective tax rate on income before income taxes varies from the
statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory rate.............................................. (34.0)% (34.0)% (34.0)%
State taxes, net............................................ (5.5) (5.5) (5.5)
Valuation allowance......................................... 38.4 2.9 36.9
Other....................................................... 2.8 1.6 2.6
----- ----- -----
Effective tax rate.......................................... (1.7)% (35.0)% --%
===== ===== =====
</TABLE>
The Company has approximately $6,081,000 of net operating loss
carryforwards at December 31, 1996. Unused net operating loss carryforwards of
approximately $4,223,000 will expire commencing in the year 2001 through 2011.
The remaining $1,858,000 of net operating loss carryforwards will begin to
expire, if unused, beginning in the year 2008 through 2010. The utilization of
net operating loss carryforwards may be further limited as to future use due to
the change in control provisions in the Internal Revenue Code which applies
because of a purchase acquisition in May 1996. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $31,000 which are
available to reduce future Federal regular income taxes, if any, over an
indefinite period.
(13) EXTRAORDINARY LOSS
During 1995, upon the completion of a public offering, the Company
terminated a certain loan commitment agreement with a REIT and paid an aggregate
termination fee of $1,488,000, of which $500,000 was paid in cash and $988,000
by delivery of 87,823 shares of the Company's common stock. The Company incurred
an extraordinary pretax loss of $1,923,000 ($1,176,000 net of income taxes),
which represents the termination cost incurred by the Company related to the
early extinguishment of the loan commitment and the write-off of all unamortized
financing costs as of the public offering which were incurred by the Company
pursuant to the terminated loan commitment.
(14) COMMITMENTS AND CONTINGENCIES
The Company has entered into sale/leaseback agreements with certain REITs
as a primary source of financing the development, construction, and to a lesser
extent, acquisitions of assisted living residences. Under such agreements, the
Company may enter into a series of sale/leaseback transactions whereby each new
residence is sold at its negotiated value and the Company will enter into a
lease agreement for such residence. The initial terms of the leases vary from 10
to 15 years and include aggregate renewal options ranging from 15 to 40 years.
The Company is responsible for all operating costs, including repairs, property
taxes, and insurance. All of these lease arrangements provide the Company with a
right of first refusal if the REIT were to seek to sell the property. The annual
minimum lease payments are based upon a percentage of the negotiated sales value
of each residence. Such percentages are generally equal to the yield for the
ten-year United States Treasury Note plus rates ranging from 3.25% to 3.75%. The
minimum lease payments are adjusted annually by a percentage multiplier that is
contingent upon changes in the Consumer Price Index. The residences sold in the
sale/leaseback transactions are sold for an amount equal to or less than their
fair market value. The leases are accounted for as operating leases with any
applicable gain or loss realized in the initial sales transaction being deferred
and amortized into income in proportion to rental expense over the initial term
of the lease.
In addition to leased residences, the Company leases certain office space
and equipment under noncancelable operating and capital leases from
nonaffiliates that expire at various times through 2014. Rental
F-16
<PAGE> 51
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense on all such operating leases, including residences, for the years ended
December 31, 1996, 1995, and 1994 was $9,110,000, $983,000, and $710,000,
respectively.
Future minimum lease payments for the next five years and thereafter under
noncancelable leases at December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1997........................................................ $ 1,359 $ 18,456
1998........................................................ 1,341 18,523
1999........................................................ 6,118 18,575
2000........................................................ 4,922 18,617
2001........................................................ -- 18,415
Thereafter.................................................. -- 158,785
------- --------
Total minimum lease payments................................ 13,740 $251,371
========
Less amount representing interest........................... 2,894
-------
Present value of net minimum capital lease payments......... 10,846
Less current portion........................................ 345
-------
Long-term capital lease obligations......................... $10,501
=======
</TABLE>
On January 22, 1996, the Company sold two assisted living residences for
approximately $7 million, and leased them back under a ten-year sale and
leaseback agreement. The transaction produced a gain of approximately $1
million, which was deferred and is being amortized over the lease period.
On March 26, 1996, the Company entered into an agreement with a REIT to
lease three assisted living residences, as well as to enter into a sale and
leaseback for two Company-owned residences. The total aggregate amount financed
with the REIT for the five residences was approximately $7.5 million. The
transaction produced a loss of approximately $680,000.
On December 31, 1996, the Company sold 12 assisted living residences for
approximately $45.0 million and leased them back under a 12-year sale and
leaseback agreement. The transaction produced a gain of approximately $5.7
million, which will be deferred and amortized over the lease period.
The Company is required by certain REITs to obtain a letter of credit as
collateral for leased residences. Outstanding letters of credit at December 31,
1996 and 1995 were $1,270,000 and $470,000, respectively.
(15) SUBSEQUENT EVENTS
On February 12, 1997, the Company entered into an agreement to acquire
interests in three recently constructed assisted living residences in upstate
New York with an aggregate capacity of 313 residents. The acquisition will
represent an investment by the Company of approximately $21.5 million (cash and
assumed debt).
F-17
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2 -- The Agreement and Plan of Merger, dated as of July 30, 1997,
as amended as of September 2, 1997, by and among the
Company, Merger Sub and Sterling is incorporated herein by
reference to Appendix A to the Joint Proxy
Statement/Prospectus.
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Ernst & Young LLP
99.1 -- Joint Proxy Statement and Prospectus Dated September 22,
1997*
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Alternative Living Services, Inc.:
We consent to the incorporation by reference in the registration statements
(No. 333-37737) on Form S-3, (No. 333-32907) on Form S-8 of Alternative Living
Services, Inc. and (No. 333- 38595) on Form S-8 of Alternative Living Services,
Inc. of our report dated February 21, 1997, except for note 1, which is as of
November 3, 1997, relating to the supplemental consolidated balance sheets of
Alternative Living Services, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related supplemental consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the Form 8-K/A of
Alternative Living Services, Inc.
Our report dated February 21, 1997, except for note 1, which is as of
November 3, 1997, contains an explanatory paragraph that states that the
supplemental consolidated financial statements give retroactive effect to the
merger of Alternative Living Services, Inc. and Sterling House Corporation on
October 23, 1997, which has been accounted for as a pooling-of-interests as
described in note 1 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
Alternative Living Services, Inc. and subsidiaries after financial statements
covering the date of consummation of the business combination are issued.
KPMG PEAT MARWICK LLP
Chicago, Illinois
November 5, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
Form S-8 No. 333-38595, Registration Statement Form S-3 No. 333-37737 and
related Prospectus, and Registration Statement Form S-8 No. 333-32907 of
Alternative Living Services, Inc. of our report dated February 10, 1997, with
respect to the consolidated financial statements of Sterling House Corporation
included in Amendment No. 1 to the Joint Proxy Statement of Alternative Living
Services, Inc. that is made a part of the Registration Statement and Prospectus
(Form S-4 No. 333-34851) of Alternative Living Services, Inc. for the
registration of shares of its common stock and which is incorporated by
reference in this Current Report (Form 8-K/A) pertaining to the merger between
Alternative Living Services, Inc. and Sterling House Corporation.
ERNST & YOUNG LLP
Wichita, Kansas
November 5, 1997
