<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-39705
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO
COMPLETION PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF 1933. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415
UNDER THE SECURITIES ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT AND
PROSPECTUS WILL BE DELIVERED TO PURCHASERS OF THESE SECURITIES. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 28, 1997)
$125,000,000
[ALTERNATE LIVING SERVICES LOGO]
% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
------------------------
Alternative Living Services, Inc. ("ALS" or the "Company") is hereby
offering (the "Offering") $125.0 million aggregate principal amount of %
Convertible Subordinated Debentures Due 2002 (the "Debentures"). Commencing 180
days after their issuance and thereafter at any time prior to maturity, except
as otherwise provided herein, the Debentures will be convertible, unless
previously redeemed, into shares of common stock of the Company, par value $.01
per share (the "Common Stock"), at a conversion price of $ per share,
subject to adjustment in certain events. Under certain circumstances, a portion
of the Debentures may not be converted into shares of Common Stock, in which
event the Company will be obligated to repurchase such Debentures if tendered
for conversion at a purchase price equal to 100% of the principal amount thereof
plus accrued interest thereon. See "Description of Debentures -- Conversion
Rights." Interest on the Debentures will be payable semiannually on
and of each year, commencing , 1998. Subject to certain
conditions, the Debentures will be redeemable at any time and from time to time,
on or after , 2000, at the option of the Company, in whole or in part,
at a redemption price equal to 100% of the principal amount thereof, together
with accrued interest thereon to the redemption date. Upon a Change in Control
(as defined), each holder of Debentures will have the right, subject to certain
conditions and restrictions, to require the Company to repurchase any or all
outstanding Debentures owned by such holder at 101% of the principal amount
thereof plus accrued interest thereon.
The Debentures will be unsecured and subordinated in right of payment to all
present and future Senior Indebtedness (as defined) of the Company and will be
effectively subordinated to all indebtedness and other liabilities of
subsidiaries of the Company. See "Description of Debentures." There is no
limitation on the amount of Senior Indebtedness or other liabilities that the
Company or its subsidiaries may incur in the future. At November 30, 1997, the
Company's outstanding Senior Indebtedness totaled approximately $97.6 million
and liabilities of the Company's subsidiaries totaled approximately $130.0
million, of which $71.6 million was included in Senior Indebtedness.
The Common Stock is listed on the American Stock Exchange (the "AMEX") under
the symbol "ALI." On November 28, 1997, the last sale price of the Common Stock
was $26 5/8 per share, as reported by the AMEX. See "Price Range of Common
Stock." Prior to the Offering, there has been no public market for the
Debentures. The Company will apply to list the Debentures on the AMEX.
Concurrently herewith, the Company is offering 2,800,000 shares of Common
Stock pursuant to an underwritten public offering (the "Concurrent Offering"),
excluding up to an additional 420,000 shares of Common Stock for the purpose of
covering over-allotments, if any. See "Prospectus Summary -- Concurrent
Offering."
SEE "RISK FACTORS" COMMENCING ON PAGE S-7 OF THIS PROSPECTUS SUPPLEMENT FOR
A DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE DEBENTURES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Debenture............................
- ------------------------------------------------------------------------------------------------------------------
Total.................................... $ $ $
==================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from , 1997.
(2) See "Underwriting" for indemnification arrangements.
(3) Before deducting expenses payable by the Company estimated to be $ .
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional $18.75 million principal amount of Debentures solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds
to Company will be $ , $ , and $ , respectively. See
"Underwriting."
The Debentures are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
prior conditions including the right of the Underwriters to reject orders in
whole or in part. It is expected that delivery of such Debentures will be made
in New York, New York, on or about December , 1997.
SCHRODER & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
COWEN & COMPANY
MCDONALD & COMPANY
SECURITIES, INC.
December , 1997
<PAGE> 2
[Alternative Living Services LOGO]
[MAP]
The above map indicates the locations, as of November 1, 1997, of the
Company's operating residences and residences under construction. Of the 219
residences operated by the Company, the Company owns 50, leases 101, holds
majority interests in entities which own 20 and lease 12, holds minority
interests in entities which own 11 and lease 9, and manages 16 for other owners.
In addition, the Company currently has 99 residences under construction. The
above map excludes residences under development.
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
---------------------
Sterling House(R), Crossings(R) and WovenHearts(R) are registered service
marks of the Company and the Company claims service mark protection in the marks
Alternative Living Services(SM), Wynwood (SM) and Clare Bridge(SM).
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which represent the
Company's expectations or beliefs concerning future events that involve risks
and uncertainties. All statements other than statements of historical facts
included in this Prospectus Supplement, including, without limitation, the
statements under "Prospectus Summary," "Management's Discussion and Analysis of
Combined Financial Condition and Results of Combined Operations," "Business" and
elsewhere herein, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Such forward-looking statements are subject to risks, uncertainties and
other factors which could cause actual future results or trends to differ
materially from future results or trends expressed or implied by such
forward-looking statements. The most significant of such risks, uncertainties
and other factors are discussed under the heading "Risk Factors," beginning on
page S-7 of this Prospectus Supplement, and prospective investors are urged to
consider carefully such factors.
S-2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus Supplement, in the accompanying Prospectus of the
Company dated November 28, 1997 (the "Prospectus") and in the documents
incorporated by reference. Prospective investors should carefully review the
matters set forth in this Prospectus Supplement under "Risk Factors" before
making a decision with respect to an investment in the Debentures. Unless
otherwise indicated, the information contained in this Prospectus Supplement
assumes that the Underwriters' over-allotment option will not be exercised.
THE COMPANY
Alternative Living Services, Inc. ("ALS" or the "Company") is a leading
national assisted living company, operating 219 residences with an aggregate
capacity of approximately 9,200 residents as of November 1, 1997. Of these
residences, the Company owns 50, leases 101, holds majority interests in
entities which own 20 and lease 12, holds minority interests in entities which
own 11 and lease 9, and manages 16 for other owners. The Company and its
predecessor have operated high-acuity assisted living residences since 1981, and
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, routine and skilled nursing 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" residential
settings which emphasize privacy, individual choice and independence. The
Company operates multiple residence models, each with a recognized brand name
and each serving a particular segment of the private pay elderly population.
Each residence model is designed to permit residents to age in place by meeting
their personal and health care needs across a range of pricing options.
Since 1993, the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions and mergers.
In October 1997, the Company completed its merger (the "Sterling Merger") with
Sterling House Corporation ("Sterling"), another assisted living company which
at the time operated 104 residences with an aggregate capacity of approximately
3,900 residents. As a result of the Sterling Merger, the Company added
significant depth to its experienced management team, acquired an additional
high-acuity residence model in the Sterling House residence model and
significantly expanded its presence in the Midwest and Southeast. In 1996, the
Company acquired New Crossings International Corporation ("Crossings"), an
assisted living company which operated 15 residences with a capacity of
approximately 1,420 residents throughout the Western United States, and
Heartland Retirement Services, Inc. ("Heartland"), an assisted living company
which operated 20 WovenHearts residences throughout Wisconsin. As a result of
these 1996 transactions, the Company expanded into several new geographic
markets and broadened its offering of assisted living residence models 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 (including Sterling, Crossings
and Heartland) has developed 203 residences with an aggregate capacity of
approximately 8,700 residents. The Company intends to continue its development
strategy and, at November 1, 1997, was constructing 99 residences with an
aggregate capacity of approximately 4,200 residents and was developing an
additional 74 residences with an aggregate capacity of approximately 3,200
residents. Of these residences, at least 110 are expected to open during 1998.
The Company's executive offices are located at 450 North Sunnyslope Road,
Suite 300, Brookfield, Wisconsin 53005, and its telephone number is (414)
789-9565.
S-3
<PAGE> 4
THE OFFERING
DEBENTURES OFFERED......... $125.0 million aggregate principal amount of the
Company's % Convertible Subordinated
Debentures Due 2002 ($143.8 million if the
Underwriters' over-allotment option is exercised in
full).
INTEREST PAYMENT DATES..... and , commencing
, 1998.
MATURITY................... Due on , 2002.
CONVERSION OF DEBENTURES... Commencing 180 days after issuance and thereafter
at any time prior to maturity, except as otherwise
provided herein, the Debentures will be
convertible, unless previously redeemed, into
shares of Common Stock at a price of per
share, subject to adjustment in certain events.
Under certain circumstances, a portion of the
Debentures may not be converted into shares of
Common Stock, in which event the Company will be
obligated to repurchase such Debentures if tendered
for conversion at a purchase price equal to 100% of
the principal amount thereof plus accrued interest
thereon. See "Description of
Debentures -- Conversion Rights."
OPTIONAL REDEMPTION........ Subject to certain conditions, the Debentures will
be redeemable at any time and from time to time on
or after , 2000 at the option of the
Company, in whole or in part, at a redemption price
equal to 100% of the principal amount thereof,
together with accrued interest thereon to the
redemption date.
RANKING.................... The Debentures will be subordinated to all present
and future Senior Indebtedness of the Company. In
addition, the Debentures will be effectively
subordinated to all indebtedness and other
liabilities of the Company's subsidiaries. The
Indenture will not limit the amount of Senior
Indebtedness or other liabilities the Company or
its subsidiaries may incur in the future. At
November 30, 1997, the Company's outstanding Senior
Indebtedness totaled approximately $97.6 million
and liabilities of the Company's subsidiaries
totaled approximately $130.0 million, of which
$71.6 million was included in Senior Indebtedness.
USE OF PROCEEDS............ The net proceeds from this Offering will be used
for repayment of existing indebtedness and to
finance development activities and acquisitions.
See "Use of Proceeds."
CHANGE IN CONTROL.......... Upon a Change in Control, each holder of the
Debentures will have the right, subject to certain
conditions and restrictions, to require the Company
to repurchase any or all outstanding Debentures
owned by such holder at 101% of the principal
amount thereof, plus accrued interest thereon.
CONCURRENT OFFERING
Concurrently herewith, the Company is offering 2,800,000 shares of Common
Stock (3,220,000 shares if an over-allotment option to be granted to the
underwriters in the Concurrent Offering is exercised in full). The Company
intends to use the net proceeds from the Concurrent Offering as described herein
under "Use of Proceeds." The consummation of the Concurrent Offering is not a
S-4
<PAGE> 5
condition to the consummation of the Offering, and the consummation of the
Offering is not a condition to the consummation of the Concurrent Offering.
Except where otherwise indicated, all information in this Prospectus Supplement
assumes that the underwriters of the Concurrent Offering will not exercise their
over-allotment option.
RISK FACTORS
Prospective investors should carefully consider the risk factors set forth
under the caption "Risk Factors" beginning on page S-7 of this Prospectus
Supplement.
S-5
<PAGE> 6
SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following financial data for the three years ended December 31, 1996,
1995 and 1994 are derived from the audited supplemental consolidated financial
statements of the Company included elsewhere herein. The financial data for the
nine month periods ended September 30, 1997 and 1996 are derived from the
unaudited interim supplemental consolidated financial statements of the Company
included elsewhere herein. The supplemental consolidated financial statements
give retroactive effect to the Sterling Merger consummated on October 23, 1997,
which has been accounted for as a pooling-of-interests as described in Note 1 to
the audited supplemental financial statements. In accordance with generally
accepted accounting principles, such supplemental consolidated financial
statements will become the historical consolidated financial statements of
Alternative Living Services, Inc. and subsidiaries after financial statements
covering the date of consummation of the Sterling Merger are issued. The
supplemental financial statements include all adjustments, consisting of normal
recurring accruals, that the Company considers necessary for a fair presentation
of the financial position and the results of operations for these periods.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues................................... $89,104 $35,289 $55,637 $15,061 $ 7,228
Operating loss....................................... (3,445) (4,537) (5,717) (1,765) (489)
Net income (loss).................................... $ 79 $(7,052) $(8,796) $(1,835) $(1,137)
Net income (loss) per share.......................... $ 0.00 $ (0.49) $ (0.57) $ (0.21) $ (0.21)
Weighted average number of common shares
outstanding........................................ 18,989 14,395 15,429 8,929 5,469
OPERATING DATA:
Residences at period end............................. 208 104 135 36 22
Resident capacity at period end...................... 8,738 4,022 5,250 1,132 642
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------------------------------------
PRO AS FURTHER
ACTUAL FORMA(1) AS ADJUSTED(2) ADJUSTED(3)
-------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 19,566 $ 28,809 $100,434 $171,007
Working capital (deficit)......................... (8,231) 7,182 98,853 169,426
Total assets...................................... 366,587 340,249 415,249 485,822
Long-term obligations, net of current
maturities...................................... 195,478 170,478 265,524 265,524
Stockholders' equity.............................. 91,263 91,263 91,263 161,836
</TABLE>
- ---------------
(1) Reflects the effect of a sale/leaseback transaction which occurred on
November 21, 1997. See "Capitalization."
(2) Reflects the sale of $125.0 million aggregate principal amount of the
Debentures in the Offering and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
(3) Reflects the sale of 2,800,000 shares of Common Stock in the Concurrent
Offering at an assumed public offering price of $26.625 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
S-6
<PAGE> 7
RISK FACTORS
An investment in the Debentures offered hereby involves various risks.
Prospective investors are urged to carefully consider each of the following
risks, in conjunction with the other information contained in this Prospectus
Supplement and in the accompanying Prospectus, before purchasing any Debentures
of the Company.
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS
Giving effect to the Sterling Merger, (i) the Company had lease expense of
$9.0 million and $18.1 million for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, and (ii) the Company's total
indebtedness as of September 30, 1997 was $222.4 million, and its net interest
expense was $3.2 million for the year ended December 31, 1996 and $2.2 million
for the nine months ended September 30, 1997. Debt and annual operating lease
payment obligations will continue to increase significantly as the Company
pursues its growth strategy. In addition, the Company anticipates that future
development of residences may be financed with construction loans and,
therefore, there is a risk that, upon completion of construction, permanent
financing for newly developed residences may not be available or may be
available only on terms that are unfavorable or unacceptable to the Company.
The Company has not had sufficient earnings on a historical basis (or on a
pro forma basis giving effect to the Offering) to cover fixed charges. See
"Ratio of Earnings to Fixed Charges" in the Prospectus. Giving effect to the
Sterling Merger, earnings of the Company were insufficient to cover fixed
charges by $10.7 million for the year ended December 31, 1996 and $10.2 million
for the nine months ended September 30, 1997. There can be no assurance that the
Company will generate sufficient cash flow to meet its future obligations. Any
payment default or other default with respect to such obligations could cause
the lender to foreclose upon the residences securing the indebtedness or, in the
case of an operating lease, to terminate the lease, with a consequent loss of
income and asset value to the Company. Moreover, because of cross-default and
cross-collateralization provisions in certain mortgages and debt instruments of
the Company and in most of its leases, a default by the Company on one of its
payment obligations could result in acceleration of other obligations and
adversely affect a significant number of its other residences. See "-- Need for
Additional Financing; Risk of Rising Interest Rates."
HISTORY OF OPERATING LOSSES
The Company has experienced significant operating losses and net losses in
each year since inception, primarily as a result of its development,
construction and residence lease-up activities as well as the incurrence of
certain expenses to establish corporate infrastructure to support future planned
growth. Giving effect to the Sterling Merger, (i) for the years ended December
31, 1994, 1995 and 1996, the Company incurred operating losses of $489,000, $1.8
million and $5.7 million, respectively, and net losses of $1.1 million, $3.0
million and $8.8 million, respectively, and (ii) for the nine months ended
September 30, 1997, the Company incurred an operating loss of $3.4 million and
net income of $79,000.
Newly opened assisted living residences typically operate at a loss during
the first six to 12 months of operation, primarily due to the incurrence of
certain fixed and variable expenses in advance of the achievement of targeted
rent and service fee revenues from the lease-up of such residences. As of
November 1, 1997, of the Company's 219 residences, 90 had been open for 12
months or less. In addition, the development and construction of assisted living
residences requires the commitment of substantial capital over a typical six- to
12-month construction period, the consequence of which may be an adverse impact
on the Company's liquidity. As of November 1, 1997, the Company had 99
residences under construction and an additional 74 residences under development.
In the case of acquired residences, resident turnover and increased marketing
expenditures which may be required to reposition such residences, together with
the possible
S-7
<PAGE> 8
disruption of operations resulting from the implementation of renovations, may
adversely impact the financial performance of such residences for a period of
time after their acquisition. In addition, occupancy levels and the rates which
the Company may be able to charge for its services may be adversely affected in
competitive market circumstances which would negatively impact the operating
results of affected residences. Accordingly, there can be no assurance that the
Company will not experience unforeseen expenses, difficulties, complications and
delays which could result in greater than anticipated operating losses or
otherwise materially adversely affect the Company's financial condition and
results of operations. See "-- Development and Construction Risks" and
"-- Competition."
INTEGRATION OF OPERATIONS FOLLOWING THE STERLING MERGER; ANTICIPATED MERGER
RESTRUCTURING CHARGE
The Sterling Merger, which was consummated on October 23, 1997, involves
the integration of two companies that have previously operated independently.
Among the factors considered by the Board of Directors of the Company in
connection with its approval of the Sterling Merger were the opportunities for
operating efficiencies that may result from the Sterling Merger. While the
Company would expect to achieve certain operating efficiencies as a result of
the Sterling Merger, no assurance can be given that difficulties will not be
encountered in integrating the operations of the Company and Sterling or that
the benefits expected from such integration will be realized. In addition,
management of the Company expects to devote significant attention to efforts to
integrate the operations of the two companies, which effort may affect such
management's ability to manage ongoing operations and expansion efforts. Any
delays or unexpected costs incurred in connection with such integration could
have a material adverse effect on the business, results of operations or
financial condition of the Company.
Significant expenses are expected to be incurred in connection with the
consolidation and integration of the Company and Sterling as a result of the
Sterling Merger. Such activities may include restructuring regional and
corporate functions, consolidating information systems, integrating operations,
and other personnel costs. In addition, under the pooling-of-interests
accounting method, direct transaction costs are expensed in the period in which
the transaction is consummated. Such costs include investment banking, legal,
accounting, printing, solicitation and filing fees, and similar expenses. The
Company anticipates recording charges to earnings in the quarter ending December
31, 1997 related to the Sterling Merger in an aggregate range of $9.0 million to
$11.0 million. A portion of these charges to earnings will be identified as
non-recurring merger charges in the Company's financial statements for such
quarter.
INSUFFICIENT AUTHORIZED SHARES OF COMMON STOCK TO SATISFY CONVERSION OF
DEBENTURES; INCREASE IN AUTHORIZED SHARES
The Debentures to be issued in the Offering will be convertible commencing
180 days after their issuance into an aggregate of approximately million
shares of Common Stock, based on an assumed conversion price of $ per share.
The Company's Restated Certificate of Incorporation, as amended (the
"Certificate"), authorizes the issuance of 5,000,000 shares of preferred stock
and 30,000,000 shares of Common Stock. After giving effect to the sale of
2,800,000 shares in the Concurrent Offering and the reservations of shares
issuable upon conversion of the 6.75% Debentures and 7% Debentures and the
exercise of stock options previously granted or available for grant under the
Company's stock option plans, the Company will have 2,615,369 shares of
authorized but unissued Common Stock. As a result, the Company will not have
sufficient authorized shares of Common Stock to fully satisfy its obligations
with respect to the conversion of the Debentures to be issued in the Offering.
The Company has agreed to seek stockholder approval of an amendment to the
Certificate (the "Charter Amendment") to increase the number of authorized
shares of Common Stock to a number sufficient to permit the 100% conversion of
the Debentures. Directors of the Company and certain of their affiliates
beneficially owning in the aggregate approximately 27.4% of the outstanding
shares of Common Stock prior to the Concurrent
S-8
<PAGE> 9
Offering and approximately 22.9% of the outstanding shares of Common Stock after
the Concurrent Offering (22.4% if the Underwriters' over-allotment option in the
Concurrent Offering is exercised in full) have indicated their intent to vote in
favor of the Charter Amendment. If and for so long as the Charter Amendment is
not approved by the Company's stockholders, holders of a portion of the
Debentures may not be able to convert such Debentures into shares of Common
Stock and as a result such holders would be precluded from benefiting from the
conversion feature.
Pursuant to the terms of the Debentures, a holder of Debentures who seeks
to convert his Debentures into Common Stock at a time that the Company does not
have sufficient authorized shares of Common Stock to satisfy such conversion
will have the right to require the Company to repurchase his Debentures for an
amount payable in cash equal to the principal amount of such Debentures plus
accrued and unpaid interest thereon. There can be no assurance that the Company
will have sufficient capital resources available to satisfy its obligations with
respect to the repurchase of any Debentures. In addition, until the Charter
Amendment is approved, the Company will not be permitted (i) to exercise its
right to voluntarily redeem the Debentures at any time on or after ,
2000 or (ii) to issue additional shares of Common Stock or securities
convertible into or exchangeable for Common Stock except for employee stock
options to acquire Common Stock granted under the Company's existing stock
option plans. If and for so long as the Company is unable to secure stockholder
approval of the Charter Amendment, the Company will be prohibited from issuing
Common Stock in connection with financing, acquisition or other transactions,
which may preclude the Company from raising additional equity capital or
effecting acquisitions or other transactions that may be in the best interest of
the Company. No assurances can be given that a failure to secure such
stockholder approval of the Charter Amendment will not have a material adverse
effect upon the price of the Common Stock or the Debentures. See "-- Need for
Additional Financing; Rising Interest Rates."
SUBORDINATION OF DEBENTURES
The Debentures will be unsecured and subordinated in right of payment in
full to all existing and future Senior Indebtedness (as defined in the
accompanying Prospectus) of the Company. As a result of such subordination, in
the event of bankruptcy, liquidation or reorganization of the Company, or upon
the acceleration of any Senior Indebtedness, the assets of the Company will be
available to pay obligations on the Debentures only after all Senior
Indebtedness has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on any or all of the Debentures then outstanding.
The Company expects from time to time to incur additional indebtedness,
including indebtedness that would constitute Senior Indebtedness. The Debentures
are also structurally subordinated to all indebtedness and other liabilities,
including trade payables, of the Company's subsidiaries, including joint venture
entities. The Indenture (as defined in the accompanying Prospectus) does not
prohibit or limit the incurrence of additional indebtedness, including Senior
Indebtedness, by the Company or its subsidiaries and the incurrence of
additional indebtedness by the Company or its subsidiaries could adversely
affect the Company's ability to pay its obligation on the Debentures. As of
November 30, 1997, the Company's outstanding Senior Indebtedness totaled
approximately $97.6 million and liabilities of the Company's subsidiaries
totaled approximately $130.0 million, of which $71.6 million was included in
Senior Indebtedness.
ABILITY TO CONTINUE GROWTH; ABILITY TO MANAGE RAPID EXPANSION AND BUSINESS
DIVERSIFICATION
The Company has and expects to continue to pursue an aggressive expansion
strategy focused on developing, constructing and acquiring assisted living
residences. The Company is currently managing significant construction and
development activity. Accordingly, the Company's prospects are directly affected
by its ability to develop, construct and, to a lesser extent, acquire additional
S-9
<PAGE> 10
residences. The Company's ability to continue to grow will depend in large part
on its ability to identify suitable and affordable development and acquisition
opportunities and successfully pursue such opportunities, identify and obtain
necessary financing commitments and effectively operate its assisted living
residences. There can be no assurance, however, that the Company will be
successful in developing, constructing or acquiring any additional residences or
that it will be able to continue to achieve or exceed its historical growth
rate.
The Company's rapid expansion places significant demands on the Company's
management and operating personnel. The Company's ability to manage its recent
and future growth effectively will require it to continue to improve its
operational, financial and management information systems and to continue to
attract, retain, train, motivate and manage key employees. If the Company is
unable to manage its growth effectively, its business, operating results and
financial condition will be adversely affected.
Management of the Company intends to review and, in appropriate
circumstances, pursue opportunities for development and expansion of new
products and services, such as home health care, rehabilitation and pharmacy
services. Efforts to achieve such business diversification, however, are subject
to certain risks, including management's relative unfamiliarity with such
businesses, additional uncertainties related to government regulation and
possible difficulties in integrating new products or businesses.
DEVELOPMENT AND CONSTRUCTION RISKS
The Company's growth strategy is dependent, in part, on its ability to
develop and construct a significant number of additional residences. As of
November 1, 1997, the Company had 99 residences under construction and 74
residences under development. Development projects generally are subject to
various risks, including zoning, permitting, health care licensing and
construction delays, that may result in construction cost overruns and longer
development periods and, accordingly, higher than anticipated start-up losses.
Project management is subject to a number of contingencies over which the
Company will have little or no control and which might adversely affect project
costs and completion time. Such contingencies include shortages of, or the
inability to obtain, labor or materials, the inability of the general contractor
or subcontractors to perform under their contracts, strikes, adverse weather
conditions and changes in applicable laws or regulations or in the method of
applying such laws and regulations. In addition, the Company's construction
management subsidiary serves as general contractor on many of the Company's
residences in construction and development, and, accordingly, in these instances
the Company may not have the same contractual recourse for construction delays
and defects as would generally be available were a third party general
contractor engaged to construct these residences. As a result of these various
factors, there can be no assurance that the Company will not experience
construction delays, that it will be successful in developing and constructing
currently planned or additional residences or that any developed residence will
be economically successful. If the Company's planned development is delayed, the
Company's business, operating results and financial condition could be adversely
affected.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has acquired residences in the past and intends to continue to
seek acquisition opportunities in the future. However, no assurances can be
given that the Company will be successful in identifying any future acquisition
opportunities or completing any identified acquisitions. The acquisition of
residences involves a number of risks. Existing residences available for
acquisition frequently serve or target different market segments than those
presently served by the Company. It may be necessary in such cases to reposition
and renovate acquired residences or turn over the existing resident population
to achieve a resident acuity and income profile which is consistent with the
Company's current operations. In addition, the Company may also determine that
staff and operating management personnel changes are necessary to successfully
integrate
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<PAGE> 11
such residences into the Company's existing operations. No assurances can be
made that management will be successful in repositioning any acquired residences
or in effecting any necessary operational or structural changes and improvements
on a timely basis. Any failure by the Company to make necessary operational or
structural changes or to successfully reposition acquired residences may
adversely impact the Company's business, operating results and financial
condition. In undertaking acquisitions of residences, the Company also may be
adversely impacted by unforeseen liabilities attributable to the prior operators
of such residences, against whom the Company may have little or no recourse.
NEED FOR ADDITIONAL FINANCING; RISK OF RISING INTEREST RATES
To achieve its growth strategy, the Company will need to obtain sufficient
financing to fund its continued development, construction and acquisition
activities. Accordingly, the Company's future growth will depend on its ability
to obtain additional financing on acceptable terms. The Company has executed
non-binding letters of intent with four health care REITs for financing
commitments aggregating approximately $574.0 million (of which $325.9 million
has been utilized in sale /leaseback and mortgage financing transactions through
November 30, 1997) and with conventional mortgage lenders for construction and
long- term mortgage financing aggregating $130.0 million ($8.0 million of which
has been used as of November 30, 1997). The Company's management believes
financing available pursuant to these arrangements, and pursuant to other
sources of financing, will be sufficient to fund its development and acquisition
programs for at least the next 12 months. The Company will from time to time
seek additional funding through public or private financing, including equity or
debt financing. If additional funds are raised by issuing equity securities, the
Company's stockholders may experience dilution. In addition, the Company will
require significant financial resources to meet its operating and working
capital needs, including contractual obligations to purchase the equity interest
of joint venture portions in residences owned in joint ventures. See "-- Joint
Ventures and Related Mandatory Purchase Obligations." There can be no assurance
that any newly constructed residences will achieve a stabilized occupancy rate
and attain a resident mix that meet the Company's expectations or generate
sufficient positive cash flow to cover operating and financing costs associated
with such residences. There can be no assurance that the Company will be
successful in securing additional financing or that adequate funding will be
available and, if available, will be on terms that are acceptable to the
Company. A lack of funds may require the Company to delay or eliminate all or
some of its development projects and acquisition plans. In addition, the Company
may require additional financing to enable it to acquire additional residences,
to respond to changing economic conditions, to expand the Company's development
program or to account for changes in assumptions related to its development
program.
Approximately $21.0 million, or 10%, of the Company's total indebtedness as
of November 30, 1997 was subject to floating interest rates. Although a majority
of the debt and lease payment obligations of the Company are not subject to
floating interest rates, indebtedness that the Company may incur in the future
may bear interest at a floating rate. In addition, future fixed rate
indebtedness and lease obligations will be based on interest rates prevailing at
the time such arrangements are obtained. Therefore, increases in prevailing
interest rates could increase the Company's interest or lease payment
obligations and could have an adverse effect on the Company's business,
financial condition and results of operations.
JOINT VENTURES AND RELATED MANDATORY PURCHASE OBLIGATIONS
The Company has entered into several joint ventures with regional real
estate development partners and others for the construction, development and
ownership of assisted living residences in targeted geographic areas. As of
November 1, 1997, 52 of the Company's operating residences were jointly owned,
directly or indirectly, with venture partners. Of the 173 residences which were
either under construction or development by the Company as of November 1, 1997,
a significant portion of such residences are being or will be constructed or
developed under joint venture
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<PAGE> 12
agreements. There can be no assurance that these joint venture development
partners will be successful in identifying sites for future residences, securing
necessary permits and licenses for the construction of new residences and
supervising the construction of new residences on time and within budget. In
addition, the Company has agreed not to own or operate competing assisted living
residences during specified contractual periods within specified geographic
areas adjacent to residences developed through certain of its joint ventures.
While the Company typically receives a fee for managing residences developed
through joint ventures, it shares with its joint venture partners any profits or
losses realized from the operation or sale of such residences. The Company is
obligated under its joint venture arrangements to purchase the equity interests
of its joint venture partners upon the election of such joint venture partners
at a price based on either a formula price or the appraised value of the
residence owned by the applicable joint venture. These purchase rights generally
become exercisable during the first six months to two years following the
opening of the residence owned by such joint venture. As a result of these
provisions, the Company might become obligated to acquire additional interests
in residences developed through joint ventures on terms or at times that would
otherwise not be acceptable to the Company, including times during which the
Company may not have adequate liquidity to fund such acquisitions.
RESIDENCE MANAGEMENT, STAFFING AND LABOR COSTS
The Company competes with other providers of long-term care with respect to
attracting and retaining qualified and skilled personnel. The Company will be
dependent upon its ability to attract and retain management personnel
responsible for the day-to-day operations of each of the Company's residences.
Any inability of the Company to attract or retain qualified residence management
personnel could have a material adverse effect on the Company's financial
condition or results of operations. In addition, a possible shortage of nurses
or trained personnel may require the Company to enhance its wage and benefits
package in order to compete in the hiring and retention of such personnel. The
Company will also be dependent upon the available labor pool of semi-skilled and
unskilled employees in each of the markets in which it operates. No assurance
can be given that the Company's labor costs will not increase, or that, if they
do increase, they can be matched by corresponding increases in rates charged to
residents. Any significant failure by the Company to attract and retain
qualified management and staff personnel, to control its labor costs or to pass
on any increased labor costs to residents through rate increases would have a
material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION
The long-term care industry is highly competitive and, given the relatively
low barriers to entry and continuing health care cost containment pressures, the
Company expects that the assisted living segment of such industry will become
increasingly competitive in the future. The Company competes with other
companies providing assisted living services as well as numerous other companies
providing similar service and care alternatives, such as home health care
agencies, congregate care facilities, retirement communities and skilled nursing
facilities. While the Company believes there is a need for additional assisted
living residences in the markets where the Company is constructing and
developing residences, the Company expects that, as assisted living residences
receive increased market awareness and the number of states which include
assisted living services in their Medicaid programs increases, competition will
increase from new market entrants, many of whom may have substantially greater
financial resources than the Company. No assurance can be given that increased
competition will not adversely affect the Company's ability to attract or retain
residents or maintain its existing rate structures. Moreover, in implementing
its growth strategy, the Company expects to face competition for development and
acquisition opportunities from local developers and regional and national
assisted living companies. Some of the Company's present and potential
competitors have, or may have access to, greater financial resources than those
of the Company. Consequently, there can be no assurance that the Company will
not encounter increased competition in the future which could limit its ability
to attract and retain residents, to maintain or
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<PAGE> 13
increase resident service fees or to expand its business and could have a
material adverse effect on the Company's financial condition, results of
operations and prospects.
Management of the Company is not able to predict the effect that the health
care industry trend towards managed care will have on the assisted living
marketplace. Managed care, an arrangement whereby service and care providers
agree to sell specifically defined services to one or more public or private
payors (frequently not the end user or resident) subject to a predefined system
in an effort to achieve more efficiency with respect to utilization and cost, is
not currently a significant factor in the assisted living marketplace. However,
managed care plans sponsored by insurance companies or HMOs may in the future be
a factor in the assisted living marketplace. There can be no assurance that the
Company will not encounter increased competition or be subject to other
competitive pressures that could affect its business, results of operation or
financial condition as a result of managed care.
GOVERNMENT REGULATION
Health care is an area of extensive and frequent regulatory change. The
assisted living industry is relatively new, and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels is evolving.
Changes in the laws or new interpretations of existing laws may have a
significant impact on the Company's methods and costs of doing business. The
Company is, and will be, subject to varying degrees of regulation and licensing
by health or social service agencies and other regulatory authorities in the
various states and localities where they operate or intend to operate.
The Company and its activities are subject to zoning, health and other
state and local government regulations. Zoning variances or use permits are
often required for construction. Severely restrictive regulations could impair
the ability of the Company to open additional residences at desired locations or
could result in costly delays. Several of the Company's residences have been
financed by revenue bonds. In order to continue to qualify for favorable tax
treatment of the interest payable on certain of these bonds, the financed
residences must comply with certain federal income tax requirements, principally
pertaining to the maximum income level of a specified portion of the residents.
Failure to satisfy these requirements constitutes an event of default under the
bonds, thereby accelerating their maturity.
The Company's success will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses in rapidly changing regulatory environments. Any failure to satisfy
applicable regulations or to procure or maintain a required license could have a
material adverse effect on the Company's financial condition, results of
operations and prospects. The Company's operations could also be adversely
affected by, among other things, regulatory developments such as revisions in
building code requirements for assisted living residences, mandatory increases
in the scope and quality of care to be offered to residents and revisions in
licensing and certification standards. There can be no assurance that Federal,
state or local laws or regulations will not be imposed or expanded which
adversely impact the Company's business, financial condition, results of
operations or prospects. The Company's residence operations are also subject to
health and other state and local government regulations.
The Company has sold franchises for its Sterling House model and may sell
on a limited basis franchises for such model in the future. 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 conducts franchise operations. Principally, these regulations require
that certain written disclosures be made prior to the sale of a franchise. In
addition, some states have relationship laws which prescribe the basis for
terminating a franchisee's rights and regulate both the franchisor's and its
franchisees' post-termination rights and obligations. There can be no assurance
that changes in such regulations will not have an adverse impact upon the
ability of the combined company to continue its franchising activities.
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<PAGE> 14
The Company intends to review and, in appropriate circumstances, pursue
opportunities for development and expansion into new products and services.
These new products and services may include home health care, rehabilitation and
pharmacy services. The Federal and state regulation of such additional products
and services may be more evolved and extensive than that related to the
Company's assisted living operations. The Company has not in the past engaged in
significant activities outside of its core assisted living business. Should the
Company expand into new products and services, the Company will be subject to
additional Federal, state and local laws and regulations. Non-compliance with
such regulations could have a material adverse effect on the Company's business,
financial condition, results of operations or prospects.
LIABILITY AND INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the long-term care industry have
become subject to an increasing number of lawsuits alleging malpractice or
related legal theories, many of which involved large claims and resulted in the
incurrence of significant defense costs. In addition, compared to more
institutional long-term care facilities, assisted living residences (especially
dementia care residences) of the type operated by the Company offer residents a
greater degree of independence in their daily lives. This increased level of
independence, however, may subject the resident and the Company to certain risks
that would be reduced in more institutionalized settings. The Company currently
maintains liability insurance intended to cover such claims which it believes is
adequately based on the nature of the risks, historical experience and industry
standards. There can be no assurance, however, that claims in excess of such
insurance or claims not covered by insurance, such as claims for punitive
damages, will not arise. A successful claim against the Company not covered by,
or in excess of, its insurance could have a material adverse effect upon the
Company's financial condition and results of operations. Claims against the
Company, regardless of their merit or eventual outcome, may also have a material
adverse effect upon the Company's ability to attract or retain residents or
expand its business and may require management to devote substantial time to
matters unrelated to day-to-day operations. In addition, insurance policies must
be renewed annually. There can be no assurance that the Company will be able to
obtain liability insurance in the future or that, if such insurance is
available, it will be available on acceptable economic terms.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
The Company currently relies, and for the foreseeable future, the Company
expects to rely, primarily on the ability of its residents to pay for services
from their own and their families' financial resources. Generally, only elderly
adults with income or assets meeting or exceeding the comparable median in the
region where assisted living residences of the Company are located can afford
the fees for such residences. Inflation or other circumstances which adversely
affect the ability of residents and potential residents to pay for assisted
living services could have an adverse effect on the Company. In the event that
the Company encounters difficulty in attracting seniors with adequate resources
to pay for the Company's services, the Company would be adversely affected.
ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean up responsibility and liability without regard to
whether the owner knew of or caused the presence of contaminants, and liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation or responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of
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<PAGE> 15
such substances, or the failure to properly remediate such property, may
adversely affect the owner's ability to sell or lease such property or to borrow
using such property as collateral. In addition, some environmental laws create a
lien on the contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site.
With the exception of four Sterling House residences operated by the
Company or its predecessors since prior to 1995, the Company has conducted
environmental assessments of all of its operating residences and has conducted,
or is in the process of conducting, environmental assessments of all of its
undeveloped sites and sites currently under construction. These assessments have
not revealed, and the Company is not otherwise aware of, any environmental
liability that it believes would have a material adverse effect on the Company's
business, assets or results of operations. There can be no assurance, however,
that environmental assessments would detect all environmental contamination
which may give rise to material environmental liabilities. The Company believes
that its respective residences are in compliance in all material respects with
all applicable environmental laws. The Company has not been notified by any
governmental authority, or is otherwise aware, of any material non-compliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with any of the residences its currently operates.
ANTI-TAKEOVER PROVISIONS
The Certificate authorizes the issuance of 5,000,000 shares of preferred
stock and 30,000,000 shares of Common Stock. The Company intends to seek an
increase in its authorized Common Stock at its 1998 Annual Meeting of
Stockholders. Subject to the rules of the American Stock Exchange ("AMEX") upon
which the Common Stock is listed, the Board of Directors of the Company has the
power to issue any or all of the authorized and unissued shares without
stockholder approval, and the preferred shares can be issued with such rights,
preferences and limitations as may be determined by the Company's Board. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of any holders of preferred stock that may be issued in
the future. The Company presently has no commitments or contracts to issue any
additional shares of Common Stock (other than pursuant to the exercise of
outstanding stock options or the conversion of the 6.75% Debentures and 7%
Debentures or the Debentures) or any shares of preferred stock. Authorized and
unissued preferred stock and Common Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
delay, discourage, hinder or preclude an unsolicited acquisition of the Company,
could make it less likely that stockholders receive a premium for their shares
as a result of any such attempt and could adversely affect the market price of
and the voting and other rights of the holders of outstanding shares of Common
Stock. As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL") which, in general, prevents an
"interested stockholder" (defined generally as a person owing 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) for three years following the date such
person became an interested stockholder unless certain conditions are satisfied.
S-15
<PAGE> 16
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices of the Common Stock.
In connection with the Sterling Merger, the Company issued 5,549,760 shares
of Common Stock to holders of the common stock of Sterling. Up to 46% of such
shares are available for sale by the holders thereof pursuant to Rule 145
adopted by the Commission under the Securities Act upon the publication by the
Company of financial results covering at least 30 days of post-Sterling Merger
combined operations, and the remainder of such shares are available for
immediate resale by the holders thereof.
Approximately 51.1% of the outstanding shares of Common Stock was offered
and sold in reliance upon exemptions from registration under the Securities Act
and, accordingly, such shares are "restricted shares" for purposes of Rule 144
adopted under the Securities Act ("Restricted Shares"). The substantial majority
of the Restricted Shares are currently either freely tradeable without
restriction or limitation under the Securities Act or may be sold in the public
market pursuant to Rule 144 promulgated under the Securities Act, subject to the
volume and resale restrictions of such rule, and subject to 90-day lock-up
agreements with the Underwriters.
Holders of the 6.75% Debentures and 7% Debentures have the right to convert
such debentures into Common Stock at a conversion price of $20.38 or $20.25 per
share, respectively, at any time after the registration statements which have
been or will be filed by the Company with respect thereto are declared effective
by the Commission. If holders elect to convert all of the such debentures into
shares of Common Stock, the Company would issue an additional 4,186,353 shares
of Common Stock.
The holders of the Debentures to be issued in the Offering will have the
right, subject to the conditions described herein, to convert the Debentures
into Common Stock commencing 180 days after their issuance into an aggregate of
shares of Common Stock, based on an assumed conversion price of
$ per share. After giving effect to the issuance of 2,800,000 shares
pursuant to the Concurrent Offering and the reservations of shares issuable upon
conversion of the 6.75% Debentures and the 7% Debentures and the exercise of
stock options previously granted or available for grant under the Company's
existing stock option plans, the Company will not have sufficient authorized
shares of Common Stock to fully satisfy its obligations with respect to the
conversion of the Debentures to be issued in the Offering. However, a holder of
the Debentures to be issued in the Offering will be permitted to convert his
Debentures to the extent that authorized and unissued shares of Common Stock are
available to fully satisfy the conversion of his Debenture. The Company has
agreed to seek stockholder approval of the Charter Amendment to increase the
number of authorized shares of Common Stock to a number sufficient to permit the
100% conversion of the Debentures. See "-- Insufficient Authorized Shares of
Common Stock to Satisfy Conversion of Debentures; Increase in Authorized
Shares."
POSSIBLE PRICE VOLATILITY OF THE COMMON STOCK
The market price of the Debentures offered hereby could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the market for the Debentures offered hereby, variations in the
Company's operating results, and new statutes or regulations or changes in the
interpretation of existing statutes or regulations affecting the health care
industry generally or the assisted living industry in particular. In addition,
the stock market in recent years has experienced broad price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These market fluctuations also may adversely affect the
market price of the Common Stock.
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the offering of the $125.0 million
aggregate principal amount of Debentures offered hereby are estimated to be
approximately $121.6 million ($139.9 million if the Underwriters' over-allotment
option is exercised in full). The net proceeds to the Company from the
Concurrent Offering (based on an assumed offering price of $26.625 per share)
are estimated to be $70.6 million ($81.2 million if the Underwriters'
over-allotment option is exercised in full). If both the Offering and the
Concurrent Offering are completed, the total combined net proceeds to the
Company from the Offering and the Concurrent Offering are estimated to be $192.2
million ($221.1 million if the Underwriters' over-allotment options are
exercised in full).
The Company intends to use the net proceeds from the Offering and, if
consummated, the Concurrent Offering: (i) to repay bridge financing incurred in
connection with its acquisition activities, which represented aggregate
principal obligations and accrued interest through September 30, 1997 of $15.0
million (the "Bridge Loan"); (ii) to repay mortgage notes aggregating $5.6
million incurred in connection with the acquisition of the Wynwood of Sarasota
residence in 1995 (the "Sarasota Notes"); (iii) to repay $8.3 million of
indebtedness encumbering the Loma Linda, California residence (the "Loma Linda
Note") incurred in January 1996; (iv) to repay $5.0 million of working capital
borrowings incurred in 1997 under a bank line of credit accruing interest at the
prime rate; (v) to repay an aggregate of $16.1 million of construction loans on
certain residences incurred in 1996 and 1997 (the "Construction Loans"); (vi) to
finance the development and construction of additional residences; and (vii) for
general corporate purposes, including working capital.
The Bridge Loan was incurred in April 1997 and matures in April 1998. The
Bridge Loan bears interest at a rate of prime plus 1%. The proceeds from the
Bridge Loan were used to acquire three New York residences. The Sarasota Notes
are due in 2000 and bear interest at 9.2% per annum as to $4.2 million of
principal amount outstanding and prime plus 1% as to the remaining principal
amount outstanding. The Loma Linda Note is due 1999 and bears interest at 9.75%
per annum. The Construction Loans at September 30, 1997 were comprised of
promissory notes in the aggregate principal amount of $16.1 million bearing
interest at rates between 8.2% and prime plus 1.0% and maturing at various dates
between 2000 and 2009.
The Company expects to use the remaining net proceeds not used to repay
debt identified above primarily to finance the development and construction of
assisted living residences. The estimated cost to complete and lease up
residences under construction or development during the next 18 months is
approximately $525 million. To finance a portion of its development program, the
Company has executed non-binding letters of intent with several health care
REITs for financing commitments aggregating approximately $574 million (of which
$326 million has been used in sale/ leaseback and mortgage financing
transactions through November 30, 1997) and has obtained $130 million of
commitments from conventional financing lenders (of which $8 million has been
utilized at November 30, 1997). The Company may also use the net proceeds to
finance further development and construction or, if appropriate opportunities
arise, the acquisition of existing assisted living operations or the possible
acquisition of its joint venture partners' equity interest in certain of the
residences operated by the Company. See "Business -- Joint Ventures and
Strategic Alliances."
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<PAGE> 18
PRICE RANGE OF COMMON STOCK
The Common Stock has been listed on the AMEX since August 6, 1996 under the
trading symbol "ALI." The following table sets forth, for the periods indicated,
the high and low sales prices per share of Common Stock, as reported on the
AMEX:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Quarter Ended September 30, 1996 (commencing August 6,
1996)..................................................... $15 1/8 $12 7/8
Quarter Ended December 31, 1996............................. 15 1/4 10 7/8
YEAR ENDING DECEMBER 31, 1997
Quarter Ended March 31, 1997................................ 17 7/8 11 7/8
Quarter Ended June 30, 1997................................. 23 1/2 14 5/8
Quarter Ended September 30, 1997............................ 26 1/2 20 13/16
Quarter Ending December 31, 1997 (through November 28,
1997)..................................................... 27 3/8 23 5/16
</TABLE>
On November 28, 1997, the reported last sale price for the Common Stock on
the AMEX was $26 5/8 per share.
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<PAGE> 19
CAPITALIZATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth the consolidated capitalization of the
Company (i) at September 30, 1997 (derived from the Company's Supplemental
Consolidated Balance Sheet of September 30, 1997 included elsewhere herein,
which reflects the Sterling Merger as a pooling-of-interest transaction), (ii)
as adjusted to reflect the $62.0 million Sale/Leaseback Transaction, (iii) as
further adjusted to give effect to the sale by the Company of $125.0 million in
aggregate principal amount of the Debentures in the Offering and the application
of the estimated net proceeds therefrom as set forth under "Use of Proceeds,"
(iv) as further adjusted to give effect to the sale by the Company of 2,800,000
shares of Common Stock in the Concurrent Offering at an assumed public offering
price of $26.625 per share and the application of the estimated net proceeds
therefrom as set forth under "Use of Proceeds," and (v) as further adjusted to
give effect to the 100% conversion of the Company's outstanding 6.75% Debentures
and 7% Debentures and the Debentures. The capitalization table should be read in
connection with the Company's supplemental consolidated financial statements and
related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------------------------------------
AS FURTHER
AS FURTHER ADJUSTED
AS ADJUSTED FOR ADJUSTED FOR THE ASSUMING
SALE/LEASEBACK FOR THE CONCURRENT 100%
ACTUAL TRANSACTION OFFERING OFFERING CONVERSION
-------- --------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents......................... $ 19,566 $ 28,809 $100,434 $171,007 $171,007
======== ======== ======== ======== ========
Short-term debt:
Current installments of long-term debt.......... $ 916 $ 916 $ 916 $ 916 $ 916
Notes payable(1)................................ 26,046 20,046 -- -- --
-------- -------- -------- -------- --------
Total short-term debt.................... 26,962 20,962 916 916 916
======== ======== ======== ======== ========
Long-term debt, less current installments:
Senior long-term debt(1)........................ 110,478 85,478 55,524 55,524 55,524
7% Convertible Subordinated Debentures due
2004.......................................... 50,000 50,000 50,000 50,000 --
6.75% Convertible Subordinated Debentures due
2006.......................................... 35,000 35,000 35,000 35,000 --
% Convertible Subordinated Debentures due 2002.. -- -- 125,000 125,000 --
-------- -------- -------- -------- --------
Total long-term debt..................... 195,478 170,478 265,524 265,524 55,524
-------- -------- -------- -------- --------
Minority interest................................. 12,614 12,614 12,614 12,614 12,614
Stockholders' equity:
Preferred stock, $0.01 par value per share;
5,000,000 shares authorized, none issued...... -- -- -- -- --
Common stock, $0.01 par value per share;
30,000,000 shares authorized; 18,575,524
shares issued and outstanding as of September
30, 1997 and as adjusted for Sale/Leaseback
Transaction and the Offering; 21,381,134
shares issued and outstanding as adjusted for
the Concurrent Offering; shares
issued and outstanding assuming 100%
conversion(2)................................. 186 186 186 214
Additional paid-in capital...................... 104,258 104,258 104,258 174,803
Accumulated deficit............................. (13,181) (13,181) (13,181) (13,181) (13,181)
-------- -------- -------- -------- --------
Total stockholders' equity.................... 91,263 91,263 91,263 161,836 365,211
-------- -------- -------- -------- --------
Total capitalization..................... $299,355 $274,355 $369,401 $439,974 $433,349
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) As a result of the November 21, 1997 sale/leaseback transaction relating to
24 of the Company's residences ("Sale/Leaseback Transaction"), the Company
repaid $31.0 million of bridge loan financing, $6.0 million of which was
classified as short-term at September 30, 1997. See "Management's Discussion
and Analysis of Combined Financial Condition and Results of Combined
Operations -- Liquidity and Capital Resources." The Company intends to repay
with the proceeds of the Offering and Concurrent Offering additional debt of
$50.0 million, of which $20.0 million is classified as short-term.
(2) Does not include 1,425,000 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plans under which options to purchase
1,201,510 have been granted at a weighted average exercise price of $9.35
per share.
S-19
<PAGE> 20
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following financial data for the three years ended December 31, 1996,
1995 and 1994 are derived from the audited supplemental financial statements
included elsewhere herein. The financial data for the nine month periods ended
September 30, 1997 and 1996 are derived from the interim supplemental financial
statements included elsewhere herein. The supplemental consolidated financial
statements give retroactive effect to the Sterling Merger consummated on October
23, 1997, which has been accounted for as a pooling-of-interests as described in
Note 1 to the audited supplemental financial statements. In accordance with
generally accepted accounting principles, such supplemental consolidated
financial statements will become the historical consolidated financial
statements of Alternative Living Services, Inc. and subsidiaries after financial
statements covering the date of consummation of the Sterling Merger are issued.
The supplemental financial statements include all adjustments, consisting of
normal recurring accruals, that the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, FISCAL YEARS ENDED DECEMBER 31,
------------------ --------------------------------
1997 1996 1996 1995 1994
------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues................................. $89,104 $ 35,289 $ 55,637 $15,061 $ 7,228
Operating expenses:
Residence operations............................. 56,153 22,986 35,977 8,717 3,185
Lease expense.................................... 18,088 5,833 9,035 944 697
General and administrative....................... 11,480 7,450 11,143 5,890 3,489
Depreciation and amortization.................... 6,828 2,581 4,223 1,275 346
Non-recurring charge............................. -- 976 976 -- --
------- -------- -------- ------- -------
Total operating expenses.................. 92,549 39,826 61,354 16,826 7,717
------- -------- -------- ------- -------
Operating loss............................ (3,445) (4,537) (5,717) (1,765) (489)
------- -------- -------- ------- -------
Other income (expense):
Interest expense, net............................ (2,236) (2,448) (3,231) (984) (397)
Equity in losses of unconsolidated affiliates.... (195) (56) (52) (716) (299)
Minority interest in losses of consolidated
subsidiaries................................... 6,022 24 76 160 48
Other, net....................................... (67) (35) (31) 479 --
------- -------- -------- ------- -------
Total other expenses, net................. 3,524 (2,515) (3,238) (1,061) (648)
------- -------- -------- ------- -------
Loss before income taxes........................... 79 (7,052) (8,955) (2,826) (1,137)
Income taxes (benefit)............................. -- -- (159) (991) --
------- -------- -------- ------- -------
Net income (loss).................................. $ 79 $ (7,052) $ (8,796) $(1,835) $(1,137)
======= ======== ======== ======= =======
Net income (loss) per share........................ $ 0.00 $ (0.49) $ (0.57) $ (0.21) $ (0.21)
Weighted average number of common shares
outstanding...................................... 18,989 14,395 15,429 8,929 5,469
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------
1997 1996 1995
---------------- -------- -------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 19,566 $ 39,455 $20,394
Working capital (deficit)................................... (8,231) 20,352 10,425
Total assets................................................ 366,587 204,353 82,450
Long-term obligations, net of current maturities............ 195,478 68,238 23,663
Stockholders' equity........................................ 91,263 91,064 45,466
</TABLE>
S-20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF COMBINED
FINANCIAL CONDITION AND RESULTS OF COMBINED OPERATIONS
OVERVIEW
The Company is a leading national assisted living company operating 219
assisted living residences with an aggregate capacity of approximately 9,200
residents as of November 1, 1997. Of these residences, the Company owns 50,
leases 101, holds majority interests in entities which own 20 and lease 12,
holds minority interests in entities which own 11 and lease 9, and manages 16
for other owners. The Company's rapid growth over the last several years has had
a significant impact on the Company's results of operations and accounts for
substantially all of the changes in its results of operations between the nine
month periods ended September 30, 1997 and 1996 and the years ended 1996, 1995
and 1994. As of September 30, 1997 and December 31, 1996, 1995 and 1994, the
Company operated or managed residences with an aggregate capacity to accommodate
approximately 8,700, 5,200, 1,100 and 600 residents, respectively.
Since 1993, the Company has grown significantly as a result of its
aggressive development and acquisition activities, which have focused on
purposeful built, free-standing assisted living residences. In October 1997, the
Company completed its merger with Sterling, which at the time of the merger
operated 104 residences with an aggregate capacity of approximately 3,900
residents. In May 1996, the Company acquired Crossings, an assisted living
company which operated 15 Crossings residences with a capacity to accommodate
approximately 1,420 residents throughout the western United States; and in
January 1996, the Company acquired Heartland, an assisted living company which
operated 20 WovenHearts residences with an aggregate capacity of approximately
330 residents throughout Wisconsin. Both 1996 transactions were accounted for as
purchases. The Company intends to continue its development strategy and, at
November 1, 1997, was constructing 99 residences and developing an additional 74
residences. Of these residences, at least 110 with an aggregate capacity of
approximately 5,000 residents are expected to open during 1998.
As a result of the Sterling Merger: (i) Sterling became a wholly-owned
subsidiary of the Company; (ii) the Company issued approximately 5,550,000
shares of Common Stock in exchange for the Sterling common stock then
outstanding; (iii) the Company assumed the 6.75% Debentures; and (iv) the
Sterling stock options then outstanding were converted into options to acquire
Common Stock based on the merger exchange ratio. Significant expenses are
expected to be incurred in connection with the consolidation and integration of
the Company and Sterling as a result of the Sterling Merger. Such activities may
include restructuring regional and corporate functions, consolidating
information systems, integrating operations, and other personnel costs. In
addition, under the pooling-of-interests accounting method, direct transaction
costs are expensed in the period in which the transaction is consummated. Such
costs include investment banking, legal, accounting, printing, solicitation and
filing fees, and similar expenses. The Company anticipates recording charges to
earnings in the quarter ended December 31, 1997 related to the Sterling Merger
in an aggregate range of $9.0 million to $11.0 million. A portion of these
charges to earnings will be identified as non-recurring merger charges on the
Company's financial statements for such quarter.
The following discussion and analysis relates to, and should be read in
conjunction with, the supplemental consolidated financial statements included
elsewhere herein. These financial statements give retroactive effect to the
Sterling Merger consummated on October 23, 1997, which has been accounted for as
a pooling-of-interests. In accordance with generally accepted accounting
principles, such supplemental consolidated financial statements will become the
historical consolidated financial statements of Alternative Living Services,
Inc. and subsidiaries after financial statements covering the date of
consummation of the Sterling Merger are issued. See "Index to Supplemental
Consolidated Financial Statements."
S-21
<PAGE> 22
Nine Months Ended September 30, 1997 Compared To the Nine Months Ended
September 30, 1996
Operating Revenue. Operating revenues for the nine months ended September
30, 1997 were $89.1 million representing an increase of $53.8 million, or 152%,
from the $35.3 million for the comparable 1996 period. Substantially all of this
increase resulted from the addition of newly constructed residences, the
acquisition of Crossings in May 1996 and other acquisitions. The Company
operated 208 residences at the end of the nine month period ended September 30,
1997 compared to 94 residences for the comparable 1996 period.
Residence Operating Expenses. Residence operating expenses for the nine
months ended September 30, 1997 increased to $56.2 million from $23.0 million
for the comparable 1996 period primarily as a result of an increase in the
number of residences operated during the 1997 period.
Lease Expense. Lease expense for the nine months ended September 30, 1997
was $18.1 million, compared to $5.8 million in the comparable period in 1996.
Such increase was primarily attributable to the acquisition of Crossings
residences in May 1996, 13 of which are leased, and utilization of
sale/leaseback financing for the majority of newly developed Sterling House
residences opened during 1997.
General and Administrative Expense. General and administrative expenses
for the nine months ended September 30, 1997 were $11.5 million compared to $7.5
million for the comparable 1996 period. General and administrative expense as a
percentage of operating revenue declined from 21% in the nine months ended
September 30, 1996 to 13% in the nine months ended September 30, 1997. The
increase in expenses was primarily attributable to salaries, related payroll
taxes and employee benefits for additional corporate personnel retained to
support the Company's rapid growth. The Company expects that its general and
administrative expenses will continue to decrease as a percentage of operating
revenue as the Company grows and achieves additional economies of scale.
Depreciation and Amortization. Depreciation and amortization for the nine
months ended September 30, 1997 was $6.8 million, representing an increase of
$4.2 million, or 165%, from $2.6 million for the comparable period in 1996. This
increase resulted primarily from amortization of pre-opening costs on new
residences that opened during 1997 and the fourth quarter of 1996. The Company
amortizes pre-opening costs over a twelve month period.
Interest Expense, Net. Interest expense, net was $2.2 million for the nine
month period ended September 30, 1997 compared to $2.4 million for the
comparable period in 1996. Gross interest expense for the 1997 period was $8.6
million as compared to $5.3 million for the 1996 period, an increase of $3.3
million. This increase is primarily attributable to the issuance of the 7%
Debentures in May 1997 and an increase in the amount of construction financing
used in the 1997 period as compared to the 1996 period. The Company capitalized
$4.4 million of interest expense in the 1997 period compared to $1.4 million in
the comparable 1996 period due to increased construction activity in 1997.
Interest income for the 1997 period was $1.9 million as compared to $1.4 million
for the 1996 period. This increase was primarily due to the investment of the
proceeds received from the 7% Debentures issued in May 1997.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the nine months ended
September 30, 1997 was $6.0 million, representing an increase of $6.0 million
from $24,000 for the comparable period in 1996. The increase was primarily
attributable to the increase in the number of residences owned by the Company
with joint venture partners. As of September 30, 1997, the Company had 30
residences held in joint venture relationships compared to one residence held in
a joint venture relationship at September 30, 1996.
Net Income. As a result of the foregoing, the net income for the nine
months ended September 30, 1997 was $79,000 compared to a net loss of $7.1
million for the comparable period in 1996.
S-22
<PAGE> 23
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Operating Revenue. Operating revenues for the year ended December 31, 1996
were $55.6 million, representing an increase of $40.5 million, or 269%, from
$15.1 million for 1995, due to the increased number of residences operated
during 1996. Substantially all of this increase resulted from newly constructed
residences and acquisitions.
Residence Operating Expenses. Residence operating expenses for the year
ended December 31, 1996 were $36.0 million representing an increase of $27.3
million, or 313%, from $8.7 million for 1995. The increase primarily resulted
from the increased number of residences operated during the 1996 period.
Lease Expense. Lease expense for the year ended December 31, 1996 was $9.0
million, representing an increase of $8.1 million from $944,000 for 1995. Such
increase was primarily attributable to the increased utilization of
sale/leaseback financing during 1996, including the acquisition of 15 Crossings
residences in May 1996, substantially all of which residences were financed
under sale/leaseback arrangements.
General and Administrative. General and administrative expenses for year
ended December 31, 1996 were $11.1 million, representing an increase of $6.7
million, or 151%, from $4.4 million for 1995. The increase in expenses was
primarily attributable to salaries, related payroll taxes and employee benefits
relating to additional corporate personnel retained to support the Company's
growth strategy.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 was $4.2 million, representing an increase of $2.9
million, or 231%, from $1.3 million for 1995. This increase resulted primarily
from a greater number of new openings during 1996 and related amortization of
pre-opening costs.
Non-Recurring Charge. The Company recorded a non-recurring charge of
$976,000 in 1996 related to the acquisitions of Heartland and Crossings. The
charge related to the establishment of a reserve for the costs associated with
the physical downsizing of the Crossings corporate office and employee
separation costs at Crossings and Heartland. In 1996, the Company applied costs
of $166,000 against this reserve primarily related to employee separation costs.
Through September 30, 1997, the Company has applied additional costs totaling
$504,000 against the reserve. The Company believes that the provisions for the
non-recurring charge continue to be adequate and will not require material
adjustment in future periods.
Interest Expense, Net. Interest expense, net was $3.2 million for the year
ended December 31, 1996 compared to $1.0 million for the year ended December 31,
1995. Gross interest expense in 1996 was $7.0 million as compared to $1.8
million in 1995, an increase of $5.2 million. This increase was primarily
attributable to the issuance of the 6.75% Debentures in 1996, the bridge
financing incurred in January 1996 to finance the Heartland acquisition, an
increase in mortgage financing of existing residences in 1996 compared to 1995,
and increased construction financing in 1996 compared to 1995. The Company
capitalized $1.9 million of interest expense in 1996 compared to $407,000 in
1995 reflecting the increased construction activity in 1996. Interest income for
1996 was $1.9 million as compared to $439,000 for 1995. This increase was
primarily due to the investment of proceeds received from the Company's initial
public offering in 1996.
Equity in Losses of Unconsolidated Affiliates. Equity in net losses from
investments in unconsolidated affiliates was $52,000 for the year ended December
31, 1996, representing a decrease of $664,000, or 93%, from equity in losses of
unconsolidated affiliates of $716,000 in 1995. These losses were primarily
attributable to the Company's investment in five Michigan residences and losses
of unconsolidated affiliates of Sterling, all of which were acquired and
consolidated in late 1995 and 1996.
S-23
<PAGE> 24
Net Loss. As a result of the foregoing, the net loss for 1996 was $8.8
million compared to $1.8 million for 1995, an increase of $7.0 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Operating Revenue. Operating revenues for the year ended December 31, 1995
were $15.1 million, representing an increase of $7.9 million, or 108%, from $7.2
million for 1994 due to the increased number of residences operated during 1995.
Residence Operating Expenses. Residence operating expenses for the year
ended December 31, 1995 were $8.7 million representing an increase of $5.5
million, or 174%, from $3.2 million for 1994, due to the incurrence of lease-up
expenses related to residences acquired and opened in 1995.
Lease Expense. Lease expense for the year ended December 31, 1995 was
$944,000, representing an increase of $247,000, or 35% from $697,000 for 1994.
Such increase is primarily attributable to the full year of lease expense in
1995 for the residence that commenced operations in March 1994 and the increase
in lease expense associated with the residence expansion discussed above.
General and Administrative. General and administrative expenses for year
ended December 31, 1995 were $4.4 million, representing an increase of $1.8
million, or 68%, from $2.6 million for 1994. The increase in expenses was
primarily attributable to salaries, related payroll taxes and employee benefits
relating to additional corporate personnel retained to support the Company's
growth strategy.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1995 was $1.3 million, representing an increase of $929,000,
or 268%, from $346,000 for 1994. This increase resulted primarily from the full
year of operations of one residence that commenced operations in September 1994
and an additional residence acquired in April 1995.
Interest Expense, Net. Interest expense, net was $984,000 for the year
ended December 31, 1995 compared to $397,000 for the year ended December 31,
1994. Gross interest expense in 1995 was $1.8 million as compared to $458,000 in
1994, an increase of $1.4 million. This increase was primarily due to increased
utilization of mortgage and construction financing in 1995 compared to 1994. The
Company capitalized $407,000 of interest expense in 1995 compared to $33,000 in
1994 reflecting increased construction activity in 1995. Interest income for
1995 was $439,000 as compared to $28,000 in 1994 reflecting investment of the
proceeds from the Sterling initial public offering in 1995.
Gain on Sale of Land. Two parcels of land adjacent to one of the Company's
residences were sold in the last quarter of 1995 resulting in a gain of
$439,000. Since the Company has not engaged in other land sales, a similar gain
does not appear in the comparable periods discussed herein.
Equity in Losses of Unconsolidated Affiliates. Equity in net losses from
investments in unconsolidated affiliates increased to $716,000 in 1995 from
$299,000 in 1994, an increase of $417,000 or 139%. These losses were primarily
attributable to the start-up losses incurred by several minority owned
residences opened during 1995.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the year ended December 31,
1995 was $160,000, representing an increase of $112,000, or 233%, from $48,000
for 1994. The increase was attributable to the losses allocated to the minority
interest in two residences and the costs associated with identifying development
opportunities in the eastern United States.
Net Loss. As a result of the foregoing, the net loss for 1995 was $1.8
million compared to $1.1 million for 1994, an increase of $700,000.
S-24
<PAGE> 25
Liquidity and Capital Resources
For the years ended December 31, 1996, 1995 and 1994, the Company
experienced cash flow deficits from operations of $5.4 million, $0.9 million and
$0.3 million respectively. For the nine months ended September 30, 1997, the
Company experienced a cash flow deficit from operations of $2.7 million. These
cash flow deficits were primarily a result of the Company's significant
development of new residences, which typically incur cash flow deficits during
the lease-up period.
During the nine months ended September 30, 1997, the Company required
approximately $197.6 million of financing for construction, development and
acquisition activities. Financing was provided by a $50.0 million convertible
debt offering completed in May 1997, $72.4 million of sale/ leaseback financing,
$37.0 million of secured bridge loan financing incurred in advance of
anticipated sale/leaseback transactions involving the encumbered residences,
$14.5 million of construction loan financing, $15.0 million of unsecured
short-term financing, $5.0 million of borrowing under a short-term operating
line of credit, $3.7 million of minority partner contributions and cash from
operations. In addition, the Company assumed existing debt of $23.7 million and
$7.6 million of financing under an operating lease on four properties acquired
in the second quarter of 1997. Due to the increase in short-term debt financing,
the Company had a working capital deficit of approximately $8.2 million at
September 30, 1997, compared to working capital of $20.5 million at December 31,
1996. On November 21, 1997, the Company completed a sale/leaseback transaction
totaling $62 million of which (i) $31 million was used to repay secured bridge
loan financing outstanding, $6.0 million of which was classified as short-term,
as of September 30, 1997, (ii) $10 million was used to repay secured bridge loan
financing incurred subsequent to September 30, 1997; (iii) $14 million has been
held in escrow to fund construction in progress on six residences and (iv) $5
million was available to fund future development activities. This transaction
involved the sale and immediate leaseback by the Company of 24 residences having
an aggregate capacity of 775 residents. By December 31, 1997, the Company
expects to repay the remaining short-term debt outstanding at September 30, 1997
with permanent long-term financing.
Giving effect to the Sterling Merger (but excluding the pro forma effect of
the Offering), the Company's earnings were inadequate to cover fixed charges by
$10.7 million for the year ended December 31, 1996 and $10.2 million for the
nine months ended September 30, 1997. The Company expects that its earnings will
not be sufficient to cover its fixed charges in future periods. Accordingly, the
Company may have to incur additional indebtedness in the future to cover its
fixed charges.
To achieve its growth objectives, the Company will need to obtain
sufficient financing to fund its development, construction and acquisition
activities. This need for financing has increased substantially due to the
merger with Sterling. After giving effect to the Sterling Merger, the Company
has plans to develop approximately $350 million of residences through the end of
1998. Historically, the Company has financed its development program and
acquisitions through a combination of various forms of real estate financing
(mortgage and sale/leaseback financing), capital contributions from joint
venture partners and the sale of its securities. The Company currently has
executed non-binding letters of intent with various health care REITs for
financing commitments aggregating approximately $574 million, $326 million of
which has been utilized by the Company through November 30, 1997. In addition,
the Company has obtained $130 million of commitments from conventional financing
lenders for the purpose of financing future residence construction and
acquisition activities. As of November 30, 1997, $8 million of this conventional
financing has been utilized. The Company believes that financing under these
commitments, together with other mortgage financing that the Company expects to
utilize and equity contributions from its joint venture development partners,
will be sufficient to fund its growth strategy for the next 12 months.
On November 6, 1997, the Company filed a shelf registration statement with
the Securities and Exchange Commission pursuant to which the Company may offer
up to $325 million of equity or debt securities. The Company intends to utilize
proceeds from the Offering and the Concurrent
S-25
<PAGE> 26
Offering to repay certain indebtedness, to fund its current construction and
development schedule and to fund strategic acquisitions which may become
available from time to time. See "Use of Proceeds."
In addition to financing construction and development costs, the Company
will require capital resources to meet its operating and working capital needs
incurred primarily through the start-up and lease-up phases of new residences.
There can be no assurance that any newly constructed residences will
achieve a stabilized occupancy level and attain a resident mix that meet the
Company's expectations or generate sufficient positive cash flow to cover
operating and financing costs associated with such residences. There can be no
assurance that the Company will be successful in securing additional financing
or that adequate funding will be available and, if available, will be on terms
that are acceptable to the Company. A lack of funds may require the Company to
delay or eliminate all or some of its development projects and acquisition
plans. In addition, the Company may require additional financing to enable it to
acquire additional residences, to respond to changing economic conditions, to
expand the Company's development program or to account for changes in
assumptions related to its development program.
The Company is obligated under its joint venture arrangements to purchase
the equity interests of its joint venture partners upon the election of such
partners upon agreed upon terms and conditions. See "Business -- Joint Venture
and Related Mandatory Purchase Obligations." Within the next twelve months, the
Company will become subject to such contingent purchase obligations with respect
to equity interests held by joint venture partners, exercisable at their
election, related to certain of the Company's residences. At such times as such
contingent purchase obligations are exercisable, the Company may also elect to
exercise its rights to purchase such interests. Based on a number of
assumptions, including assumptions as to the number of residences to be
developed with joint venture partners, the timing of such development, the time
at which such options will be exercised and the fair market value of such
residences at the date such options are exercised, the Company estimates that it
may require approximately $15 million to $20 million to satisfy these purchase
obligations during 1998.
S-26
<PAGE> 27
BUSINESS
OVERVIEW
The Company is a leading national assisted living company, operating 219
residences with an aggregate capacity of approximately 9,200 residents as of
November 1, 1997. Of these total residences, the Company owns 50, leases 101,
holds majority interests in entities which own 20 and lease 12, holds minority
interests in entities which own 11 and lease 9, and manages 16 for other owners.
The Company and its predecessor have operated high-acuity 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, routine and skilled nursing 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" residential
settings which emphasize privacy, individual choice and independence. The
Company operates multiple residence models, each with a recognized brand name
and each serving a particular segment of the private pay elderly population.
Each residence model 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 Residence Models."
Since 1993, the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions and mergers.
In October 1997, the Company completed the merger with Sterling, which, at the
time, operated 104 residences with an aggregate capacity to accommodate
approximately 3,900 residents. As a result of the Sterling Merger, the Company
added significant depth to its experienced management team, acquired an
additional high-acuity residence model in the Sterling House residence model and
significantly expanded its presence in the Midwest 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, 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 offering of assisted living residence models 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 (including Sterling, Crossings
and Heartland) has developed 203 residences with an aggregate capacity of
approximately 8,700 residents. The Company intends to continue its development
strategy and, at November 1, 1997, is constructing 99 residences with an
aggregate capacity of 4,200 residents and was developing an additional 74
residences with an aggregate capacity of approximately 3,200 residents. Of these
residences, at least 110 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 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.
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<PAGE> 28
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.
Growth Strategy. The Company's growth strategy emphasizes growth through
the development and construction of assisted 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
203 residences (including residences developed by Sterling, Crossings and
Heartland) and, at November 1, 1997, was in the process of developing or
constructing 173 additional residences, at least 110 of which are expected
to open during 1998. Construction time for new development generally ranges
from six to 12 months. 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 national general contracting 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 throughout the country.
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 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, 52 of the
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<PAGE> 29
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 health care operations.
The Company may seek 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 geographic location (in proximity to
existing or anticipated Company residences), 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
other 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 21 states: Arizona,
California, Colorado, Florida, Idaho, Kansas, Massachusetts, Michigan,
Minnesota, North Dakota, 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 strategically clusters its brand-named residences 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 secondary adjacent markets. The Company also
uses its Sterling House and WovenHearts residence models to enter into secondary
residential
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<PAGE> 30
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.
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 residence models 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
residences 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 residence models
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 Strengthen Occupancy Rates. The Company will also seek
to maintain and strengthen occupancy rates by continuing to (i) attract new
residents through marketing programs directed towards family decision
makers, namely adult children, 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, (iii) leverage its national and regional presence to deepen
market penetration and create referral sources.
Offer 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. By offering levels of care, the Company is able to incrementally
capture additional revenue as residents age in place and require additional
services. 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.
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<PAGE> 31
ASSISTED LIVING RESIDENCE MODELS
The Company operates multiple residence models designed to meet the
increasing personal and health care needs of the private pay elderly population.
Each residence model offers a full range of assisted living services, and its
dementia residence model also offers specialized care for residents with
Alzheimer's disease and other dementias. Each of the Company's residence models
targets a distinct segment of the elderly population through site selection,
building design, staffing, service and care plans, as well as pricing structures
based on the needs and characteristics of each targeted segment. All of the
Company's residences incorporate its philosophy of preserving residents'
privacy, encouraging individual choice and fostering independence in a
"home-like" setting.
Frail-Elderly Models. The Company's frail-elderly residence models offer
residents 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 services. All residents are assessed at admission to determine the level
of care and service required and placed in one of four levels ranging from basic
care to three different levels of advanced care. In addition, each of the
Company's frail-elderly residence models offers its residents participation in
the RISE and ESP ancillary support programs. See "-- Assisted Living Care and
Service Programs." The Company's frail-elderly residence models are described
below.
- 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. 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. 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 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 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.
- Crossings. These apartment-style residences are generally located in
metropolitan markets. Apartment-style residences are favored in certain
markets in the United States, particularly throughout Western states and
are required in certain states to meet licensing requirements. The Company
believes this residence model enables it to capture a broader segment of
the assisted living market. These multi-story residences range in size
from 45,000 to 65,000 square feet and accommodate 60 to 80 residents, who
choose among studio, one-bedroom and two-bedroom apartments. These
apartments typically include a bedroom, a kitchenette, a full bathroom and
a living/dining area and range in size from 280 to 700 square feet. Like
the Sterling House residence model, common space is dispersed throughout
the buildings and
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<PAGE> 32
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. The Company customarily charges monthly rates per
resident ranging from $1,500 to $3,300.
- WovenHearts. These residences are designed to meet the needs of 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 WovenHearts
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 Company customarily charges monthly rates
per resident ranging from $1,700 to $2,200.
Dementia Model. The Company's specially designed, free-standing
dementia residence model serve the programmatic needs of individuals with
Alzheimer's disease and other dementias. The Company's dementia model
residents typically require higher levels of care and services as a result
of their progressive decline in cognitive abilities including impaired
memory, thinking and behavior. These residents require increased
supervision because they are typically highly confused, wander prone and
incontinent. As a result, these residences have a staffing pattern which
includes a full-time nurse and a care giver to resident ratio of
approximately one to six. Due to the generally high level of care required
by residents, a single-tier pricing structure is used. The Company's
dementia residence model is described below.
- Clare Bridge. The Company's Clare Bridge dementia residence model ranges
in size from 16,000 to 28,000 square feet, is a single-story residence
accommodating 24 to 52 residents and is primarily located in metropolitan
and suburban markets. The Company seeks to create a "home-like" setting
that addresses the resident's cognitive limitations using internal
neighborhoods consisting of rooms which are scaled to the size typically
found in an upper-income, single family home with the same level of
furniture, fixtures and carpeting. Key features specific to the needs of
Clare Bridge residents generally include indoor wandering paths, a
simulated "town-square" area, secure outdoor spaces with raised gardening
beds, directional aids to assist in "wayfinding" such as signs,
color-coded neighborhoods and memory boxes with the resident's photograph
outside of their unit, and specially designed furniture suitable for
incontinent residents. The Company generally charges monthly rates per
resident ranging from $2,800 for a shared room to $3,700 for a private
room in its Clare Bridge residences.
In addition, 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 residence that
includes separate entrances, an internal wandering path and more intensive 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.
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<PAGE> 33
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 residence models
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. At each of the Company's frail elderly residence models,
residents are placed in one of several care levels depending upon their
individual needs. At its Clare Bridge residences, the 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.
RISE (Restoring Independence, Strength and Energy). Crossings
residences also offer RISE, a one-on-one exercise program designed to help
residents regain their independence and become healthier, and stronger by
improving flexibility, balance, strength and endurance. The program is
targeted to residents with health concerns related to Parkinson's disease,
strokes, osteoarthritis, osteoporosis, congestive heart disease, hip
fractures and other limitations in ambulation and mobility. Monthly rates
for the program range from $90 to $400 depending on the frequency and
duration of sessions.
ESP (Extended Support Program). ESP, also offered at Crossings
residences, is a program designed to provide additional structure and
personal attention to residents with early stages of dementia. Regularly
scheduled group recreational activities and social events help residents
build self-esteem and decrease anxiety related to confusion and
disorientation. The ESP program has been successful in retaining residents
who, due to their dementia, might otherwise need to relocate to a more
supportive environment. The monthly program rates range from $325 to $450.
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 reim-
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<PAGE> 34
bursed 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.
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.
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.
RESIDENCES
The table below sets forth certain information with respect to the
residences which were operated by the Company as of November 1, 1997. The
Company owns, leases, holds equity interests in entities which own or lease, or
manages on behalf of others, 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>
OWNED OR
LEASED RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% HELD)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
OWNED/LEASED
FLORIDA
Clare Bridge.......... Sarasota (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
Clare Bridge.......... Tampa Dementia Care Leased 38 October 1996
Wynwood............... Sarasota Frail Elderly Owned 86 June 1990
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........ Orlando (Leesburg) Frail Elderly Leased 42 December 1996
Sterling House........ Jacksonville (St. Augustine) Frail Elderly Leased 42 December 1996
Sterling House........ Orlando (Tavares) Frail Elderly Leased 42 March 1997
Sterling House........ Daytona (Port Orange) Frail Elderly Leased(51.0) 42 March 1997
Sterling House........ Orlando (Ocala) Frail Elderly Leased(51.0) 42 March 1997
Sterling House........ Ft. Myers (Punta Gorda) Frail Elderly Leased(51.0) 42 June 1997
Sterling House........ Gainesville Frail Elderly Leased(51.0) 50 June 1997
Sterling House........ Ft. Myers (Port Charlotte) Frail Elderly Leased(9.8) 42 June 1997
Sterling House........ Daytona (DeLand) Frail Elderly Leased(51.0) 42 June 1997
Sterling House........ Jacksonville (Merrimac) Frail Elderly Leased(9.8) 42 July 1997
Sterling House........ Daytona (Ormond Beach) Frail Elderly Owned(9.8) 42 September 1997
Sterling House........ Sarasota (Winterhaven) Frail Elderly Owned(9.8) 42 September 1997
Sterling House........ Sarasota (Venice) Frail Elderly Owned(9.8) 42 September 1997
</TABLE>
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<PAGE> 35
<TABLE>
<CAPTION>
OWNED OR
LEASED RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% HELD)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
Sterling House........ Ft. Myers (Lehigh Acres) Frail Elderly Owned(9.8) 42 September 1997
-----
1,038
-----
TEXAS
Sterling House........ Dallas (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........ Dallas (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........ Dallas (DeSoto) Frail Elderly Leased 37 December 1996
Sterling House........ Dallas (Mansfield) Frail Elderly Leased 37 December 1996
Sterling House........ Dallas (Richland Hills) Frail Elderly Leased 37 December 1996
Sterling House........ Dallas (Weatherford) Frail Elderly Leased 37 December 1996
Sterling House........ Kerrville Frail Elderly Leased 37 December 1996
Sterling House........ Dallas (Cedar Hill) Frail Elderly Leased 37 December 1996
Sterling House........ Dallas (Lancaster) Frail Elderly Leased 37 December 1996
Sterling House........ Temple Frail Elderly Leased 42 January 1997
Sterling House........ Dallas (Carrolton) Frail Elderly Leased 42 January 1997
Sterling House........ Dallas (Lewisville) Frail Elderly Leased 42 January 1997
Sterling House........ San Antonio (Nacogdoches) Frail Elderly Leased 37 March 1997
Sterling House........ Austin (Georgetown) Frail Elderly Leased(51.0) 42 March 1997
Sterling House........ San Antonio (Maltsberger) Frail Elderly Leased(9.8) 37 March 1997
Sterling House........ Waco Frail Elderly Leased(9.8) 42 March 1997
Sterling House........ San Antonio (Whitby) Frail Elderly Leased(9.8) 50 March 1997
Sterling House........ San Antonio (New Braunfels) Frail Elderly Leased(9.8) 37 May 1997
-----
965
-----
OKLAHOMA
Sterling House........ Oklahoma City (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........ Oklahoma City (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........ Oklahoma City (SW) Frail Elderly Leased 33 January 1996
Sterling House........ Chickasha Frail Elderly Leased 33 February 1996
Sterling House........ Oklahoma City (Edmond) Frail Elderly Leased 37 April 1996
Sterling House........ Oklahoma City (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........ Tulsa (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........ Oklahoma City (NW) Frail Elderly Leased 37 September 1996
Sterling House........ Ada Frail Elderly Leased 37 October 1996
Sterling House........ Tulsa (Owasso) Frail Elderly Leased 37 October 1996
Sterling House........ Oklahoma City (Hefner) Frail Elderly Leased 37 December 1996
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
</TABLE>
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<PAGE> 36
<TABLE>
<CAPTION>
OWNED OR
LEASED RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% HELD)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
Sterling House........ Bartlesville II Frail Elderly Owned 33 September 1997
-----
842
-----
WISCONSIN
Clare Bridge.......... Milwaukee (Brookfield) Dementia Care Leased 24 November 1991
Clare Bridge.......... Madison (Middleton) Dementia Care Owned 28 March 1991
Wynwood............... Madison Frail Elderly Leased 54 February 1992
Wynwood............... Milwaukee (Brookfield) Frail Elderly Leased 61 March 1994
WovenHearts(3)........ Madison (Baraboo) Frail Elderly Owned 20 September 1996
WovenHearts........... Milwaukee (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(4)........ 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(4)........ Manitowoc Frail Elderly Owned 20 December 1995
WovenHearts(4)........ Medford Frail Elderly Owned 19 June 1990
WovenHearts........... Menomonie Frail Elderly Leased 19 March 1995
WovenHearts(4)........ Madison (Middleton) Frail Elderly Owned 20 April 1997
WovenHearts(4)........ 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(4)........ Oshkosh Frail Elderly Owned 20 August 1996
WovenHearts(3)........ Platteville Frail Elderly Owned(72.7) 20 November 1995
WovenHearts(4)........ Wausau (Plover) Frail Elderly Owned 37 June 1992
WovenHearts........... Plymouth Frail Elderly Leased 15 June 1994
WovenHearts(3)........ Rice Lake Frail Elderly Owned 19 October 1995
WovenHearts(3)........ River Falls Frail Elderly Owned 20 December 1996
WovenHearts........... Shawano Frail Elderly Owned 15 October 1993
WovenHearts(4)........ Madison (Sun Prairie) Frail Elderly Owned 20 May 1994
WovenHearts........... Milwaukee (Sussex) Frail Elderly Leased 20 August 1995
WovenHearts(4)........ Wausau Frail Elderly Owned 40 June 1992
WovenHearts........... Whitewater Frail Elderly Owned(50.0) 20 November 1996
WovenHearts(4)........ Wisconsin Rapids Frail Elderly Owned 20 December 1995
WovenHearts........... Wisconsin Rapids Frail Elderly Leased 19 May 1995
-----
829
-----
OREGON
Crossings............. Portland (Albany) Support Services Leased 74 August 1990
Crossings............. Portland (Albany) Support Services Leased 63 June 1989
Crossings............. Portland (Forest Grove) Support Services/ Leased 88 September 1990
Frail Elderly
Crossings............. Portland (Gresham) Frail Elderly Leased 78 January 1990
Crossings............. Portland (McMinnville) Support Services/ Leased 87 May 1991
Frail Elderly
Crossings............. Medford Frail Elderly Leased 76 January 1991
Crossings............. Portland (Tualatin) Frail Elderly Leased 112 February 1989
Crossings............. Portland (Albany II) Frail Elderly Leased(60.0) 70 August 1997
-----
648
-----
</TABLE>
S-36
<PAGE> 37
<TABLE>
<CAPTION>
OWNED OR
LEASED RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% HELD)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
COLORADO
Crossings............. Denver (Aurora) Support Services Leased 159 April 1991
Crossings............. Denver (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........ Denver (Brighton) Frail Elderly Leased 42 May 1997
-----
634
-----
NEW YORK
Wynwood............... Buffalo Frail Elderly Owned(51.0) 119 October 1995
Wynwood............... Albany Frail Elderly Owned(51.0) 110 January 1996
Wynwood............... Syracuse (Manlius) Frail Elderly Leased 84 April 1994
Clare Bridge.......... Buffalo (Williamsville) Dementia Care Owned(51.0) 52 June 1997
Clare Bridge.......... Albany (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 75 June 1991
Frail Elderly
Crossings............. Sherman Brook Support Services/ Owned 84 June 1991
-----
Frail Elderly 628
-----
KANSAS
Sterling House........ Wichita (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........ Wichita (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
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
-----
OHIO
Sterling House........ Findlay Frail Elderly Leased(51.0) 37 March 1997
Sterling House........ Dayton (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........ Cincinnati (Fairfield) Frail Elderly Leased(9.8) 42 June 1997
Sterling House........ Cincinnati (Springdale) Frail Elderly Owned(9.8) 42 August 1997
Sterling House........ Bowling Green Frail Elderly Owned(51.0) 37 September 1997
Sterling House........ Dayton (Piqua) Frail Elderly Owned(9.8) 37 September 1997
Sterling House........ Urbana Frail Elderly Owned(9.8) 37 September 1997
Sterling House........ Cincinnati (Washington Frail Elderly Owned(9.8) 42 September 1997
Township)
</TABLE>
S-37
<PAGE> 38
<TABLE>
<CAPTION>
OWNED OR
LEASED RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% HELD)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
Sterling House........ Dayton (Englewood) Frail Elderly Owned(51.0) 42 September 1997
-----
437
-----
MICHIGAN
Clare Bridge.......... Ann Arbor Dementia Care Leased 36 June 1995
Clare Bridge.......... Detroit (Farmington Hills) Dementia Care Leased 28 July 1994
Clare Bridge.......... Detroit (Farmington Hills II) Dementia Care Leased 32 October 1995
Clare Bridge.......... Lansing Dementia Care Leased 36 January 1996
Clare Bridge.......... Detroit (Utica I) Dementia Care Leased 36 January 1995
Wynwood............... Detroit (Northville) Frail Elderly Owned(75.0) 72 October 1996
Wynwood............... Detroit (Utica II) Frail Elderly Owned(75.0) 72 December 1996
WovenHearts........... Flint (Davison) Frail Elderly Owned 20 August 1997
WovenHearts........... Flint (Swartz Creek) Frail Elderly Owned 20 September 1997
-----
352
-----
MINNESOTA
WovenHearts(3)........ Austin Frail Elderly Owned 20 December 1996
WovenHearts(4)........ Fairibauit Frail Elderly Owned 20 April 1997
WovenHearts(4)........ St. Cloud (Sauk Rapids) Frail Elderly Owned 20 April 1997
WovenHearts(4)........ Mankato Frail Elderly Owned 20 October 1996
WovenHearts(4)........ Owatonna Frail Elderly Owned 20 December 1996
WovenHearts(4)........ Winona Frail Elderly Owned 20 January 1997
WovenHearts(4)........ Wilmar Frail Elderly Owned 20 April 1997
WovenHearts........... Minneapolis (Inver Grove Frail Elderly Owned(60.0) 20 July 1997
Heights)
WovenHearts........... Minneapolis (Blaine) Frail Elderly Owned(60.0) 20 July 1997
WovenHearts........... Moorhead Frail Elderly Leased 63 June 1992
WovenHearts........... Minneapolis (Brooklyn Center) Frail Elderly Leased 103 June 1993
-----
346
-----
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
-----
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
-----
PENNSYLVANIA
Clare Bridge.......... Philadelphia (Lower Makefield) Dementia Care Leased 48 February 1996
Clare Bridge.......... Philadelphia (Montgomery) Dementia Care Leased 48 September 1996
Wynwood............... Philadelphia (Richboro) Frail Elderly/ Leased 113 June 1990
Dementia Care
-----
209
-----
NORTH CAROLINA
Wynwood............... Chapel Hill Frail Elderly Owned(51.0) 70 December 1996
Clare Bridge.......... Raleigh (Cary) Dementia Care Owned(51.0) 50 July 1997
Clare Bridge(4)....... Greensboro Dementia Care Owned(80.0) 38 September 1997
-----
158
-----
</TABLE>
S-38
<PAGE> 39
<TABLE>
<CAPTION>
OWNED OR
LEASED RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% HELD)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
NEVADA
Crossings............. Reno (Westwood) Frail Elderly Owned 91 June 1987
Crossings............. Reno (Silverwood) Frail Elderly Owned 64 June 1991
-----
155
-----
CALIFORNIA
Crossings(5).......... Los Angeles (Loma Linda) Support Services/ Leased 140 June 1991
-----
Frail Elderly
ARIZONA
Clare Bridge.......... Phoenix (Tempe) Dementia Care Owned(60.0) 52 June 1997
WovenHearts........... Phoenix (Mesa) Dementia Care Owned 27 April 1997
-----
79
-----
NORTH DAKOTA
WovenHearts........... Fargo Frail Elderly Leased 63 June 1990
-----
NEW JERSEY
Clare Bridge.......... Westhampton Dementia Care Owned(80.0) 50 March 1997
-----
SUBTOTAL OWNED OR 8,663
LEASED.............. =====
MANAGED
COLORADO
Sterling House(6)..... Greeley Frail Elderly -- 42 June 1997
Sterling House(6)..... Loveland Frail Elderly -- 50 July 1997
Sterling House(6)..... Denver (Arvada) Frail Elderly -- 50 July 1997
-----
142
-----
MASSACHUSETTS
Wynwood............... Boston (Leominster) Frail Elderly -- 72 May 1996
-----
MINNESOTA
WovenHearts........... Minneapolis (Apple Valley) Frail Elderly -- 72 June 1995
-----
OKLAHOMA
Sterling House(6)..... Oklahoma (Edmond) Frail Elderly -- 29 August 1997
Sterling House(6)..... Weatherford Frail Elderly -- 35 August 1997
-----
64
-----
WISCONSIN
Elm Grove House....... Milwaukee (Elm Grove) Dementia Care -- 8 --
Finch House........... Milwaukee (Greendale) Dementia Care -- 8 --
North Shore House..... Milwaukee (Fox Point) Dementia Care -- 8 --
Oak Ridge House....... Milwaukee (Wauwatosa) Dementia Care -- 8 --
Parkway House......... Milwaukee Dementia Care -- 8 --
Ridgefield House...... Madison Dementia Care -- 8 --
-----
48
-----
KANSAS
Sterling House........ Pratt Frail Elderly -- 43 September 1994
-----
OHIO
Sterling House(6)..... Springfield Frail Elderly -- 42 June 1997
-----
</TABLE>
S-39
<PAGE> 40
<TABLE>
<CAPTION>
OWNED OR
LEASED RESIDENT DATE
RESIDENCE MODEL LOCATION CARE LEVEL (% HELD)(1) CAPACITY OPENED(2)
- --------------- -------- ---------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
TEXAS
Sterling House(6)..... Dallas (Watauga) Frail Elderly -- 35 August 1997
-----
SUBTOTAL MANAGED...... 518
=====
GRAND TOTAL(7)........ 9,181
=====
</TABLE>
- ---------------
(1) The "percentage held" indicates the percentage ownership of the Company in
the entity that owns or leases such residence. See "-- Joint Ventures and
Strategic Alliances." Approximately 60% of the residences identified as
being owned by the Company or entities in which the Company has an equity
interest 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) Residence sold subsequent to November 1, 1997 at an amount approximating its
book value.
(4) On November 21, 1997, these residences were sold to a health care real
estate investment trust (REIT) and leased back by the Company pursuant to
long-term operating leases.
(5) This residence is leased under a lease which expires upon the first to occur
of (i) December 1998 or (ii) the achievement of a 95% occupancy rate.
(6) 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.
(7) Does not include eight Sterling House residences operated by franchisees
under franchise agreements.
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.
At November 1, 1997, the Company was 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 on November 1, 1997.
S-40
<PAGE> 41
RESIDENCES UNDER CONSTRUCTION OR DEVELOPMENT
<TABLE>
<CAPTION>
UNDER CONSTRUCTION UNDER DEVELOPMENT
--------------------- ---------------------
RESIDENCES CAPACITY RESIDENCES CAPACITY
---------- -------- ---------- --------
<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
-- ----- -- -----
TOTAL...................................... 99 4,194 74 3,157
== ===== == =====
</TABLE>
- ---------------
(1) Certain of the residences under construction or development may be owned
directly by joint venture entities in which the Company will own varying
percentages of equity interests. See "Business -- Joint Ventures and
Strategic Alliances."
(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, and
from 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 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
S-41
<PAGE> 42
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 members 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
S-42
<PAGE> 43
shop" the Company's residences. This independent service analyzes the Company's
performance from the perspective of a customer without the inherent biases of a
Company employee. This service assists the Company in continually monitoring and
improving the level of services offered to its residents to further ensure
maximum customer satisfaction.
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.
S-43
<PAGE> 44
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.
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
S-44
<PAGE> 45
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.
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
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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 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. The Company 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 November 1, 1997,
unconsolidated affiliates operated 17 Sterling House residences. The Company
holds a majority interest in 12 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 is 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.
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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 is expected to 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 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.
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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 and Connecticut 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 or biannually. The
Company has also obtained a CON for each residence under construction or
development in New Jersey and is in the process of obtaining CONs for the
residences under development in Connecticut.
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.
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
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(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 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
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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
Sterling House, Crossings and WovenHearts are registered service marks of
the Company and the Company claims service mark protection in the marks
Alternative Living Services, Wynwood, Hamilton House and Clare Bridge.
EMPLOYEES
At November 1, 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, Secretary and
Chief Financial Officer
Mark W. Ohlendorf............................ 37 Senior Vice President
Richard W. Boehlke........................... 49 Vice Chairman of the Board
Gene E. Burleson............................. 56 Director
D. Ray Cook, M.D............................. 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 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.
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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.
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.
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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.
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.
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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; (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.
DESCRIPTION OF DEBENTURES
The Debentures are more fully described in the accompanying Prospectus and
will be limited to $143,750,000 aggregate principal amount and will be issued
pursuant to an indenture (together with any supplemental indenture, the
"Indenture") by and between the Company and United States Trust Company of New
York, as trustee (the "Trustee"). Reference should be made to the accompanying
Prospectus for a detailed summary of additional provisions of the Debentures and
of the Indenture.
MATURITY
The Debentures will mature on , 2002.
INTEREST
Except as otherwise provided in the Indenture, interest on the Debentures
will accrue from , 1997 at the annual rate set forth on the cover
page of this Prospectus Supplement and will be payable semi-annually on
and , commencing on , 1998, to the persons in
whose names the Debentures are registered at the close of business on the next
preceding or and, unless other arrangements are made, will
be paid by checks mailed to such persons at their registered addresses. The
interest payable on , 1998 will be $ per $1,000 aggregate
principal amount of the Debentures and on each and
thereafter will be $ per $1,000 aggregate principal amount of the
Debentures.
CONVERSION RIGHTS
The Debentures will be convertible, unless previously redeemed, into shares
of Common Stock at a price of $ per share (subject to adjustments)
commencing 180 days after their date of issuance and thereafter at any time
prior to maturity, subject to the next paragraph. See "Description of Debt
Securities -- Conversion Rights" in the accompanying Prospectus.
After giving effect to the sale of 2,800,000 shares in the Concurrent
Offering and the reservations of shares issuable upon conversion of the 6.75%
Debentures and 7% Debentures and the exercise of stock options previously
granted or available for grant under the Company's stock option plans, the
Company will have 2,615,369 shares of authorized but unissued Common Stock. As a
result, the Company currently does not have a sufficient number of shares of
Common Stock available for issuance upon the conversion of all the Debentures.
In order to provide a sufficient number of shares to permit the conversion of
all the Debentures, the Company has agreed to seek stockholder approval of the
Charter Amendment at its 1998 Annual Meeting of Stockholders (the "1998 Annual
Meeting"). The Charter Amendment, which will require the approval of the holders
of
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<PAGE> 55
a majority of the shares of Common Stock entitled to vote at the 1998 Annual
Meeting, would increase the number of authorized shares of Common Stock to an
amount at least sufficient to permit the conversion of all the Debentures. The
Company has agreed that, until its Certificate has been so amended, it will not
be permitted (i) to exercise its right to voluntarily redeem the Debentures at
any time on or after , 2000 or (ii) to issue additional shares of
Common Stock or securities convertible into or exchangeable for Common Stock
except for employee stock options to acquire Common Stock granted under the
Company's existing stock option plans. In the event a holder of Debentures seeks
to convert Debentures into Common Stock at a time that the Company does not have
sufficient authorized shares of Common Stock to satisfy such conversion, such
holder will have the right to require the Company to repurchase his Debentures
for an amount payable in cash equal to the principal amount of such Debentures
plus accrued interest thereon.
SUBORDINATION
The Debentures will be unsecured general obligations of the Company and
will be subordinated to all existing and future Senior Indebtedness (as defined
in the accompanying Prospectus) of the Company. Upon completion of the Offering
and the application of the net proceeds therefrom, the Company will have
outstanding $55.9 million of indebtedness that will constitute Senior
Indebtedness. In addition, upon completion of the Offering and the application
of the net proceeds therefrom, the Company's subsidiaries will have outstanding
$105.5 million of indebtedness to which the Debentures will be structurally
subordinated, of which $54.9 million will be included in Senior Indebtedness.
There is no limitation on the amount of Senior Indebtedness that the Company may
incur in the future. The Company may not pay principal of, premium, if any, or
interest on, the Debentures, or repurchase or redeem the Debentures, if any
Senior Indebtedness is in default unless, in each case, the default has been
cured or waived or shall have ceased to exist. Upon any payment or distribution
of assets of the Company upon liquidation, dissolution, reorganization or any
similar proceeding, the holders of Senior Indebtedness will be entitled to
receive payment in full before the holders of the Debentures are entitled to
receive any payment. See "Description of Debt Securities -- Subordination" in
the accompanying Prospectus. The Debentures will be effectively subordinated to
all existing and future liabilities, including indebtedness, trade payables and
lease obligations, of the Company's subsidiaries. Certain of the Company's
operations are conducted by subsidiaries.
The Debentures will rank pari passu with the 6.75% Debentures and the 7%
Debentures.
OPTIONAL REDEMPTION
The Company may, at its option at any time and from time to time on or
after , 2000, redeem all of the Debentures or some of them, on at
least 30 days' but not more than 60 days' notice to each holder of Debentures to
be redeemed at his or her registered address, at a redemption price equal to
100% of the principal amount thereof plus accrued interest thereon to the
redemption date; provided, however, that the Company may not exercise its option
to redeem any Debentures unless the Company has sufficient authorized shares to
give effect to full conversion of the Debentures.
DISTRIBUTIONS
The Indenture does not restrict distributions to holders of the Company's
Common Stock. See "Description of Debt Securities -- Dividends, Distributions
and Acquisitions of Common Stock" in the accompanying Prospectus.
MARKETABILITY
At present there is no public market for the Debentures. The Company will
submit an application to list the Debentures on the AMEX.
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<PAGE> 56
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF DEBENTURES BY THE COMPANY
In the event of any Change in Control of the Company occurring after the
date of issuance of the Debentures and on or prior to maturity, each holder of
Debentures will have the right, at such holder's option, to require the Company
to repurchase all or any part of such holder's Debentures on the date (the
"Repurchase Date") that is 75 days after the date the Company gives notice of
the Change in Control (as described below) at a price (the "Repurchase Price")
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest to the Repurchase Date. On or prior to the Repurchase Date, the Company
is required to deposit with the Trustee or a Paying Agent an amount of money
sufficient to pay the Repurchase Price of the Debentures that are to be
repurchased on the Repurchase Date. Neither the Board of Directors of the
Company nor the Trustee, acting alone or together, can modify or waive this
required repurchase of the Debentures.
Failure by the Company to repurchase the Debentures when required under the
proceeding paragraph will result in an event of default under the Indenture,
whether or not such repurchase is permitted by the subordination provisions of
the Indenture.
On or before the 15th day after the occurrence of a Change in Control, the
Company is obligated to mail to all holders of Debentures a notice of the event
constituting, and the date of, such Change in Control, the Repurchase Date, the
date by which the repurchase right must be exercised, the Repurchase Price for
Debentures, and the procedures that a holder must follow to exercise a
repurchase right. To exercise the repurchase right, a holder of a Debenture must
deliver, on or before the 10th day prior to the Repurchase Date, written notice
to the Company (or an agent designated by the Company for such purpose) and to
the Trustee of the holder's exercise of such right, together with the
certificates evidencing the Debentures with respect to which the right is being
duly exercised, duly endorsed for transfer.
A "Change in Control" will occur when: (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons; (ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly-owned subsidiary of the
Company in which all Common Shares outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (B) pursuant to which the Common Stock is converted into cash, securities, or
other property, in each case other than a consolidation or merger of the Company
in which the holders of the Common Stock immediately prior to the consolidation
or merger have, directly or indirectly, at least a majority of the common stock
of the continuing or surviving corporation immediately after such consolidation
or merger; or (iii) any person, or any persons acting together that would
constitute a "group" for purposes of Section 13(d) of the Exchange Act, together
with any affiliates thereof, acquires beneficial ownership (as defined in Rule
13d-3 under the Exchange Act) of at least 50% of the total voting power of all
classes of capital shares of the Company entitled to vote generally in the
election of directors of the Company. Notwithstanding clause (iii) of the
foregoing definition, a Change in Control will not be deemed to have occurred
solely by virtue of the Company; any subsidiary of the Company; any employee
share purchase plan, share option plan, or other share incentive plan or
program; retirement plan or automatic dividend reinvestment plan; or any
substantially similar plan of the Company or any subsidiary or any person
holding securities of the Company for or pursuant to the terms of any such
employee benefit plan, filing or becoming obligated to file a report under or in
response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or
report) under the Exchange Act disclosing beneficial ownership by it of shares
or securities of the Company, whether at least 50% of the total voting power
referred to in clause (iii) of the foregoing definition or otherwise. A
recapitalization or a leveraged buyout or similar transaction involving members
of management or their affiliates will constitute a Change in Control if it
meets the foregoing definition.
Notwithstanding the foregoing, a Change in Control as described above will
not be deemed to have occurred if (i) the Current Market Price of the Common
Stock on the date of a Change in
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<PAGE> 57
Control is at least equal to 105% of the conversion price of the Debentures in
effect immediately preceding the time of such Change in Control; or (ii) all of
the consideration (excluding cash payments for fractional shares) in the
transaction giving rise to such Change in Control to the holders of Common Stock
consists of shares of common stock that are, or immediately upon issuance will
be, listed on a national securities exchange or quoted on the Nasdaq National
Market, and as a result of such transaction the Debentures will become
convertible solely into such shares of common stock; or (iii) the consideration
in the transaction giving rise to such Change in Control to the holders of
Common Stock consists of cash or securities that are, or immediately upon
issuance will be, listed on a national securities exchange or quoted on the
Nasdaq National Market, or a combination of cash and such securities, and the
aggregate fair market value of such consideration (which, in the case of such
securities, will be equal to the average of the daily closing prices of such
securities during the 10 consecutive trading days commencing with the sixth
trading day following consummation of such transaction) is at least 105% of the
conversion price of the Debentures in effect on the date immediately preceding
the closing date of such transaction.
There is no definition of the phrase "all or substantially all" as applied
to the Company's assets and used in the definition of Change in Control in the
Indenture, and there is no clear definition of the phrase under applicable law.
As a result of the uncertainty of the meaning of this phrase, in the event the
Company were to sell a significant amount of its assets, the holders and the
Company may disagree over whether the sale gives rise to the right of holders to
require the Company to repurchase the Debentures. In such event, the holders
would likely not be able to require the Company to repurchase unless and until
the disagreement were resolved in favor of the holders.
The right to require the Company to repurchase Debentures as a result of a
Change in Control could create an event of default under Senior Indebtedness, as
a result of which any repurchase could, absent a waiver, be blocked by the
subordination provisions of the Debentures. See "-- Subordination". The
Company's ability to pay cash to the holders upon a repurchase may also be
limited by certain financial covenants contained in the Company's Senior
Indebtedness.
In the event a Change in Control occurs and the holders exercise their
rights to require the Company to repurchase Debentures, the Company intends to
comply with applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase. The
Change in Control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. The Change in Control purchase
feature, however, is not the result of management's knowledge of any specific
effort to accumulate Common Stock or to obtain control of the Company by means
of a merger, tender offer, solicitation, or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the Change in
Control purchase feature is a standard term contained in other similar debt
offerings and the specific terms of this feature resulted from negotiations
between the Company and the Underwriters. Management has no present intention to
engage in a transaction involving a Change in Control.
The foregoing provisions would not necessarily afford holders protection in
the event of highly leveraged or other transactions involving the Company that
may adversely affect holders.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations relevant to holders of the Debentures. This discussion
is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now
in effect, all of which are subject to change (possibly with retroactive effect)
or different interpretations. This discussion does not purport to deal with all
aspects of federal income taxation that may be relevant to a particular
investor's decision to purchase the Debentures, and it is not intended to be
wholly applicable to all categories of investors, some of which, such as dealers
in securities, banks, insurance companies, tax-exempt organizations and
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<PAGE> 58
non-United States persons, may be subject to special rules. In addition, this
discussion is limited to persons that purchase the Debentures in the Offering
and hold the Debentures as a "capital asset" within the meaning of Section 1221
of the Code and not as part of a "hedge," "straddle," "conversion transaction,"
"synthetic security" or other integrated investment.
PROSPECTIVE PURCHASERS OF THE DEBENTURES ARE ADVISED TO CONSULT THEIR TAX
ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE DEBENTURES AND THE COMMON STOCK.
CONVERSION OF DEBENTURES INTO COMMON STOCK
In general, no gain or loss will be recognized for income tax purposes on a
conversion of the Debentures into shares of Common Stock. However, cash paid in
lieu of a fractional share of Common Stock will result in taxable gain (or
loss), which will be capital gain (or loss) to the extent that the amount of
such cash exceeds (or is exceeded by) the portion of the adjusted basis of the
Debenture allocable to such fractional share. The adjusted basis of shares of
Common Stock received on conversion will equal the adjusted basis of the
Debenture converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of an
investor in the Common Stock received on conversion will include the period
during which the converted Debentures were held.
The conversion price of the Debentures is subject to adjustment under
certain circumstances. See "Description of Debt Securities-Conversion Rights" in
the accompanying Prospectus. These adjustments are intended as "anti-dilution"
measures designed to maintain the proportionate interests of the holders of the
Debentures in the fully diluted Common Stock. However, in the event that any
such adjustment were to increase such proportionate interest of the Debenture
holders, Section 305 of the Code and the Treasury Regulations issued thereunder
may treat the holders of the Debentures as having received a constructive
distribution, resulting in ordinary income to the extent of the Company's
current and accumulated earnings and profits, whether or not such holder ever
exercises its conversion privilege. Moreover, if there is not a full adjustment
to the conversion price of the Debentures to reflect a stock dividend or other
event increasing the proportionate interest of the holders of outstanding Common
Stock in the assets or earnings and profits of the Company, then such increase
in the proportionate interest of the holders of the Common Stock generally will
be treated as a distribution to such Common Stock holders, taxable as ordinary
income to the extent of the Company's current and accumulated earnings and
profits.
MARKET DISCOUNT
Investors acquiring Debentures in the Offering should note that the resale
of those Debentures may be adversely affected by the market discount provisions
of sections 1276 through 1278 of the Code. Under the market discount rules, if a
Debenture is purchased after original issuance for a price lower than its
principal amount by more than a statutorily-defined de minimis amount and such
subsequent holder thereafter recognizes gain upon a disposition or retirement of
the Debenture, then the lesser of the gain recognized or the portion of the
market discount that has accrued on a ratable basis (or, if elected, on a
constant interest rate basis) generally will be treated as ordinary income at
the time of the disposition or retirement. Moreover, any market discount on a
Debenture may be taxable to an investor to the extent of appreciation at the
time of certain otherwise non-taxable transactions (e.g., gifts). Any accrued
market discount not previously taken into income prior to a conversion of a
Debenture, however, should carry over to the Common Stock received on conversion
and be treated as ordinary income upon a subsequent disposition of such Common
Stock to the extent of any gain recognized on such disposition. In addition,
absent an election to include market discount in income as it accrues, a holder
of a market discount debt instrument may be required to defer a portion of any
interest expense that otherwise may be deductible on any
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<PAGE> 59
indebtedness incurred or maintained to purchase or carry such debt instrument
until the holder disposes of the debt instrument in a taxable transaction.
SALE, EXCHANGE OR RETIREMENT OF DEBENTURES
Except as described above under "-- Conversion of Debentures into Common
Stock," each holder of Debentures generally will recognize gain or loss upon the
sale, exchange, redemption, repurchase, retirement, or other disposition of the
Debentures measured by the difference (if any) between (i) the amount of cash
and the fair market value of any property received (except to the extent, if
any, that such cash or other property is attributable to the payment of accrued
interest not previously included in income by the holder, which amount will be
taxable as ordinary income) and (ii) the holder's adjusted tax basis in those
Debentures (including any market discount previously included in income by the
holder). Each holder of Common Stock into which the Debentures are converted, in
general, will recognize gain or loss upon the sale, exchange, or other
disposition of the Common Stock measured under rules similar to those described
in the preceding sentence for the Debentures. Any such gain or loss recognized
on the sale, exchange, repurchase, retirement, or other disposition of a
Debenture or share of Common Stock should be capital gain or loss (except as
discussed under "-- Market Discount" above.) Pursuant to the recently enacted
Taxpayer Relief Act of 1997, long-term capital gains tax rates will apply to
dispositions by individuals of capital assets (such as the Debentures or Common
Stock) held for more than 18 months. The maximum long-term capital gains tax
rate applicable to individuals is currently 20% (10% for individuals in the 15%
tax bracket). Mid-term capital gains tax rates will apply to dispositions by
individuals of capital assets held for more than one year but not more than 18
months. The maximum mid-term capital gains tax rate applicable to individuals is
currently 28% (15% for individuals in the 15% tax bracket). Corporate taxpayers
continue to be subject to a maximum regular tax rate of 35% on all capital gains
and ordinary income. Investors acquiring Debentures in the Offering will have an
initial basis equal to the cash price paid therefor.
BACKUP WITHHOLDING
A holder of Debentures or Common Stock may be subject to "backup
withholding" at a rate of 31% with respect to certain "reportable payments,"
including interest and dividend payments. These backup withholding rules apply
if the holder, among other things, (i) fails to furnish a social security number
or other taxpayer identification number ("TIN") certified under penalties of
perjury within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN furnished is the correct number and
that such holder is not subject to backup withholding. A holder who does not
provide the Company with its correct TIN also may be subject to penalties
imposed by the IRS. Any amount withheld from a payment to a holder under the
backup withholding rules is creditable against the holder's federal income tax
liability, provided the required information is furnished to the IRS. Back-up
withholding will not apply, however, with respect to payments made to certain
holders, including corporations, tax-exempt organizations and certain foreign
persons, provided their exemption from backup withholding is properly
established.
The Company will report to the holders of Debentures and Common Stock and
to the IRS the amount of any "reportable payments" for each calendar year and
the amount of tax withheld, if any, with respect to such payments.
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<PAGE> 60
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
aggregate principal amount of Debentures set forth opposite their respective
names:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME OF DEBENTURES
- ---- ----------------
<S> <C>
Schroder & Co. Inc..........................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Smith Barney Inc............................................
Cowen & Company.............................................
McDonald & Company Securities, Inc..........................
------------
Total..................................................... $125,000,000
============
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the Debentures offered hereby, if any such Debentures are
purchased.
The Underwriters have advised the Company that they propose to offer the
Debentures directly to the public, initially at the public offering price set
forth on the cover page of this Prospectus Supplement; that the Underwriters
propose initially to allow a concession not in excess of % of the
principal amount of the Debenture to certain dealers; and that the Underwriters
and such dealers may initially allow a concession not in excess of %
of the principal amount of the Debenture to other dealers. After the initial
offering of the Debentures, the public offering price and such concessions may
be changed by the Underwriters.
The Company has granted an option to the Underwriters, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to $18.75
million additional principal amount of the Debentures at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus Supplement. The Underwriters may exercise such option only to cover
over-allotments in connection with the sale of the Debentures offered hereby.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company and its executive officers and directors have agreed with the
Underwriters that, for a period of 90 days following the Offering, they will not
offer, sell, contract to sell, grant an option to purchase, or otherwise dispose
(or announce any offer, sale, grant of any option, or other distribution) of any
shares of Common Stock or any securities convertible into or exchangeable for
shares of Common Stock without the prior written consent of Schroder & Co. Inc.
other than the issuance by the Company of Common Stock upon exercise of
outstanding options and grants of employee stock options or upon conversion of
the 6.75% Debentures, the 7% Debentures or the Debentures.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities
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<PAGE> 61
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the AMEX or otherwise and, if commenced,
may be discontinued at any time.
McDonald & Company Securities, Inc. acted as representative of the
underwriters or as placement agent in connection with previous offerings by the
Company and has served as financial advisor to the Company in connection with
the Sterling Merger. Schroder & Co. Inc. acted as financial advisor to Sterling
in connection with the Sterling Merger. All of the Representatives are acting as
representatives of the underwriters in the Concurrent Offering.
LEGAL MATTERS
Certain legal matters with respect to the Debentures offered hereby will be
passed upon for the Company by Rogers & Hardin LLP, Atlanta, Georgia and for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. Stroock &
Stroock & Lavan LLP has performed legal services for Sterling in connection with
the adoption of its shareholders' rights plan and the Sterling Merger.
EXPERTS
The supplemental consolidated financial statements of Alternative Living
Services, Inc. and subsidiaries as of December 31, 1995 and 1996 and for the
years ended December 31, 1994, 1995 and 1996 included herein and in the
registration statement of which the Prospectus is a part have been included in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing therein upon the authority of said firm as experts in
accounting and auditing.
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<PAGE> 62
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Supplemental Consolidated Balance Sheets as of December 31,
1996 and 1995............................................. F-3
Supplemental Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994.............. F-4
Supplemental Consolidated Statements of Changes in
Stockholders' Equity for years ended December 31, 1996,
1995 and 1994............................................. F-5
Supplemental Consolidated Statements of Cash Flows for years
ended December 31, 1996, 1995 and 1994.................... F-6
Notes to Supplemental Consolidated Financial Statements..... F-7
Supplemental Consolidated Balance Sheets as of September 30,
1997 (unaudited) and December 31, 1996.................... F-19
Supplemental Consolidated Statements of Operations for the
three months ended September 30, 1997 and 1996 and for the
nine months ended September 30, 1997 and 1996
(unaudited)............................................... F-20
Supplemental Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996
(unaudited)............................................... F-21
Notes to Supplemental Consolidated Financial Statements..... F-22
</TABLE>
F-1
<PAGE> 63
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-2
<PAGE> 64
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-3
<PAGE> 65
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-4
<PAGE> 66
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
stockholder............................ -- 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-5
<PAGE> 67
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-6
<PAGE> 68
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>
F-7
<PAGE> 69
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no transactions between Alternative Living Services, Inc. and
Sterling House Corporation prior to the combination.
(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.
F-8
<PAGE> 70
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-9
<PAGE> 71
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(K) NET 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 leasehold interest in a 44-unit assisted living facility located in
Liberal, Kansas in August 1996;
F-10
<PAGE> 72
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
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.
F-11
<PAGE> 73
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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-12
<PAGE> 74
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>
F-13
<PAGE> 75
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
(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
F-14
<PAGE> 76
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-15
<PAGE> 77
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of 3% of the employee's salary. Amounts expensed for matching contributions
during 1995 and 1996 were $40,000 and $43,000, respectively.
(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,
F-16
<PAGE> 78
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-17
<PAGE> 79
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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-18
<PAGE> 80
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 19,566 $ 39,455
Residence receivables, net................................ 5,562 2,032
Advances to unconsolidated affiliates..................... 14,155 --
Other current assets...................................... 12,252 10,877
-------- --------
Total current assets.............................. 51,535 52,364
-------- --------
Land........................................................ 43,343 11,389
Buildings & improvements.................................... 157,996 64,574
Furniture, fixtures & equipment............................. 21,196 9,142
Construction in progress.................................... 74,821 53,127
-------- --------
Total property, plant and equipment......................... 297,356 138,232
Less: accumulated depreciation.............................. (8,679) (5,310)
-------- --------
Property, plant & equipment, net............................ 288,677 132,922
-------- --------
Long-term investments....................................... 4,436 2,835
Investments in and advances to unconsolidated affiliates.... 2,168 1,649
Goodwill, net............................................... 5,424 5,216
Other assets................................................ 14,347 9,367
-------- --------
Total assets...................................... $366,587 $204,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 916 $ 985
Short-term notes payable.................................. 26,046 8,335
Accounts payable.......................................... 15,016 11,771
Accrued expenses.......................................... 17,788 10,741
-------- --------
Total current liabilities......................... 59,766 31,832
-------- --------
Long-term obligations, less current installments............ 110,478 33,238
Convertible debt............................................ 85,000 35,000
Deferred gain on sale....................................... 7,466 7,331
Minority interest........................................... 12,614 5,888
Stockholders' equity:
Common stock and additional paid-in capital............... 104,444 104,324
Accumulated deficit....................................... (13,181) (13,260)
-------- --------
Total stockholders' equity........................ 91,263 91,064
-------- --------
Total liabilities and stockholders' equity........ $366,587 $204,353
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-19
<PAGE> 81
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Resident service fees.......................... $35,528 $16,931 $87,783 $34,279
Other.......................................... 614 331 1,321 1,010
------- ------- ------- -------
Total operating revenue................ 36,142 17,262 89,104 35,289
------- ------- ------- -------
Operating expenses:
Residence operations........................... 22,563 11,199 56,153 22,986
Lease expense.................................. 6,672 2,802 18,088 5,833
General and administrative..................... 4,155 2,947 11,480 7,450
Depreciation and amortization.................. 3,023 1,170 6,828 2,580
Non-recurring charge........................... -- -- -- 977
------- ------- ------- -------
Total operating expenses............... 36,413 18,118 92,549 39,826
------- ------- ------- -------
Operating loss................................... (271) (856) (3,445) (4,537)
------- ------- ------- -------
Other income (expense):
Interest expense, net.......................... (1,617) (1,326) (2,236) (2,448)
Other, net..................................... (43) (28) (67) (35)
Equity in losses of unconsolidated
affiliates.................................. (58) (9) (195) (56)
Minority interest in losses of consolidated
subsidiaries................................ 3,190 12 6,022 24
------- ------- ------- -------
Total other income (expense) net....... 1,472 (1,351) 3,524 (2,515)
------- ------- ------- -------
Net income (loss)................................ $ 1,201 $(2,207) $ 79 $(7,052)
======= ======= ======= =======
Net Income Per Share Data:
Primary:
Net income (loss) per common and common
equivalent share.......................... $ 0.06 $ (0.13) $ 0.00 $ (0.49)
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding............. 19,087 17,160 18,989 14,395
======= ======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-20
<PAGE> 82
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 79 $ (7,052)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 6,828 2,580
Minority interest in losses of consolidated
subsidiaries.......................................... (6,022) (24)
Equity in losses of unconsolidated affiliates.......... 195 56
Increase in net resident receivables................... (3,775) (448)
Increase in other current assets....................... (2,462) (646)
Increase (decrease) in accounts payable................ 1,857 (211)
Increase in accrued expenses........................... 5,900 4,594
Changes in other assets and liabilities................ (5,310) (203)
--------- --------
Net cash used in operating activities....................... (2,710) (1,354)
--------- --------
Cash flows from investing activities:
Investment in property, plant and equipment and project
development costs..................................... (171,043) (83,960)
Net cash for acquisitions.............................. (22,914) (1,565)
Changes in advances to unconsolidated affiliates....... (12,393) (756)
--------- --------
Net cash used in investing activities....................... (206,350) (86,281)
--------- --------
Cash flows from financing activities:
Repayments of short-term note payable.................. (8,304) (13,844)
Repayments of long-term debt........................... (301) (14,167)
Net proceeds from issuance of debt..................... 121,568 66,378
Contributions by minority partners..................... 3,726 1,764
Issuance of common stock and other capital
contributions......................................... 44 42,410
Proceeds from sale/leaseback........................... 72,438 27,348
--------- --------
Net cash provided by financing activities................... 189,171 109,889
--------- --------
Net (decrease) increase in cash and cash equivalents........ (19,889) 22,254
Cash and cash equivalents:
Beginning of period.................................... 39,455 20,344
--------- --------
End of period.......................................... $ 19,566 $ 42,598
========= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-21
<PAGE> 83
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The supplemental consolidated balance sheets as of September 30, 1997 and
December 31, 1996, the supplemental consolidated statements of operations for
the three and nine months ended September 30, 1997 and 1996 and the supplemental
consolidated statements of cash flows for the nine months ended September 30,
1997 and 1996 contained herein include the accounts of the Company and Sterling
(collectively, the "Combined Company") and its affiliates which are under the
common financial control of the Combined Company. All significant intercompany
accounts have been eliminated in consolidation. In the opinion of management,
all adjustments (consisting only of normal recurring items) necessary for a fair
presentation of such supplemental consolidated financial statements have been
included. The results of operations for the nine months ended September 30,
1997, are not necessarily indicative of the results to be expected for the full
fiscal year.
The supplemental consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The accompanying supplemental consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements of the Company and Sterling included in their respective
annual reports on Form 10-K for the year ended December 31, 1996.
(2) ACQUISITIONS
On May 1, 1997, the Company acquired an assisted living residence under
construction in Mesa, Arizona which is expected to have an aggregate capacity of
61 residents. The acquisition represents an investment by the Company of
approximately $2.7 million in cash. This acquisition was accounted for as a
purchase.
In May 1997, the Company completed a series of related transactions
resulting in the Company acquiring the operations of three recently constructed,
Wynwood-type assisted living residences located in upstate New York with an
aggregate capacity of 313 residents (the "New York Transaction"). The Company
assumed operations of these residences effective as of March 31, 1997. The
Company is leasing one of these residences pursuant to an operating lease and
acquired a 51% majority interest in the two other residences for an investment
by the Company of $12.4 million, of which $3.1 million was paid in cash,
$867,000 was paid in the form of an 11% promissory note payable over a two year
term and the remainder was debt assumed. As a result of this transaction, the
Company's consolidated long-term debt increased by $17.5 million. The
acquisition of the majority interest in these two residences was accounted for
as a purchase.
On June 19, 1997, the Company acquired the remaining 81% partnership
interests not already owned by it in four residences for an aggregate purchase
price of $1.1 million. The four residences were simultaneously sold and leased
back pursuant to a 13-year sale and leaseback arrangement accounted for as an
operating lease.
On June 25, 1997, the Company acquired two Crossings-type assisted living
residences in Nevada for an aggregate purchase price of $13.2 million, $6.1
million of which was paid in cash and the remainder was debt assumed by the
Company. This transaction has been accounted for as a purchase.
On June 30, 1997, a wholly owned affiliate of the Company acquired two
Crossings-type assisted living residences located in upstate New York for $7.2
million in cash. This transaction was accounted for as a purchase.
F-22
<PAGE> 84
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 1, 1997, the Company acquired operations of three WovenHearts
type assisted living residences in Minnesota with an aggregate capacity of 202
beds through a lease agreement. The Company also entered into agreements to
manage one Wynwood and one WovenHearts type residences located in Massachusetts
and Minnesota respectively with aggregate capacity of 144 beds. The Company
anticipates acquiring ownership interests in both managed residences by the end
of the year.
In September 1997, Sterling purchased two assisted living residences in
Colorado for an aggregate purchase price of $6.7 million from a franchisee of
Sterling. These residences have an aggregate capacity of 74 units. Sterling also
entered into an agreement to manage two assisted living residences with
aggregate capacity of 99 units in Oklahoma and Texas, respectively. Sterling has
the option to enter into lease agreements on these residences in the fourth
quarter of 1997.
(3) DEBT FINANCING
On April 28, 1997, to partially fund its acquisition activity, the Company
obtained a $15 million bridge loan from RDV Capital Management L.P., a limited
partnership affiliated with Jerry L. Tubergen, one of the Company's directors.
This loan is unsecured, bears interest at prime plus one percent and principal
is repayable in April 1998 with accrued interest payable monthly.
On May 21, 1997, the Company sold at par $50,000,000 of 7.0% convertible
subordinated debentures due June 1, 2004. The debentures are convertible into
shares of common stock of the Company at the conversion price of $20.25 per
share, which equates in aggregate to 2,469,136 shares.
In September 1997, the Company obtained $25.0 million in bridge loan
financings from a health care REIT. These financings bear interest rates ranging
from 9.63% to 10.25% and are secured by 12 existing WovenHearts residences and
by eight residences currently under construction. These loans will be repaid out
of the proceeds of sale/leaseback transactions of the secured properties. These
borrowings have been classified as long-term debt on the September 30, 1997
balance sheet.
Through September 30, 1997, the Combined Company completed 33
sale/leaseback transactions resulting in net proceeds totaling $72 million. The
interest rate for the above transactions averaged 10%.
(4) SUBSEQUENT EVENT
On October 8, 1997, the Company obtained a non-binding commitment for a
$100 million credit facility from Nomura Asset Capital Corp. to be used for long
term financing of the Company's assisted living residences.
(5) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion
("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities that
could share in the earnings of the company, similar to fully diluted EPS under
APB No. 15. The Statement requires dual presentation of basic and diluted EPS by
entities with complex capital structures. The Company will adopt SFAS No. 128
for the financial statements for the year ended December 31, 1997.
F-23
<PAGE> 85
PROSPECTUS
SECURITIES
ALTERNATIVE LIVING SERVICES, INC.
Alternative Living Services, Inc., a Delaware corporation (the "Company"),
may offer from time to time, in one or more series, its debt securities (the
"Debt Securities"), shares of its preferred stock, $.01 par value per share (the
"Preferred Stock"), and shares of its common stock, $.01 par value per share
(the "Common Stock"). The Debt Securities, Preferred Stock and Common Stock are
collectively referred to herein as the "Securities". The Securities will have an
aggregate offering price of up to $325,000,000 and will be offered on terms to
be determined at the time of the offering.
In the case of Debt Securities, the specific title, the aggregate principal
amount, the ranking, the purchase price, the maturity, the rate and time of
payment of any interest, any redemption or sinking fund provisions, any
conversion provisions and any other specific term of the Debt Securities will be
set forth in an accompanying supplement to this Prospectus (the "Prospectus
Supplement"). In the case of Preferred Stock, the specific number of shares,
designation, stated value per share, liquidation preference per share, issuance
price, dividend rate (or method of calculation), dividend payment dates, any
redemption or sinking fund provisions, any conversion rights and other specific
terms of the series of Preferred Stock will be set forth in an accompanying
Prospectus Supplement. In the case of Common Stock, the specific number of
shares and issuance price per share will be set forth in an accompanying
Prospectus Supplement. The Prospectus Supplement will also disclose whether the
Securities will be listed on a national securities exchange and, if they are not
to be listed, the possible effects thereof on their marketability.
The Securities may be sold: (i) directly by the Company; (ii) through
underwriting syndicates represented by one or more managing underwriters, or
through one or more underwriters without a syndicate; and (iii) through agents
designated from time to time. The names of any underwriters or agents of the
Company involved in the sale of the Securities in respect of which this
Prospectus is being delivered and any applicable commissions or discounts will
be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution". The net proceeds to the Company from such sale will be set forth
in the Prospectus Supplement.
The Company's Common Stock is traded on the American Stock Exchange (the
"AMEX") under the symbol "ALI". On November 26, 1997, the closing sale price of
the Common Stock on the AMEX was $26 1/2 per share.
SEE "RISK FACTORS" IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT FOR CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 28, 1997.
<PAGE> 86
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission located at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the New York Regional
Office of the Commission, Seven World Trade Center, Suite 1300, New York, New
York 10048, and at the Chicago Regional Office of the Commission, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Such reports and other information may also be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006. The
Commission also maintains a World Wide Web Site that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission, at
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Securities offered hereby. The
Prospectus and any accompanying Prospectus Supplement do not contain all of the
information included in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Securities, reference is
hereby made to the Registration Statement including the exhibits and schedules
thereto. Statements contained in this Prospectus and any accompanying Prospectus
Supplement concerning the provisions or contents of any contract, agreement or
any other document referred to herein or therein are not necessarily complete.
With respect to each such contract, agreement or document filed as an exhibit to
the Registration Statement, reference is made to such exhibit for a more
complete description of the matters involved, and each such statement shall be
deemed qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. and
copies of it or any part thereof may be obtained from such office, upon payment
of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, as amended by
Amendment No. 1 on Form 10-K/A filed with the Commission on May 12, 1997; (ii)
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997; (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997; (iv) the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997; (v) the Company's Current Report on Form 8-K dated
December 31, 1996, filed with the Commission on January 15, 1997, as amended by
Amendment No. 1 on Form 8-K/A filed with the Commission on March 17, 1997; (vi)
the Company's Current Report on Form 8-K dated May 14, 1997, filed with the
Commission on May 27, 1997; (vii) the Company's Current Report on Form 8-K dated
July 30, 1997, filed with the Commission on August 14, 1997; (viii) the
Company's Current Report on Form 8-K dated September 23, 1997, filed with the
Commission on October 10, 1997, as amended by Amendment No. 1 on Form 8-K/A
filed with the Commission on November 6, 1997; and (ix) the description of the
Company's Capital Stock contained in the Company's Registration Statement on
Form 8-A, filed with the Commission on July 30, 1996. In addition, each document
filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to termination
of the offering
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<PAGE> 87
of Securities offered hereby shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date such document is
filed with the Commission.
Any statement contained herein, or in any document, all or a portion of
which is incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Prospectus to the extent that a statement contained herein, or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of the Registration Statement or this Prospectus. All
information appearing in this Prospectus is qualified in its entirety by the
information and financial statements (including notes thereto) appearing in the
documents incorporated herein by reference. This Prospectus incorporates
documents by reference which are not presented herein or delivered herewith.
These documents (other than exhibits to such documents which are not
specifically incorporated by reference into such documents) are available
without charge, upon written or oral request by any person to whom this
Prospectus has been delivered, from Thomas E. Komula, Senior Vice President, 450
N. Sunnyslope Road, Suite 300, Brookfield, Wisconsin 53005, telephone (414)
789-9565.
FORWARD LOOKING STATEMENTS
The matters discussed in this Prospectus under "Risk Factors," in addition
to certain statements contained elsewhere in this Prospectus, in the
accompanying Prospectus Supplement or in the Company's filings under the
Exchange Act, are "Forward-Looking Statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are thus prospective. Such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual future results or trends to differ materially from
future results or trends expressed or implied by such forward-looking
statements. The most significant of such risks, uncertainties and other factors
are discussed in the accompanying Prospectus Supplement under "Risk Factors" and
prospective investors are urged to carefully consider such factors. Updated
information will be periodically provided by the Company as required by the
Securities Act and the Exchange Act. The Company, however, undertakes no
obligation to publicly release the results of any revisions to such
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
3
<PAGE> 88
THE COMPANY
Alternative Living Services, Inc. is a leading national assisted living
company, operating 219 residences with an aggregate capacity of approximately
9,200 residents as of November 1, 1997. Of these residences, the Company owns
50, leases 101, holds majority interests in entities which own 20 and lease 12,
holds minority interests in entities which own 11 and lease 9, and manages 16
for other owners. The Company and its predecessor have operated high-acuity
assisted living residences since 1981, and 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 routine and skilled nursing 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" residential
settings which emphasize privacy, individual choice and independence. The
Company operates multiple residence models, each with a recognized brand name
and each serving a particular segment of the private pay elderly population.
Each residence model is designed to permit residents to age in place by meeting
their personal and health care needs across a range of pricing options.
Since 1993, the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions and mergers.
In October 1997, the Company completed the merger with Sterling, which at the
time operated 104 residences with an aggregate capacity of approximately 3,900
residents. As a result of the Sterling Merger, the Company added significant
depth to its experienced management team, acquired an additional high-acuity
residence model line in the Sterling House residence model and significantly
expanded its presence in the Midwest 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 offering of assisted living residence
models 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 (including Sterling Crossings
and Heartland) has developed 203 residences with an aggregate capacity of
approximately 8,700 residents. The Company intends to continue its development
strategy and, at November 1, 1997, is constructing 99 residences with an
aggregate capacity of approximately 4,200 residents and was developing an
additional 74 residences with an aggregate capacity of approximately 3,200
residents. Of these residences, at least 110 are expected to open during 1998.
The Company's executive offices are located at 450 North Sunnyslope Road,
Suite 300, Brookfield, Wisconsin 53005, and its telephone number is (414)
789-9565.
4
<PAGE> 89
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(1)....... -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) No preferred stock was outstanding during the periods presented; therefore,
the ratio of earnings to combined fixed charges and preferred stock
dividends has not been presented. Earnings consist of earnings from
continuing operations excluding unusual charges or extraordinary items, plus
fixed charges, reduced by the amount of unamortized interest capitalized.
Fixed charges consist of interest on debt, including amortization of debt
issuance costs, and a portion of rent expense estimated by management to be
the interest component of such rentals. Without giving effect to the
Sterling Merger, earnings of the Company were not sufficient to cover fixed
charges as follows: for the years ended December 31, 1992, 1993, 1994, 1995
and 1996, $130,000, $180,000, $691,000, $1,482,000 and $8,326,000,
respectively; and for the nine months ended September 30, 1996 and 1997,
$6,547,000 and $7,485,000, respectively.
USE OF PROCEEDS
Unless otherwise specified in the Prospectus Supplement which accompanies
this Prospectus, the net proceeds from the sale of the Securities offered from
time to time hereby will be used for the repayment of outstanding amounts under
the Company's temporary construction financing arrangements, to fund the
development of additional assisted living and dementia residences and for
general corporate purposes.
DILUTION
To the extent the Company offers Common Stock, information with respect to
dilution will be set forth in an accompanying Prospectus Supplement.
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The summary of the terms of the capital stock of the Company set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to the Certificate, and the Company's Restated Bylaws, as
amended (the "Bylaws"), copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Available
Information".
GENERAL
The Certificate authorizes 30,000,000 shares of Common Stock, par value
$.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per
share. As of November 1, 1997, the Company had 18,575,524 shares of Common Stock
issued and outstanding and no outstanding shares of Preferred Stock.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote is
required for all action to be taken by stockholders. Cumulative voting of shares
is prohibited. Accordingly, the holders of a majority of the voting power of the
shares voting for the election of directors can elect all of the directors if
they choose to do so. The Common Stock bears no preemptive rights, and is not
subject to redemption, sinking fund or conversion provisions. The shares of
Common Stock offered hereby will be, when issued and paid for, fully paid and
non-assessable.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Company's Board of Directors out of funds legally available
therefor, subject to the dividend and
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<PAGE> 90
liquidation rights of any preferred stock that may be issued (and subject to any
dividend restriction contained in any credit facility which the Company may
enter into in the future) and distributed pro rata in accordance with the number
of shares of Common Stock held by each stockholder.
The Common Stock is listed on the American Stock Exchange. The transfer
agent and registrar for the Common Stock is American Stock Transfer & Trust
Company.
PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Certificate and the Board of Directors' resolution relating to each series of
the Preferred Stock which will be filed with the Commission and incorporated by
reference to the Registration Statement of which this Prospectus is a part at or
prior to the time of the issuance of such series of Preferred Stock.
Under the Certificate, the Board of Directors of the Company is authorized
to establish and issue, from time to time, up to 5,000,000 shares of Preferred
Stock, in one or more series, with such dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preference as shall be stated in the resolution providing for the issue of a
series of such stock, adopted, at any time or from time to time, by the Board of
Directors of the Company.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
the dividend rate (or method of calculation), the dates on which dividends shall
be payable and the dates from which dividends shall commence to cumulate, if
any; (v) any redemption or sinking fund provisions; (vi) any conversion rights;
and (vii) any additional voting, dividend, liquidation, redemption, sinking fund
and other rights, preferences, privileges, limitations and restrictions.
The Preferred Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. Unless otherwise stated in a Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and distributions
of assets with each other series of the Preferred Stock. The rights of the
holders of each series of the Preferred Stock will be subordinate to those of
the Company's general creditors.
Dividend Rights. Unless otherwise stated in a Prospectus Supplement
relating to a particular series of the Preferred Stock, holders of shares of the
Preferred Stock of each series will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds of the Company
legally available therefor, cash dividends on such dates and at such rates as
will be set forth in, or as are determined by the method described in the
Prospectus Supplement relating to such series of the Preferred Stock. Such rate
may be fixed or variable or both. Each such dividend will be payable to the
holders of record as they appear on the stock books of the Company on such
record dates, fixed by the Board of Directors of the Company, as specified in
the Prospectus Supplement relating to such series of Preferred Stock.
Such dividends may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating to such series of Preferred Stock. If the Board
of Directors of the Company fails to
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<PAGE> 91
declare a dividend payable on a dividend payment date on any series of Preferred
Stock for which dividends are noncumulative, then the holders of such series of
Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company shall have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
dates. Dividends on the shares of each series of Preferred Stock for which
dividends are cumulative will accrue from the date on which the Company
initially issues shares of such series.
Unless otherwise stated in a Prospectus Supplement relating to a particular
series of the Preferred Stock, so long as the shares of any series of the
Preferred Stock shall be outstanding, unless (i) full dividends (including if
such Preferred Stock is cumulative, dividends for prior dividend periods) shall
have been paid or declared and set apart for payment on all outstanding shares
of the Preferred Stock of such series and all other classes and series of
Preferred Stock (other than Junior Stock, as defined below) and (ii) the Company
is not in default or in arrears with respect to the mandatory or optional
redemption or mandatory repurchase or other mandatory retirement of, or with
respect to any sinking or other analogous fund for, any shares of Preferred
Stock of such series or any shares of any other Preferred Stock of any class or
series (other than Junior Stock), the Company may not declare any dividends on
any shares of Common Stock or any other stock of the Company ranking as to
dividends or distributions of assets junior to such series of Preferred Stock
(the Common Stock and any such other stock being herein referred to as "Junior
Stock"), or make any payment on account of, or set apart money for, the
purchase, redemption or other retirement of, or for a sinking or other analogous
fund for, any shares of Junior Stock or make any distribution in respect
thereof, whether in cash or property or in obligations or stock of the Company,
other than Junior Stock which is neither convertible into, nor exchangeable or
exercisable for, any securities of the Company other than Junior Stock.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, voluntary or involuntary, the holders of each series
of the Preferred Stock will be entitled to receive out of the assets of the
Company available for distribution to stockholders, before any distribution of
assets or payment is made to the holders of Common Stock or any other shares of
stock of the Company ranking junior as to such distribution or payment to such
series of Preferred Stock, the amount set forth in the Prospectus Supplement
relating to such series of the Preferred Stock. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the Preferred
Stock of such series and such other shares of Preferred Stock will share ratably
in any such distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled. After payment to the
holders of the Preferred Stock of each series of the full preferential amounts
of the liquidating distribution to which they are entitled, the holders of each
such series of the Preferred Stock will be entitled to no further participation
in any distribution of assets by the Company.
If such payment shall have been made in full to all holders of shares of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes of stock ranking junior to the Preferred Stock
upon liquidation, dissolution or winding up, according to their respective
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of the Company with or
into any other corporation, or the sale, lease or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution or winding up of the Company.
Redemption. A series of the Preferred Stock may be redeemable, in whole or
from time to time in part, at the option of the Company, and may be subject to
mandatory redemption pursuant to a sinking fund or otherwise, in each case upon
terms, at the times and at the redemption prices set forth in the Prospectus
Supplement relating to such series. Shares of the Preferred Stock redeemed by
the Company will be restored to the status of authorized but unissued shares of
Preferred Stock of the Company.
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<PAGE> 92
In the event that fewer than all of the outstanding shares of a series of
the Preferred Stock are to be redeemed, whether by mandatory or optional
redemption, the number of shares to be redeemed will be determined by lot or pro
rata (subject to rounding to avoid fractional shares) as may be determined by
the Company or by any other method as may be determined by the Company in its
sole discretion to be equitable. From and after the redemption date (unless the
Company defaults in the payment of the redemption price plus accumulated and
unpaid dividends, if any), dividends shall cease to accumulate on the shares of
the Preferred Stock called for redemption and all rights of the holders thereof
(except the right to receive the redemption price plus accumulated and unpaid
dividends, if any) shall cease.
So long as any dividends on shares of any series of the Preferred Stock or
any other series of Preferred Stock of the Company ranking on a parity as to
dividends and distributions of assets with such series of the Preferred Stock
are in arrears, no shares of any such series of the Preferred Stock or such
other series of Preferred Stock of the Company will be redeemed (whether by
mandatory or optional redemption) unless all such shares are simultaneously
redeemed, and the Company will not purchase or otherwise acquire any such
shares; provided, however, that the foregoing will not prevent the purchase or
acquisition of such shares of Preferred Stock of such series or of shares of
such other series of Preferred Stock pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Preferred Stock
of such series and, unless the full cumulative dividends on all outstanding
shares of any cumulative Preferred Stock of such series and any other stock of
the Company ranking on a parity with such series as to dividends and upon
liquidation shall have been paid or contemporaneously are declared and paid for
all past dividend periods, the Company shall not purchase or otherwise acquire
directly or indirectly any shares of Preferred Stock of such series (except by
conversion into or exchange for stock of the Company ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation).
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of shares of Preferred
Stock to be redeemed at the address shown on the stock transfer books of the
Company. After the redemption date, dividends will cease to accrue on the shares
of Preferred Stock called for redemption and all rights of the holders of such
shares will terminate, except the right to receive the redemption price without
interest.
Conversion Rights. The terms, if any, on which shares of Preferred Stock
of any series may be exchanged for or converted (mandatorily or otherwise) into
shares of Common Stock or another series of Preferred Stock will be set forth in
the Prospectus Supplement relating thereto.
Voting Rights. Except as indicated below or in a Prospectus Supplement
relating to a particular series of the Preferred Stock, or except as required by
applicable law, the holders of the Preferred Stock will not be entitled to vote
for any purpose.
Unless otherwise stated in a Prospectus Supplement relating to a particular
series of the Preferred Stock, so long as any shares of Preferred Stock remain
outstanding, the Company shall not, without the consent or the affirmative vote
of the holders of a majority of the shares of each series of Preferred Stock
outstanding at the time given in person or by proxy, either in writing or at a
meeting (such series voting separately as a class) (i) authorize, create or
issue, or increase the authorized or issued amount of, any class or series of
stock ranking prior to such series of Preferred Stock with respect to payment of
dividends, or the distribution of assets on liquidation, dissolution or winding
up or reclassifying any authorized stock of the Company into any such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner which materially and adversely affects the powers,
preferences, voting power or other rights or privileges of such series of the
Preferred Stock or the holders thereof; provided, however, that any increase in
the amount of the authorized Preferred Stock or the creation or issuance of
other series of Preferred Stock, or any increase in the amount
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<PAGE> 93
of authorized shares of such series or of any other series of Preferred Stock,
in each case ranking on a parity with or junior to the Preferred Stock of such
series, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of the Preferred Stock shall have been
redeemed or called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
Transfer Agent and Registrar. The transfer agent, dividend and redemption
price disbursement agent and registrar for shares of each series of the
Preferred Stock will be set forth in the Prospectus Supplement relating thereto.
RESTRICTIONS ON BUSINESS COMBINATIONS AND CORPORATE CONTROL
Section 203 of the DGCL prohibits certain transactions between a publicly
held Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates and/or associates of such person,
beneficially owns, directly or indirectly, 15 percent or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
business combinations (defined broadly to include mergers, consolidations, sales
or other dispositions of assets having an aggregate value 10 percent or more of
the consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder acquired its stock, unless
(i) the business combination or the transaction whereby the person became an
interested stockholder is approved by the corporation's board of directors prior
to the date of such transaction; (ii) the interested stockholder acquired at
least 85 percent of the voting stock of the corporation in the transaction in
which it became an interested stockholder; or (iii) the business combination is
approved by a majority of the board of directors and by the affirmative vote of
two-thirds of the outstanding voting stock owned by disinterested stockholders
at an annual or special meeting.
Limitations on Directors Liability. The Certificate limits the liability
of directors and officers to the Company or its stockholders to the fullest
extent permitted by the DGCL. The inclusion of this provision in the Certificate
may have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an indenture (the "Indenture")
to be executed by the Company and the United States Trust Company of New York,
as trustee (the "Trustee"), a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the Indenture and the Debt Securities do not
purport to be complete. These summaries are qualified in their entirety by
reference to all of the provisions of the Indenture to which reference is hereby
made for a full description of such provisions, including the definitions
therein of certain terms and other information regarding the Debt Securities.
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Indenture. Whenever particular sections or defined terms of the
Indenture are referred to, it is intended that such sections or defined terms
shall be incorporated herein by reference. Copies of the form of the Indenture
are available for inspection during normal business hours at the principal
executive offices of the Company, 450 N. Sunnyslope Road, Suite 300, Brookfield,
Wisconsin 53005.
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GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder and provides that Debt Securities may
be issued from time to time in one or more series. The Prospectus Supplement
will describe certain terms of any Debt Securities offered thereby, including
(i) the title of such Debt Securities; (ii) any limit on the aggregate principal
amount of such Debt Securities and their purchase price; (iii) the date or dates
on which such Debt Securities will mature; (iv) the rate or rates per annum (or
manner in which interest is to be determined) at which such Debt Securities will
bear interest, if any, and the date from which such interest, if any, will
accrue; (v) the dates on which such interest, if any, on such Debt Securities
will be payable and the regular record dates for such interest payment dates;
(vi) any mandatory or optional sinking fund or analogous provisions; (vii)
additional provisions, if any, for the defeasance of such Debt Securities;
(viii) the date, if any, after which and the price or prices at which such Debt
Securities may, pursuant to any optional or mandatory redemption or repayment
provisions, be redeemed and the other detailed terms and provisions of any such
optional or mandatory redemption or repayment provisions; (ix) whether such Debt
Securities are to be issued in whole or in part in registered form represented
by one or more registered global securities (a "Registered Global Security")
and, if so, the identity of the depository for such Registered Global Security
or Debt Securities; (x) certain applicable United States federal income tax
consequences; (xi) any provisions relating to security for payments due under
such Debt Securities; (xii) any provisions relating to the conversion or
exchange of such Debt Securities into or for shares of Common Stock or Debt
Securities of another series; (xiii) any provisions relating to the ranking of
such Debt Securities in right of payment as compared to other obligations of the
Company; (xiv) the denominations in which such Debt Securities are authorized to
be issued; (xv) the place or places where principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable; and (xvi) any other
specific term of such Debt Securities, including any additional events of
default or covenants provided for with respect to such Debt Securities, and any
terms that may be required by or advisable under applicable laws or regulations.
CONVERSION RIGHTS
The terms, if any, on which Debt Securities of any series may be exchanged
for or converted into shares of Common Stock or Debt Securities of another
series will be set forth in the Prospectus Supplement relating thereto.
The conversion price will be subject to adjustment under certain
conditions, including (i) the payment of dividends (and other distributions) in
shares of Common Stock on any class of capital stock of the Company; (ii)
subdivisions, combinations and reclassifications of the Common Stock; (iii) the
issuance to all or substantially all holders of Common Stock of rights or
warrants entitling them to subscribe for or purchase shares of Common Stock at a
price per share (or having a conversion price per share) less than the then
current market price; and (iv) distributions to all or substantially all holders
of shares of Common Stock of evidences of indebtedness or assets (including
securities, but excluding those rights, warrants, dividends and distributions
referred to above and dividends and distributions not prohibited under the terms
of the Indenture) of the Company, subject to the limitation that all adjustments
by reason of any of the foregoing would not be made until they result in a
cumulative change in the conversion price of at least 1%. No adjustments in the
conversion price of the Debt Securities will be made for regular quarterly or
other periodic or recurring cash dividends or distributions. In the event the
Company shall effect any capital reorganization or reclassification of its
shares of Common Stock or shall consolidate or merge with or into any trust or
corporation (other than a consolidation or merger in which the Company is the
surviving entity) or shall sell or transfer substantially all of its assets to
any other trust or corporation, the holders of the Debt Securities of any series
shall, if entitled to convert such Debt Securities at any time after such
transaction, receive upon conversion thereof, in lieu of each share of Common
Stock into which the Debt Securities of such series would have been convertible
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prior to such transaction, the same kind and amount of stock and other
securities, cash or property as shall have been issuable or distributable in
connection with such transaction wit respect to each share of Common Stock.
A conversion price adjustment made according to the provisions of the Debt
Securities of any series (or the absence of provisions for such an adjustment)
might result in a constructive distribution to the holders of Debt Securities of
such series or holders of shares of Common Stock that would be subject to
taxation as a dividend. The Company may, at its option, make such reductions in
the conversion price, in addition to those set forth above, as the Board of
Directors of the Company deems advisable to avoid or diminish any income tax to
holders of shares of Common Stock resulting from any dividend or distribution of
shares of Common Stock (or rights to acquire shares of Common Stock) or from any
event treated as such for income tax purposes or for any other reason. The Board
of Directors will also have the power to resolve any ambiguity or correct any
error in the adjustments made pursuant to these provisions and its actions in so
doing shall be final and conclusive.
Fractional shares of Common Stock will not be issued upon conversion but,
in lieu thereof, the Company will pay a cash adjustment based upon market price.
The holders of Debt Securities of any series at the close of business on an
interest payment record date shall be entitled to receive the interest payable
on such Debt Securities on the corresponding interest payment date
notwithstanding the conversion thereof. However, Debt Securities surrendered for
conversion during the period from the close of business on any record date for
the payment of interest to the opening of business on the corresponding interest
payment date must be accompanied by payment of an amount equal to the interest
payable on such interest payment date. Holders of Debt Securities of any series
who convert Debt Securities of such series on an interest payment date will
receive the interest payable by the Company on such date and need not include
payment in the amount of such interest upon surrender of such Debt Securities
for conversion. Except as aforesaid, no payment or adjustment is to be made on
conversion for interest accrued on the Debt Securities of any series or for
dividends on shares of Common Stock.
OPTIONAL REDEMPTION
The Debt Securities of any series may be subject to redemption as permitted
or required by the terms of such Debt Securities on at least 30 days' prior
notice by mail. The Indenture does not contain any provision requiring the
Company to repurchase the Debt Securities of any series at the option of the
holders thereof in the event of a leveraged buyout, recapitalization or similar
restructuring of the Company, even though the Company's creditworthiness and the
market value of the Debt Securities may decline significantly as a result of
such transaction. The Indenture does not protect holders of the Debt Securities
of any series against any decline in credit quality, whether resulting from any
such transaction or from any other cause. The Company may at any time buy Debt
Securities of any series on the open market.
SUBORDINATION
The indebtedness evidenced by the Debt Securities of any series may be
subordinated and junior in right of payment to the extent set forth in the
Indenture to the prior payment in full of amounts then due or thereafter created
on all Senior Indebtedness (as defined). The terms, if any, on which the Debt
Securities of any series may be subordinated and junior in right of payment to
the prior payment in full of amounts then due or thereafter created on all
Senior Indebtedness will be set forth in the Prospectus Supplement relating
thereto. No payment shall be made by the Company on account of principal of (or
premium, if any) or interest on the Debt Securities of any series or on account
of the purchase or other acquisition of Debt Securities of any series, if there
shall have occurred and be continuing a default with respect to any Senior
Indebtedness permitting the holders to accelerate the maturity thereof or with
respect to the payment of any Senior Indebtedness, and
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<PAGE> 96
such default shall be the subject of a judicial proceeding or the Company shall
have received notice of such default from any holder of Senior Indebtedness,
unless and until such default or event of default shall have been cured or
waived or shall have ceased to exist. By reason of these provisions, in the
event of default on any Senior Indebtedness, whether now outstanding or
hereafter issued, payment of principal of (and premium, if any) and interest on
the Debt Securities of any series may not be permitted to be made until such
Senior Indebtedness is paid in full, or the event of default on such Senior
Indebtedness is cured or waived.
Upon any acceleration of the principal of the Debt Securities or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debt Securities of any series or the Trustee are entitled to
receive or retain any assets so distributed in respect of the Debt Securities.
By reason of this provision, in the event of insolvency, holders of the Debt
Securities of any series may recover less, ratably, than holders of Senior
Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post-filing interest is allowed in such proceedings), fees,
charges, expenses, reimbursement and indemnification obligations, and all other
amounts payable under or in respect of Indebtedness (as defined) of the Company
for money borrowed, whether any such Indebtedness exists as of the date of the
Indenture or is created, incurred, assumed or guaranteed after such date (other
than Indebtedness owed to a subsidiary of the Company, Indebtedness which is
expressly pari passu to the Debt Securities, Indebtedness which is expressly
subordinated to the Debt Securities, the Company's 7% Convertible Subordinated
Debentures due 2004 or the Company's 6.75% Convertible Subordinated Debentures
due 2006). There is no limit on the amount of Senior Indebtedness that the
Company may incur.
"Indebtedness" with respect to any Person is defined to mean:
(i) all indebtedness for money borrowed whether or not evidenced by a
promissory note, draft or similar instrument;
(ii) that portion of obligations with respect to leases that is
properly classified as a liability on a balance sheet in accordance with
generally accepted accounting principles;
(iii) notes payable and drafts accepted representing extensions of
credit;
(iv) any balance owed for all or any part of the deferred purchase
price or services which purchase price is due more than six months from the
date of incurrence of the obligation in respect thereof (except any such
balance that constitutes (a) a trade payable or an accrued liability
arising in the ordinary course of business or (b) a trade draft or note
payable issued in the ordinary course of business in connection with the
purchase of goods or services), if and to the extent such debt would appear
as a liability upon a balance sheet of such person prepared in accordance
with generally accepted accounting principles; and
(v) any deferral, amendment, renewal, extension, supplement or
refunding of any liability of the kind described in any of the preceding
clauses (i) through (iv);
provided, however, that, in computing the "Indebtedness" of any Person, there
shall be excluded any particular indebtedness if, upon or prior to the maturity
thereof, there shall have been deposited with a depositary in trust money (or
evidence of indebtedness if permitted by the instrument creating such
indebtedness) in the necessary amount to pay, redeem or satisfy such
indebtedness as it becomes due, and the amount so deposited shall not be
included in any computation of the assets of such Person.
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<PAGE> 97
DIVIDENDS, DISTRIBUTIONS AND ACQUISITIONS OF COMMON STOCK
The Company will not (i) declare or pay any dividend, or make any
distribution on its Common Stock to its stockholders (other than dividends or
distributions payable in Common Stock of the Company) or (ii) purchase, redeem,
or otherwise acquire or retire for value any of its Common Stock, or any
warrants, rights, or options to purchase or acquire any shares of its Common
Stock (other than the Debt Securities of any series or any other convertible
indebtedness of the Company that is neither secured nor subordinated to the Debt
Securities of any series), if at the time of such action an Event of Default has
occurred and is continuing or would exist immediately after such action. The
foregoing, however, will not prevent (i) the payment of any dividend within 60
days after the date of declaration when the payment would have complied with the
foregoing provision on the date of declaration; or (ii) the Company's retirement
of any of its Common Stock by exchange for, or out of the proceeds of the
substantially concurrent sale of, other Common Stock.
ADDITIONAL COVENANTS
Any additional covenants of the Company with respect to a series of the
Debt Securities will be set forth in the Prospectus Supplement relating thereto.
MODIFICATION OF THE INDENTURE
Under the Indenture, with certain exceptions, the rights and obligations of
the Company with respect to any series of Debt Securities and the rights of
Holders of such series may only be modified by the Company and the Trustee with
the consent of the Holders of at least a majority in principal amount of the
outstanding Debt Securities of such series. However, without the consent of each
Holder of any Debt Securities affected, an amendment, waiver or supplement may
not (i) reduce the principal of, or rate of interest on, any Debt Securities;
(ii) change the stated maturity date of the principal of, or any installment of
interest on, any Debt Securities; (iii) waive a default in the payment of the
principal amount of, or the interest on, or any premium payable on redemption
of, any Debt Securities; (iv) change the currency for payment of the principal
of, or premium or interest on, any Debt Securities; (v) impair the right to
institute suit for the enforcement of any such payment when due; (vi) adversely
affect any right to convert any Debt Securities; (vii) reduce the amount of
outstanding Debt Securities necessary to consent to an amendment, supplement or
waiver provided for in the Indenture; or (viii) modify any provisions of the
Indenture relating to the modification and amendment of the Indenture or waivers
of past defaults, except as otherwise specified.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Except as otherwise set forth in the accompanying Prospectus Supplement,
the following is a summary of certain provisions of the Indenture relating to
Events of Default, notice and waiver.
The following are Events of Default under the Indenture with respect to any
series of Debt Securities: (i) default in the payment of interest on the Debt
Securities of such series when due and payable, which continues for 30 days;
(ii) default in the payment of principal of (and premium, if any) on the Debt
Securities when due and payable, at maturity, upon redemption or otherwise,
which continues for five Business Days; (iii) failure to perform any other
covenant of the Company contained in the Indenture or the Debt Securities of
such series which continues for 60 days after written notice as provided in the
Indenture; (iv) default under any bond, debenture or other Indebtedness (as
defined in the Indenture) of the Company or any subsidiary if (a) either (x)
such Event of Default results from the failure to pay any such Indebtedness at
maturity or (y) as a result of such Event of Default, the maturity of such
Indebtedness has been accelerated prior to its expressed maturity and such
acceleration shall not be rescinded or annulled or the accelerated amount paid
within 10 days after notice to the Company of such acceleration, or such
Indebtedness having been discharged, and (b) the principal amount of such
Indebtedness, together with the
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<PAGE> 98
principal amount of any other such Indebtedness in default for failure to pay
principal or interest thereon, or the maturity of which has been so accelerated,
aggregates $10 million or more; and (v) certain events of bankruptcy, insolvency
or reorganization relating to the Company.
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, either the Trustee or the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series may
declare the Debt Securities due and payable immediately.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of any Default or Event of Default with respect to the Debt
Securities of any series, give to the Holders of Debt Securities notice of all
uncured Defaults and Events of Default known to it, but the Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of such Holders, except in the
case of a default in the payment of the principal of (or premium, if any) or
interest on any of the Debt Securities of such series.
The Indenture provides that the Holders of a majority in aggregate
principal amount of the Debt Securities of any series then outstanding may
direct the time, method and place of conducting any proceedings for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Debt Securities of such series. The right of a
Holder to institute a proceeding with respect to the Indenture is subject to
certain conditions precedent including notice and indemnity to the Trustee, but
the Holder has an absolute right to receipt of principal of (and premium, if
any) and interest on such Holder's Debt Securities on or after the respective
due dates expressed in the Debt Securities, and to institute suit for the
enforcement of any such payments.
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series then outstanding may on behalf of the Holders of all
Debt Securities of such series waive certain past defaults, except a default in
payment of the principal of (or premium, if any) or interest on any Debt
Securities of such series or in respect of certain provisions of the Indenture
which cannot be modified or amended without the consent of the Holder of each
outstanding Debt Security of such series affected thereby.
The Company will be required to furnish to the Trustee annually a statement
of certain officers of the Company stating whether or not they know of any
Default or Events of Default and, if they have knowledge of a Default or Event
of Default, a description of the efforts to remedy the same.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Indenture provides that the Company may merge or consolidate with, or
sell or convey all, or substantially all, of its assets to any other trust or
corporation, provided that (i) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) shall be any entity
organized and existing under the laws of the United States or a state thereof or
the District of Columbia (although it may, in truth, be owned by a foreign
entity) and such entity shall expressly assume by supplemental indenture all of
the obligations of the Company under the Debt Securities of any series and the
Indenture; (ii) immediately after giving effect to such transactions, no Default
or Event of Default shall have occurred and be continuing; and (iii) the Company
shall have delivered to the Trustee an Officers' Certificate and opinion of
counsel, stating that the transaction and supplemental indenture comply with the
Indenture.
GLOBAL SECURITIES
The Debt Securities may be issued in whole or in part in global form (the
"Global Securities"). The Global Securities will be deposited with a depository
(the "Depository"), or with a nominee for a Depository, identified in the
Prospectus Supplement. In such case, one or more Global Securities will be
issued in a denomination or aggregate denominations equal to the portion of the
aggregate principal amount of outstanding Debt Securities to be represented by
such Global Security or Securities. Unless and until it is exchanged in whole or
in part for Debt Securities in definitive form, a
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<PAGE> 99
Global Security may not be transferred except as a whole by the Depository for
such Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor for such Depository or a nominee
of such successor.
The specific material terms of the depository arrangement with respect to
any portion of a series of Debt Securities to be represented by a Global
Security will be described in the Prospectus Supplement. The Company anticipates
that the following provisions will apply to all depository arrangements.
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depository or such nominee as the
case may be, will be considered the sole owner or Holder of the Debt Securities
represented by such Global Security for all purposes under the Indenture;
provided, however, that for purposes of obtaining any consents or directions
required to be given by the Holders of the Debt Securities, the Company, the
Trustee and its agents will treat a person as the holder of such principal
amount of Debt Securities as specified in a written statement of the Depository.
Principal, premium, if any, and interest payments, if any, on Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made directly to the owners of beneficial
interests of such Global Security, except as may be limited by the terms of the
resolution of the Board of Directors of the Company that authorizes such series
of Debt Securities.
The Company expects that the depository for any Debt Securities represented
by a Global Security, upon receipt of any payment of principal, premium, if any,
or interest will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of such Depository. The
Company also expects that payments by participants will be governed by standing
instructions and customary practices, as is now the case with the securities
held for the accounts of customers registered in "street names," and will be the
responsibility of such participants.
If the Depository for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depository and a successor
Depository is not appointed by the Company within 90 days, the Company will
issue each Debt Security in definitive form to the beneficial owners thereof in
exchange for such Global Security. In addition, the Company may at any time and
in its sole discretion determine not to have any of the Debt Securities of a
series represented by one or more Global Securities and, in such event, will
issue Debt Securities of such series in definitive form in exchange for all of
the Global Security or Securities representing such Debt Securities.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York.
PLAN OF DISTRIBUTION
The Company may sell Securities in any of three ways; (i) directly to
investors; (ii) through underwriting syndicates represented by one or more
managing underwriters, or by one or more underwriters without a syndicate; or
(iii) through agents designated from time to time. The names of any underwriters
or agents of the Company involved in the sale of the Securities in respect of
which this Prospectus is being delivered and any applicable commissions or
discounts will be set forth in the Prospectus Supplement. The net proceeds to
the Company from each such sale will also be set forth in the Prospectus
Supplement.
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Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may engage in transactions with or perform
services for the Company in the ordinary course of business.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Rogers & Hardin LLP, Atlanta, Georgia.
EXPERTS
The (i) consolidated financial statements of Alternative Living Services,
Inc. and subsidiaries as of December 31, 1995 and 1996 and for the years ended
December 31, 1994, 1995 and 1996 have been included in the Company's Form 10-K
for the year ended December 31, 1996 and (ii) supplemental consolidated
financial statements of Alternative Living Services, Inc. and subsidiaries as of
December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and
1996 have been included in the Form 8-K/A filed by the Company on November 6,
1997; and each such financial statements have been incorporated by reference in
the Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing therein upon the authority of said firm
as experts in accounting and auditing.
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======================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the Prospectus, in connection with the Offering
covered by this Prospectus Supplement and the Prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus Supplement and the
Prospectus do not constitute an offer to sell or the solicitation of any offer
to buy, any of the Securities in any jurisdiction where, or to any person to
whom, it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus Supplement or the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that there has not been any
change in the facts set forth in this Prospectus Supplement or the Prospectus or
in the affairs of the Company since the date hereof.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... S-3
Risk Factors........................... S-7
Use of Proceeds........................ S-17
Price Range of Common Stock............ S-18
Capitalization......................... S-19
Selected Supplemental Consolidated
Financial Data....................... S-20
Management's Discussion and Analysis of
Combined Financial Condition and
Results of Combined Operations....... S-21
Business............................... S-27
Management............................. S-51
Description of Debentures.............. S-54
Certain Federal Income Tax
Considerations....................... S-57
Underwriting........................... S-60
Legal Matters.......................... S-61
Experts................................ S-61
Index to Supplemental Consolidated
Financial Statements................. F-1
PROSPECTUS
Available Information.................. 2
Incorporation of Certain Documents by
Reference............................ 2
Forward Looking Statements............. 3
The Company............................ 4
Ratio of Earnings to Fixed Charges..... 5
Use of Proceeds........................ 5
Dilution............................... 5
Description of the Company's Capital
Stock................................ 5
Description of Debt Securities......... 9
Plan of Distribution................... 15
Legal Matters.......................... 16
Experts................................ 16
</TABLE>
======================================================
======================================================
$125,000,000
ALTERNATE LIVING SERVICES
% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2002
-----------------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------------
SCHRODER & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
COWEN & COMPANY
MCDONALD & COMPANY
SECURITIES, INC.
DECEMBER , 1997
======================================================
