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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-37737
PROSPECTUS
ALTERNATIVE LIVING SERVICES, INC.
$50,000,000 7.0% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2004
(INTEREST PAYABLE JUNE 1 AND DECEMBER 1)
AND
2,469,136 SHARES COMMON STOCK, $.01 PAR VALUE PER SHARE,
ISSUABLE UPON CONVERSION THEREOF
_______________________________
This Prospectus relates to $50,000,000 aggregate principal amount of
Convertible Subordinated Debentures due 2004 (the "Debentures") of Alternative
Living Services, Inc., a Delaware corporation (the "Company" or "ALS"), issued
in a private placement on May 21, 1997 (the "Debenture Offering") and the
2,469,136 shares of the common stock, $.01 par value per share, of the Company
(the "Common Stock") that are issuable upon conversion of the Debentures,
subject to adjustment under certain circumstances. The Debentures and the
shares of Common Stock issued upon conversion of the Debentures may be offered
from time to time for the account of the holders of Debentures named herein
(the "Selling Securityholders"). The Company will not receive any proceeds from
this offering. See "Plan of Distribution."
The aggregate principal amount of Debentures that may be offered by
the Selling Securityholders pursuant to this Prospectus is $50,000,000.
Information concerning such Selling Securityholders may change from time to
time and will be set forth in Supplements to this Prospectus. Accordingly, the
aggregate principal amount of Debentures offered hereby may decrease. As of
the date of this Prospectus, the aggregate principal amount of Debentures
outstanding is $50,000,000.
The Debentures are convertible into Common Stock at any time after the
effectiveness of the registration statement of which this Prospectus is a part
and at or prior to maturity, unless previously redeemed, at a conversion price
of $20.25 per share, subject to adjustment under certain circumstances. Prior
to this offering, there has not been any public market for the Debentures,
although the Debentures have been eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. The Common
Stock is traded on the American Stock Exchange ("AMEX") under the symbol "ALI."
On November 12, 1997, the last reported sale price of the Common Stock, as
reported by AMEX, was $23 1/2 per share.
The Debentures are redeemable, in whole or in part, at the option of
the Company, for cash, at any time on or after July 15, 2000 on at least 30
days' notice at the redemption prices set forth herein plus accrued interest.
See "Description of Debentures."
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The Debentures are unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. The Indenture (as defined) does not restrict the
incurrence of Senior Indebtedness or other Indebtedness (as defined) by the
Company or any subsidiary. At September 30, 1997, the Company had approximately
$100.2 million of Senior Indebtedness.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE DEBENTURES AND
THE COMMON STOCK.
The Company has been advised by the Selling Securityholders that the
Selling Securityholders, acting as principals for their own account, directly,
through agents designated from time to time, or through dealers or underwriters
also to be designated, may sell all or a portion of the Debentures or shares of
Common Stock offered hereby from time to time on terms to be determined at the
time of sale. The aggregate proceeds to the Selling Securityholders from the
sale of Debentures and Common Stock offered by the Selling Securityholders
hereby will be the purchase price of such Debentures or Common Stock less any
commissions or discounts, if any. For information concerning indemnification
arrangements between the Company and the Selling Securityholders, see "Plan of
Distribution."
The Selling Securityholders and any broker-dealers, agents or
underwriters that participate with the Selling Securityholders in the
distribution of the Debentures or shares of Common Stock may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), in which event any commissions received by such
broker-dealers, agents or underwriters and any profit on the resale of the
Debentures or shares of Common Stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is November 14, 1997
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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 United States Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company may
be inspected 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, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Company has filed with the Commission a Registration Statement on
Form S-3 (the "Registration Statement") under the Securities Act, with respect
to the registration of the Debentures and the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus or in any document incorporated by
reference herein as to the contents of any contract or other documents referred
to herein or therein are not necessarily complete and, in each instance,
reference is made to the copy of such documents filed as an exhibit to the
Registration Statement or such other documents, which may be obtained from the
Commission as indicated above upon payment of the fees prescribed by the
Commission. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates documents by reference which are not
presented herein or delivered herewith. Copies of such reports, proxy
statements and other information filed by the Company, other than exhibits to
such documents unless such exhibits are specifically incorporated herein by
reference, are available without charge upon written or oral request from the
Chief Financial Officer of the Company, 450 North Sunnyslope Road, Suite 300,
Brookfield, Wisconsin 53005, Telephone (414) 789-9565.
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 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; (v) the
Company's Current Report on Form 8-K dated May 14, 1997, filed with the
Commission on May 27, 1997; (vi) the Company's Current Report of Form 8-K dated
July 30, 1997, filed with the Commission on August 14,1997; (vii) 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 (viii) 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.
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All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date hereof shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this
Prospectus from the date of filing thereof. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statements so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The matters discussed in this Prospectus under "Risk Factors," in
addition to certain statements contained elsewhere in this Prospectus 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 this Prospectus 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.
-------------------
Crossings(R) and WovenHearts(R) are registered service marks of the
Company and the Company claims service mark protection in the marks Wynwood(SM)
and Clare Bridge(SM). Sterling House(R) is a registered service mark of
Sterling House Corporation.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus and in the
documents incorporated in this Prospectus by reference. Prospective investors
should carefully review the matters set forth under "Risk Factors" before
making a decision with respect to an investment in the Debentures or the
Common Stock.
THE COMPANY
Alternative Living Services, Inc. is a national assisted living company
operating 219 residences with an aggregate capacity to accommodate approximately
9,200 residents as of November 1, 1997. Of these residences, the Company owns
48, leases 101, holds majority interests in 34 (22 of which are owned and 12 of
which are leased), holds minority interests in 20 (11 of which are owned and
nine of which are leased) and manages 16. The Company provides a full range of
assisted living services in its residences for the frail elderly and
free-standing specialty care residences for individuals with Alzheimer's disease
and other dementias. The Company and its predecessor have operated assisted
living residences since 1981, 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 and health monitoring) to its residents. In
addition, the Company offers a wide range of specialized services, including
behavior management and environmental adaptation programs, to residents who
suffer from Alzheimer's disease and other dementias. All of these services are
provided on a 24-hour basis in "home-like" settings which emphasize privacy,
individual choice and independence. The Company operates five distinct assisted
living product lines (Clare Bridge, Wynwood, Crossings, Sterling House and
WovenHearts), each serving a particular segment of the private pay elderly
population. Each assisted living product line is designed to permit residents
to age in place by meeting their personal and health care needs across a range
of pricing options.
Since 1993, the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions. In October
1997, the Company completed the merger (the "Sterling Merger") with Sterling
House Corporation ("Sterling"), which, at the time, operated 104 residences
with an aggregate capacity of 3,892 residents. As a result of the
Sterling Merger, the Company added significant depth to its experienced
management team, acquired a fifth product line in the Sterling House residence
model and significantly expanded its presence in the Mid west and southeast.
In 1996, the Company acquired New Crossings International Corporation, an
assisted living company which operated 15 residences with a capacity of
approximately 1,420 residents throughout the Western United States, and
Heartland Retirement Services, Inc., an assisted living company which operated
20 WovenHearts residences throughout Wisconsin. As a result of these
transactions, the Company expanded into several new geographic markets and
broadened its assisted living product lines through the addition of the
Crossings apartment style residence model and the WovenHearts residence model
designed to serve frail elderly individuals in moderate income markets and
smaller communities. The Company has also significantly expanded its
operations through the development of free-standing residences. Through
November 1, 1997, the Company has developed 203 residences with an aggregate
capacity to accommodate approximately 8,700 residents. The Company intends to
continue its development strategy and, at November 1, 1997, is constructing 99
residences and is developing an additional 74 residences. Of these residences,
110 to 130 are expected to open during 1998.
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.
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Unless the context otherwise requires, references in this Prospectus
to "ALS" shall mean Alternative Living Services, Inc., it predecessor entity
and its subsidiaries.
RISK FACTORS
See "Risk Factors" beginning on page 10 for a discussion of certain
factors which should be considered prospective investors in evaluating an
investment in the Debentures or the Common Stock.
USE OF PROCEEDS
The proceeds from the sale of the Debentures and shares of Common
Stock offered hereby are solely for the account of the Selling Securityholders.
Accordingly, the Company will receive none of the proceeds from sales thereof.
DESCRIPTION OF DEBENTURES
<TABLE>
<S> <C>
The Debentures . . . . . . . . . . . . . . . . . . . . . $50,000,000 of 7% Convertible Subordinated
Debentures due 2004 issued under the Indenture dated
May 21, 1997 between the Company and IBJ Schroder
Bank & Trust Company, as trustee (the "Indenture").
</TABLE>
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<TABLE>
<S> <C>
Interest Payment Dates . . . . . . . . . . . . . . . . . June 1 and December 1, commencing December 1, 1997.
Maturity Date . . . . . . . . . . . . . . . . . . . . . . June 1, 2004.
Conversion Rights . . . . . . . . . . . . . . . . . . . . The holders of the Debentures are entitled at any
time, subject to prior redemption or repurchase, to
convert the Debentures, or portions thereof (if the
portions are $1,000 or whole multiples thereof) into
shares of the Common Stock at the conversion price
of $20.25 per share (subject to certain
adjustments). See "Description of Debentures -
Conversion Rights."
Optional Redemption . . . . . . . . . . . . . . . . . . . The Debentures are not redeemable by the Company
prior to June 15, 2000. On or after June 15, 2000
the Debentures are redeemable on at least 30 days'
and not more than 60 days' prior notice at the
option of the Company, in whole or in part at any
time, at the redemption prices set forth herein, in
each case together with accrued interest. See
"Description of Debentures - Optional Redemption."
Consolidation, Merger, Sale or Conveyance. . . . . . . . . . The Indenture provides that the Company may not
merge or consolidate with, or sell or convey all, or
substantially all, of its assets to another person
unless such person is a company or a trust; such
person assumes by supplemental indenture all the
obligations of the Company under the Debentures and
the Indenture; and immediately after the transaction
no default or Event of Default shall exist. See
"Description of Debentures - Consolidation, Merger,
Sale or Conveyance," and "- Events of Default,
Notice and Waiver."
Subordination . . . . . . . . . . . . . . . . . . . . . . The payment of the principal of and premium, if any,
and interest on the Debentures is subordinated in
right of payment to the prior payment in full of
amounts then due on all existing and future Senior
Indebtedness (as defined herein). The Indenture
contains no limitations on the incurrence of
additional Senior Indebtedness or other indebtedness
by the Company. See "Description of Debentures -
Subordination of Debentures."
</TABLE>
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<TABLE>
<S> <C>
Events of Default . . . . . . . . . . . . . . . . . . . . An Event of Default with respect to the Debentures
includes the occurrence of any of the following:
default for 30 days in payment of interest; default
in payment of principal at maturity, upon redemption
or otherwise, which continues for five business
days; acceleration of any indebtedness or money
borrowed of at least $5,000,000 principal amount if
such indebtedness is not paid or such acceleration
is not annulled within 10 days after notice to the
Company of such acceleration; failure by the Company
for 60 days after notice to it to comply in any
material respect with any of its other agreements in
the Indenture or the Debentures; and certain events
of bankruptcy or insolvency. If an Event of Default
occurs and is continuing, the Trustee or the holders
of at least a majority in principal amount of the
Debentures may declare all the Debentures to be due
and payable immediately. See "Description of
Debentures - Events of Default, Notice and Waiver."
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . Prior to this offering, there has not been any
public market for the Debentures, although the
Debentures have been eligible for trading in the
Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") market.
</TABLE>
Description of Common Stock
<TABLE>
<S> <C>
The Common Stock . . . . . . . . . . . . . . . . . . . . 2,469,136 shares of Common Stock are issuable upon
conversion of the Debentures. The Debentures are
convertible into Common Stock at a conversion price
of $20.25 per share, subject to adjustment under
certain circumstances. See "Description of Capital
Stock" and "Description of Debentures - Conversion
Rights."
Shares Outstanding . . . . . . . . . . . . . . . . . . . As of November 1, 1997, there were 18,575,524 shares of
Common Stock outstanding. As of the date of this
Prospectus, none of the Debentures have been
converted into shares of Common Stock.
</TABLE>
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<TABLE>
<S> <C>
Shares Outstanding if all
Debentures are Converted . . . . . . . . . . . . . . . . 21,044,660 shares of Common Stock would be
outstanding if all of the Debentures were converted
into shares of Common Stock.
Dividend Policy . . . . . . . . . . . . . . . . . . . . . The Company has never declared or paid a cash
dividend to stockholders. The Company's Board of
Directors presently intends to retain all earnings
to finance the expansion of the Company's operations
and does not expect to authorize cash dividends in
the foreseeable future. Any payment of cash
dividends in the future will depend upon the
Company's earnings, capital requirements and other
factors considered relevant by the Company's Board
of Directors. Certain of the Company's debt
agreements restrict the amount of dividends which
may be paid.
Trading . . . . . . . . . . . . . . . . . . . . . . . . . The Common Stock is traded on the American Stock
Exchange under the symbol "ALI".
</TABLE>
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) Computed by dividing earnings by total fixed charges. 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. Earnings 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.
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RISK FACTORS
An investment in the Debentures or the Common Stock 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, before purchasing the Debentures or the Common
Stock in this offering.
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. For the years ended December 31, 1994, 1995 and 1996, the Company
incurred operating losses of $390,000, $1.0 million and $4.1 million,
respectively, and net losses of $643,000, $1.7 million and $7.8 million,
respectively. For the nine months ended September 30, 1997, the Company incurred
an operating loss and net loss of $1.7 million and $57,000, respectively. On a
pro forma basis giving effect to the Sterling Merger as if it had occurred as of
January 1, 1994, the Company would have incurred operating losses of $5.7
million and $3.4 million and a net loss of $8.8 million and net income of
$79,000 for the year ended December 31, 1996 and for the nine months ended
September 30, 1997, respectively.
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 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."
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS
The Company had lease expense of $6.1 million and $10.7 million for the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. On a pro forma basis giving effect to the Sterling Merger as if it
had occurred as of January 1, 1994, the Company's total indebtedness as of
September 30, 1997 would have been $222 million, and its net interest expense
and lease expense would have been $3.2 million and $9.0 million, respectively,
for the year ended December 31, 1996 and $2.2 million and $18.1 million,
respectively, 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
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completion of construction, permanent financing for newly developed residences
may not be available or may be available only on terms that are unfavorable or
unacceptable to the Company.
There can be no assurance that the Company will generate sufficient
cash flow to meet its obligations. Any payment or other default with respect to
such obligations could cause the lender to foreclose upon the residences
securing the indebtedness or, in the case of an operating lease, 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."
INTEGRATION OF OPERATIONS FOLLOWING THE STERLING MERGER
The merger of the Company with Sterling, 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.
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 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
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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 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 million (of which $281
million has been utilized in sale/leaseback and mortgages financing
transactions through November 1, 1997) and with a mortgage lender for
construction and long- term mortgage financing aggregating $100 million (none
of which has been used as of November 1, 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
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<PAGE> 13
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 $34 million, or 20%, of the Company's total indebtedness
as of November 1, 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.
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<PAGE> 14
SUBORDINATION
The Debentures are expressly subordinated in right of payment to all
existing and future Senior Indebtedness of the Company. At September 30, 1997,
the Company's Senior Indebtedness aggregated approximately $100.2 million.
Neither the Indenture nor the Debentures limit the ability of the Company to
incur additional Senior Indebtedness or other indebtedness by the Company. In
connection with the Sterling Merger, the Company assumed $35 million in
principal amount of the 6.75% Convertible Subordinated Debentures due 2006
which are convertible into Common Stock with a conversion price of $20.38 per
share, subject to adjustments under certain circumstances. The Indenture and
the Debentures do not contain any financial covenants or similar restrictions
with respect to the Company and, therefore, the holders of the Debentures have
no protection (other than rights upon Events of Default as described under
"Description of Debentures") from adverse changes in the Company's financial
condition. By reason of the subordination of the Debentures, in the event of
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up
of the business of the Company or upon a default in payment with respect to any
indebtedness of the Company or an event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of the Company
will be available to pay the amounts due on the Debentures only after all
Senior Indebtedness has been paid in full.
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 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.
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<PAGE> 15
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.
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, 53 of the Company's operating residences were jointly owned,
directly or indirectly, with venture partners. Of the 173 of the Company
residences which were either under construction or development as of November
1, 1997, a significant portion of such residences are being or will be
constructed or developed under joint venture 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.
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
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<PAGE> 16
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.
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 involve large claims and result in the
incurrence of significant defense costs. In addition, compared to more
institutional long-term care facilities, assisted living residences (especially
dementia care residences) of the type operated by the Company offer residents a
greater degree of independence in their daily lives. This increased level of
independence, however, may subject the resident and the Company to certain
risks that would be reduced in more institutionalized settings. The Company
currently maintains liability insurance intended to cover such claims which it
believes is adequate based on the nature of the risks, 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
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<PAGE> 17
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 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 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. Giving effect to the reservation of
shares issuable upon conversion of the Debentures and the Company's outstanding
$35,000,000 principal amount of 6.75% Convertible Subordinated Debentures due
2006 (the "6.75% Debentures") and exercise of stock options previously granted
or available to be granted under the Company's stock option plans, the Company
will have 5,415,369 shares of authorized but unissued Common Stock. 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 these additional shares without stockholder approval, and the preferred
shares can be issued with such rights, preferences and limitations as may be
determined by the 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 Debentures and the 6.75% 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
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<PAGE> 18
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.
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.
Holders of the Debentures and the 6.75% Debentures have the right to
convert the such debentures into Common Stock at a conversion price of $20.25
or $20.38 per share, respectively, at any time after the registration
statements which have been filed by the Company with respect thereto are
declared effective by the Commission. If holders elect to convert all of the
outstanding Debentures and 6.75% Debentures into shares of Common Stock, the
Company would issue an additional 4,186,506 shares of Common Stock.
POSSIBLE PRICE VOLATILITY OF DEBENTURES AND THE COMMON STOCK
The market price of the Debentures and Common Stock offered hereby
could be subject to significant fluctuations in response to various factors and
events, including the liquidity of the market for the Debentures and Common
Stock 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 Debentures and
Common Stock.
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<PAGE> 19
USE OF PROCEEDS
The proceeds from the sale of the Debentures and shares of Common Stock
offered hereby are solely for the account of the Selling Securityholders.
Accordingly, the Company will receive none of the proceeds from sales thereof.
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<PAGE> 20
SELLING SECURITYHOLDERS
The Debentures being offered hereby were acquired by the Selling
Securityholders in connection with a private placement of the Debentures by the
Company on May 21, 1997 pursuant to Rule 144A, and Regulation D under the
Securities Act or in permitted resale transactions from the initial purchasers
of the Debentures (the "Initial Purchasers") or holders acquiring such
Debentures from prior holders thereof in further permitted resale transactions.
The following table sets forth information concerning the principal amount of
Debentures beneficially owned by such Selling Securityholders which may be
offered from time to time pursuant to this Prospectus. Other than as a result
of the ownership of Debentures or Common Stock, none of the Selling
Securityholders has had any material relationship with the Company within the
past three years, except as noted herein. The table has been prepared based
upon information furnished to the Company by the Trustee (as defined) for the
Debentures, by The Depository Trust Company (the "Depository"), and by or on
behalf of the Selling Securityholders.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF DEBENTURES OF DEBENTURES PERCENT OF OUTSTANDING
NAME BENEFICIALLY OWNED THAT MAY BE SOLD DEBENTURE
----------------- ---------------------------- -------------------------- ----------------------------
<S> <C> <C> <C>
</TABLE>
Information concerning the Selling Securityholders may change from time
to time and will be set forth in Prospectus Supplements. As of the date of this
Prospectus, the aggregate principal amount of Debentures outstanding is
$50,000,000.
Because the Selling Securityholders may offer all or some of the
Debentures and shares of Common Stock issued upon conversion thereof pursuant
to the offering contemplated by this Prospectus, and because there are
currently no agreements, arrangements or understandings with respect to the
sale of any of the Debentures or shares of Common Stock that will be held by
the Selling Securityholders after completion of this offering, no estimate can
be given as to the principal amount of Debentures or shares of Common Stock
that will be held by the Selling Securityholders after completion of this
offering. See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from this offering.
The Company has been advised by the Selling Securityholders that the Selling
Securityholders may sell all or a portion of the Debentures and shares of
Common Stock offered hereby from time to time on terms to be determined at the
times of such sales. The Debentures and shares of Common Stock offered hereby
be sold from time to time by the Selling Securityholders or by pledgees,
donees, transferees or other successors in interest. Such sales may be made on
one or more exchanges or in the over-the-counter market, or otherwise at prices
and at terms then prevailing or at prices related to the then-current market
price, or in negotiated transactions. The Debentures and shares of Common Stock
offered hereby may be sold by one or more of the following: (a) a block trade
in which the broker or dealer so engaged will attempt to sell the Debentures
and shares of Common Stock offered hereby as agent but may position and resell
a portion
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<PAGE> 21
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; and (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers. In effecting sales,
brokers or dealers engaged by the Selling Securityholders may arrange for other
brokers or dealers to participate. Brokers or dealers will receive commissions
or discounts from the Selling Securityholders in amounts to be negotiated
immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. To the extent
required, the aggregate principal amount of Debentures and number of shares of
Common Stock to be sold, the names of the Selling Securityholders, the purchase
price, the name of any such agent, dealer or underwriter and any applicable
commissions with respect to a particular offer will be set forth in an
accompanying Prospectus Supplement. The aggregate proceeds to the Selling
Securityholders from the sale of the Debentures and Common Stock offered by the
Selling Securityholders hereby will be the purchase price of such Debentures
and shares of Common Stock less any commissions. There is no assurance that the
Selling Securityholders will sell any or all of the Debentures and shares of
Common Stock offered hereby.
The Debentures and the shares of Common Stock issued upon conversion of
the Debentures may be sold from time to time in one or more transactions at
fixed offering prices, which may be changed, or at varying prices determined at
the time of sale or at negotiated prices. Such prices will be determined by the
holders of such securities or by agreement between such holders and
underwriters or dealers who may receive fees or commissions in connection
therewith.
The outstanding Common Stock is listed on the AMEX and the shares of
Common Stock issuable upon conversion of the Debentures has been approved for
listing thereon. The Company does not intend to apply for listing of the
Debentures on any national securities exchange or on Nasdaq. The Company does
not anticipate that an active market for the Debentures will develop.
In order to comply with the securities laws of certain states, if
applicable, the Debentures and shares of Common Stock offered hereby will be
sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states the Debentures and shares of Common
Stock offered hereby may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Debentures and the shares of Common
Stock issued upon conversion of the Debentures may not simultaneously engage in
market making activities with respect to the Common Stock for a period of two
business days prior to the commencement of such distribution. In addition and
without limiting the foregoing, each Selling Securityholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Rules 10b-6 and 10b-7, which
provisions may limit the timing of purchase and sales of shares of the Common
Stock by the Selling Securityholders.
The Debentures were originally sold to the Initial Purchasers on May
21, 1997 in a private placement at a purchase price of 100% of their principal
amount. Under certain circumstances, the Company agreed to indemnify and hold
the Initial Purchasers and certain subsequent holders of the Debentures
harmless against certain liabilities under the Securities Act that could arise
in connection with the sale of the Debentures by the Initial Purchasers or such
subsequent holders.
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<PAGE> 22
The Company will pay all expenses incident to this offering and sale of
the Debentures and Common Stock to the public other than underwriting discounts
and selling commissions and fees.
The Company has filed the Registration Statement of which this
Prospectus is a part to satisfy its obligations under the Registration Rights
Agreement dated May 21, 1997 by and between the Company and the Initial
Purchasers (the "Registration Rights Agreement"). Pursuant to the Registration
Rights Agreement, the Company has also agreed to prepare and file such
amendments and supplements to the Registration Statement of which this
Prospectus is a part as may be necessary to keep the Registration Statement
effective until all the Debentures and the shares of Common Stock issuable upon
conversion thereof have been sold thereby or until the Debentures and the
shares of Common Stock issuable upon conversion thereof are no longer, by
reason of Rule 144(k) promulgated under the Securities Act or any other rule of
similar effect, required to be registered for the sale thereof by the holders
thereof. The Registration Rights Agreement entitles the Company to suspend
temporarily the right of holders of Registrable Securities to make dispositions
of the Debentures or the Common Stock pursuant to the Registration Statement to
the extent the Company's Board of Directors determines such suspension to be
necessary in light of the existence of any undisclosed acquisition, financing
activity or other material event the disclosure of which may reasonably be
expected to materially disadvantage the Company.
DESCRIPTION OF DEBENTURES
The Debentures were issued under an Indenture dated as of May 21, 1997
(the "Indenture"), executed by the Company and IBJ Schroder Bank & Trust
Company, as the trustee under the Indenture (the "Trustee"). The terms of the
Debentures include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended.
The following is a summary of certain provisions of the Indenture and
does not purport to be complete and is qualified in its entirety by reference
to the detailed provisions of the Indenture, including the definitions of
certain terms therein to which reference is hereby made, for a complete
statement of such provisions. Wherever particular provisions or sections of
the Indenture or terms defined therein are referred to herein, such provisions
or definitions are incorporated herein by reference.
GENERAL
The Debentures are unsecured general obligations of the Company,
subject to the rights of holders of Senior Indebtedness of the Company, and
will mature on June 1, 2004. The Debentures are limited to $50.0 million
aggregate principal amount and bear interest payable semiannually on June 1 and
December 1 of each year, commencing December 1, 1997, at the per annum rate of
7.0%. The first payment will be for the period from the date of delivery to
December 1, 1997. The Company will pay interest on the Debentures to the
persons who are registered holders of Debentures at the close of business on
the May 15 or November 15 preceding the interest payment date. Principal (and
premium, if any) and interest will be payable, the Debentures will be
convertible and exchangeable, and transfers thereof will be registerable, at
the office or agency of the Company maintained for such purposes, initially at
the offices of the Trustee. The Company may pay principal and interest by
check and may mail an interest check to a holder's registered address. Holders
must surrender Debentures to a Paying Agent to collect principal payments.
-22-
<PAGE> 23
Initially, the Trustee will act as Paying Agent, Registrar and
Conversion Agent. The Company may change any Paying Agent, Registrar,
Conversion Agent or co-registrar upon prior written notice to the Trustee and
may act in any such capacity itself.
DELIVERY AND FORM OF DEBENTURES
Those Debentures initially sold to qualified institutional buyers (as
defined in Rule 144A under the Securities Act) were issued in global form
represented by a single global Debenture (the "Rule 144A Global Security") and
were deposited on May 21, 1997 with the Depository and registered in the name
of Cede & Co., as nominee of the Depository. Those Debentures that were
initially sold to institutional accredited investors were initially issued in
fully registered form.
A holder may transfer or exchange Debentures in accordance with the
Indenture. No service charge will be made for any registration or transfer,
exchange or conversion of Debentures, except for any tax or other governmental
charges that may be imposed in connection therewith. The Registrar need not
transfer or exchange any Debentures selected for redemption. Also, in the
event of a partial redemption, it need not transfer or exchange any Debentures
for a period of 15 days before selecting Debentures to be redeemed. The
Indenture does not contain any provision requiring the Company to repurchase
the Debentures 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 credit worthiness and the market value of the Debentures may
decline significantly as a result of such transaction. The Indenture does not
protect holders of the Debentures against any decline in credit quality,
whether resulting from any such transaction or from any other cause. The
registered holder of a Debenture may be treated as its owner for all purposes.
CONVERSION RIGHTS
The holders of the Debentures are entitled at any time after the
effective date of the Registration Statement of which this Prospectus is a part
and prior to maturity, subject to prior redemption, to convert the Debentures
or portions thereof (which are $1,000 or multiples thereof) into shares of
Common Stock at the conversion price set forth in the Debenture (subject to
adjustments as described below). No payment or adjustment will be made for
accrued interest on a converted Debenture. If any Debenture not called for
redemption is converted between a record date for the payment of interest and
the next succeeding interest payment date, such Debenture must be accompanied
by funds equal to the interest payable to the registered holder on such
interest payment date on the principal amount so converted. The Company will
not issue fractional interests in shares of Common Stock upon conversion of the
Debentures and instead will deliver a check for the fractional share based upon
the market value of the Common Stock on the last trading date prior to the
conversion date. If the Debentures are called for redemption, conversion
rights will expire at the close of business on the redemption date, unless the
Company defaults in payment due upon such redemption.
The conversion price is subject to adjustments, as set forth in the
Indenture, in certain events, including the payment of dividends or
distributions on the Common Stock in shares of capital stock; subdivisions or
combinations of the Common Stock into a greater or smaller number of shares of
Common Stock; reclassification of the shares of Common Stock resulting in an
issuance of any shares of the Company's capital stock; distribution of rights
or warrants to all holders of Common Stock entitling them to purchase Common
Stock at less than the then current price at that time; and the distribution to
all holders of Common Stock of assets, excluding certain cash dividends and
distributions,
-23-
<PAGE> 24
or debt securities or any rights or warrants to purchase securities of the
Company; provided, however, that no adjustment will be required if holders of
the Debentures receive notice of and are allowed to participate in such
transactions. No adjustment will be required for rights to purchase Common
Stock pursuant to a Company plan for reinvestment of dividends or interest, or
for a change in the par value of the Common Stock. To the extent that
Debentures become convertible into cash, no adjustment will be required
thereafter as to cash. No adjustment in the conversion price need be made
unless such adjustment would require a change of at least 1.0% in the
conversion price; however, any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment. The Company may voluntarily reduce the conversion price for a
period of time.
If the Company pays dividends on the Common Stock in shares of capital
stock or subdivides or combines the Common Stock or issues by reclassification
of its Common Stock any shares of its capital stock or merges with, or
transfers or leases substantially all of its assets to, another corporation or
trust, the holders of the Debentures then outstanding will be entitled
thereafter to convert such Debentures into the kind and amount of shares of
capital stock, other securities, cash or other assets which they would have
owned immediately after such event had such Debentures been converted before
the effective date of the transaction.
Any Debentures called for redemption, unless surrendered for conversion
on or before the close of business on the redemption date, are subject to being
purchased from the holder of such Debentures at the redemption price by one or
more investment banks or other purchasers who may agree with the Company to
purchase such Debentures and convert them into Common Stock of the Company.
SUBORDINATION OF DEBENTURES
The indebtedness evidenced by the Debentures is 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 on all Senior Indebtedness. No payment
shall be made by the Company on account of principal of (or premium if any) or
interest on the Debentures or on account of the purchase or other acquisition
of Debentures, 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 any Senior Indebtedness and such default
shall be the subject of a judicial proceeding, or the Company shall have
received notice of such default from certain authorized persons, 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,
payments of principal of (and premium, if any) and interest on the Debentures
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 Debentures 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 Debentures or the Trustee are entitled to receive or retain
any assets so distributed in respect of the Debentures. By reason of this
provision, in the event of insolvency, holders of the Debentures may recover
less, ratably, than holders of Senior Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if
any, interest on and all other amounts payable under or in respect of
Indebtedness (as defined in the Indenture) of the Company (other
-24-
<PAGE> 25
than Indebtedness owed to a subsidiary of the Company, Indebtedness of the
Company which is expressly pari passu with the Debentures or Indebtedness which
is expressly subordinated to the Debentures). There is no limit on the amount
of Senior Indebtedness that the Company may incur.
OPTIONAL REDEMPTION
The Debentures are subject to redemption, as a whole or in part, at any
time or from time to time commencing on or after June 15, 2000 at the option of
the Company on at least 30 days' and not more than 60 days' prior notice by
mail. The redemption prices (expressed as a percentage of principal amount)
are as follows for the 12-month period beginning on or after June 15 of the
following years:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -----
<S> <C>
2000 . . . . . . . . . . . . . . . . . . . . 103%
2001 . . . . . . . . . . . . . . . . . . . . 102%
2002 . . . . . . . . . . . . . . . . . . . . 101%
2003 and thereafter . . . . . . . . . . . . . 100%
</TABLE>
MODIFICATION OF THE INDENTURE
Under the Indenture, with certain exceptions, the rights and
obligations of the Company with respect to the Debentures and the rights of
holders of the Debentures may only be modified by the Company and the Trustee
with the written consent of the holders of not less than 66-2/3% in principal
amount of the outstanding Debentures. However, without the consent of each
Holder of any Debenture affected, an amendment, waiver or supplement may not
(a) reduce the amount of Debentures whose holders may consent to an amendment;
(b) reduce the rate or change the time of payment of interest on any Debenture;
(c) reduce the principal of or change the fixed maturity of any Debenture; (d)
make any Debenture payable in money other than that stated in the Debenture;
(e) change the provisions of the Indenture regarding the right of the holders
of a majority of the Debenture to waive defaults under the Indenture or impair
the right of any holder of Debentures to institute suit for the enforcement of
any payment of principal and interest on the Debentures on and after their
respective due dates; or (f) make any change that adversely affects the right
to convert any Debenture.
EVENTS OF DEFAULT, NOTICE AND WAIVER
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 the Debentures: (i) default in the payment of interest on the Debentures
when due and payable which continues for 30 days; (ii) default in the payment
of principal of (and premium, if any) on the Debentures 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 Debentures which continues for 60 days after notice as
provided in the Indenture; (iv) acceleration of any indebtedness for money
borrowed (including obligations under leases required to be capitalized on the
balance sheet of the lessee under generally accepted accounting principles but
not including any indebtedness or obligation for which recourse is limited to
property purchased) in an aggregate principal amount in excess of $5.0 million,
-25-
<PAGE> 26
whether existing on the date of the execution of the Indenture or thereafter
created, if such indebtedness is not paid or such acceleration is not annulled
within ten days after notice to the Company of such acceleration; 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
Debentures, either the Trustee or the Holders of at least a majority in
principal amount of the Debentures may declare all of the Debentures to be due
and payable immediately.
The Company will not (i) declare or pay any dividends or make any
distribution to holders of its capital stock 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 Debentures or any other convertible indebtedness of the Company that
is neither secured nor subordinated to the Debentures), if at the time any of
the aforementioned Events of Default has occurred and is continuing or would
exist immediately after giving effect to such action.
The Trustee may require indemnity reasonably satisfactory to it before
it enforces the Indenture or the Debentures. Subject to certain limitations,
holders of a majority in principal amount of the Debentures may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
holders of the Debentures notice of any default (except a default in payment of
principal or interest) if it determines that withholding notice is in their
interests. The Company is required to file with the Trustee annually an
officer's statement as to the absence of defaults in fulfilling any of its
obligations under the Indenture.
No consent of the holders of the Debentures is required for the
Company to consolidate with or merge into or transfer or lease substantially
all of its assets to another corporation or trust which assumes the obligations
of the Company under the Indenture and Debentures or for any reorganization
within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code; nor is
any such consent of holders of the Debentures required for any amendment of the
Indenture or the Debentures by the Company or the Trustee to cure any
ambiguity, defect or inconsistency, or to provide for uncertificated Debentures
in addition to certified Debentures, or to make any change that does not
adversely affect the right of a holder of a Debenture.
Subject to certain conditions, any person having a beneficial interest
in the Rule 144A Global Security may, upon request to the Trustee, exchange
such beneficial interest for Debentures in the form of certificated Debentures.
Upon any such issuance, the Trustee is required to register such certificated
Debentures in the name of, and cause the same to be delivered to, such person
or persons (nominee of any thereof). All such certificated Debentures will be
subject to the legend requirements set forth in the Indenture. In addition, if
(i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of
Debentures in the form of certificated Debentures under the Indenture, then,
upon surrender by the Rule 144A Global Security Holder of its Rule 144A Global
Security, Debentures in certificated form will be issued to each person that
the Rule 144A Global Security Holder and the Depository identify as being the
beneficial owner of the related Debentures.
-26-
<PAGE> 27
Neither the Company nor the Trustee will be liable for any delay by
the Rule 144A Global Security Holder or the Depository in identifying the
beneficial owners of Debentures, and the Company and the Trustee may
conclusively rely on, and will be protected in relying on, instructions from
the Rule 144A Global Security Holder or the Depository for all purposes.
The Debentures may not be sold or otherwise transferred except in
accordance with the provisions set forth in the Indenture.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Indenture provides that the Company may not merge or consolidate
with, or sell or convey all, or substantially all, of its assets to another
person unless such person is a company or a trust; such person assumes by
supplemental indenture all the obligations of the Company under the Debentures
and the Indenture; and immediately after the transaction no default or Event of
Default shall exist.
MARKETABILITY
The Debentures are a new issue of securities with no established
trading market. The Company does not intend to list the Debentures on Nasdaq or
on any national securities exchange. No assurance can be given as to the
liquidity of the trading market for the Debentures.
GOVERNING LAW
The Indenture and the Debentures are governed by and construed in
accordance with the laws of the State of New York.
LEGAL MATTERS
Certain legal matters relating to the validity of the Debentures and
the Common Stock 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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<PAGE> 28
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or by any Selling Securityholder. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any of the
securities offered hereby 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 nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Selling Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Description of Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
================================================================================
$50,000,000
ALTERNATIVE LIVING SERVICES, INC.
7.0% Convertible Subordinate Debentures Due 2004
and
2,469,136
Common Stock, par value $.01 per share,
Issuable Upon Conversion Thereof
----------------
PROSPECTUS
----------------
November 14, 1997
================================================================================
