AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1996
REGISTRATION NO. 333-05877
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTEGRATED LIVING COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware........................... 8059 52-1967027
(State or other jurisdiction of ... (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) .... Classification Code Number) Identification No.)
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Bernwood Centre, 24850 Old 41 Road, Suite 10, Bonita Springs, Florida 34135
(941) 947-7200
(Address,including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
EDWARD J. KOMP
Bernwood Centre
24850 Old 41 Road, Suite 10
Bonita Springs, Florida 34135
Tel.: 941-947-7200
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
with copies to:
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CARL E. KAPLAN, ESQ. MARSHALL A. ELKINS, ESQ. FREDERICK W. KANNER, ESQ.
Fulbright & Jaworski L.L.P. Integrated Health Services, Inc. Dewey Ballantine
666 Fifth Avenue 10065 Red Run Boulevard 1301 Avenue of the Americas
New York, New York 10103 Owings Mills, Maryland 21117 New York, New York 10019-6092
Tel.: 212-318-3000 Tel.: 410-998-8400 Tel.: 212-259-8000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] --------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] --------------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall thereafter
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC.
CROSS-REFERENCE SHEET
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FORM S-1 ITEM AND CAPTION PROSPECTUS CAPTIONS
- ------------------------------------------------------------- --------------------------------------------------
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus Inside Front Cover Page and Outside Back Cover
Page of Prospectus; Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges Prospectus Summary; Risk Factors (Ratio of
Earnings to Fixed Charges Not Applicable)
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
6. Dilution Risk Factors; Dilution
7. Selling Security Holders Principal and Selling Stockholders
8. Plan of Distribution Outside and Inside Front Cover Pages of
Prospectus; Underwriting
9. Description of Securities to be Registered Outside Front Cover Page of Prospectus;
Description of Capital Stock; Underwriting
10. Interests of Named Experts and Counsel Not Applicable
11. Information With Respect to the Registrant:
(a) Description of Business Prospectus Summary; Company History; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business
(b) Description of Property Business-Properties
(c) Legal Proceedings Business-Legal Proceedings
(d) Market Price and Dividends on Registrant's
Common Equity and Related Stockholder Matters Description of Capital Stock; Dividend Policy
(e) Financial Statements Financial Statements; Pro Forma Financial
Information
(f) Selected Financial Information Prospectus Summary; Selected Consolidated
Financial Data
(g) Supplementary Financial Information Not Applicable
2
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FORM S-1 ITEM AND CAPTION PROSPECTUS CAPTIONS
- ------------------------------------------------------------- --------------------------------------------------
(h) Management's Discussion and Analysis of
Financial Condition and Results of Operations Management's Discussion and Analysis of Financial
Condition and Results of Operations
(i) Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures Not Applicable
(j) Directors and Executive Officers Management
(k) Executive Compensation Management-Executive Compensation
(l) Security Ownership of Certain Beneficial
Owners and Management Principal and Selling Stockholders
(m) Certain Relationships and Related
Transactions Prospectus Summary; Company History; Management
-- Compensation Committee Interlocks and Insider
Participation; Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not Applicable
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2
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SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1996
PROSPECTUS
5,130,600 SHARES
[PASTE-UP LOGO]
COMMON STOCK
Of the 5,130,600 shares of Common Stock offered hereby, 2,435,700 shares are
being sold by Integrated Living Communities, Inc. ("ILC" or the "Company") and
2,694,900 shares are being sold by Integrated Health Services, Inc. ("IHS"), the
sole stockholder of the Company prior to this offering. Upon completion of this
offering, IHS and its directors and executive officers will continue to
beneficially own approximately 23.0% of the Company's outstanding Common Stock
(approximately 20.7% if the Underwriters exercise their over-allotment option in
full). The Company will not receive any proceeds from the sale of shares by IHS.
Prior to this offering there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $13.00 and $15.00 per share. See "Underwriting" for information
related to the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for quotation on The Nasdaq
Stock Market's National Market under the symbol "ILCC."
See "Risk Factors" beginning on page 6 for a discussion of certain factors
that should be considered by prospective purchasers of the Common Stock offered
hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THE OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
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Underwriting
Price to Discounts and Proceeds to Proceeds to
Public Commissions(1) Company(2) IHS
Per Share $ $ $ $
Total (3) $ $ $ $
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(1) The Company and IHS have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to 769,590 additional shares of Common Stock solely to cover over-allotments,
if any. See "Underwriting." If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them, and
subject to certain conditions. It is expected that certificates for the shares
of the Common Stock offered hereby will be available for delivery on or about ,
1996 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001.
SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
Donaldson, Lufkin & Jenrette
Securities Corporation
, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Prospective investors should carefully consider
the information set forth under "Risk Factors."
THE COMPANY
The Company provides assisted living and related services to the private pay
elderly market. Assisted living facilities combine housing, personalized support
and healthcare services in a cost-effective, non-institutional setting designed
to address the individual needs of the elderly who need regular assistance with
activities of daily living, such as eating, bathing, dressing and personal
hygiene, but who do not require the level of healthcare provided in a skilled
nursing facility. The Company currently operates 19 assisted living and other
senior housing facilities containing 1,812 units in seven states. The 1,812
units operated by the Company consist of 1,187 assisted living units (including
172 units devoted to Alzheimer's and dementia care), 544 independent living
units for persons who require occasional assistance with the activities of daily
living, and 81 skilled nursing units. The Company is pursuing a strategy of
rapid growth through development and acquisition and intends to acquire, develop
or obtain agreements to manage approximately 60 to 75 assisted living facilities
per year in each of the next three years. As part of this strategy, ILC is
currently developing 33 new assisted living facilities, of which 24 are
scheduled to open during 1997, has entered into an agreement to acquire one
facility containing 258 units simultaneous with the closing of this offering and
is evaluating numerous additional acquisition opportunities. All of ILC's
revenues from its owned and leased facilities for 1995 and the first six months
of 1996 were derived from private-pay sources.
The Company's objective is to expand its operations to become a leading
provider of high-quality, affordable assisted living services. Key elements of
the Company's strategy to achieve this goal are to: (i) provide high-quality
healthcare-oriented services; (ii) grow rapidly through development and
acquisition of assisted living facilities; (iii) utilize a flexible,
cost-effective approach for the development of new assisted living facilities;
and (iv) target a broad segment of the private-pay population.
The assisted living industry is highly fragmented and characterized by
numerous small operators whose scope of services vary widely. Annual
expenditures for assisted living services were estimated to be $10 to 12 billion
in 1995. The Company believes that factors contributing to the growth of the
assisted living industry include: (i) the aging of the U.S. population; (ii) the
increasing affluence of the elderly and their families; (iii) the decreasing
availability of family care in the home; (iv) consumer preference for greater
independence and a less institutional setting; (v) the increasing emphasis by
both federal and state governments and private insurers on containing long-term
care costs; and (vi) the reduced availability of skilled nursing beds for less
medically intensive residents. The Company believes that the foregoing factors,
combined with the fragmented nature of the industry and the inexperience and
lack of resources of many operators, have created a significant opportunity for
ILC to become a leading provider of high-quality, affordable assisted living
services.
The Company believes that its approach to the development of new assisted
living facilities differs from that of many other operators. Unlike many
assisted living operators, the Company intends to rely primarily on a limited
number of third-party developers, rather than maintain a large internal
development staff. ILC currently has relationships with three developers, which
developers are responsible for 29 of the 33 facilities currently under
development by the Company. The Company has, together with these developers,
developed three flexible and expandable prototype building designs. The
flexibility feature is expected to allow the facility's assisted living and
Alzheimer's bed allotment to be quickly and cost-effectively reconfigured based
on changing market demand. The expandability feature is expected to allow the
prototype buildings to be easily and cost-effectively expanded with little or no
disruption to current operations. The Company believes its development approach
will offer many advantages, including better construction quality control, lower
architectural and engineering fees, bulk purchasing of materials and fixtures,
and faster development and construction schedules.
3
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THE OFFERING
Common Stock being offered by:
The Company 2,435,700 shares
IHS 2,694,900 shares
Common Stock to be outstanding
after the offering 6,333,600 shares(1)
Use of proceeds For acquisition and development of
assisted living facilities, for
repayment of certain indebtedness
due to IHS and for general corporate
purposes
Proposed Nasdaq National Market
symbol ILCC
- ----------
(1) Excludes (i) 855,500 shares of Common Stock issuable upon exercise of
outstanding options and (ii) 94,540 additional shares of Common Stock
reserved for issuance pursuant to the Company's stock option plans. See
"Management -- Stock Options."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------------
1995 1996
----------------------- -----------------------
PRO
1993 1994 ACTUAL FORMA(1) 1995 ACTUAL PRO FORMA(1)
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Statement of Operations Data(2):
Net revenues .......................... $5,240 $11,645 $16,269 $27,452 $8,018 $11,295 $14,241
Facility operations.................... 3,455 8,254 11,243 18,522 5,576 7,138 9,379
Facility rents......................... 856 1,466 2,430 1,770 1,215 1,309 1,005
Corporate administrative and general .. 315 726 1,005 3,895 499 678 1,948
Depreciation and amortization ......... 24 369 415 1,672 206 480 912
Loss on impairment of long-lived
assets(3).............................. -- -- 5,126 5,126 -- -- --
-------- --------- ---------- ------------ -------- --------- -------------
Earnings (loss) before income taxes
and minority interest................. 590 830 (3,950) (3,533) 522 1,690 997
Minority interest...................... 10 (29) 37 -- 23 -- --
-------- --------- ---------- ------------ -------- --------- -------------
Earnings (loss) before income taxes ... 580 859 (3,987) (3,533) 499 1,690 997
Federal and state income taxes ....... 226 322 (643) (468) 192 651 384
-------- --------- ---------- ------------ -------- --------- -------------
Net earnings (loss) ................... $ 354 $ 537 $(3,344) $(3,065) $ 307 $ 1,039 $ 613
======== ========= ========== ============ ======== ========= =============
Earnings (loss) per common share ...... $ 0.09 $ 0.14 $ (0.86) $ (0.63) $ 0.08 $ 0.27 $ 0.13
======== ========= ========== ============ ======== ========= =============
Weighted average shares
outstanding(4)........................ 3,898 3,898 3,898 4,835 3,898 3,898 4,835
======== ========= ========== ============ ======== ========= =============
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JUNE 30, 1996
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
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Balance Sheet Data:
Cash and cash equivalents .... $ 120 $ 120 $14,920
Total assets................... 55,465 67,745 82,545
Note payable to parent company 3,363 3,363 --
Stockholder's equity........... 40,331 52,531 70,694
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(1) The pro forma statement of operations data for the year ended December
31, 1995 and the six months ended June 30, 1996 were prepared as if the
Company's interest in the following facilities had been acquired on January 1,
1995: Vintage Healthcare Center ("Vintage"), which was leased by the Company
commencing January 29, 1996; Terrace Gardens Healthcare and Retirement Center
("Terrace Gardens"), which the Company has agreed to acquire simultaneous with
the closing of this offering; Homestead of Garden City ("Garden City"), which
the Company leased effective July 1, 1996; and Carrington Pointe, which the
Company acquired effective December 31, 1995. Effective October 31, 1995, a
subsidiary of IHS (which subsidiary is now a subsidiary of the Company)
exchanged its 60.5% partnership interest in a retirement community for the 39.5%
minority partnership interest in the Waterside Retirement Estates ("Waterside")
facility. The pro forma statement of operations data for the year ended December
31, 1995 is adjusted to
4
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reflect the acquisition of the minority interest in the Waterside facility as if
such acquisition had occurred on January 1, 1995. Effective June 1, 1996, the
Company received as a capital contribution condominium interests in the assisted
living and related portions of the Vintage, Treemont Retirement Community
("Treemont") and West Palm Beach Retirement ("West Palm Beach") facilities which
the Company had previously leased from IHS. Accordingly, the pro forma statement
of operations data is adjusted to decrease rent expense associated with these
facilities and to increase depreciation resulting from the receipt of a
condominium interest in these facilities. The pro forma statement of operations
data is also adjusted to (i) increase facility rents to reflect an increase in
rent for the Company's Shores and Cheyenne Place Retirement ("Cheyenne Place")
facilities effective June 1, 1996 and (ii) increase corporate administrative and
general expenses to reflect management's estimate of the additional corporate
administrative and general expense that would have been incurred during the
period if the Company had operated on a stand-alone basis. No pro forma
adjustments have been made to reflect the operations of the Homestead of Wichita
facility ("Homestead Wichita"), which the Company leased commencing July 17,
1996, or the Cabot Pointe facility, which the Company acquired in August 1996
and intends to sell and lease back pursuant to a sale/leaseback transaction
which the Company anticipates will close in October 1996, because such
facilities were not in operation at June 30, 1996. See "Company History," "Use
of Proceeds," "Pro Forma Financial Information," "Business -- Properties" and
Notes 2 and 12 of Notes to Consolidated Financial Statements.
(2) The Company has grown substantially through acquisitions, which
materially affects the comparability of the financial data reflected herein.
See "Company History" and "Certain Transactions."
(3) In 1995, the Company implemented Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121 in connection with IHS'
implementation thereof. Through evaluation of the recent financial performance
and a recent appraisal of one of its facilities, the Company estimated the fair
value of this facility and determined that the carrying value of certain
long-lived assets, including goodwill and buildings and improvements, exceeded
their fair value. The excess carrying value was written off and is included in
the statement of operations for 1995 as a loss on impairment of long-lived
assets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(4) The pro forma weighted average shares outstanding is presented as if the
Company sold 937,020 shares of Common Stock, representing the number of shares
which would be required to be sold by the Company at the assumed initial public
offering price of $14.00 per share (net of estimated underwriting discounts) in
order for the Company to pay the purchase price for the Terrace Gardens
facility. See "Use of Proceeds."
(5) The pro forma balance sheet data as of June 30, 1996 was prepared as if
the acquisition of the Terrace Gardens facility, which is expected to close
simultaneous with the closing of this offering, had been consummated as of June
30, 1996. No pro forma adjustments have been made to reflect the acquisition of
leasehold interests in the Garden City and Homestead Wichita facilities because
such acquisitions will have no effect on the Company's balance sheet. No pro
forma adjustments have been made to reflect the acquisition of Cabot Pointe
because the Company intends to sell and lease back that facility in a
sale/leaseback transaction which the Company anticipates will close in October
1996 and, as a result, such transaction will have no effect on the Company's
balance sheet. See "Company History," "Use of Proceeds," "Pro Forma Financial
Information" and "Business -- Properties."
(6) Adjusted to reflect (i) the transaction reflected in note 5 above and
(ii) the sale of 2,435,700 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $14.00 per share and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds."
RELATIONSHIPS WITH INTEGRATED HEALTH SERVICES, INC.
The Company is a wholly-owned subsidiary of Integrated Health Services,
Inc. Upon completion of this offering, IHS and its directors and executive
officers will continue to beneficially own approximately 23.0% of the Company's
outstanding Common Stock (approximately 20.7% if the Underwriters exercise their
over-allotment option in full), and IHS will be the Company's largest
stockholder. As a result of its ownership interest upon completion of this
offering, IHS could have a significant influence over, and may be able to
control, the vote on all matters submitted to stockholders, including the
election of directors and the approval of extraordinary transactions. Currently,
two of the six members of the Company's Board of Directors are directors and
executive officers of IHS. Prior to this offering, IHS provided capital and
healthcare and administrative services to the Company. Following completion of
this offering certain of these arrangements and services will Be terminated and
others will be modified. See "Risk Factors -- Dependence on IHS," "-- Potential
Conflicts of Interest with IHS" and "Certain Transactions."
Unless otherwise indicated, all information in this Prospectus (i) assumes no
exercise of the Underwriters' option to purchase from the Company up to 769,590
additional shares of Common Stock to cover over-allotments, if any, and (ii)
gives effect to the issuance of 4,960,900 shares of Common Stock as a dividend
to effect a 49,610-for-1 stock split of the Common Stock on June 10, 1996 and
IHS' subsequent surrender of 1,063,100 shares of Common Stock to the Company in
August 1996. As used herein, unless the context requires otherwise, the terms
"Company" and "ILC" include Integrated Living Communities, Inc. and its
subsidiaries and predecessors and the term "IHS" includes Integrated Health
Services, Inc. and its subsidiaries other than the Company.
5
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RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the factors set forth below, as well as other information contained in
this Prospectus, before making a decision to purchase the Common Stock offered
hereby. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below as
well as those discussed elsewhere in this Prospectus.
RECENT ORGANIZATION; HISTORY OF LOSSES; ANTICIPATED OPERATING LOSSES
The Company was organized in November 1995 to own, operate and develop
assisted living facilities and has a limited operating history. The Company is
currently a wholly-owned subsidiary of IHS, which operated 14 of the 19
facilities currently operated by the Company until such operations were
transferred to the Company following its formation. For the year ended December
31, 1995 and the six months ended June 30, 1996, the Company had net income
(loss) of $(3,344,000) and $1,039,000, respectively. On a pro forma basis,
giving effect to the acquisition of the Terrace Gardens facility, which is
expected to close simultaneous with this offering (the "Proposed Acquisition"),
the acquisition of a leasehold interest in two facilities in July 1996, the
acquisition of the Cabot Pointe facility in August 1996 and the subsequent
sale/leaseback of such facility, which the Company anticipates will close in
October 1996, the acquisition of the Carrington Pointe facility, the acquisition
of the minority interest in the Waterside facility and the contribution by IHS
to the Company's capital of the condominium interests in the Treemont, Vintage
and West Palm Beach facilities as if such transactions had occurred on January
1, 1995, as well as the related adjustments to facility rents, depreciation and
corporate administrative and general expense, the net income (loss) for the year
ended December 31, 1995 and the six months ended June 30, 1996 would have been
$(3,065,000) and $613,000, respectively. See "Pro Forma Financial Information."
Under Florida insurance regulations relating to life-care contracts, IHS'
transfer of the Waterside facility to the Company is subject to review by the
Florida Department of Insurance. The Company believes that the Department of
Insurance will approve the transfer of the facility, although there can be no
assurance that such transfer will be approved. If the transfer is not approved,
the Company will be obligated to transfer ownership of the Waterside facility
back to IHS. During the year ended December 31, 1995 and the six months ended
June 30, 1996, the Waterside facility generated revenues of $3,644,000 and
$1,807,000, respectively, and earnings (loss) before income taxes of
$(4,850,000) and $402,000, respectively. At December 31, 1995 and June 30, 1996,
total assets of the Waterside facility were $10,693,000 and $10,873,000,
respectively, total liabilities were $10,025,000 and $10,111,000, respectively,
and stockholder's equity was $668,000 and $762,000, respectively.
The Company's growth strategy focuses on the rapid acquisition and
development of assisted living facilities. The Company currently expects to open
24 newly developed assisted living facilities in 1997, all of which are expected
to incur start-up losses for at least eight months after commencing operations.
The Company estimates that it will take approximately six to 12 months for a
newly developed assisted living facility to achieve a stabilized level of
occupancy (i.e., an occupancy level in excess of 90%). As a result, the Company
expects to incur losses at least through the end of 1997. The Company may incur
additional operating losses thereafter if it fails to achieve expected occupancy
rates at newly acquired or developed facilities or if expenses related to the
development, acquisition or operation of newly acquired or developed facilities
exceed expectations. There can be no assurance as to when the Company's
operations will become profitable, if at all. The inability to achieve
profitability at a newly acquired or developed facility on a timely basis could
have an adverse effect on the Company's business, operating results and
financial condition and the market price of the Common Stock. The success of the
Company's future operations is dependent to a large extent on expansion of the
Company's operational base. 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 business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations," "-- Liquidity and
Capital Resources" and "Business -- Business Strategy."
6
<PAGE>
DIFFICULTIES OF MANAGING RAPID GROWTH
The Company expects the number of facilities it operates will increase
substantially as it pursues its rapid growth strategy. The Company's success
will depend in large part on identifying suitable development and acquisition
opportunities, and its ability to pursue such opportunities, complete
developments, consummate acquisitions, create demand for its facilities and
effectively operate its assisted living facilities. The Company competes for
acquisition and expansion opportunities with companies which have significantly
greater financial and management resources than the Company. The Company's
growth will place a significant burden on the Company's management and operating
personnel and its financial resources. The Company's ability to manage its
growth effectively will require it to continue to improve its operational,
financial and management information systems and to continue to attract, train,
motivate, manage and retain key employees. There can be no assurance that the
Company will be able to implement its rapid growth strategy or that such
strategy will ultimately be profitable. If the Company is unable to implement
its rapid growth strategy or to manage its growth effectively, its business,
operating results and financial condition could be adversely affected. See "--
Difficulties of Integrating Acquisitions," "-- Limited Development Experience;
Development Delays and Cost Overruns," "-- Need for Substantial Additional
Capital," "-- Dependence on Senior Management and Skilled Personnel," "--
Competition," "Business -- Business Strategy" and "Management -- Directors and
Executive Officers."
DIFFICULTIES OF INTEGRATING ACQUISITIONS
The Company's growth strategy depends significantly upon the rapid
acquisition (through purchase, lease or management agreements) of existing
assisted living facilities and other properties that it believes it can
efficiently reposition as assisted living facilities. The Company's strategy of
acquiring, developing or attaining agreements to manage 60 to 75 assisted living
facilities per year in each of the next three years is likely to place a
significant strain on the Company's management and financial resources. If the
Company is unsuccessful in operating newly acquired facilities and integrating
them into the Company's existing operations, the Company's business, operating
results and financial condition could be adversely affected. There can be no
assurance that the Company's acquisition of assisted living facilities will
occur at the rate currently expected by the Company or that future acquisitions
will be completed in a timely manner, if at all. The success of the Company's
acquisitions will be determined by numerous factors, including the Company's
ability to identify suitable acquisition candidates, competition for such
acquisitions, the purchase price, the financial performance of the facilities
after acquisition and the ability of the Company to integrate effectively the
operations of acquired facilities. Acquisitions of facilities are typically
subject to a number of closing conditions, including those regarding the status
of title to real property included in the acquisition, the results of
environmental investigations performed on the Company's behalf, the transfer of
applicable licenses or permits and the availability of appropriate financing. In
addition, the Company may under certain circumstances acquire skilled-nursing
facilities that for various reasons it does not reposition as assisted living
facilities or integrate into a continuing care retirement community. There can
be no assurance that the Company will successfully dispose of or operate such
skilled-nursing facilities. Furthermore, the acquisition of skilled nursing
facilities by the Company may exacerbate potential conflicts of interest between
the Company and IHS, and could expose directors of the Company to claims that
duties to one or both companies have not been met. Any failure by the Company
with respect to the repositioning, integration or operation of any acquired
facilities may have a material adverse effect on the Company's business,
operating results and financial condition. See "-- Potential Conflicts of
Interest with IHS," "-- Difficulties of Managing Rapid Growth," "Business --
Business Strategy" and "Certain Transactions."
LIMITED DEVELOPMENT EXPERIENCE; DEVELOPMENT DELAYS AND COST OVERRUNS
The Company currently expects to open approximately 25 to 35 newly developed
assisted living facilities per year over the next three years, and currently has
33 assisted living facilities in various early stages of development. The
Company has very limited experience in developing new assisted living facilities
and its ability to achieve this objective will be dependent to a great extent
upon the experience and abilities of the third-party developers with which the
Company has established relationships. To date, the Company has not opened any
newly developed assisted living facilities, and there can be no assurance it
will be successful in doing so. There can be no assurance that the Company will
not suffer delays in its development program,
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which could slow the Company's growth. Achieving the Company's plan to open 25
to 35 new assisted living facilities in each of the next three years is
dependent on numerous factors, many of which the Company is unable to control or
significantly influence, which could adversely affect the Company's growth.
These factors include, but are not limited to: (i) locating sites for new
facilities at acceptable costs; (ii) obtaining proper zoning use permits,
development plan approval, authorization and licensing from governmental units
in a timely manner; (iii) obtaining adequate financing under acceptable terms;
(iv) relying on third-party architects and contractors and the availability and
costs of labor and construction materials, as well as weather; and (v) obtaining
qualified staff. Development of assisted living facilities can be delayed or
precluded by various zoning, healthcare licensing and other applicable
governmental regulations and restrictions. ILC may also incur construction costs
that exceed original estimates, may experience competition in the search for
suitable development sites and may be unable to arrange financing for
development. The Company intends to rely on third-party developers to construct
new assisted living facilities. There can be no assurance that the Company will
not experience difficulties in working with developers, project managers,
general contractors and subcontractors, any of which difficulties could result
in increased construction costs and delays. The Company estimates that the
development cost of most of its assisted living facilities will generally range
from approximately $68,000 to $75,000 per unit, depending on local variations in
land and construction costs, with an overall average development cost of
approximately $72,000 per unit. The Company estimates that it will require
approximately six months from the date of land acquisition to develop its 40
unit facilities and approximately nine months from the date of land acquisition
to develop its 80 unit facilities. However, project development is subject to a
number of contingencies over which the Company will have little control and that
may adversely affect project cost and completion time, including 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. If the Company's development
schedule is delayed, the Company's business, operating results and financial
condition could be adversely affected. In addition, the Company estimates that
it will take approximately six to 12 months for a newly developed assisted
living facility to achieve a stabilized level of occupancy (i.e., an occupancy
level in excess of 90%) and that each new facility will incur start-up losses
for at least eight months after commencing operations. See "-- Recent
Organization; History of Losses; Anticipated Operating Losses," "-- Difficulties
of Managing Rapid Growth," "-- Dependence on Senior Management and Skilled
Personnel," "Business -- Business Strategy," "-- Development and Acquisition"
and "-- Properties -- Development."
NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL
To achieve its growth objectives, the Company will need to obtain substantial
additional financial resources to fund its development, construction and
acquisition activities and anticipated operating losses. Accordingly, the
Company's future growth will depend on its ability to obtain additional
financing on acceptable terms. The Company does not expect any of its newly
developed assisted living facilities to generate positive cash flow for at least
eight months after commencing operations. As a result, the Company expects
negative cash flow for at least the next several years as it continues to
develop and acquire assisted living facilities. There can be no assurance that
any newly developed facility will achieve a stabilized occupancy rate and
resident mix that meets the Company's expectations or generates positive cash
flow. The Company currently estimates that the net proceeds to be received by it
in this offering, together with financing commitments and sale/leaseback and
mortgage financing that it anticipates will be available, will be sufficient to
fund its acquisition and development program and its anticipated operating
losses for at least the next 12 months. There can be no assurance, however, that
the Company will not be required to seek additional capital earlier. There are a
number of circumstances beyond the Company's control that may result in the
Company's financial resources being inadequate to meet its needs. The Company
expects from time to time to seek additional funds through public or private
financing, including equity financing. If additional funds are raised by issuing
equity securities, the Company's stockholders may experience dilution. Further,
such equity securities may have rights, preferences or privileges senior to
those of the Common Stock. To the extent the Company finances its activities
through debt or sale/leaseback arrangements, the Company may become subject to
certain financial and other covenants which may restrict its ability to pursue
its rapid growth strategy and to pay dividends on the Common Stock. There can be
no assurance that adequate equity, debt or
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sale/leaseback financing will be available as needed or on terms acceptable to
the Company. A lack of available funds may require the Company to delay, scale
back or eliminate all or some of its development and acquisition projects and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Recent Organization; History of
Losses; Anticipated Operating Losses," "-- Substantial Anticipated Debt and
Lease Obligations," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Capital Stock."
SUBSTANTIAL ANTICIPATED DEBT AND LEASE OBLIGATIONS
The Company intends to finance the development and acquisition of its
assisted living facilities through mortgage financing, operating leases
(including sale/leaseback financing) and lines of credit. As a result, the
Company expects to incur substantial indebtedness and debt related payments
(including payments on operating leases) as the Company pursues its growth
strategy. The Company is presently a party to long-term operating leases for
four of its residential facilities and anticipates that it will lease the Cabot
Pointe facility commencing in October 1996. These leases require minimum annual
lease payments aggregating approximately $2.4 million in 1996, and generally
provide for annual rent increases. The Company currently expects to finance 24
of its assisted living facilities currently under development through
sale/leaseback transactions or mortgage financing, although the Company may
lease certain of these facilities from the developer. The remaining nine
facilities currently under development are expected to be leased from the
developer which owns the facilities. As a result, it is anticipated that a
substantial portion of the Company's cash flow will be devoted to debt service
and lease payments. There can be no assurance that the Company will generate
sufficient cash flow from operations to cover required interest, principal and
lease payments. If the Company were unable to meet interest, principal or lease
payments, or satisfy financial covenants relating to, among other things, cash
flow and debt coverage ratios, it could be required to seek renegotiation of
such payments or obtain additional equity or debt financing. There can be no
assurance that any such efforts would be successful or timely or that the terms
of any such financing or refinancing would be acceptable to the Company. Any
payment or other default could cause the lender to foreclose upon the facilities
securing such indebtedness or, in the case of an operating lease, could result
in termination of the lease, with a consequent loss of income and asset value to
the Company. Furthermore, to the extent the Company's mortgage and
sale/leaseback agreements contain cross-default and cross-collateralization
provisions, a default by the Company on one of its payment obligations could
adversely affect a significant number of the Company's properties. The Company's
leverage may also adversely affect the Company's ability to respond to changing
business and economic conditions or continue its development and acquisition
program. See "-- Need for Substantial Additional Capital," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Business -- Properties."
UNCERTAINTY OF THE PROPOSED ACQUISITION(); DIFFICULTIES OF INTEGRATING THE
PROPOSED ACQUISITION
The Company has entered into an agreement to acquire one assisted living
facility for an aggregate purchase price of $12.2 million. The closing of the
Terrace Gardens acquisition is subject to certain customary conditions,
including conditions regarding the status of title to real property being
acquired, the results of environmental investigations performed on the Company's
behalf and the transfer of applicable licenses and permits. Although the Company
expects the proposed acquisition of the Terrace Gardens facility to be
consummated simultaneous with the closing of this offering, there can be no
assurance that the conditions to closing will be satisfied in a timely manner,
if at all. Any delay or failure to consummate the acquisition of Terrace Gardens
could have an adverse effect on the Company's operating results. Additionally,
there can be no assurance that the Company's anticipated sale and leaseback of
the Cabot Pointe facility will be consummated in October 1996 as scheduled or at
all. The Terrace Gardens acquisition, together with the acquisition of a
leasehold interest in two facilities in July 1996 and the acquisition of the
Cabot Pointe facility in August 1996, will result in a 23.5% increase in the
number of facilities, and a 21.1% increase in the number of units, operated by
the Company at June 30, 1996. Such an increase in the Company's operations may
strain the Company's available resources, and there can be no assurance that the
Company will successfully assume operational control over the newly acquired
facilities or integrate them with the Company's
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existing operations. If the Company is unsuccessful in operating the newly
acquired facilities and integrating them into the Company's existing operations,
the Company's business, operating results and financial condition could be
adversely affected. See "-- Difficulties of Managing Rapid Growth," "--
Difficulties of Integrating Acquisitions," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Properties -- Proposed Acquisition."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends, and will continue to depend, on the services of Robert
N. Elkins, M.D., its Chairman of the Board, Edward Komp, its President and Chief
Executive Officer and other key management staff. The loss of the services of
Dr. Elkins or Mr. Komp could have a material adverse effect on the Company's
business, operating results and financial condition. Dr. Elkins is Chairman of
the Board and Chief Executive Officer of IHS. As a result, he will not be
devoting his full time and efforts to the Company. See "-- Potential Conflicts
of Interest with IHS." The Company also depends on its ability to attract and
retain management personnel who will be responsible for the day-to-day
operations of each of its residential facilities. The Company's ability to
attract and retain management personnel for its facilities will be critical to
the success of the Company's rapid growth strategy, which contemplates
acquiring, developing or acquiring agreements to manage 60 to 75 new assisted
living facilities per year for each of the next three years. If the Company is
unable to hire qualified management to operate its assisted living facilities,
the Company's business, operating results and financial condition could be
adversely affected. See "Management."
STAFFING AND LABOR COSTS
The Company competes with various healthcare providers, including other
assisted living providers, with respect to attracting and retaining qualified or
skilled personnel. The Company also depends on the available labor pool of
low-wage employees. A shortage of nurses or other trained personnel or general
inflationary pressures may require the Company to enhance its wage and benefits
package in order to compete. There can be no assurance that the Company's labor
costs will not increase or, if they do, that they can be matched by
corresponding increases in revenues. Any significant failure by the Company to
attract and retain qualified employees, to control its labor costs or to match
increases in its labor expenses with corresponding increases in revenues could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Employees."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's fees from their own or
familial financial resources. Generally only seniors with income or assets
meeting or exceeding the comparable median in the region where the Company's
assisted living facilities are located are expected to be able to afford the
Company's fees. Inflation or other circumstances that adversely affect the
ability of seniors to pay for the Company's services could have an adverse
effect on the Company. If the Company encounters difficulty in attracting
seniors with adequate resources to pay for its services, its business, operating
results and financial condition could be adversely affected. See "Business --
Services."
SUBSTANTIAL PORTION OF THE OFFERING TO BENEFIT IHS
IHS will receive approximately $35.1 million (assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts) for the shares of Common Stock to be sold by it in this offering,
which shares were received by IHS from the Company in January 1996 in
consideration of IHS' transfer to the Company of 14 of the 19 assisted living
facilities currently operated by the Company. In addition, the Company will use
a portion of the proceeds of this offering to repay all amounts the Company has
borrowed from IHS, which at August 31, 1996 aggregated $7.4 million. See "--
Potential Conflicts of Interest with IHS," "Company History" and "Use of
Proceeds."
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DEPENDENCE ON IHS
The Company was formed in November 1995 as a wholly-owned subsidiary of IHS
to operate the assisted living and other senior housing facilities owned, leased
or managed by IHS. To date, IHS has provided all required financial, legal,
accounting, human resources and information systems services to the Company, and
has satisfied all the Company's capital requirements in excess of internally
generated funds. Subsequent to the closing of this offering, the Company will be
responsible for obtaining its own external sources of financing and for its own
financial, legal, accounting, human resources and information systems services.
The Company believes that the cost of these services following this offering
will exceed substantially the expense for these services allocated to the
Company by IHS. There can be no assurance that the Company will be successful in
obtaining these services. IHS has agreed to provide certain accounting and
information systems services to the Company until it has implemented its own MIS
and accounting systems, which the Company anticipates will occur in the fourth
quarter of 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Operations" and "Certain
Transactions."
The Company currently subleases The Shores and Cheyenne Place facilities from
IHS. IHS leases these facilities, as well as 41 other facilities, from
Litchfield Asset Management Corp. ("LAM"). IHS is required to meet certain
financial tests under its agreement with LAM and, to the extent IHS is unable to
meet such tests, LAM has the right to terminate IHS' lease of the 43 facilities,
which would result in the termination of the subleases. The loss of these
facilities, which accounted for approximately 39.0% and 29.0% of the Company's
revenues, and approximately 39.6% and 14.8% of the Company's earnings before
loss from impairment of long-lived assets in the year ended December 31, 1995
and the six months ended June 30, 1996, respectively, could have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that IHS will be able to meet such tests.
POTENTIAL CONFLICTS OF INTEREST WITH IHS
Robert N. Elkins, M.D., the Chairman of the Board of the Company, and
Lawrence P. Cirka, a director of the Company, are the Chairman of the Board and
Chief Executive Officer and President, Chief Operating Officer and a director,
respectively, of IHS and, as a result, may have conflicts of interest in
addressing business opportunities and strategies with respect to which the
Company's and IHS' interests differ. The Company and IHS have not adopted any
formal procedures designed to assure that conflicts of interest will not occur
or to resolve any such conflicts. Dr. Elkins is also a director and principal
stockholder of Community Care of America, Inc. ("CCA"), which operates long-term
care and assisted living facilities, and is a director of Capstone Capital
Corporation, a real estate investment trust from which the Company expects to
receive financing. IHS will continue to operate Alzheimer's units in certain of
its skilled nursing facilities, including the skilled nursing facilities located
in the condominiums in which the Company's Treemont and West Palm Beach
facilities are located. The Company is prohibited from including a segregated
and secured Alzheimer's ward in its portion of these facilities. In geographic
areas where the Company and either IHS or CCA operates a facility, ILC will be
competing with these companies for residents for its facilities. In addition,
upon completion of this offering IHS, Dr. Elkins and Mr. Cirka will continue to
beneficially own in aggregate approximately 23.0% of the Company's outstanding
Common Stock (approximately 20.7% if the Underwriters' exercise their
over-allotment option in full), and IHS will be the Company's largest
stockholder. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," "Business --
Properties," "Certain Transactions" and "Principal and Selling Stockholders."
DISCRETIONARY USE OF PROCEEDS
The Company will use approximately $12.2 million of the net proceeds from
this offering to finance the purchase of the Terrace Gardens facility and a
portion of the net proceeds to repay outstanding loans from IHS, which
aggregated $7.4 million at August 31, 1996. The Company expects to use the
remaining net proceeds (approximately $10.8 million, assuming an initial public
offering price of $14.00 per share (approximately $13.5 million if the
sale/leaseback transaction for the Cabot Pointe facility is consummated prior to
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the closing of this offering) to fund the development and acquisition of
additional assisted living facilities and for general corporate purposes,
including working capital. The Company will have broad discretion in using the
unallocated net proceeds of this offering. See "Use of Proceeds."
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials
or petroleum, that could be located on, in or under such property. Such laws and
regulations often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of the hazardous or toxic substances. The
costs of any required remediation or removal of these substances could be
substantial and the liability of an owner or operator as to any property is
generally not limited under such laws and regulations, and could exceed the
value of the property and the aggregate assets of the owner or operator. The
presence of these substances or failure to remediate such substances properly
may also adversely affect the owner's ability to sell or rent the property, to
borrow using the property as collateral or, in the case of facilities currently
being developed, to occupy and use the property. Under these laws and
regulations, an owner, operator or any entity which arranges for the disposal of
hazardous or toxic substances, such as asbestos-containing materials, at a
disposal site may also be liable for the costs of any required remediation or
removal of the hazardous or toxic substances at the disposal site. In connection
with the ownership or operation of its properties, the Company could be liable
for these costs, as well as certain other costs, including governmental fines
and injuries to persons or properties. As a result, the presence, with or
without the Company's knowledge, of hazardous or toxic substances at any
property held, operated or developed by the Company could have an adverse effect
on the Company's business, operating results and financial condition. Further,
the Company cannot predict the nature, scope or effect of legislation or
regulatory requirements that could be imposed or how existing or future laws or
regulations will be administered or interpreted with respect to activities to
which they have not previously applied. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies, could require substantial expenditures by the Company and could
adversely affect the results of operations of the Company.
GOVERNMENTAL REGULATION
Healthcare is heavily regulated at the federal, state and local levels and
represents an area of extensive and frequent regulatory change. A number of
legislative and regulatory initiatives relating to long-term care are proposed
or under study at both the federal and state levels that, if enacted or adopted,
could have an adverse effect on the Company's business and operating results.
The Company cannot predict whether and to what extent any such legislative or
regulatory initiatives will be enacted or adopted, and therefore cannot assess
what effect any current or future initiatives would have on the Company's
business and operating results. Changes in applicable laws and new
interpretations of existing laws can significantly affect the Company's
operations, as well as its revenues (particularly those from governmental
sources) and expenses. The Company's facilities are subject to varying degrees
of regulation and licensing by local and state health and social service
agencies and other regulatory authorities specific to their location. While
regulations and licensing requirements often vary significantly from state to
state, they typically address, among other things: personnel education, training
and records; facility services, including administration of medication,
assistance with self-administration of medication and limited nursing services;
physical plant specifications; furnishing of resident units; food and
housekeeping services; emergency evacuation plans; and resident rights and
responsibilities. In several states assisted living facilities also require a
certificate of need before the facility can be opened. In most states, assisted
living facilities also are subject to state or local building codes, fire codes
and food service licensure or certification requirements. Like other healthcare
facilities, assisted living facilities are subject to periodic survey or
inspection by governmental authorities. The Company's success will depend in
part on its ability to satisfy such regulations and requirements and to acquire
and maintain any required licenses. The Company's operations could also be
adversely affected by, among other things, regulatory developments such as
mandatory increases in the scope and quality of care to be offered to residents
and revisions in licensing and certification standards. In addition, the Company
is subject to certain federal and state laws that regulate relationships among
providers of healthcare services. These laws include the Medi-
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care and Medicaid anti-kickback provisions of the Social Security Act, which
prohibit the payment or receipt of any remuneration by anyone in return for, or
to induce, the referral of patients for items or services that are paid for, in
whole or in part, by Medicare or Medicaid. A violation of these provisions may
result in civil or criminal penalties for individuals or entities and/or
exclusion from participation in the Medicare and Medicaid programs. Federal,
state and local governments occasionally conduct unannounced investigations,
audits and reviews to determine whether violations of applicable rules and
regulations exist. Devoting management and staff time and legal resources to
such investigations, as well as any material violation by the Company that is
discovered in any such investigation, audit or review, could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Business Strategy" and "-- Governmental Regulation."
The Company and its activities are subject to zoning 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, which could adversely affect the Company's growth strategy and
results. See "-- Limited Development Experience; Development Delays and Cost
Overruns," "Business -- Business Strategy" and "-- Development and Acquisition."
Certain states provide for Medicaid reimbursement for assisted living
services pursuant to Medicaid Waiver Programs permitted by the Federal
government. In the event the Company elects to provide services in states with a
Medicaid Waiver Program, the Company may then elect to become certified as a
Medicaid provider in such states. As a provider of services under the Medicaid
Waiver Program, the Company will be subject to all of the requirements of such
program, including the fraud and abuse laws, violations of which may result in
civil and criminal penalties and exclusion from further participation in the
Medicaid Waiver Program. The Company intends to comply with all applicable laws,
including the fraud and abuse laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not in the future have a material adverse impact on the Company's business,
results of operations or financial condition. See "Business -- Governmental
Regulation."
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its properties are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
COMPETITION
The healthcare industry is highly competitive and the Company expects that
the assisted living segment in particular will become more competitive in the
future. In general, regulatory and other barriers to competitive entry in the
assisted living industry are presently not substantial. The Company will
continue to face competition from numerous local, regional and national
providers of assisted living and long-term care. The Company will compete with
skilled nursing facilities and acute care hospitals primarily on the bases of
cost, quality of care, array of services provided and physician referrals. The
Company will also compete with companies providing home-based healthcare, and
even family members, based on those factors as well as the reputation,
geographic location, physical appearance of facilities and family preferences.
Some of the Company's competitors operate on a not-for-profit basis or as
charitable organizations, while others have, or may obtain, greater financial
resources than those of the Company. However, the Company anticipates that its
most significant competition will come from other assisted living and long-term
care facilities within the same geographic area as the Company's facilities
because management's experience indicates that senior citizens frequently elect
to move into facilities near their homes.
In implementing its growth strategy, the Company expects to face competition
in its efforts to develop and acquire assisted living facilities. Some of the
Company's present and potential competitors are significantly larger and have,
or may obtain, greater financial resources than those of the Company. A
significant
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number of industry competitors have recently raised financing in the public
markets, providing them with cash to develop and acquire assisted living
facilities and making it easier for them to use their equity and debt securities
as consideration for acquisitions. Consequently, there can be no assurance that
the Company will not encounter increased competition in the future that could
limit its ability to attract residents or expand its business and therefore have
a material adverse effect on its business, operating results and financial
condition. Further, if the development of new assisted living facilities
outpaces demand for those facilities in the markets in which the Company has or
is developing facilities, such markets may become saturated. Such an oversupply
of facilities could cause the Company to experience decreased occupancy,
depressed margins and lower profitability. See "Business -- Competition."
POTENTIAL ADVERSE IMPACT OF GOVERNMENTAL REIMBURSEMENT PROGRAMS
Currently, the federal government does not provide any reimbursement for the
type of assisted living services offered by the Company, although the federal
government does provide reimbursement for the services provided in the skilled
nursing beds located in the Company's continuing care retirement communities.
Although some states have reimbursement programs in place, the level of
reimbursement is generally insufficient to cover the costs of the Company's
assisted living services. Currently all of the Company's revenue is from private
pay sources except that one of its managed facilities, which includes 60 skilled
nursing units, received approximately 23% of its revenues in the year ended
December 31, 1995 from federal and state reimbursement programs. Depending in
part on the results of the Company's acquisition and development program, net
revenues from governmental reimbursement programs could increase from time to
time. There can be no assurance that the Company or the facilities which it
manages will continue to meet the requirements for participating in governmental
reimbursement programs. Furthermore, governmental reimbursement programs are
subject to statutory and regulatory changes, retroactive rate settlements,
administrative rulings and governmental funding restrictions, some of which
could have a material adverse effect on the future rate of payment to facilities
operated by the Company. A substantial dependence on governmental reimbursement
programs, changes in the funding levels of such programs or the failure of the
Company's operations to qualify for governmental reimbursement could have an
adverse effect on the Company's business, operating results and financial
condition. See "-- Governmental Regulation," "Business -- Governmental
Regulation" and "-- Operations -- Service Revenue Sources."
GEOGRAPHIC CONCENTRATION
A significant number of the 53 properties currently operated, managed,
proposed to be acquired or under development are located in California and Texas
(14 and 12 facilities, respectively). The market value of these properties and
the income generated from properties managed or leased by the Company could be
negatively affected by changes in local and regional economic conditions and by
acts of nature. See "Business -- Properties." In addition, the Company
anticipates that a substantial portion of its business and operations will
ultimately be concentrated in several states in the southern, midwestern and
western portion of the United States, and that economic conditions in such
states may adversely affect the Company's business, results of operations and
financial condition.
LIABILITY AND INSURANCE
The Company's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry, including the Company, have
become subject to an increasing number of lawsuits alleging malpractice or
related legal theories, many of which involve large claims and significant legal
costs. The Company expects that from time to time it will be subject to such
suits as a result of the nature of its business. The Company currently maintains
insurance policies in amounts and with such coverage and deductibles as it deems
appropriate, based on the nature and risks of its business, historical
experience and industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
the Company's insurance coverage will not arise. A successful claim against the
Company not covered by, or in excess of, the Company's insurance could have a
material adverse effect on the Company's operating results and financial
condition. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect on the Company's ability to
attract
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residents or expand its business and would require management to devote time to
matters unrelated to the operation of the Company's business. In addition, the
Company's insurance policies must be renewed annually, and there can be no
assurance that the Company will be able to obtain liability insurance coverage
in the future or, if available, that such coverage will be on acceptable terms.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of shares of Common Stock in the public market
after this offering or the perception that such sales could occur could
adversely affect the market price of the Common Stock and the Company's ability
to raise equity. Upon completion of this offering, the Company will have
6,333,600 shares of Common Stock outstanding (7,103,190 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
5,130,600 shares sold in this offering will be freely tradable without
restriction or limitation under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by "affiliates" of the
Company, as such term is defined in Rule 144 promulgated under the Securities
Act. The remaining 1,203,000 shares, all of which will be owned by IHS, are
"restricted securities" within the meaning of Rule 144. The Company, its
directors and officers and IHS have agreed with the Underwriters pursuant to
"lock-up" agreements not to sell or otherwise dispose of any shares of Common
Stock, any options or warrants to purchase shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock for a period of 180 days after the date of this Prospectus other
than, in the case of the Company, in certain limited circumstances, without the
prior written consent of Smith Barney Inc. Smith Barney Inc. may, in its sole
discretion and at any time without prior notice, release all or any portion of
the shares of Common Stock subject to the "lock-up" agreements. Beginning in
January 1998, all of the shares which will be held by IHS upon completion of
this offering may be sold subject to the volume and other limitations of Rule
144. The Securities and Exchange Commission (the "Commission") has proposed an
amendment to Rule 144 under the Securities Act which, if adopted as currently
proposed, would permit the sale of such 1,203,000 shares of Common Stock held by
IHS upon expiration of the 180-day "lock-up" period referred to above, rather
than beginning in January 1998, subject to the volume and other limitations of
Rule 144. All shares of Common Stock held by IHS will be eligible for sale to
certain qualified institutional buyers in accordance with Rule 144A under the
Securities Act. Furthermore, the Company intends to register soon after the date
of this Prospectus 950,040 shares of Common Stock reserved for issuance pursuant
to the Company's stock option plans and agreements, under which options to
purchase 855,500 shares of Common Stock are currently outstanding. The Company
has granted IHS "piggyback" and demand "shelf" registration rights with respect
to the shares held by IHS upon completion of this offering. If the Company is
required to include in a Company-initiated registration shares held by IHS
pursuant to the exercise of its "piggyback" registration rights, such sales may
have an adverse effect on the Company's ability to raise needed capital. See
"Management -- Stock Options," "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained after this offering. The initial public offering price of the Common
Stock will be determined by negotiation among the Company, IHS and the
Underwriters and may bear no relationship to the price at which the Common Stock
will trade after completion of this offering. For factors that will be
considered in determining the initial public offering price, see "Underwriting."
After completion of this offering, the market price of the Common Stock could be
subject to significant fluctuations in response to various factors and events,
including the liquidity of the market for the shares of Common Stock, variations
in the Company's operating results, changes in earnings estimates by securities
analysts, publicity regarding the assisted living industry or the Company and
new statutes or regulations or changes in the interpretation of existing
statutes or regulations affecting the healthcare industry in general 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 shares of Common
Stock. In the past, following periods of volatility in the market price of a
company's securities,
15
<PAGE>
securities class action litigation has often been initiated against such
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon the Company's business, operating results and financial condition.
CONTROL BY CERTAIN PRINCIPAL STOCKHOLDERS
Following completion of this offering, IHS and the Company's executive
officers and directors as a group will beneficially own approximately 27.8% of
the outstanding Common Stock. Currently, IHS' Chairman of the Board and Chief
Executive Officer and President and Chief Operating Officer are two of the six
members of the Company's Board of Directors, and IHS' Chairman of the Board
serves as Chairman of the Board of the Company. As a result, IHS and the
Company's executive officers and directors as a group could have a significant
influence over, and may be able to control, the outcome of all matters submitted
to a vote of the Company's stockholders, including the election of directors and
significant corporate transactions. See "-- Potential Conflicts of Interest with
IHS" and "Principal and Selling Stockholders."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and By-laws, as well as
Delaware corporate law, contain certain provisions that could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from attempting to acquire, control of the Company. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of Common Stock. Certain of these provisions allow the Company to issue,
without stockholder approval, preferred stock having voting rights senior to
those of the Common Stock. Other provisions impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, the Company's Board of Directors is
divided into three classes, each of which serves for a staggered three-year
term, which may make it more difficult for a third party to gain control of the
Board of Directors. As a Delaware corporation, the Company is subject to Section
203 of the Delaware General Corporation Law which, in general, prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) for three years following the date such person became
an interested stockholder unless certain conditions are satisfied. See
"Description of Capital Stock -- Preferred Stock," "-- Certain Provisions of the
Restated Certificate of Incorporation and By-laws" and "-- Delaware
Anti-Takeover Law."
IMMEDIATE AND SUBSTANTIAL DILUTION
The existing stockholder of the Company acquired its shares of Common Stock
at an average cost substantially below the initial public offering price set
forth on the cover page of this Prospectus. Therefore, purchasers of Common
Stock in this offering will experience immediate and substantial dilution,
which, at the assumed initial public offering price of $14.00 per share, will be
$2.84 per share. See "Dilution."
NO DIVIDENDS
The Company anticipates that future earnings will be retained by the
Company for the development of its business. Accordingly, the Company does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. See "Dividend Policy."
16
<PAGE>
COMPANY HISTORY
GENERAL
The Company was formed in November 1995 as a wholly-owned subsidiary of IHS
to operate the assisted living and other senior housing facilities owned, leased
and managed by IHS. Following the Company's formation, IHS transferred to the
Company as a capital contribution its ownership interest in the Waterside and
The Homestead facilities, sublet to the Company The Shores and Cheyenne Place
facilities, and leased to the Company the assisted living and related portions
of the Treemont Retirement Community and West Palm Beach Retirement facilities.
IHS also transferred to the Company agreements to manage nine facilities (one of
which was cancelled by mutual agreement in July 1996 and one of which the
Company has been notified will be cancelled effective October 31, 1996). The
Company's principal executive offices are located at Bernwood Centre, 24850 Old
41 Road, Suite 10, Bonita Springs, Florida 34135, and its telephone number is
941-947-7200.
ACQUISITION HISTORY
In January 1989, IHS acquired a leasehold interest in the Dallas at Treemont
facility, a skilled nursing facility with a 231 unit assisted living,
Alzheimer's and adult day care facility, and IHS subsequently purchased the
Dallas at Treemont facility in June 1994. The Company leased the assisted
living, Alzheimer's and adult day care portions of this facility from IHS until
June 1, 1996, when the Company and IHS entered into a condominium agreement for
the Dallas at Treemont facility. In connection with the condominium agreement,
the Company received as a capital contribution from IHS the condominium interest
in the assisted living, Alzheimer's and adult day care portion of the facility.
In December 1993, IHS acquired Central Park Lodges, Inc., which owned the
West Palm Beach skilled nursing and assisted living facility and a 60.5%
partnership interest in each of the Waterside and Lakehouse West continuing care
retirement communities. Effective October 31, 1995, IHS exchanged its 60.5%
partnership interest in the Lakehouse West facility for the 39.5% partnership
interest in the Waterside facility which it did not own. The Company received
the Waterside facility from IHS as a capital contribution and leased the
assisted living portion of the West Palm Beach facility from IHS until June 1,
1996, when the Company and IHS entered into a condominium agreement for the West
Palm Beach facility. In connection with the condominium agreement, the Company
received as a capital contribution from IHS the condominium interest in the
assisted living portion of the facility. Under Florida insurance regulations
relating to life-care contracts, IHS' transfer of the Waterside facility to the
Company is subject to review by the Florida Department of Insurance. The Company
believes that the Department of Insurance will approve the transfer of the
facility, although there can be no assurance that such transfer will be
approved. If the transfer is not approved, the Company will be obligated to
transfer ownership of the Waterside facility back to IHS. See "Risk Factors --
Recent Organization; History of Losses; Anticipated Operating Losses" and Notes
2 and 12 of Notes to Consolidated Financial Statements.
In March 1994, IHS acquired The Homestead, a 50 unit assisted living and
adult day care facility for a total cost of approximately $1.3 million, adjusted
for certain accrued liabilities, prepayments and deposits assumed by IHS. Prior
to the purchase IHS had managed the facility under a management agreement with
the prior owner. The Company received this facility from IHS as a capital
contribution.
In August 1994, IHS entered into separate facility operating leases for the
260 unit Shores and 95 unit Cheyenne Place facilities. IHS has subleased these
assisted living facilities, including the related equipment, furniture and
fixtures, to the Company. These facilities are part of 43 facilities leased by
IHS from LAM. IHS is required to meet certain financial tests under its
agreement with LAM and, to the extent IHS is unable to meet such tests, LAM has
the right to terminate IHS' lease of the 43 facilities, which would result in
the termination of the subleases. There can be no assurance that IHS will be
able to meet such tests. See "Risk Factors -- Dependence on IHS."
In December 1995, IHS acquired Carrington Pointe, a 172 unit congregate care
and assisted living facility. Prior to the acquisition, IHS had managed the
facility under a management agreement with the prior owner. Following the
acquisition, IHS transferred ownership of the facility to the Company as a
capital contribution.
17
<PAGE>
In January 1996, IHS acquired Vintage Health Care Center, a skilled nursing
and assisted and independent living facility which it had previously managed
from April 1995. The Company leased the assisted and independent living portions
of the facility from IHS until June 1, 1996, when the Company and IHS entered
into a condominium agreement for the facility. In connection with the
condominium agreement, the Company received as a capital contribution from IHS
the condominium interest in the assisted living portion of the facility.
In July 1996 the Company acquired a leasehold interest in the Homestead of
Garden City and Homestead Wichita facilities from one of its third party
developers. In August 1996 the Company acquired the Cabot Pointe facility for
$2.7 million with funds borrowed from IHS. The Company currently anticipates
that it will sell the facility to, and lease back this facility from, a real
estate investment trust in October 1996. The proceeds of the sale/leaseback
transaction will be used to repay amounts borrowed from IHS to fund the
acquisition. In addition, the Company has entered into a definitive agreement to
acquire the Terrace Gardens facility, which acquisition the Company anticipates
will be consummated simultaneous with the closing of this offering. There can be
no assurance the sale/leaseback transaction or the acquisition of the Terrace
Gardens facility will occur as scheduled, if at all. See "Business --
Properties."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,435,700 shares of
Common Stock offered hereby, assuming an initial public offering price of $14.00
per share and after deducting estimated underwriting discounts and commissions
and offering expenses, are estimated to be $30.4 million ($40.4 million if the
over-allotment option granted by the Company to the Underwriters is exercised in
full). The Company will not receive any proceeds from the sale of Common Stock
by IHS.
The Company intends to use approximately $12.2 million of the net proceeds to
purchase the Terrace Gardens facility and a portion of the net proceeds to repay
outstanding loans from IHS, which aggregated $7.4 million at August 31, 1996.
The remainder of the net proceeds, approximately $10.8 million (approximately
$13.5 million if the sale/leaseback transaction for the Cabot Pointe facility is
consummated prior to the closing of this offering), will be used to finance
development and acquisition of additional assisted living facilities and for
working capital and general corporate purposes. Pending such uses, the net
proceeds will be invested in short-term, interest-bearing investment grade
securities. See "Business -- Strategy."
The outstanding indebtedness to be repaid was borrowed from IHS pursuant to a
$75 million revolving credit facility to finance the Company's development
activities. Borrowings under the facility bear interest at the rate of 14% per
annum and are due at the earlier of (i) the closing of an initial public
offering by ILC or (ii) June 30, 1998. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Although an integral part of the Company's business strategy is growth
through acquisitions and the Company is currently in discussions with several
acquisition candidates, the Company has not entered into any definitive
agreements respecting any acquisitions except as set forth under "Business --
Properties -- Proposed Acquisition."
DIVIDEND POLICY
The Company anticipates that future earnings will be retained by the Company
for the development of its business. Accordingly, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of future dividends is within the discretion of the Board of
Directors and will depend upon, among other things, the Company's future
earnings, if any, its capital requirements, financial condition, the terms of
the Company's debt instruments and lease agreements then in effect and other
relevant factors. Under a cash management facility provided by IHS, the
operating cash balances of the Company's facilities were generally transferred
to a centralized account and applied to reduce additional paid-in-capital. See
"Risk Factors -- No Dividends" and Note 1 of Notes to Consolidated Financial
Statements.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996, (ii) on a pro forma basis as of such date to give effect to the
acquisition of the Terrace Gardens facility and the issuance of 937,020 shares
of Common Stock, representing the number of shares which would be required to be
sold by the Company at the assumed initial public offering price of $14.00 per
share (net of estimated underwriting discounts and commissions) in order for the
Company to pay the purchase price for the Terrace Gardens facility, as if such
transactions had occurred on June 30, 1996, and (iii) on a pro forma basis as of
such date as adjusted to reflect the sale of the 2,435,700 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $14.00 per share and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds." The table should be read in conjunction
with the Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Note payable to parent company......................... $ 3,363 $ 3,363 $ --
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding............. -- -- --
Common Stock, $.01 par value, 100,000,000 shares
authorized; 3,897,900 shares issued and outstanding
actual; 4,834,920 shares issued and outstanding
pro forma; 6,333,600 shares issued and outstanding
pro forma as adjusted(1)............................ 39 48 63
Additional paid-in capital........................... 42,359 54,550 72,698
Accumulated deficit ................................. (2,067) (2,067) (2,067)
--------- ----------- -------------
Total stockholders' equity......................... 40,331 52,531 70,694
--------- ----------- -------------
Total capitalization................................... $43,694 $55,894 $70,694
========= =========== =============
</TABLE>
(1) Excludes (i) 855,500 shares of Common Stock issuable upon exercise of
outstanding options and (ii) 94,540 additional shares of Common Stock
reserved for issuance pursuant to the Company's stock option plans. See
"Management -- Stock Options."
19
<PAGE>
DILUTION
At June 30, 1996, the net tangible book value of the Company was
approximately $40,331,060, or $10.35 per share. Net tangible book value per
share represents the total tangible assets of the Company, reduced by its total
liabilities, and divided by the number of shares of Common Stock outstanding.
Dilution per share represents the difference between the price per share to be
paid by investors in this offering and the pro forma net tangible book value per
share of Common Stock immediately after the offering. After giving effect to the
sale of the 2,435,700 shares of Common Stock offered by the Company hereby (at
an assumed initial public offering price of $14.00 per share) and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds," the pro forma net tangible book value of the Common Stock at June 30,
1996 would have been $70,694,000, or $11.16 per share. This represents an
immediate increase in the pro forma net tangible book value of $0.81 per share
to existing stockholders and an immediate dilution of $2.84 per share to
purchasers in this offering, as illustrated in the following table.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............................. $14.00
Net tangible book value per share as of June 30, 1996..................... $10.35
Increase in pro forma net tangible book value per share attributable to
this offering ........................................................... 0.81
--------
Adjusted pro forma net tangible book value per share after this offering
(1)........................................................................ 11.16
---------
Dilution per share to new investors (2)..................................... $ 2.84
=========
</TABLE>
- ----------
(1) After deduction of estimated underwriting discounts and commissions and
expenses of the offering to be paid by the Company.
(2) Assumes no exercise of outstanding options. As of the date of this
Prospectus, there are outstanding options to purchase 855,500 shares of Common
Stock, all of which have an exercise price equal to the initial public offering
price as set forth on the cover page of this Prospectus. See "Management --
Stock Options."
The following table sets forth as of June 30, 1996 the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by IHS and by new investors purchasing shares from
the Company in this offering, at an assumed initial public offering price of
$14.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- --------- ------------- --------- ------------
IHS (1)......... 3,897,900 61.5% $42,398,000 55.4% $10.88
New investors . 2,435,700 38.5 34,099,800 44.6 $14.00
----------- --------- ------------- --------- ------------
Total......... 6,333,600 100.0% $76,497,800 100.0%
=========== ========= ============= =========
- ----------
(1) Sales by IHS in this offering will reduce the number of shares held by it
to 1,203,000 shares or 19.0% (16.9% if the Underwriters' over-allotment option
is exercised in full) of the total Common Stock outstanding after this offering,
and will increase the number of shares held by new investors to 5,130,600 or
81.0% of the total number of shares of Common Stock outstanding after this
offering (83.1% if the Underwriters' over-allotment option is exercised in
full). Total consideration represents the net book value of the facilities
contributed as capital to the Company by IHS less the cash distributions
received by IHS from the Company. See "Principal and Selling Stockholders."
The foregoing table assumes no exercise of outstanding stock options or
warrants. See "Management -- Stock Options."
20
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma financial statements have been prepared
based on the audited consolidated financial statements of ILC for the year ended
December 31, 1995 and the unaudited consolidated financial statements of ILC for
the six months ended June 30, 1996, as well as the following financial
statements:
1) The audited financial statements of Terrace Gardens Health Care and
Retirement Center ("Terrace Gardens") as of and for the year ended December 31,
1995, and the unaudited financial statements of Terrace Gardens as of and for
the six months ended June 30, 1996.
2) The audited financial statements of Vintage Health Care Center Retirement
Division ("Vintage") as of and for the year ended December 31, 1995, and the
unaudited twenty-nine day period ended January 29, 1996.
3) The audited financial statements of Carrington Pointe as of and for the
year ended December 31, 1995.
4) The audited financial statements of Homestead of Garden City, L.C.
("Garden City") as of and for the period from inception (November 1, 1995) to
December 31, 1995, and the unaudited financial statements of Garden City as of
and for the six months ended June 30, 1996.
The pro forma balance sheet as of June 30, 1996 was prepared as if the
acquisition of the Terrace Gardens facility, which is expected to close
simultaneous with the closing of this offering, and the issuance of 937,020
shares of Common Stock, representing the number of shares which would be
required to be sold by the Company at the assumed initial public offering price
of $14.00 per share (net of estimated underwriting discounts) in order for the
Company to pay the purchase price for the Terrace Gardens facility had been
consummated as of June 30, 1996. No pro forma adjustments have been made to
reflect the acquisition of leasehold interests in the Garden City and Homestead
Wichita facilities and the acquisition and anticipated sale/leaseback of the
Cabot Pointe facility because such acquisitions will have no effect on the
Company's balance sheet. See "Company History," "Use of Proceeds" and "Business
- -- Properties."
The pro forma statements of operations for the year ended December 31, 1995
and the six months ended June 30, 1996 were prepared as if the Company's
interest in the following facilities had been acquired on January 1, 1995:
Vintage, which was leased by the Company commencing January 29, 1996; Terrace
Gardens, which the Company has agreed to acquire simultaneous with the closing
of this offering; Garden City, which was leased by the Company commencing July
1, 1996; and Carrington Pointe, which the Company acquired effective December
31, 1995. Additionally, the pro forma statement of operations for the year ended
December 31, 1995 was prepared as if the 39.5% minority interest in the
Waterside facility was acquired on January 1, 1995. No pro forma adjustments
have been made to reflect the operations of the Homestead Wichita facility,
which was leased by the Company commencing July 17, 1996, or the Cabot Pointe
facility, which the Company acquired in August 1996 and intends to sell and
leaseback in October 1996, because such facilities were not in operation at June
30, 1996. Effective June 1, 1996, the Company received as a capital contribution
condominium interests in the assisted living and related portions of the
Vintage, Treemont and West Palm Beach facilities which the Company had
previously leased. Accordingly, the pro forma financial statements are adjusted
to decrease rent expense associated with these facilities and to increase
depreciation resulting from the ownership of a condominium interest in these
facilities. Effective June 1, 1996, the rent for The Shores and Cheyenne Place
facilities, which the Company subleases from IHS, was increased, and the pro
forma statements of operations are adjusted to reflect this increase in rent.
Finally, the pro forma statements are adjusted to reflect the estimated
additional corporate administrative and general expenses that would have been
incurred if ILC had operated as a stand-alone company. See "Company History,"
"Use of Proceeds" and "Business -- Properties."
To date IHS has provided all required financial, legal, accounting, human
resources and information systems services to the Company, and has satisfied all
the Company's capital requirements in excess of internally generated funds. IHS
has charged the Company a flat fee of 6% of total revenue for these services,
except that with respect to the Waterside facility prior to November 1995, IHS
and the minority owner of the facility each charged the Company a fee of 4.5% of
monthly service fee revenue for these services. The Company estimates that the
cost of obtaining these services from third parties would have been
significantly higher than the fees charged by IHS. IHS has agreed to provide
certain administrative
21
<PAGE>
services to the Company after the closing of this offering until the Company has
implemented its own MIS and accounting systems, which the Company anticipates
will occur in the fourth quarter of 1996. See "Business -- Operations" and
"Certain Transactions."
The unaudited pro forma combined financial information set forth below is not
necessarily indicative of the Company's combined financial position or the
results of operations that actually would have occurred if the transactions had
been consummated on the dates shown. In addition, they are not intended to be a
projection of results of operations that may be obtained in the Company's
future. The unaudited pro forma combined financial information should be read in
conjunction therewith and in conjunction with the financial statements and
related notes thereto included elsewhere in the Prospectus.
INTEGRATED LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ILC TERRACE GARDENS
--------- ---------------------- PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS(a) CONSOLIDATED
--------- ---------------------- PRO FORMA
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents........................... $ 120 $ 457 $ (457) $ 120
Accounts receivable................................. 355 387 (387) 355
Prepaid expenses and other current assets........... 407 79 (79) 407
--------- --------- --------------- ---------------
Total current assets............................... 882 923 (923) 882
--------- --------- --------------- ---------------
Assets limited as to use............................ 705 -- 705
Property, plant and equipment, net.................. 50,626 7,895 4,385 62,906
Other assets........................................ 3,252 133 (133) 3,252
--------- --------- --------------- ---------------
$55,465 $8,951 $ 3,329 $67,745
========= ========= =============== ===============
Liabilities and Stockholder's Equity
Accounts payable ................................... $ 828 $ 176 $ (176) $ 828
Accrued expenses.................................... 1,309 711 (631) 1,389
Current portion of long-term debt................... -- 324 (324) --
--------- --------- --------------- ---------------
Total current liabilities.......................... 2,137 1,211 (1,131) 2,217
--------- --------- --------------- ---------------
Note payable to parent company...................... 3,363 -- 3,363
Refundable deposits................................. 5,398 -- 5,398
Deferred income taxes............................... 324 -- 324
Unearned entrance fees.............................. 3,912 -- 3,912
Long-term debt less current portion................. -- 7,927 (7,927) --
--------- --------- --------------- ---------------
Total liabilities.................................. 15,134 9,138 (9,058) 15,214
--------- --------- --------------- ---------------
Stockholder's equity
Common stock, $.01 par value. Authorized
100,000,000 shares; 3,897,900 shares issued and
outstanding actual and 4,834,920 shares issued and
outstanding pro forma............................. 39 -- 9 48
Additional paid-in capital......................... 42,359 -- 12,191 54,550
Retained earnings (deficit)........................ (2,067) (187) 187 (2,067)
--------- --------- --------------- ---------------
Net stockholder's equity........................... 40,331 (187) 12,387 52,531
--------- --------- --------------- ---------------
$55,465 $8,951 $ 3,329 $67,745
========= ========= =============== ===============
</TABLE>
22
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GARDEN
ILC TERRANCE GARDENS VINTAGE CARRINGTON POINTE CITY
---------------------- --------------------- ------------------- ------------------- -------
ACTUAL ADJUSTMENTS ACTUAL ADJUSTMENTS ACTUAL ADJUSTMENTS ACTUAL ADJUSTMENTS ACTUAL
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Monthly service and
entrance fees.......... $15,123 $5,642 $1,598 $3,486 $ 31
Management services
and other.............. 1,146 301 23 102 --
------ ------ ------ ------ ------
Total revenues......... 16,269 5,943 1,621 3,588 31
------ ------ ------ ------ ------
Expenses:
Facility operations..... 11,243 4,068 1,208 1,937 66
Facility rents.......... 2,430 $(708)(b) -- -- -- --
Corporate administrative
and general ........... 1,005 2,008 (c) 546 81 249 6
Depreciation and
amortization........... 415 593 (b) 345 $ (47)(d) 200 $(113)(b) 425 $(146)(f) 14
Loss on impairment of
long-lived assets...... 5,126 -- -- -- --
Interest................ -- 739 (739)(d) 429 (429)(e) -- 16
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
Total expenses......... 20,219 1,893 5,698 (786) 1,918 (542) 2,611 (146) 102
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
Earnings (loss) before
income taxes and
minority interest....... (3,950) (1,893) 245 786 (297) 542 977 146 (71)
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
Minority interest........ 37 (37)(h) -- -- -- -- -- -- --
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
Earnings (loss) before
income taxes............ (3,987) $ (1,856) $ 245 $ 786 $ (297) $ 542 $ 977 $ 146 $(71)
====== =========== ====== =========== ====== =========== ====== =========== ------
Federal and state income
taxes ................ (643)
------
Net loss................. $(3,344)
------
Net earnings per common
share................... $ (.86)
------
Weighted average
shares outstanding...... 3,898
======
GARDEN CITY
----------- PRO FORMA
ADJUSTMENTS CONSOLIDATED
----------- ------------
Revenues:
Monthly service and
entrance fees.......... $ 25,880
Management services
and other.............. 1,572
--------
Total revenues......... 27,452
--------
Expenses:
Facility operations..... 18,522
Facility rents.......... $ 48 (g) 1,770
Corporate administrative
and general ........... 3,895
Depreciation and
amortization........... (14)(g) 1,672
Loss on impairment of
long-lived assets.... 5,126
Interest................ (16)(g) --
------- -------
Total expenses......... 18 30,985
------- -------
Earnings (loss) before
income taxes and
minority interest....... (18) (3,533)
------- -------
Minority interest........ -- --
------- -------
Earnings (loss) before
income taxes............ $ (18) (3,533)
------- -------
Federal and state income
taxes ................ (468)(i)
-------
Net loss................. $ (3,065)
Net earnings per common -------
share................... $ (.63)
Weighted average =======
shares outstanding...... 4,835
=======
</TABLE>
INTEGRATED LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ILC TERRANCE GARDENS VINTAGE GARDEN CITY
-------------------- -------------------------------------- ------------------ PRO FORMA
ACTUAL ADJUSTMENTS ACTUAL ADJUSTMENTS ACTUAL ADJUSTMENTS ACTUAL ADJUSTMENTS CONSOLIDATED
------ ----------- ------ ----------- ------ ----------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Monthly service and entrance fees.. $10,568 $2,467 $139 $181 $13,355
Management services and other...... 727 157 2 -- 886
------ ----- ---- ----- ---
Total revenues.................... 11,295 2,624 141 181 14,241
------ ----- ---- ----- ---
Expenses:
Facility operations................ 7,138 1,966 104 171 9,379
Facility rents..................... 1,309 $(448)(b) -- -- -- $ 144 (g) 1,005
Corporate administrative and
general........................... 678 1,004 (c) 245 -- 21 1,948
Depreciation and amortization...... 480 276 (b) 173 $(24)(d) 17 $(10)(b) 43 (43)(g) 912
Interest........................... -- 339 (339)(d) 36 (36)(e) 56 (56)(g) --
------ ----- ----- ---- ---- --- ----- --- ------
Total expenses.................... 9,605 $ 832 2,723 (363) 157 (46) 291 45 13,244
------ ----- ----- ---- ---- --- ----- --- ------
Earnings (loss) before income
taxes.............................. 1,690 $(832) $ (99) $ 363 $(16) $ 46 $(110) $ (45) 997
====== ===== ===== ==== ==== === ==== === ======
Federal and state income taxes ..... 651 384(i)
------ -----
Net earnings ....................... $1,039 $ 613
------ -----
Net earnings per common share ...... $ .27 $ .13
====== ======
Weighted average shares
outstanding........................ 3,898 4,835
====== ======
</TABLE>
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
PRO FORMA ADJUSTMENTS
(a) To reflect the purchase price of, and estimated transaction costs related
to, the acquisition of the Terrace Gardens facility and the issuance of
937,020 shares of Common Stock, representing the number of shares which
would be required to be sold by the Company at the assumed initial public
offering price of $14.00 per share (net of estimated underwriting
discounts) in order for the Company to pay the purchase price for the
Terrace Gardens facility, and to eliminate the assets and liabilities
retained by the seller. See "Business -- Properties -- Proposed
Acquisition."
(b) To reflect depreciation and amortization on the new cost bases; the
reduction of rent resulting from the capital contribution of condominium
interests in the Treemont, West Palm Beach and Vintage facilities by IHS;
and the increase in rent related to The Shores and Cheyenne Place
facilities. The Company assumed a 40 year life for the condominium
interests.
(c) To reflect management's estimate that corporate pro forma consolidated
administrative and general expenses would have been $3,895,000 for the year
ended December 31, 1995 and $1,948,000 for the six months ended June 30,
1996 if the Company had operated without the benefit of IHS' management
services. This adjustment is based on Company budgets and does not include
any additional corporate expenses which may be incurred in implementing the
Company's future growth strategy.
(d) To reflect the impact of the Company's new basis in the assets of Terrace
Gardens and the elimination of amortization of deferred financing fees and
interest expense on debt not assumed. The Company assumed a 40 year life
for building and improvements and a 10 year life for equipment.
(e) To reflect elimination of Vintage's interest expense on debt not assumed.
(f) To reflect the impact of the Company's new basis in the assets of
Carrington Pointe. The Company assumed a 40 year life for building and
improvements and a 10 year life for equipment.
(g) To reflect the impact of the lease agreement for the Garden City facility.
(h) To reflect the acquisition of the 39.5% minority interest in the Waterside
facility. See Notes 2 and 12 of Notes to Consolidated Financial Statements.
(i) To adjust consolidated income tax expense for the effect of the adjustments
above.
24
<PAGE>
SELECTED CONSOLDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1994
and 1995, and for each of the years in the three-year period ended December 31,
1995 are derived from consolidated financial statements of the Company which
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, which appear elsewhere in this Prospectus. The selected
consolidated financial data as of December 31, 1991, 1992 and 1993, and for the
years ended December 31, 1991 and 1992 are derived from the unaudited
consolidated financial statements of the Company. The selected consolidated
financial data as of June 30, 1996 and for the six months ended June 30, 1995
and 1996 are derived from the unaudited consolidated financial statements of the
Company. In the opinion of management, such unaudited consolidated financial
statements contain all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of the Company as of such dates and for such periods. Operating
results for the six-month period ended June 30, 1996 are not necessarily
indicative of the results that may be expected for any other interim period or
for the full year. This selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
- ------------------------------- ------- --------- --------- --------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Revenues:
Monthly service and entrance fees..... $4,893 $4,681 $5,010 $10,906 $15,123 $7,471 $10,568
Management services and other......... 72 48 230 739 1,146 547 727
--------- --------- --------- ---------- ----------- --------- ----------
Total revenue........................ 4,965 4,729 5,240 11,645 16,269 8,018 11,295
--------- --------- --------- ---------- ----------- --------- ----------
Expenses:
Facility operations................... 2,987 3,020 3,455 8,254 11,243 5,576 7,138
Facility rents........................ 797 821 856 1,466 2,430 1,215 1,309
Corporate administrative and general.. 298 284 315 726 1,005 499 678
Depreciation and amortization......... -- -- 24 369 415 206 480
Loss on impairment of long-lived
assets(2)............................ -- -- -- -- 5,126 -- --
--------- --------- --------- ---------- ----------- --------- ----------
Total expenses....................... 4,082 4,125 4,650 10,815 20,219 7,496 9,605
--------- --------- --------- ---------- ----------- --------- ----------
Earnings (loss) before income taxes
and minority interest................. 883 604 590 830 (3,950) 522 1,690
Minority interest...................... -- -- 10 (29) 37 23 --
--------- --------- --------- ---------- ----------- --------- ----------
Earnings (loss) before income taxes ... 883 604 580 859 (3,987) 499 1,690
Federal and state income taxes......... 228 230 226 322 (643) 192 651
--------- --------- --------- ---------- ----------- --------- ----------
Net earnings (loss).................... $ 655 $ 374 $ 354 $ 537 $(3,344) $ 307 $ 1,039
========= ========= ========= ========== =========== ========= ==========
Earnings (loss) per common share ...... $ 0.17 $ 0.10 $ 0.09 $ 0.14 $ (0.86) $ 0.08 $ 0.27
========= ========= ========= ========== =========== ========= ==========
Weighted average shares outstanding ... 3,898 3,898 3,898 3,898 3,898 3,898 3,898
========= ========= ========= ========== =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------ ----------
1991 1992 1993 1994 1995 1996
----- ------ ------ --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .... $ -- $ -- $ 1 $ 787 $ 413 $ 120
Working capital (deficit) .... 27 26 (36) 208 (315) (1,256)
Total assets.................. 27 26 15,834 18,300 25,774 55,465
Note payable to parent
company....................... -- -- -- -- -- 3,363
Minority interest............. -- -- 2,400 2,371 -- --
Stockholder's equity.......... 27 26 4,886 6,347 14,773 40,331
</TABLE>
(1) The Company has grown substantially through acquisitions, which
materially affects the comparability of the financial data reflected herein.
(2) In 1995, the Company implemented Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121 in connection with IHS'
implementation thereof. Through evaluation of the recent financial performance
and a recent appraisal of one of its facilities, the Company estimated the fair
value of this facility and determined that the carrying value of certain
long-lived assets, including goodwill and buildings and improvements, exceeded
their fair value. The excess carrying value was written off and is included in
the statement of operations for 1995 as a loss from impairment of long-lived
assets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
and related Notes thereto included elsewhere in this Prospectus. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors" as well as those
discussed elsewhere in this Prospectus.
OVERVIEW
The Company currently operates 19 assisted living and other senior housing
facilities containing 1,812 units in seven states. The 1,812 units operated by
the Company consist of 1,187 assisted living units (including 172 units devoted
to Alzheimer's and dementia care), 544 independent living units for persons who
require occasional assistance with the activities of daily living and 81 skilled
nursing units. The Company is pursuing a strategy of rapid growth through
development and acquisition, and intends to acquire, develop or obtain
agreements to manage approximately 60 to 75 assisted living facilities per year
in each of the next three years. As part of this strategy, ILC is currently
developing 33 assisted living facilities, of which 24 are scheduled to open
during 1997, has entered into an agreement to acquire one facility containing
258 units simultaneous with the closing of this offering and is evaluating
numerous additional acquisition opportunities. All of ILC's revenues from its
owned and leased facilities in 1995 and the first six months of 1996 were
derived from private pay sources. The Company's historical results of operations
are not necessarily indicative of the Company's future financial performance
because of the Company's prior operation as a wholly-owned subsidiary of IHS and
its strategy to significantly expand its operating base over the next three
years.
To achieve its growth objectives, the Company will need to obtain sufficient
financial resources to fund its development, construction and acquisition
activities and anticipated operating losses. Accordingly, the Company's future
growth will depend on its ability to obtain additional financing on acceptable
terms. The Company expects negative cash flow for at least the next several
years as it continues to develop and acquire assisted living facilities,
primarily as a result of the development and opening of 25 to 35 new assisted
living facilities in each of the next three years. There can be no assurance
that any newly developed facility will achieve a stabilized occupancy rate and
resident mix that meets the Company's expectations or generates positive cash
flow. The Company currently estimates that the net proceeds to be received by it
in this offering, together with financing commitments and sale/leaseback and
mortgage financing that it anticipates will be available, will be sufficient to
fund its acquisition and development program and its anticipated operating
losses for at least the next 12 months. There can be no assurance, however, that
the Company will not be required to seek additional capital earlier. See "Risk
Factors -- Need for Substantial Additional Capital" and "-- Liquidity and
Capital Resources."
The Company intends to finance the development and acquisition of its
assisted living facilities through mortgage financing, operating leases
(including sale/leaseback financing) and lines of credit. As a result, the
Company expects to incur substantial indebtedness and debt related payments
(including payments on operating leases) as the Company pursues its growth
strategy. Consequently, the Company anticipates that a substantial portion of
the Company's cash flow will be devoted to debt service and lease payments.
There can be no assurance that the Company will generate sufficient cash flow
from operations to cover required interest, principal and lease payments. The
Company's leverage may also adversely affect the Company's ability to respond to
changing business and economic conditions or continue its development and
acquisition program. See "Risk Factors -- Substantial Anticipated Debt and Lease
Obligations."
The Company derives its revenues from two primary sources: (i) resident fees
for the delivery of assisted living services and (ii) management services and
other income, primarily for management of facilities owned by third parties.
Historically, most of the Company's operating revenue has come from resident
fees, which in 1995 and the first half of 1996 comprised 93.0% and 93.6%,
respectively, of total revenues. Resident fees typically are paid monthly by
residents, their families or other responsible parties. Resident fees include
revenue derived from basic care, entrance fees, healthcare services provided by
the Company, Alzheimer's care and other sources. Entrance fees are one-time fees
generally payable by a
26
<PAGE>
resident upon admission. Residents who require personal care in excess of
services provided under the basic care program pay additional fees. Management
services and other income, which in 1995 and the first half of 1996 accounted
for the remaining 7.0% and 6.4%, respectively, of revenues, consists principally
of management fees. Management fees are generally in the range of four to five
percent of a managed facility's total operating revenues. Resident fees and
management fees are recognized as revenues when services are provided.
The Company classifies its operating expenses into the following categories:
(i) facility operating expenses, which include labor, food, marketing and other
direct facility expenses; (ii) facility development and pre-opening expenses,
which include non-capitalized development expenses and pre-opening labor and
marketing expenses; (iii) corporate administrative and general expenses, which
primarily includes headquarters and regional staff expenses and other overhead
costs; and (iv) depreciation and amortization. In anticipation of its growth
plans, the Company intends to increase significantly its corporate management
and staff in the 12 months following this offering.
From its inception in November 1995 through the present, the Company has been
operated as a wholly-owned subsidiary of Integrated Health Services, Inc. To
date IHS has provided all required financial, legal, accounting, human resources
and information systems services to the Company, and has satisfied all the
Company's capital requirements in excess of internally generated funds. IHS has
charged the Company a flat fee of 6% of total revenue for these services, except
that with respect to the Waterside facility prior to November 1995, IHS and the
minority owner of the facility each charged ILC a fee of 4.5% of monthly service
fee revenue for these services. The Company estimates that the cost of obtaining
these services from third parties would have been significantly higher than the
fee charged by IHS. IHS has agreed to provide certain administrative services to
the Company after the closing of this offering until the Company has implemented
its own MIS and accounting systems, which the Company anticipates will occur in
the fourth quarter of 1996. In addition, IHS provides certain building
maintenance, housekeeping, emergency call and resident meal services to the
Company's Treemont, Vintage and West Palm Beach facilities. See "Business --
Operations" and "Certain Transactions."
The Company believes that for the foreseeable future the greatest portion of
its revenue growth will be from the development and acquisition of new
facilities. The Company generated 100% of its revenues from its owned and leased
facilities from private pay sources during 1995 and the first six months of
1996. However, depending in part on the results of future acquisitions, this
percentage could decrease from time to time. The Company believes that, for the
foreseeable future, the level of governmental reimbursement for its services
that will be available to its residents who receive such reimbursement will be
insufficient to cover the costs of delivering the level of service that the
Company currently provides. As a result, the Company currently and for the
foreseeable future expects to rely primarily on its residents' ability to pay
the Company's charges from their own familial financial resources. See "Risk
Factors -- Dependence on Attracting Seniors with Sufficient Resources to Pay."
Under Florida insurance regualtions relating to life-care contracts, IHS'
transfer of the Waterside facility to the Company is subject to review by the
Florida Department of Insurance. The Company believes that the Department of
Insurance will approve the transfer of the facility, although there can be no
assurance that such transfer will be approved. If the transfer is not approved,
the Company will be obligated to transfer ownership of the Waterside facility
back to IHS. During the year ended December 31, 1995 and the six months ended
June 30, 1996, the Waterside facility generated revenues of $3,644,000 and
$1,807,000, respectively, and earnings (loss) before income taxes of
$(4,850,000) and $402,000, respectively. At December 31, 1995 and June 30, 1996,
total assets of the Waterside facility were $10,693,000 and $10,873,000,
respectively, total liabilities were $10,025,000 and $10,111,000, respectively,
and stockholder's equity was $668,000 and $762,000, respectively. In addition,
the Company has been notified by the owner of the Elim Place facility, a 24 unit
assisted living and alzheimer's facility located in California which the Company
currently manages, that the management agreement will terminate effective
October 31, 1996. During the six months ended June 30, 1996, management fees
from this facility, which the Company began to manage in February 1996,
aggregated $16,000.
27
<PAGE>
RESULTS OF OPERATIONS
The following table presents selected financial data as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1993 1994 1995 1995 1996
- -------------------------------------------------------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Monthly service and entrance fees....................... 95.6% 93.7% 93.0% 93.2% 93.6%
Management services and other........................... 4.4 6.3 7.0 6.8 6.4
-------- -------- ---------- -------- --------
Total revenues......................................... 100.0 100.0 100.0 100.0 100.0
-------- -------- ---------- -------- --------
Facility operations..................................... 66.0 70.8 69.1 69.5 63.2
Facility rents.......................................... 16.3 12.6 14.9 15.2 11.6
Corporate administrative and general.................... 6.0 6.2 6.2 6.2 6.0
Depreciation and amortization .......................... 0.4 3.2 2.6 2.6 4.2
Loss on impairment of long-lived assets................. -- -- 31.5 -- --
-------- -------- ---------- -------- --------
Total expenses......................................... 88.7 92.8 124.3 93.5 85.0
-------- -------- ---------- -------- --------
Earnings (loss) before income taxes and minority
interest............................................... 11.3 7.2 (24.3) 6.5 15.0
Minority interest....................................... 0.2 (0.2) 0.3 0.3 --
-------- -------- ---------- -------- --------
Earnings (loss) before income taxes..................... 11.1 7.4 (24.6) 6.2 --
Federal and state income taxes.......................... 4.3 2.8 (4.0) 2.4 5.8
-------- -------- ---------- -------- --------
Net earnings (loss)..................................... 6.8% 4.6% (20.6)% 3.8% 9.2%
======== ======== ========== ======== ========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Revenues increased from $8.0 million in 1995 to $11.3 million in 1996,
representing a 40.9% increase. Substantially all of the increase in revenues
resulted from the acquisition of the Carrington Pointe facility on December 31,
1995 and the leasing of the Vintage facility on January 29, 1996. Average
occupancy of the Company's owned and leased facilities during the six months
ended June 30, 1996 was 94.4% as compared to 88.1% during the six months ended
June 30, 1995. Management services and other revenue increased from $547,000 in
1995 to $727,000 in 1996, representing a 32.9% increase, primarily due to the
addition of four managed facilities subsequent to June 30, 1995 and increased
other revenue at its existing owned and leased facilities.
Facility operations expense increased from $5.6 million in 1995 to $7.1
million in 1996, representing a 28.0% increase. Substantially all of the
increase resulted from the addition of the Carrington Pointe and Vintage
facilities. Facility operations expense as a percentage of revenues decreased
from 69.5% in 1995 to 63.2% in 1996 due to the higher margins of the Carrington
Pointe facility, as well as improved operating results at facilities in
operation in both periods.
Facility rents increased from $1.2 million in 1995 to $1.3 million in 1996,
representing a 7.7% increase. Substantially all of the increase resulted from
the leasing of the Vintage facility commencing January 29, 1996, partially
offset by a reduction in rent as a result of the contribution to the Company of
condominium interests in the Treemont, Vintage and West Palm Beach facilities on
June 1, 1996. Facility rents as a percentage of revenue decreased from 15.2% in
1995 to 11.6% in 1996 due to the higher revenue base of the Carrington Pointe
facility, which is an owned facility.
Corporate administrative and general expense increased from $499,000 in 1995
to $678,000 in 1996, an increase of 35.9%. Substantially all of the increase is
due to the addition of the Carrington Pointe and Vintage facilities. Corporate
administrative and general expense as a percentage of revenue decreased from
6.2% in 1995 to 6.0% in 1996. The Company's facilities were charged a management
fee of 6% of total revenues by IHS, except that prior to November 1995, the
Company's Waterside facility was charged a management fee of 4.5% of monthly
service fee revenue by each of IHS and the minority partner (whose interest was
subsequently acquired by IHS in October 1995). The reason for the decrease in
corporate administrative and general expense as a percentage of revenues from
1995 to 1996 is that in 1996 the Company paid a fee of 6.0% of total revenues
with respect to the Waterside facility compared to a fee of 9.0% of monthly
service revenues in the comparable period in 1995. See Note 7 of Notes to
Consolidated Financial Statements.
Depreciation and amortization expense increased from $206,000 in 1995 to
$480,000 in 1996, representing a 133.1% increase. Of the $274,000 increase,
$140,000 resulted from the addition of the Carrington Pointe facility on
December 31, 1995, $70,000 resulted from a write-off of software costs in the
first quarter of 1996, $57,000 resulted from depreciation of the condominium
interests in the
28
<PAGE>
Treemont, Vintage and West Palm Beach facilities acquired June 1, 1996 and the
remaining $7,000 resulted from depreciation of routine additions of $35,000
partially offset by a $28,000 reduction in depreciation resulting from the
write-down of excess carrying value related to the Waterside facility.
Depreciation and amortization expense as a percentage of revenue increased from
2.6% in 1995 to 4.2% in 1996 due to the above mentioned reasons.
Earnings before income taxes and minority interest increased $1,168,000 from
$522,000 in 1995 to $1,690,000 in 1996, representing a 223.4% increase. This was
primarily due to the acquisition of the Carrington Pointe and Vintage facilities
subsequent to June 30, 1995, as well as improved operating results at facilities
in operation in both periods.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenues increased from $11.6 million in 1994 to $16.3 million in 1995,
representing a 39.7% increase. Substantially all of the increase in revenues
resulted from the lease of The Shores and Cheyenne Place facilities commencing
August 31, 1994 and the addition of The Homestead facility on April 1, 1994.
Average occupancy of the Company's owned and leased facilities during the year
ended December 31, 1995 was 90.9% as compared to 79.7% during the year ended
December 31, 1994. Management services and other revenue increased from $739,000
in 1994 to $1.1 million in 1995, representing a 55.1% increase, primarily due to
the addition of three managed facilities in 1995 and increased other revenue at
its existing owned and leased facilities.
Facility operations expense increased from $8.3 million in 1994 to $11.2
million in 1995, representing a 36.2% increase. Substantially all of the
increase in facility operations expense resulted from the addition of the
Cheyenne Place, The Homestead and The Shores facilities. Facility operations
expense as a percentage of revenue decreased from 70.8% of revenues in 1994 to
69.1% of revenues in 1995 due to the improved operating results in 1995 of the
two facilities leased and the one facility acquired in 1994.
Facility rents increased from $1.5 million in 1994 to $2.4 million in 1995,
representing a 65.8% increase. The increase in rent expense primarily resulted
from the two leases entered into in 1994. Facility rents as a percentage of
revenues increased from 12.6% in 1994 to 14.9% in 1995 due to the lease of The
Shores and Cheyenne Place facilities in 1994.
Corporate administrative and general expense increased from $725,000 in 1994
to $1.0 million in 1995, representing a 38.6% increase. Substantially all of the
increase in corporate administrative and general expense resulted from the
addition of the Cheyenne Place, The Homestead and The Shores facilities.
Corporate administrative and general expenses as a percentage of revenues
remained constant in both periods at 6.2% of revenues.
Depreciation and amortization expense increased from $369,000 in 1994 to
$415,000 in 1995, representing a 12.4% increase. The increase in depreciation
and amortization expense primarily resulted from the addition of The Homestead
facility and routine capital additions at other facilities. Depreciation and
amortization decreased as a percentage of revenue from 3.2% to 2.6% due to the
increase in revenue from the two facilities leased in 1994.
Loss on Impairment of Long-Lived Assets. In 1995, the Company implemented
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 121 in connection with IHS' implementation thereof. Through
evaluation of the recent financial performance and a recent appraisal of its
Waterside facility, the Company estimated the fair value of this facility and
determined that the carrying value of certain long-lived assets, including
goodwill and buildings and improvements, exceeded their fair value. The excess
carrying value of $5,126,000 was written off and is included in the statement of
operations for 1995 as a loss on impairment of long-lived assets. See Notes 1, 2
and 12 of Notes to Consolidated Financial Statements.
Earnings (loss) before income taxes and minority interest decreased from
earnings of $830,000 in 1994 to loss of $3,950,000 in 1995, representing a
decrease of 575.7%. This was primarily due to improved operating results at
facilities in operation in both periods and facilities acquired subsequent to
December 31, 1994 offset by the loss on impairment of long-lived assets.
29
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Revenues increased from $5.2 million in 1993 to $11.6 million in 1994,
representing a 122.2% increase. The increase primarily resulted from the
addition of the Waterside and West Palm Beach facilities on December 1, 1993 and
The Homestead facility on April 1, 1994, and the leasing of the Cheyenne Place
and The Shores facilities on August 31, 1994. Management services and other
revenue increased from $231,000 in 1993 to $739,000 in 1994, representing a
220.4% increase, primarily due to one additional managed facility in 1994 and
increased other revenue at its existing owned and leased facilities.
Facility operations expense increased from $3.5 million in 1993 to $8.3
million in 1994, representing a 138.9% increase. The increase primarily resulted
from the addition of the Cheyenne Place, The Homestead, The Shores, Waterside
and West Palm Beach facilities. Facility operations expense as a percentage of
revenues increased from 66.0% in 1993 to 70.8% in 1994 due to the increased
operating expenses incurred to integrate the five new facilities.
Facility rents increased from $856,000 in 1993 to $1.5 million in 1994,
representing an increase of 71.3%. The increase primarily resulted from the
lease of the Cheyenne Place and The Shores facilities in 1994. Facility rents as
a percentage of total revenues decreased from 16.3% in 1993 to 12.6% in 1994,
primarily as a result of the addition of The Homestead and Waterside facilities,
which are owned facilities.
Corporate administrative and general expense increased from $315,000 in 1993
to $725,000 in 1994, representing an increase of 130.7%. The increase primarily
resulted from the addition of the Cheyenne Place, The Homestead, The Shores,
Waterside and West Palm Beach facilities. Corporate administrative and general
expense as a percentage of revenue increased from 6.0% in 1993 to 6.2% in 1994.
The increase primarily resulted from Waterside, which had a higher management
fee than the other facilities, being an owned facility for all of 1994 but only
one month of 1993.
Depreciation and amortization expense increased from $24,000 in 1993 to
$369,000 in 1994, representing a 1,466.8% increase. The increase primarily
resulted from the addition of The Homestead, Waterside and West Palm Beach
facilities. Depreciation and amortization expense as a percentage of revenue
increased from 0.4% to 3.2% due to the addition of these three new facilities.
Earnings before income taxes and minority interest increased from $590,000 in
1993 to $830,000 in 1994, representing a 40.6% increase. This was primarily due
to additional pre-tax income generated at facilities acquired subsequent to
December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
To date the Company has financed its operations through cash contributions
and loans from IHS and cash from operations.
At June 30, 1996, the Company had a working capital deficit of $1.3 million
compared to a deficit of $315,000 at December 31, 1995.
The Company has obtained a commitment (the "Financing Commitment") from
Health Care Property Investors, Inc. ("HCPI"), a real estate investment trust,
to make available to ILC up to $100 million to develop, construct and acquire
facilities. No less than $40 million is to be invested in existing facilities
("Existing Facilities") through purchase and lease or sale/leaseback
transactions. Remaining funds (up to $60 million) may be invested in new
development projects ("New Facilities"). The Company will develop each New
Facility pursuant to a separate development agreement with HCPI and will lease
each New Facility and financed Existing Facility from HCPI pursuant to a
separate lease agreement. Each acquisition, development, lease and ancillary
agreement executed pursuant to the Financing Commitment will contain
representations and warranties, indemnities, affirmative covenants and
conditions precedent customary for real estate investment trust transactions.
HCPI's funding of New Facilities is contingent upon the Company's completion of
an initial public offering which results in the Company having stockholders'
equity of not less than $55 million. A $200,000 deposit (the "Expense Deposit"),
to ensure the payment of HCPI's expenses in the event transactions contemplated
pursuant to the Financing Commitment are not completed, was paid upon the
Company's execution of the Financing Commitment. The Financing Commitment
expires on June 30, 1997.
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Each development agreement executed pursuant to the Financing Commitment will
require the Company, as developer, to arrange, coordinate and carry out all
services necessary to develop each New Facility. The Maximum Cost (as defined)
based on an appraisal of Fair Market Value (as defined) and a development budget
for each facility will be approved by HCPI and included in the development
agreement. Total Construction Cost (as defined) will equal land cost plus total
actual construction costs, one percent of Maximum Cost (accrued as a cost by
HCPI), all legal costs and fees (including in-house legal costs) incurred in
connection with the project, a construction administration fee to be accrued as
a cost by HCPI equal to $1,550 per month (subject to reduction) and an allowance
for HCPI's cost of money at 1.5% over the Bank of New York prime rate. The cost
of overruns, if any, including HCPI's carrying cost on overruns, are to be paid
by the Company. HCPI will not be required to pay a Total Construction Cost in
excess of Maximum Cost. The Company will guarantee the completion of a New
Facility within 12 months and will guarantee to make all payments in excess of
Maximum Cost to complete the facility. The Company may include in the Total
Construction Cost the amount of any actual development fee paid to an unrelated
developer, up to a maximum of 5% of Maximum Cost. IHS has agreed to guaranty
certain of the Company's obligations to HCPI in connection with the development
of facilities, except that IHS is not required to guaranty such obligations as
long as the Company maintains stockholders' equity or net worth in excess of $55
million and the Common Stock is publicly traded on a national securities
exchange or the Nasdaq National Market.
HCPI will pay fair market value, based on an appraisal, to purchase an
Existing Facility. All leases will be "triple net" (i.e., where the lessee is
obligated to pay, in addition to rent, all taxes, repairs and insurance in
respect of the facility) and HCPI will have the right to a higher lease rate on
facilities located in states that tax real estate investment trust income. The
primary term for each lease will be 15 years with two 10 year renewal options at
fair market value lease rates. All leases covering facilities financed under the
Financing Commitment must be renewed together as a group and not individually.
The base lease rate for Existing Facility leases executed under the Financing
Commitment will equal 325 basis points above the 10-year Treasury Note rate
published in The Wall Street Journal three business days prior to lease
commencement. The base rent under such leases will equal the base lease rate
multiplied by the Existing Facility purchase price. The base lease rate for New
Facility leases will equal 350 basis points above the 10-year Treasury Note rate
published in The Wall Street Journal three business days prior to lease
commencement. The base rent under New Facility leases will equal the base lease
rate multiplied by the lesser of Total Construction Cost or Maximum Cost.
Beginning in the second year of the lease, annual rent will be increased by an
amount equal to the annual change in the consumer price index multiplied by the
prior year's total rent. In no event will the rent increase be less than the sum
of (a) the additional rent paid for the previous year plus (b) one hundred
percent of the facility's Gross Revenues (as defined) in excess of Base Revenue
(as defined), up to but not exceeding an amount equal to two percent (2%) of the
prior year's total rent. In no event will the rent increase represent more than
a 5% increase over the prior year's total rent. In addition to the payment of
rent and the Expense Deposit, the Company is required to provide an annually
renewed letter of credit for each financed facility equal to six months total
lease payments to secure acquisition, development and lease obligations (subject
to reduction to four months upon completion of an initial public offering which
results in the Company having stockholders' equity of not less than $55
million). All leases under the Financing Commitment will be cross-defaulted and
cross-collateralized and all leases between HCPI and a subsidiary of the Company
will be guaranteed by the Company. The Company will be obligated to reimburse
HCPI for certain costs and expenses incurred in connection with transactions
completed pursuant to the Financing Commitment. In addition, a non-refundable
commitment fee, equal to one percent (1%) of the purchase price of each Existing
Facility, will be due and payable at the closing of the acquisition of each
Existing Facility.
The Company has also obtained a non-binding term sheet from Capstone Capital
Corporation ("Capstone") relating to the availability of up to $40 million in
financing through sale/leaseback transactions. An expense deposit of $100,000 is
payable by the Company within one business day of the execution of a commitment
agreement and a fee equal to 1% of total building cost is payable upon the
initial draw on the commitment relating to each facility purchased. As proposed,
leases executed with Capstone will have an initial term of 12 to 15 years and
three separate five year extension options. All leases funded under the proposed
commitment, however, will have the same initial term and no lease may be
extended unless all leases under the commitment are extended. Subject to a
minimum rate of
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10%, the initial lease rate will be 350 basis points in excess of the yield on
U.S. Treasury bills with similar maturities/terms. Lease rates during the first
year of each extended period will be based upon fair market rental values. Lease
rates will be adjusted annually (except for the first year of each renewal
period) in an amount equal to the positive change in the consumer price index;
provided, however, in no event will the change be less than 2% or more than 5%
of the previous year's lease payment.
All leases under the proposed Capstone commitment will be cross-defaulted and
all leases between Capstone and a subsidiary of the Company will be guaranteed
by the Company. Each facility lease will contain minimum rent coverage
requirements and will require the Company to maintain a minimum net worth of $55
million and minimum rent and interest coverage ratios. Each lease will be
"triple-net" and will grant the Company a right of first refusal to purchase the
facility from Capstone. The Company will reimburse Capstone for all costs
incurred in connection with transactions completed under the proposed commitment
and up to $2,000 per year for independent third-party inspections of each
facility. Capstone's commitment is subject to completion of an offering of at
least 2 million shares of Common Stock by the Company resulting in net proceeds
to the Company of at least $25 million. There can be no assurance that the
Company will receive a financing commitment from Capstone on these terms, on
different terms or at all. Dr. Elkins, the Chairman of the Board of Directors of
the Company, is a director of Capstone.
Following this offering, the Company will be dependent on third-party
financing for its acquisition and development program. Except for the financing
commitments discussed above, the Company has no other arrangements for
financing. There can be no assurance that financing for the Company's
acquisition and development program will be available to the Company on
acceptable terms or at all. Moreover, to the extent the Company acquires
facilities that do not generate positive cash flow (after rent expense and/or
interest), the Company may be required to seek additional capital for working
capital and liquidity purposes. See "Risk Factors -- Need for Substantial
Additional Capital."
The Company presently anticipates that it will make capital expenditures of
approximately $3 million in 1996 relating to its existing facilities. In
addition, the Company will use approximately $12.2 million of the net proceeds
of this offering to acquire the Terrace Gardens facility simultaneous with the
closing of this offering, and anticipates that it will make capital expenditures
of approximately $500,000 with respect to the Cabot Pointe and Terrace Gardens
facilities. The Company anticipates that it will spend approximately $9.0
million in 1996 to purchase land for the development of new assisted living
facilities. The Company has provided two of its third-party developers lines of
credit aggregating $2.0 million. See "Business -- Properties."
IHS has made available to the Company a $75 million revolving credit
facility. Borrowings under the facility bear interest at the rate of 14% per
annum. All outstanding borrowings, together with all accrued but unpaid
interest, are due at the earlier of (i) the closing of an initial public
offering by ILC or (ii) June 30, 1998. At June 30, 1996 and August 15, 1996,
$3.4 million and $6.7 million, respectively, were outstanding under this
facility. The Company intends to use a portion of the proceeds of this offering
to repay all amounts outstanding under the facility. See "Use of Proceeds."
Borrowings under this facility were used to finance the Company's development
activities.
The Company currently estimates that the net proceeds to be received by it
from this offering, together with financing commitments and sale/leaseback and
mortgage financing that it anticipates will be available, will be sufficient to
fund its acquisition and development program and operations for the next 12
months. There can be no assurance, however, that the Company will not be
required to seek additional capital earlier. Additional financing will be
necessary to enable the Company to respond to changing economic conditions or to
effect further expansion. There can be no assurance that the Company will
generate sufficient cash flow during such time to fund its future working
capital, rent and debt service requirements or growth. In such event, the
Company would have to seek additional financing through debt or equity
offerings, bank borrowings, sale/leaseback transactions or otherwise, and there
can be no assurance that such financing will be available on acceptable terms or
at all. See "Risk Factors -- Need for Substantial Additional Funds."
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BUSINESS
OVERVIEW
The Company provides assisted living and related services to the private pay
elderly market. Assisted living facilities combine housing, personalized support
and healthcare services in a cost-effective, non-institutional setting designed
to address the individual needs of the elderly who need regular assistance with
activities of daily living, such as eating, bathing, dressing and personal
hygiene, but who do not require the level of healthcare provided in a skilled
nursing facility. The Company currently operates 19 assisted living and other
senior housing facilities containing 1,812 units in seven states. The 1,812
units operated by the Company consist of 1,187 assisted living units (including
172 units devoted to Alzheimer's and dementia care), 544 independent living
units for persons who require occasional assistance with the activities of daily
living and 81 skilled nursing units. The Company is pursuing a strategy of rapid
growth through development and acquisition, and intends to acquire, develop or
obtain agreements to manage approximately 60 to 75 assisted living facilities
per year in each of the next three years. As part of this strategy, ILC is
currently developing 33 assisted living facilities, of which 24 are scheduled to
open during 1997, has entered into an agreement to acquire one facility
containing 258 units simultaneous with the closing of the offering and is
evaluating numerous additional acquisition opportunities. All of ILC's revenues
from its owned and leased facilities in 1995 and the first six months of 1996
were derived from private pay sources.
The Company's objective is to expand its operations to become a leading
provider of high-quality, affordable assisted living services. Key elements of
the Company's strategy to achieve this goal are to: (i) provide high-quality
healthcare oriented services; (ii) grow rapidly through development and
acquisition of additional assisted living facilities; (iii) utilize a flexible,
cost-effective approach for the development of new assisted living facilities;
and (iv) target a broad segment of the private-pay population.
The assisted living industry is highly fragmented and characterized by
numerous small operators whose scope of services vary widely. Annual
expenditures for assisted living services were estimated to be $10 to 12 billion
in 1995. The Company believes that factors contributing to the growth of the
assisted living industry include: (i) the aging of the U.S. population; (ii) the
increasing affluence of the elderly and their families; (iii) the decreasing
availability of family care in the home; (iv) consumer preference for greater
independence and a less institutional setting; (v) the increasing emphasis by
both federal and state governments and private insurers on containing long-term
care costs; and (vi) the reduced availability of skilled nursing beds for less
medically intensive residents. The Company believes that the foregoing factors,
combined with the fragmented nature of the industry and the inexperience and
lack of resources of many operators, have created a significant opportunity for
ILC to become a leading provider of high-quality, affordable assisted living
services.
The Company believes that its approach to the development of new assisted
living facilities differs from that of many other operators. Unlike many
assisted living operators, the Company intends to rely primarily on a limited
number of third-party developers, rather than maintain a large internal
development staff. ILC currently has relationships with three developers, which
developers are responsible for 29 of the 33 facilities currently under
development by the Company. The Company has, together with these developers,
developed three flexible and expandable prototype building designs. The
flexibility feature is expected to allow the facility's assisted living and
Alzheimer's bed allotment to be quickly and cost-effectively reconfigured based
on changing market demand. The expandability feature is expected to allow the
prototype buildings to be easily and cost-effectively expanded with little or no
disruption to current operations. The Company believes its development approach
will offer many advantages, including better construction quality control, lower
architectural and engineering fees, bulk purchasing of materials and fixtures
and faster development and construction schedules.
BACKGROUND
Assisted living is quickly emerging as an important component in the
continuum of care within the healthcare delivery system and can be viewed as
falling in the middle of the elder care continuum, with home-based care on one
end and skilled nursing facilities and acute care hospitals on the other. It is
a
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cost-effective setting for the elderly who do not require the higher level of
medical care provided by skilled nursing facilities but cannot live
independently because of physical frailties or cognitive impairments. Assisted
living facilities combine housing, personalized support services and healthcare
in a non-institutional setting designed to address the individual needs of the
elderly who need regular assistance with certain activities of daily living.
The assisted living industry is highly fragmented and characterized by
numerous small operators whose scope of services vary widely from small "board
and care" facilities (generally 12 or fewer residents) with little or no
services to large facilities offering a full array of personal care services. In
comparison to the nursing home and other healthcare industries, the assisted
living industry is currently subject to little government regulation. The
Company expects government regulation to increase, however, as more assisted
living facilities begin to expand the type and amount of healthcare services
they offer and states continue to expand Medicaid funding of assisted living as
a cost-effective alternative to skilled nursing facilities. The Company believes
that because of increased governmental regulation of the industry, a
transformation of the industry from housing and personal care services to more
healthcare-oriented services, cost containment pressures, the growth of
healthcare networks and the inexperience and limited capital resources of many
operators, the highly-fragmented assisted living industry will consolidate in
the near future. According to the U.S. Health Care Financing Administration,
annual expenditures for assisted living services were estimated to be
approximately $10 to $12 billion in 1995. Private pay services account for the
majority of payments; however, in some states, Medicaid funds are available for
assisted living, although no funding is currently available from the federal
Medicare program.
The Company believes that assisted living is one of the fastest growing
segments of elder care, benefiting from the following significant trends:
Aging Population. The Company's target market, comprised of seniors aged 75
and older, is one of the fastest growing segments of the U.S. population.
According to the U.S. Bureau of the Census, this population is expected to
increase 28% from approximately 13 million in 1990 to approximately 17 million
by 2000, as compared to the total U.S. population, which is expected to increase
by approximately 11% during the same period. According to the U.S. General
Accounting Office, in 1993 more than 7 million people in the U.S. needed
assistance with activities of daily living, and this number is expected to
double by 2020. It is further estimated that approximately 57% of the population
of seniors over the age of 85 need assistance with activities of daily living
and more than one-half of such seniors develop Alzheimer's disease or other
forms of dementia.
Increasing Financial Net Worth. As the ratio of elderly in need of assistance
has increased, so too has the number of elderly able to afford assisted living.
According to U.S. Bureau of the Census data, the median net worth of families in
which the head of the family is age 75 or older has increased from $55,178 in
1984 to $61,491 in 1988 to $76,541 in 1991.
Changing Family Role. Historically, the family has been the primary provider
of care to the elderly. The Company believes, however, that the increased
percentage of women in the workforce, the growing number of two income families
and the increased mobility of society are reducing the family's role as the
traditional caregiver for the elderly, which will make it necessary for many of
the elderly to look outside the family for assistance as they age.
Consumer Preference. The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents and their
families in which to care for the elderly. Assisted living offers residents
greater independence and allows them to "age in place" in a residential setting,
which the Company believes results in a higher quality of life than that
experienced in more institutional or clinical settings, such as skilled nursing
facilities.
Cost-Containment Pressures. In response to rapidly rising healthcare costs,
both governmental and private-pay sources have adopted cost-containment measures
that have reduced admissions and encouraged reduced lengths of stays in
hospitals and skilled nursing facilities. As a result, hospitals are discharging
patients earlier and referring seniors to skilled nursing facilities where the
cost of
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providing care is lower, and skilled nursing facility operators continue to
focus on expanding services to higher acuity patients. As a result, the supply
of skilled nursing facility beds is increasingly being filled by patients with
higher acuity needs paying higher fees, leaving little excess capacity for
seniors needing a lower level of care. The Company believes that this trend
creates a significant opportunity for assisted living facilities, as states, as
well as long-term care insurance companies and managed care companies, are
increasingly focusing on assisted living as a cost-effective alternative to
skilled nursing facilities. Based on industry data, the average cost for
assisted living facilities is approximately $24,000 per year as compared to an
average cost of approximately $35,000 per year for skilled nursing facilities.
BUSINESS STRATEGY
The Company's objective is to expand its operations to become a leading
provider of high-quality, affordable assisted living services. Key elements of
the Company's strategy to achieve this goal are to:
Provide High-Quality, Healthcare-Oriented Services. In addition to providing
a broad range of assistance with the activities of daily living and offering
special care programs to residents suffering from Alzheimer's disease or other
forms of dementia, the Company focuses on meeting the healthcare needs of its
residents to the maximum extent permitted by law, thereby enabling its residents
to age in place. As a result, residents are generally able to remain at ILC
facilities until they develop medical conditions requiring institutional care
available only in a skilled nursing facility or an acute care hospital. Where
allowed by law, the Company's assisted living facilities offer care to residents
who are incontinent, mild to moderately confused, convalescing, nonambulatory,
diabetic, oxygen dependent or similarly dependent. All of the Company's assisted
living facilities (excluding its senior housing and congregate care facilities)
employ licensed nurses. The Company ensures that all its facilities are
appropriately staffed to provide its residents with high-quality personalized
care and services.
Grow Rapidly Through Development, Acquisition and Facility Expansion. The
Company intends to pursue rapid growth over the next three years to benefit from
the anticipated increased market demand for assisted living services and the
expected industry consolidation. The Company intends to acquire, develop or
obtain agreements to manage approximately 60 to 75 assisted living facilities
per year in each of the next three years. The Company is currently developing 33
assisted living facilities, of which 24 are scheduled to open in 1997.
Management has extensive contacts in the senior housing and healthcare
industries, and the Company is frequently presented with opportunities to
acquire, develop or manage assisted living facilities. The Company expects that
industry consolidation will result in increased future acquisition
opportunities. In addition, as demand increases in its existing markets, the
Company plans to grow by expanding the capacity of existing buildings.
Utilize Flexible, Cost-Effective Development Approach. The Company believes
that its development approach will allow it to quickly and cost-effectively
develop new assisted living facilities. The Company intends to rely primarily on
a limited number of third-party developers, rather than maintain a large
internal development staff, to develop assisted living facilities. The Company
currently has relationships with three developers, with which the Company has
developed three flexible and expandable prototype building designs: a 35 unit/40
bed pure assisted living facility, a 40 unit/40 bed pure Alzheimer's facility
and an 80 unit/92 bed combination assisted living/Alzheimer's facility.
Flexibility, which will allow the Company to respond to changing utilization
patterns and service needs, and expandability, which will allow the Company to
cost-effectively respond to increased market demand, are key features of the
prototype designs. The Company believes the use of prototype designs and a small
number of developers will offer many advantages to the development process,
including better construction quality control, lower architectural and
engineering fees, bulk purchasing of materials and fixtures at a lower cost, and
faster development and construction schedules.
Target Broad Segment of Private-Pay Population. The Company's target markets
are generally second or third tier cities or suburbs of major cities. The target
population in these markets is private-pay seniors over the age of 75 with
annual incomes of at least $25,000. This mass-market
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approach enables the Company to evaluate a multitude of markets and be selective
in acquiring and developing properties. The Company believes this approach
allows it to appeal to the largest segment of the elderly population, the middle
to upper-middle income group. The Company believes that by targeting this
population segment, it will be well-positioned to achieve and sustain high
occupancy rates.
DEVELOPMENT AND ACQUISITION
The Company targets areas where there is a need for assisted living
facilities based on demographics and market studies. In selecting geographic
markets for potential expansion, the Company utilizes individual market studies
which consider such factors as population, income levels, economic climate and
competitive environment. The Company generally seeks to select assisted-living
facility locations that (a) are second or third tier cities or suburbs of major
cities, (b) have residents who generally enjoy mid-level incomes compared to
incomes generally realized in the region, (c) have a regulatory climate that the
Company considers favorable toward development and (d) are established and
economically stable compared to newer, faster-growing areas. The Company has
found that locations with these characteristics generally have a receptive
population of seniors who desire and can afford the services offered in the
Company's assisted living facilities.
Development. The Company currently expects to open approximately 25 to 35
newly developed assisted living facilities per year in each of the next three
years. The Company is currently pursuing the development of 33 new assisted
living facilities, of which 24 are scheduled to open in 1997. The Company
intends to rely primarily on a limited number of third-party developers, rather
than maintain a large internal development staff, to develop assisted living
facilities, and currently has relationships with three developers. The Company
maintains control over the entire development process by retaining authority for
site selection, prototype design, pricing, development and construction
schedules, and quality of workmanship. See "-- Properties -- Development."
The principal stages in the development process are (i) site selection and
contract signing, (ii) zoning and site plan approval, (iii) architectural
planning and design and (iv) construction and licensure. Once a market has been
identified, site selection and contract signing typically take three months.
Zoning and site plan approval generally take one to three months. The Company
anticipates that facility construction will generally take six to nine months.
The Company's use of prototype facilities facilitates architectural planning and
design. After a facility receives a certificate of occupancy and appropriate
licenses, residents usually begin to move in immediately. The Company's
experience indicates that new facilities typically reach a stable level of
occupancy of over 90% within six to 12 months of opening, but there can be no
assurance that these results will be achieved in new facilities. The Company
anticipates that the total capitalized cost to develop, construct and open a
prototype facility, including land acquisition and construction costs, will be
approximately $72,000 per unit, although the cost of any particular facility may
vary considerably based on a variety of site-specific factors. See "Risk Factors
- -- Limited Development Experience; Development Delays and Cost Overruns."
The Company is presented with land sites by independent brokers, developers,
healthcare organizations and financial institutions. The third-party developers
with which the Company has relationships are also utilized to locate suitable
sites in selected regions of the country. If a site meets the Company's general
market criteria, then the Company will order a preliminary market study by an
independent third party. If the market study indicates that the site meets its
geographic selection criteria, the Company will then conduct a more in-depth
analysis of the market, in conjunction with developers, to ensure there is a
demonstrated need for assisted living services and that the site is appropriate
in terms of location, size and zoning. If the market and site meet all of the
Company's selection criteria, the property is purchased for development.
The Company has, together with its developers, developed three flexible and
expandable prototype building designs: a 35 unit/40 bed pure assisted living
facility, a 40 unit/40 bed pure Alzheimer's facility and an 80 unit/92 bed
combination assisted living/Alzheimer's facility. Flexibility, which will allow
the Company to respond to changing utilization patterns and service needs, and
expandability, which will allow the Company to cost-effectively respond to
increased market demand, are key features of the
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prototype design. The flexibility feature allows the facility to quickly and
cost effectively reconfigure its assisted living and Alzheimer's bed allotment
based on changing market demand. The expandability feature allows the prototype
buildings to be easily and cost-effectively expanded with little or no
disruption to current operations. Facility expansion is often more
cost-effective than constructing or acquiring a new facility because of lower
incremental capital, operating and fixed costs. The Company believes that the
use of a small number of developers working with prototype designs will allow
the Company to: (a) save time and money on architectural and engineering work,
because only minor modifications will be required at each location to site adapt
the prototype; (b) ensure better construction quality control, because the
Company's third-party developers will gain experience by constructing the same
facility design, rather than a different facility design, at each site; and (c)
save time and money with bulk purchasing of materials and fixtures at a lower
cost, because each facility will, for example, utilize the same kitchen
equipment and windows. In addition, once a development site is identified, the
Company will be able to move quickly to obtain zoning approvals, since only
limited architectural and engineering work will be required. All of these
factors should contribute to faster and cost-effective development and
construction schedules. See "-- Business Strategy."
Acquisition. The Company acquired one facility in August 1996, which the
Company expects to sell to, and lease back from, HCPI in October 1996. In
addition, the Company has entered into a definitive agreement to acquire one
additional assisted living facility, which acquisition the Company anticipates
will be consummated simultaneous with the closing of this offering. There can be
no assurance the acquisition or the sale/leaseback transaction will be
consummated when anticipated or at all. The Company seeks to acquire individual
or groups of assisted living facilities from smaller owners and operators in its
targeted markets. In evaluating possible acquisitions, the Company considers (i)
the location, construction quality, condition and design of the facility, (ii)
the ability to expand the facility, (iii) the current and projected cash flow of
the facility and the anticipated ability to increase revenue through rent and
occupancy increases and additional assisted living services and (iv) the ability
to acquire the facility below replacement cost. The Company's management has
extensive contacts in the senior housing and healthcare industries, and the
Company is frequently presented with opportunities to acquire, develop or manage
assisted living facilities. In addition, the Company believes that consolidation
in the assisted living industry will offer substantial opportunities to acquire
assisted living facilities or other facilities that can be repositioned as
assisted living facilities. See "Risk Factors -- Difficulties of Integrating
Acquisitions" and "-- Uncertainty of the Proposed Acquisition; Difficulties of
Integrating the Proposed Acquisition."
Although the Company intends to focus its efforts primarily on the
development and acquisition, directly or through long-term operating leases, of
additional assisted living facilities, it may in certain cases also target
additional third-party management contracts as an interim step to acquisition of
facilities. Under a typical management agreement, the Company receives a
percentage of the gross operating revenues of the facility and has a right of
first refusal to acquire the facility. See "-- Properties -- Management
Agreements."
SERVICES
The Company's assisted living facilities offer residents a supportive,
"home-like" setting and assistance with activities of daily living. Residents of
the Company's facilities are typically unable to live alone, but do not require
the 24-hour nursing care provided in skilled nursing facilities. Services
provided to the Company's residents are designed to respond to their individual
needs and to improve their quality of life, are available 24 hours a day to meet
resident needs, and generally include three meals per day, housekeeping and
groundskeeping and building maintenance services. Available support services
include nursing care and health-related services, social and recreational
services, transportation and special services (such as banking and shopping).
Personal services include bathing, dressing, personal hygiene, grooming,
ambulating and eating assistance. Health-related services, which are made
available and provided according to the resident's individual needs and in
accordance with state regulatory requirements, may include assistance with
taking medication, skin care and injections, as well as healthcare monitoring.
By providing programs that are designed to offer residents a range of service
options as their needs change, the Company seeks to achieve greater continuity
of care, enabling seniors to age in place and thereby maintain their residency
for a longer time period.
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Clinical Assessment. Each resident is clinically assessed upon admission to
determine his/her health status including functional abilities, need for
personal care services and assistance with the activities of daily living
(ADL's) as well as likes and dislikes. The goal of the clinical assessment is to
determine the care needs of residents as well as their lifestyle preferences. A
current physician's report is also utilized to further ascertain the health
status and needs of the resident. From these assessments a plan of care is
developed for each resident to help ensure that all staff who render care and
services meet the specific needs and preferences of each resident. Residents are
reassessed periodically and when there is a significant change in a resident's
condition to be sure the care plan reflects their current needs. The care plan,
as the document which reflects the needs of the resident, is the basis for
determining the monthly charges for care and services.
Healthcare Services. The Company fosters wellness by offering health
screenings such as blood pressure checks, periodic special services such as
influenza inoculations, chronic disease management (such as diabetes with its
attendant blood glucose monitoring), dietary and similar programs as well as
ongoing exercise and fitness classes. Classes are given by healthcare
professionals to keep residents informed about disease management.
Regulations differ by state regarding the type of care that can be rendered
as well as the personnel allowed to provide such care. The Company utilizes
licensed nurses, certified and/or trained staff to meet the healthcare needs of
its residents. Staff administer or assist with medications, observe and
intervene as the health status of residents change, and provide assistance and
care to enable residents to perform the activities of daily living: dressing,
bathing, grooming, toileting, ambulating and the like. Residents who are
incontinent, mild to moderately confused, convalescing, nonambulatory, diabetic,
oxygen dependent or similarly dependent are cared for where allowed by law.
Hospice care is offered in many of the Company's facilities, as are special
programs such as post-plastic surgery recuperation, stroke recovery and
intensive rehabilitation. Dietary programs, nutritional support and special
retraining programs are also offered by the Company.
The Company's facilities provide rehabilitation services, including physical
therapy, speech and language pathology and occupational therapy, audiology,
pharmacy and physician services, as well as podiatry, dentistry and other
professional services. These specialized healthcare services are generally
provided to the residents by third-party providers, who are reimbursed by the
resident or a third-party payor (such as Medicare or Medicaid) or, in certain
cases, by the staff of the facility where permitted by state law. The Company's
facilities also provide transportation services for residents to visit
physicians and other professionals in the surrounding areas.
Alzheimer's and Dementia Care. Certain of the Company's facilities contain a
special unit to service the needs of residents with Alzheimer's disease,
dementia and other cognitive impairments. These special needs units are located
in a separate area of the facility and have their own dining facilities,
resident lounge areas and specially trained staff. This physical separation of
the special needs unit enables residents to receive the specialized care they
require with a minimum of disruption to other residents. The areas are designed
to allow residents the freedom to ambulate as they wish while keeping them
safely contained within an alarmed area. Programming for a minimum of 12 hours
per day keeps these special need residents channeled into meaningful activity.
Special nutritional programs are used to help assure caloric intake is
maintained in residents whose constant movement increases their caloric
expenditure. Family support groups meet regularly with the families of these
residents.
Adult Day Care. Some of the Company's facilities offer adult day care
services for the mentally and/or physically frail. The services are offered up
to six days per week, 12 hours per day. Many of the day care attendees
eventually become permanent residents at the facility. Residents spend the day
engaged in meaningful activities and socialize with other residents and staff.
Healthcare needs are monitored by staff and medication assistance is available.
Assistance with activities of daily living, as well as meals and nutritious
snacks, are also provided. Day care offers families the ability to continue
employment despite caregiving responsibilities and also offers residents an
opportunity to leave their home and interact with their peers.
Respite Care. The Company's facilities accept residents for short term
placement (several days to several months) to accommodate their or their
family's need for placement, either while the family is on
38
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vacation or is otherwise absent or because the resident cannot stay alone while
convalescing from illness or injury. Many residents are frequent returnees and
often eventually become permanent residents at the facility.
OPERATIONS
The Company offers a broad range of assisted living services and an
environment in which residents can age in place in an effort to retain residents
over longer periods as they become increasingly frail. The Company continually
assesses and monitors the health needs and desires of its residents and
periodically adjusts the level and frequency of care and services provided to
such residents to meet their increasing needs. The Company's multi-tiered rate
structure for the services it provides is based upon the acuity level of, or
level of services needed by, each resident. Specialized healthcare services for
those residents requiring 24-hour supervision or more extensive assistance with
activities of daily living is provided to the residents by third-party
providers, who are reimbursed by the resident or a third-party payor (such as
Medicare or Medicaid) or, in certain cases, by the staff of the facility where
permitted by state law. In order to meet the evolving needs of its residents as
they age in place, the Company expects to continually expand the range of care
and services offered at its residences. In the future, the Company may elect to
provide these services directly using its own skilled employees. In the event
that a resident's acuity reaches a level such that the Company is unable to meet
such resident's needs, the Company maintains relationships with local hospitals
and skilled nursing facilities to facilitate a transfer of the resident.
Marketing. The Company's marketing strategy is designed to integrate its
assisted living facilities into the continuum of healthcare providers in the
geographic markets in which it operates. Thus, the Company seeks to establish
relationships with local hospitals (including through joint marketing efforts,
where appropriate) and home healthcare agencies, alliances with visiting nurse
associations and, on a more limited basis, priority transfer agreements with
local skilled nursing facilities. The Company believes this marketing strategy
benefits its residents as well as strengthens and expands the Company's network
of referral sources.
The Company begins premarketing its facilities up to six months in advance of
opening so that, by the time the facility opens, referral sources, including
professionals in the community, hospitals and physicians, will be well
familiarized with the care and services provided. Age and income qualified
seniors are recipients of target marketing efforts as are their children. The
Company's goal is to open a new facility with a substantial number of residents
ready to move in. After opening, the Company continues its marketing efforts to
attain and then maintain full occupancy.
The Company seeks to position its facilities as the "senior resource center"
in each of its markets; thus when the public thinks of care and/or services for
the elderly they think of the ILC facility. Each facility offers its physical
plant for classes, meetings, social events, etc., to the surrounding city in
order to foster interdependence. The Company also intends to focus on selling
the care and services component of its facilities to those seniors who live in
the surrounding area.
Staffing. The Company ensures that all its facilities are appropriately
staffed with well-trained professionals to provide its residents with
high-quality personalized care and services. The day-to-day operations of each
facility, including quality of care and financial performance, are overseen by
an Executive Director trained in the Company's operating philosophy, policies
and procedures. A Healthcare Coordinator, who is a licensed nurse, oversees the
day-to-day care of residents and employees providing services to residents.
Other key facility employees include a Director of Dining Services, Activities
Director, Maintenance Director and Marketing Director.
Administration. The Company's corporate structure has been designed to
provide appropriate levels of support to, and oversight of, the operating
facilities. The Company's philosophy is to allow the facility administrators
enough autonomy and flexibility to expeditiously adjust operations to meet the
needs of local and changing market conditions while at the same time holding
them accountable to established quality and financial performance criteria.
In anticipation of its rapid development plans, the Company has made a
significant investment in recruiting and developing a management team with
extensive experience in the post-acute care, sub-acute care, long-term care and
assisted living industries. The Company believes that the depth and
39
<PAGE>
experience of its management team positions the Company to effectively manage
its growth plans and the increasing government regulation of assisted living
facilities which the Company anticipates. Additionally, the Company is
developing its infrastructure to manage its anticipated growth. Key
infrastructure components include standardized policies and procedures, computer
systems, management information systems, staff training and education programs
and staff recruitment and retention systems. See "Management."
The Company employs an integrated structure of management and financial
systems and controls in order to contain costs and maximize operating
efficiency. The Company provides management support services to each of its
residential facilities, including establishment of operating standards,
recruiting, training and financial and accounting services. IHS has agreed to
provide resident billing, occupancy, accounts payable and payroll information
services to the Company until the Company has implemented its own MIS and
accounting systems, which the Company anticipates will occur in the fourth
quarter of 1996. See "Certain Transactions." In addition, the Company believes
it can benefit from economies of scale by centralizing certain functions such as
purchases of supplies and equipment, employee training and certain sales and
marketing activities. The Company has established reporting and monitoring
systems which allow early detection of deviations to allow rapid correction.
Service Revenue Sources. The Company currently and for the foreseeable future
expects to rely primarily on its residents' ability to pay the Company's charges
from their own or familial resources. Although care in an assisted living
facility is typically less expensive than in a skilled nursing facility, the
Company believes generally only seniors with income or assets meeting or
exceeding the regional median will be able to afford to reside in the Company's
facilities. Inflation or other circumstances that adversely affect seniors'
ability to pay for services such as those provided by the Company could have an
adverse effect on the Company's business or operations. Furthermore, the federal
government does not currently provide any reimbursement for the type of assisted
living services provided by the Company. Although some states have reimbursement
programs in place, in many cases the level of reimbursement is insufficient to
cover the costs of delivering the level of care that the Company currently
provides. Except for the Treyton Oak Towers' assisted living facility managed by
the Company (which is 77% private pay), all of the revenues from the Company's
remaining assisted living facilities were derived from private-pay sources.
There can be no assurance, however, that the Company will continue its
private-pay mix or that it will not in the future become more dependent on
governmental reimbursement programs.
PROPERTIES
Existing Facilities. The Company currently operates 19 assisted living
facilities in seven states, containing 1,812 units. Seven of the facilities are
owned, four are leased and the remaining eight are managed. The Company
anticipates that it will sell one of the owned facilities to, and lease it back
from, HCPI in October 1996, although there can be no assurance the
sale/leaseback transaction will be consummated as anticipated or at all. The
Company's existing facilities consist of assisted living facilities, continuing
care retirement communities, congregate care facilities and senior housing.
Several of the Company's facilities have specially designed wings for residents
with Alzheimer's disease, and several offer adult day care services. The Company
believes that the physical configuration of its facilities, combined with its
level of service, contributes to resident satisfaction and allows seniors
residing at the Company's facilities to maintain an appropriate level of
autonomy.
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<PAGE>
The table below summarizes certain information regarding the Company's
existing facilities:
<TABLE>
<CAPTION>
OPERATIONS SERVICES
FACILITY LOCATION COMMENCED(1) UNITS(2) BEDS OFFERED(3) STATUS
- ---------------------------------- ---------------- ------------ -------- ------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA
- ----------
Beth Avot Santa Monica 8/95 34 34 ALZ,AL Managed
Carrington Pointe Fresno 5/90 172 181 C,AL Owned
Claremont Senior Apts Clovis 2/94 72 120 SH Managed
Claremont II Clovis 10/95 72 120 SH Managed
Elim Place((4)) Sangar 2/96 24 49 AL,ALZ Managed
Hallmark -- Bakersfield Bakersfield 1/93 51 52 AL Managed
Hallmark -- Palm Springs Palm Springs 1/93 46 47 AL Managed
Villa Alamar Santa Barbara 11/95 30 31 ALZ,AL Managed
COLORADO
- --------
Cheyenne Place Retirement Colorado Springs 9/94 95 106 C Leased
FLORIDA
- -------
Cabot Pointe((5)) Bradenton 8/96 35 56 ALZ Owned
The Shores((6)) Bradenton 9/94 260 287 CCRC,ALZ Leased
Waterside Retirement Estates((7)) Sarasota 12/93 164 201 CCRC Owned
West Palm Beach Retirement((8)) .. West Palm Beach 12/93 34 38 AL Owned
KANSAS
- ------
Homestead of Garden City Garden City 7/96 35 46 AL Leased
Homestead of Wichita Wichita 7/96 35 46 AL Leased
KENTUCKY
- --------
Treyton Oak Towers((9)) Louisville 3/93 267 290 CCRC Managed
MARYLAND
- --------
The Homestead((10)) Denton 12/92 50 50 AL,ADC(42) Owned
TEXAS
- -----
Treemont Retirement Community((8)) Dallas 2/89 231 251 CCRC,ALZ,ADC(25) Owned
Vintage Retirement Community((8)(11)) Denton 4/95 105 111 C,AL Owned
</TABLE>
- ----------
(1) Represents date operations commenced by IHS for facilities operated
prior to November 1995. See "Company History."
(2) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(3) ADC = Adult Day Care; AL = Assisted Living; ALZ = Alzheimer's/Dementia
Care; C = Congregate Care; CCRC = Continuing Care Retirement Community; and SH =
Senior Housing. Number of residents served in Adult Day Care is listed next to
ADC.
o Assisted Living Facilities are typically designed for the frail and/or
cognitively impaired elderly, with staff personnel and programs that assist
residents with personalized support services. Meals are served in a central
dining room, and staff personnel provide limited medical services, such as
medication administration and physical rehabilitation.
o Continuing Care Retirement Communities are retirement complexes providing
a full continuum of care on a single campus, including congregate care units for
those residents still able to adequately care for themselves, assisted living
facilities for those residents requiring assistance with activities of daily
living, and skilled nursing units for residents who require full-time nursing
care or supervision.
o Congregate Care Facilities are typically similar to senior housing,
except they generally provide meals in a common dining room, housekeeping,
laundry, transportation and emergency response. Medical care is provided by
third-party providers as required.
o Senior Housing is typically a multifamily complex catering to senior
citizens. These facilities typically offer limited services, such as
transportation and security, and arrange for healthcare services as required.See
"-- Services."
(4) The Company has been notified by the owner of this facility that the
management agreement will terminate effective October 31, 1996. During the six
months ended June 30, 1996, management fees from this facility aggregated
$16,000.
(5) The Company anticipates that it will sell this facility to, and lease it
back from, HCPI in a sale/leaseback transaction which is scheduled to close in
October 1996. There can be no assurance this transaction will occur as
anticipated or at all.
(6) Includes 21 skilled nursing beds.
(7) Under Florida insurance regulations relating to life-care contracts, IHS'
transfer of the Waterside facility to the Company is subject to review by the
Florida Department of Insurance. The Company believes that the Department of
Insurance will approve the transfer of the facility, although there can be no
assurance that such transfer will be approved. If the transfer is not approved,
the Company will be obligated to transfer ownership of the Waterside facility
back to IHS. See "Risk Factors -- Recent Organization; History of Losses;
Anticipated Operating Losses."
(8) The Company owns a condominium interest in the assisted living and
related services portion of this facility; the remaining condominium interest in
the facility, which consists of a skilled nursing facility, is owned by IHS. The
Company is prohibited from including a segregated and secured Alzheimer's ward
in its portion of these facilities. IHS provides certain services to these
facilities. The Company cannot transfer its condominium interest without the
prior consent of IHS. The IHS facility in which the Treemont facility is located
is subject to a mortgage. Should IHS default on its obligations under the
mortgage, the lender could foreclose on the mortgage, which could materially
adversely affect the Company's business, results of operations and financial
condition. See "Certain Transactions."
(9) Includes 60 skilled nursing beds.
(10) IHS managed the facility from December 1992 until its purchase by IHS in
March 1994.
(11) IHS managed the facility from April 1995 until its purchase by IHS in
January 1996.
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<PAGE>
Management Agreements. The Company currently manages eight assisted living
facilities with an aggregate of 621 units. The Company is responsible for
providing all personnel, marketing, nursing, resident care and dietary services,
accounting and data processing reports and services for these facilities at the
facility owner's expense. The facility owner is also obligated to pay for all
required capital expenditures. The Company manages these facilities in the same
manner as the facilities it owns or leases, and provides the same assisted
living services as are provided in its owned or leased facilities.
The Company receives a management fee for its services which generally ranges
from 4% to 5% of gross revenues of the assisted living facility. Certain
management agreements also provide the Company with an incentive fee based on
the amount of the facility's operating income that exceeds a target. The
management agreements generally have an initial term of one to five years, with
the right to renew under certain circumstances. The management agreements expire
at various times between October 1996 and November 2000, although all can be
terminated earlier under certain circumstances. Certain of the management
agreement's provide the Company with a right of first refusal in respect of the
sale of each managed facility. The Company believes that management agreements
are a cost-effective way to test new markets without having to make the capital
outlay necessary to acquire or develop a facility.
The Company has been notified by the owner of the Elim Place facility, a 24
unit assisted living and alzheimer's facility located in Sangar, California,
that the management agreement will terminate effective October 31, 1996. During
the six months ended June 30, 1996, management fees from the facility aggregated
$16,000.
Proposed Acquisition. The Company has entered into a definitive agreement to
acquire ownership of the Terrace Gardens facility, a 258 unit/342 bed assisted
living and senior housing facility located in Wichita, Kansas which also
includes a 100 bed nursing facility. The acquisition is expected to close
simultaneous with the closing of this offering, and the Company intends to use a
portion of the proceeds of this offering to pay the $12.2 million purchase price
for the facility. There can be no assurance that the acquisition will close as
scheduled or at all. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Development. The Company intends to develop assisted living facilities
generally ranging in size from 32 to 80 units, consisting of an aggregate of
approximately 23,000 to 54,000 square feet, which are located on sites typically
ranging from 2.5 to 5 acres. Unit size is expected to range from 325 to 500
square feet. The Company estimates that the development cost of most of its
assisted living facilities will generally range from approximately $68,000 to
$75,000 per unit, depending on local variations in land and construction costs,
with an overall average development cost of approximately $72,000 per unit. The
Company estimates that it will require approximately six months from the date of
land acquisition to develop its 40 unit facilities and approximately nine months
from the date of land acquisition to develop its 80 unit facilities. The Company
is currently pursuing the development of 33 assisted living facilities, of which
24 are scheduled to open in 1997. Because, however, of uncertainties associated
with development of assisted living facilities, including zoning and other
governmental limitations, not all of the facilities currently under development
may in fact be developed, and there can be no assurance that the Company will be
successful in meeting scheduled opening dates for the facilities which are
developed. See "Risk Factors -- Limited Development Experience; Development
Delays and Cost Overruns."
42
<PAGE>
The table below summarizes certain information regarding the facilities
currently under development:
SCHEDULED TO BE FACILITY
LOCATION OPENING UNITS(1) BEDS OFFERED(2) STATUS(3)
- ------------------- ----------- -------- ------ ---------- -----------
CALIFORNIA((4))
- ---------------
Bakersfield Q1/97 120 120 SH Z
Hemet Q1/98 40 40 ALZ D
Merced Q1/98 40 40 ALZ D
San Diego Q2/97 92 92 AL,ALZ D
San Bernardino Q4/97 80 92 AL,ALZ Z
Yorba Linda Q4/97 80 92 AL,ALZ Z
COLORADO((4))
- -------------
Colorado Springs Q1/98 80 92 AL,ALZ D
ILLINOIS((4))
- -------------
Barrington Q1/98 80 92 AL,ALZ D
KANSAS((5))
- -----------
Hutchinson Q4/97 35 40 AL Z
Leavenworth Q1/97 35 40 AL Z
Manhattan Q1/97 35 40 AL Z
LOUISIANA((4))
- --------------
Alexandria Q2/97 80 92 AL,ALZ D
Baton Rouge Q2/97 80 92 AL,ALZ D
Baton Rouge Q3/97 80 92 AL,ALZ D
Bossier City Q3/97 80 92 AL,ALZ D
Lafayette Q3/97 80 92 AL,ALZ D
Lake Charles Q3/97 80 92 AL,ALZ D
NEBRASKA((5))
- -------------
Columbus Q4/97 35 40 AL Z
Fremont Q2/97 35 40 AL Z
Grand Island Q2/97 35 40 AL Z
Hastings Q3/97 35 40 AL Z
Kearney Q2/97 35 40 AL Z
Norfolk Q2/97 35 40 AL Z
TEXAS((4))
- ----------
Bedford/Colleyville Q1/98 40 40 ALZ D
Dallas Q1/98 80 92 AL,ALZ D
Ft. Worth Q1/98 80 92 AL,ALZ D
Grand Prairie Q3/97 80 92 AL,ALZ Z
Henderson Q2/97 40 40 ALZ D
New Braunfels Q1/98 80 92 AL,ALZ D
San Antonio Q1/98 80 92 AL,ALZ D
San Antonio Q2/97 80 92 AL,ALZ Z
San Antonio Q4/97 40 40 ALZ D
Southlake Q3/97 80 92 AL,ALZ Z
- ----------
(1) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(2) AL = Assisted Living; ALZ = Alzheimer's/Dementia Care; and SH = Senior
Housing. See "-- Services."
(3) "Development" means that development activities, such as site surveys,
preparation of architectural plans or initiation of zoning changes, have
commenced (but construction has not commenced). "Construction" means that
construction activities, such as ground-breaking activities, exterior
construction or interior build-out, have commenced. "Zoning" means that the
zoning process has been completed or is not applicable.
(4) The Company expects to finance these developments through sale/leaseback
or mortgage financing.
(5) The Company expects to lease these facilities from the developer.
43
<PAGE>
The Company currently has relationships with three developers relating to 29
of the 33 assisted living facilities currently under development. Two of these
developers are developing, in the aggregate, 25 facilities on a turn-key basis,
of which 20 facilities are scheduled to open in 1997. Pursuant to the terms of
the arrangements, the developer will provide all necessary site procurement,
design, construction, construction oversight and licensure services. The Company
intends to finance the 16 facilities being developed by one developer, of which
11 are scheduled to open in 1997, through sale/leaseback arrangements with
several real estate investment trusts or mortgage financing, although the
Company may lease certain of the facilities from the developer. The Company will
pay this developer for certain approved costs and expenses incurred by the
developer in developing the facilities including labor, overhead, environmental
expenses and engineering expenses. In the event that the execution of leases for
the facilities, the acquisition of the sites for the facilities and the closing
of financing for the facilities has not occurred before October 31, 1996, the
Company is required to pay the developer for all costs incurred to date within
ten days and the agreement with the developer will terminate. IHS has agreed to
guaranty the payment of sums due to the developer by the Company until the
closing of this offering and the satisfaction of certain financial covenants by
the Company. The Company will lease the nine facilities being developed by the
other developer, all of which are scheduled to open in 1997, pursuant to ten
year leases with three five-year renewal options, and the right to purchase each
facility at five year intervals for a purchase price equal to the greater of its
then fair market value or $2.1 million. Lease payments for each of these
facilities will initially be approximately $250,000 per annum and will increase
annually based on the increase in the local consumer price index. The lease
payments will be guaranteed by IHS until the closing of this offering and the
satisfaction of certain financial covenants by the Company. The Company will
make non-refundable purchase option deposits of $100,000 per facility, and has
provided the developer with a $1,000,000 working capital line of credit that is
due on demand and secured by the developer's interest in all documentation,
permits, licenses and the land sites. IHS has agreed to guarantee construction
financing for the first ten facilities developed by the developer. The Company
has engaged a third developer to provide site selection, zoning, permitting and
site adaptation services for four facilities, for which it will receive a fixed
percentage of the building cost. The Company has provided the president of this
developer with a $1,000,000 working capital line of credit that is due on demand
and secured by the developer's interest in all documentation, permits and
licenses and land contracts relating to the developments it is overseeing on
behalf of the Company. This developer is also expected to provide or arrange for
the provision of design, construction, construction oversight and licensure
services for these facilities. The Company intends to finance these facilities
through sale/leaseback arrangements with real estate investment trusts or with
mortgage financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company expects that the average construction time for a typical assisted
living facility will be approximately six to nine months, depending on the
number of units. Once a site is developed, the Company estimates that it will
take approximately six to 12 months for the assisted living facility to achieve
a stabilized level of occupancy.
COMPETITION
The senior housing and healthcare industries are highly competitive and the
Company expects that the assisted living business in particular will become more
competitive in the future. The Company will continue to face competition from
numerous local, regional and national providers of assisted living and long-term
care whose facilities and services are on either end of the senior care
continuum. The Company will compete with such facilities primarily on the bases
of cost, quality of care, array of services provided and physician referrals.
The Company will also compete with companies providing home based healthcare,
and even family members, based on those factors as well as the reputation,
geographic location, physical appearance of facilities and family preferences.
Some of the Company's competitors operate on a not-for-profit basis or as
charitable organizations, while others have, or may obtain, greater financial
resources than those of the Company. However, the Company anticipates that its
most significant competition will come from other assisted living facilities
within the same geographic area as the Company's facilities because management's
experience indicates that senior citizens frequently elect to move into
facilities near their homes.
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<PAGE>
Moreover, in the implementation of the Company's expansion program, the
Company expects to face competition for the acquisition and development of
assisted living facilities. Some of the Company's current and potential
competitors are significantly larger or have, or may obtain, 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 residents or expand its business and could
have a material adverse effect on the Company's financial condition, results of
operations and prospects. See "Risk Factors -- Competition."
GOVERNMENTAL REGULATION
The Company's assisted living facilities are subject to varying degrees of
regulation and licensing by local and state health and social service agencies
and other regulatory authorities specific to their location. While regulations
and licensing requirements often vary significantly from state to state, they
typically address, among other things: personnel education, training and
records; facility services, including administration of medication, assistance
with self-administration of medication and limited nursing services; physical
plant specifications; furnishing of resident units; food and housekeeping
services; emergency evacuation plans; and resident rights and responsibilities.
In several states assisted living facilities also require a certificate of need
before the facility can be opened. In most states, assisted living facilities
also are subject to state or local building codes, fire codes and food service
licensure or certification requirements. Like other healthcare facilities,
assisted living facilities are subject to periodic survey or inspection by
governmental authorities. The Company's success will depend in part on its
ability to satisfy such regulations and requirements and to acquire and maintain
any required licenses. The Company's operations could also be adversely affected
by, among other things, regulatory developments such as mandatory increases in
the scope and quality of care afforded residents and revisions in licensing and
certification standards.
Certain states provide for Medicaid reimbursement for assisted living
services pursuant to Medicaid Waiver Programs permitted by the Federal
government. In the event the Company elects to provide services in states with a
Medicaid Waiver Program, the Company may then elect to become certified as a
Medicaid provider in such states. The Company is subject to certain federal and
state laws that regulate relationships among providers of healthcare services.
These laws include the Medicare and Medicaid anti-kickback provisions of the
Social Security Act, which prohibit the payment or receipt of any remuneration
by anyone in return for, or to induce, the referral of patients for items or
services that are paid for, in whole or in part, by Medicare or Medicaid. A
violation of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicare and
Medicaid programs. The Company intends to comply with all applicable laws,
including the fraud and abuse laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not in the future have a material adverse impact on the Company's results of
operations or financial condition. See "Risk Factors -- Governmental
Regulation."
The Company's failure to comply with such regulations could jeopardize its
reimbursement payments for any affected residents and could result in fines and
the suspension or failure to renew the Company's operating licenses. These
actions could have a material adverse effect on the Company's business and
operating results and on its ability to develop and acquire properties in the
future. The Company believes that it is currently in compliance with all
material applicable regulations and requirements with respect to its assisted
living facilities.
Twelve of the Company's 81 skilled nursing beds are currently certified to
receive benefits as a skilled nursing facility provider under the Health
Insurance for the Aged and Disabled Act (commonly referred to as "Medicare"),
and substantially all are also certified under programs administered by the
various states using federal and state funds to provide medical assistance to
qualifying needy individuals ("Medicaid"). Both initial and continuing
qualification of a skilled nursing care facility to participate in such programs
depend upon many factors including, among other things, accommodations,
equipment, services, patient care, safety, personnel, physical environment, and
adequate policies, procedures and controls.
45
<PAGE>
Under the Medicare program, the federal government pays the reasonable direct
and indirect allowable costs (including depreciation and interest) of the
services furnished. Under the various Medicaid programs, the federal government
supplements funds provided by the participating states for medical assistance to
qualifying needy individuals. The programs are administered by the applicable
state welfare or social service agencies. Although Medicaid programs vary from
state to state, typically they provide for the payment of certain expenses, up
to established limits. Funds received by the Company under Medicare and Medicaid
are subject to audit with respect to the proper preparation of annual cost
reports upon which reimbursement is based. Such audits can result in retroactive
adjustments of revenue from these programs, resulting in either amounts due to
the government agency from the Company or amounts due the Company from the
government agency.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy
determinations by insurance companies acting as Medicare fiscal intermediaries
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to healthcare facilities. Since 1985,
Congress has consistently attempted to limited the growth of federal spending
under the Medicare and Medicaid programs. In addition, a number of healthcare
reform proposals have been introduced in Congress in recent years. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals would have on the Company's business. The Company can give
no assurance that payments under such programs will in the future remain at a
level comparable to the present level or be sufficient to cover the operating
and fixed costs allocable to such patients. Changes in reimbursement levels
under Medicare or Medicaid and changes in applicable governmental regulations
could significantly affect the Company's results of operations. It is uncertain
at this time whether legislation on healthcare reform will ultimately be
implemented or whether other changes in the administration or interpretation of
governmental healthcare programs will occur. There can be no assurance that
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have an adverse
effect on the results of operations of the Company. The Company cannot at this
time predict whether any healthcare reform legislation will be adopted or, if
adopted and implemented, what effect, if any, such legislation will have on the
Company.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its properties are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
The Company and its activities are subject to zoning 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, which could adversely affect the Company's growth strategy and
results of operations. See "Risk Factors -- Limited Development Experience;
Development Delays and Cost Overruns," "-- Business Strategy" and "--
Development and Acquisition."
EMPLOYEES
As of August 30, 1996, the Company had 528 employees, including 316 full-time
employees, of which 47 were employed at the Company's headquarters. None of the
Company's employees are currently represented by a labor union, and the Company
is not aware of any union-organizing activity among its employees. The Company
believes that its relationship with its employees is good.
Although the Company believes it is able to employ sufficient skilled
personnel to staff the facilities it operates or manages, a shortage of skilled
personnel in any of the geographic areas in which it
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operates could adversely affect the Company's ability to recruit and retain
qualified employees and control its operating expenses. See "Risk Factors --
Dependence on Senior Management and Skilled Personnel" and "-- Staffing and
Labor Costs."
EXECUTIVE OFFICES
The Company's executive offices are located in Bonita Springs, Florida, where
it has leased approximately 20,000 square feet.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition and results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- -----------------------------------------------------
<S> <C> <C>
Robert N. Elkins,
M.D................... 53 Chairman of the Board of Directors
Edward J. Komp........ 42 President, Chief Executive Officer and Director
Senior Vice President -- Chief Operating Officer and
Kayda A. Johnson...... 48 Secretary
Senior Vice President -- Chief Financial Officer and
John B. Poole......... 44 Treasurer
Senior Vice President -- Acquisitions and
Kyle D. Shatterly .... 35 Development
Luis Bared............ 46 Director
Lawrence P. Cirka .... 45 Director
Charles A. Laverty ... 51 Director
Lisa K. Merritt....... 36 Director
</TABLE>
Robert N. Elkins, M.D. became the Chairman of the Board of the Company in
June 1996. Dr. Elkins has been the Chairman of the Board and Chief Executive
Officer of IHS, the selling stockholder in this offering, since March 1986 and
he served as President of IHS from March 1986 to July 1994. From 1980 until
co-founding IHS in 1985, Dr. Elkins was a co-founder and Vice President of
Continental Care Centers, Inc., an owner and operator of long-term healthcare
facilities. From 1976 through 1980, Dr. Elkins was a practicing physician. Dr.
Elkins is a graduate of the University of Pennsylvania, received his M.D. degree
from the Upstate Medical Center, State University of New York, and completed his
residency at Harvard University Medical Center. Dr. Elkins is a director of
Capstone Capital Corporation, Community Care of America, Inc. and UroHealth
Systems, Inc.
Edward J. Komp has served as President and Chief Executive Officer of the
Company since March 1996 and as a director of the Company since June 1996. Prior
to joining the Company, he served as Executive Vice President--Corporate
Operations of IHS from November 1995 to March 1996 and as Senior Vice
President--Managed Operations of IHS from October 1993 to November 1995, where
he had operational responsibility for over 100 assisted living and long-term
care facilities with approximately 13,000 beds nationwide. From 1979 until he
joined IHS, Mr. Komp served in various senior operational and financial
capacities with National Medical Enterprises, Inc., now Tenet Healthcare Corp.
Kayda A. Johnson has served as Senior Vice President--Chief Operating Officer
and Secretary of the Company since March 1996. Prior to joining the Company, she
served as Senior Vice President for Operations of IHS' Retirement Management
Services division from March 1991. Prior to joining IHS, she was Director of
Operations for Forum Group from 1990, and from 1982 to 1990 she was regional
Vice President of Operations for Retirement Corporation of America. Ms. Johnson
is a licensed Nursing Home Administrator and Registered Nurse. She is also a
licensed Preceptor for Nursing Home Administrators and a Certified Residential
Care Administrator. She has served on the faculty of the University of Redlands
for the past 15 years, teaching business and management courses to MBA and BBA
students. She is a member of the Board of Directors of the National Association
for the Senior Living Industries ("NASLI") and serves as NASLI's Commissioner
for Health Care as well as on the Executive Committee. She is a member of the
Board of Directors of the Assisted Living Facilities Association of America
("ALFAA"); serves on the Residential Services Committee for the California
Association of Homes and Services for the Aged ("CAHSA"); and is a member of the
advisory committee of the American Seniors Housing Association. She also serves
on the Assisted Living Advisory Board of the American Health Care Association
("AHCA"), the Assisted Living Advisory Board -- Contemporary Long Term Care, and
the Advisory Group for the NIC.
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John B. Poole has served as Chief Financial Officer of the Company since
March 1996. From November 1995 until he joined the Company, he was as an
independent consultant to the long-term care industry. From July 1994 through
October 1995 he served as Chief Financial Officer of American Care Communities,
Inc., an owner and operator of assisted living residences. From March 1993
through June 1994 he served as Chief Financial Officer of Medifit of America,
Inc., an owner and operator of outpatient physical therapy centers and corporate
fitness centers. From October 1990 to February 1993 he served as Chief Financial
Officer of Frankwood Holdings, Ltd., an owner and operator of a third-party
administrator of health claims. From 1979 to August 1990 he served in various
positions at Beverly Enterprises, Inc., an owner and operator of long-term
health care facilities, including Senior Vice President and Chief Accounting
Officer, where he had responsibility for all accounting and data processing for
the entire company.
Kyle D. Shatterly has served as Senior Vice President of Acquisitions and
Development of the Company since April 1996. From 1988 until 1995, he held
concurrent Vice President positions at both Health Equity Properties ("EQP"), a
New York Stock Exchange listed real estate investment trust, and at Benton
Investment Company ("BIC"). BIC was a holding company that controlled over $300
million of real estate assets, in addition to owning several operating companies
that specialized in healthcare, multi-family housing and computer networks. EQP
served as an advisory affiliate of BIC. His responsibilities included mergers
and acquisitions, financial analysis and structured finance. From 1982 until
1987, he was employed by Merrill Lynch & Co. and Alex. Brown and Sons
Incorporated.
Luis Bared has served as a director of the Company since June 1996. Mr. Bared
is currently the Chairman and Chief Executive Officer of several closely held
businesses located in Puerto Rico and also serves as President and Chief
Operating Officer of DFI Caribbean, a wholly owned subsidiary of Duty Free
International (DFI), a New York Stock Exchange listed company. From 1975 until
the sale of the company in May, 1993, Mr. Bared served as Chairman and Chief
Executive Officer of Bared Jewelers of the V.I., Inc., a chain of six duty-free
stores established by Mr. Bared in 1975, with locations in the U.S. Virgin
Islands.
Lawrence P. Cirka became a director of the Company in June 1996. He has been
President and Chief Operating Officer of IHS since July 1994 and a director of
IHS since July 1994. He was Senior Vice President and Chief Operating Officer
from October 1987 to July 1994. Prior to joining IHS, Mr. Cirka served in
various operational capacities with Unicare Healthcare Corporation, a long-term
health care company, for 15 years, most recently as Vice President-Western
Division.
Charles A. Laverty became a director of the Company in June 1996. Mr.
Laverty, Chairman and Chief Executive Officer of UroHealth Systems, Inc.
("UroHealth"), became President and Chief Executive Officer in September 1994,
and Chairman of the Board of Directors of UroHealth in December 1994. Prior to
joining UroHealth, Mr. Laverty was employed as Senior Executive Vice President
and was a director of Coram Healthcare Corporation, a home infusion therapy
company which was formed in 1994 by the merger of Curaflex Health Services,
Inc., HealthInfusion, Inc., Medisys, Inc., and T(2) Medical, Inc. Mr. Laverty
served as the Chairman of the Board, President and Chief Executive Officer of
Curaflex Health Services from February 1989 to August 1994. Prior to his
association with Curaflex, Mr. Laverty served as President and Chief Executive
Officer of InfusionCare, Inc., a home infusion services company, from October
1988 to February 1989. In addition, he has held several positions, including
Chief Operating Officer, with Foster Medical Corporation, a durable medical
equipment supply company, and worked in both sales and management for C.R. Bard,
a medical device company.
Lisa K. Merritt became a director of the Company in June 1996. She has been a
Vice President of The Chase Manhattan Private Bank since May 1996. From January
1989 to May 1996, Ms. Merritt served as Vice President/District Manager of Chase
Manhattan Personal Financial Services and from July 1987 to January 1989 served
in various capacities, including commercial real estate, residential real
estate, and consumer lending at Chase Manhattan Bank, N.A. Prior to joining
Chase Manhattan Bank, Ms. Merritt was Divisional Vice President at Pioneer
Savings Bank from 1986 to 1987. From 1983 to 1986, she served as Assistant Vice
President at Presidential Bank. Ms. Merritt is a past Director of the Mortgage
Bankers Association of Southwest Florida.
The Company's Restated Certificate of Incorporation provides for the
classification of the Board of Directors into three classes of directors (Class
I, Class II and Class III), with the term of each class expiring at successive
annual stockholders' meetings. At and after the 1997 Annual Meeting of Stock-
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holders, all nominees of the class standing for election will be elected for
three-year terms. The terms of office for Messrs. Bared and Laverty expire at
the 1997 Annual Meeting of Stockholders, the terms of office of Mr. Cirka and
Ms. Merritt expire at the 1998 Annual Meeting Stockholders, and the terms of
office of Dr. Elkins and Mr. Komp expire at the 1999 Annual Meeting of
Stockholders.
The executive officers of the Company are elected annually by the Board of
Directors following the annual meeting of stockholders and serve at the
discretion of the Board of Directors.
The members of the Audit Committee and the Compensation Committee are Mr.
Laverty, Mr. Bared and Ms. Merritt. The Audit Committee reviews the adequacy of
the Company's internal control systems and financial reporting procedures,
reviews the general scope of the annual audit, reviews and monitors the
performance of non-audit services by the Company's independent auditors and
reviews interested transactions between the Company and any of its affiliates.
The Compensation Committee administers the Company's Stock Incentive Plan and
makes recommendations to the Board concerning compensation for the Company's
officers and employees.
COMPENSATION OF DIRECTORS
The Company will pay each director who is not an employee $1,000 for
attendance in person at each meeting of the Board of Directors or of any
committee thereof held on a day on which the Board of Directors does not meet.
In addition, the Company will reimburse the directors for travel expenses
incurred in connection with their activities on behalf of the Company. Directors
have been granted options to purchase Common Stock and will also receive stock
options under the Company's Non-Employee Director Stock Option Plan. See "--
Stock Options."
EXECUTIVE COMPENSATION
The Company was organized in November 1995. During fiscal 1995, Mr. Komp and
Ms. Johnson served as executive officers of IHS. For the year ended December 31,
1995, Mr. Komp received from IHS a salary of $261,000, a cash bonus of $32,500,
a bonus consisting of 2,614 shares of IHS common stock (having a value of
$57,508 based on the $22.00 price of the IHS common stock on the date of
issuance), a car allowance of $6,000 and a $67,720 contribution by IHS to a
Supplemental Deferred Compensation Plan. For the year ended December 31, 1995,
Ms. Johnson received from IHS a salary of $162,665, a cash bonus of $15,000, and
a bonus consisting of 682 shares of IHS common stock (having a value of $15,004
based on the $22.00 price of the IHS common stock on the date of issuance).
Neither Mr. Poole nor Mr. Shatterly, the other executive officers of the
Company, was employed by IHS or the Company during 1995. For information
regarding the 1996 compensation for Messrs. Komp, Poole and Shatterly and Ms.
Johnson see "--Employment Agreements."
EMPLOYMENT AGREEMENTS
The Company is a party to Employment Agreements (the "Employment Agreements")
with each of Edward J. Komp, Kayda A. Johnson, John B. Poole and Kyle D.
Shatterly to serve as President and Chief Executive Officer, Senior Vice
President -- Chief Operating Officer, Senior Vice President -- Chief Financial
Officer and Senior Vice President -- Acquisitions and Development, respectively.
Subject to earlier termination, as discussed below, each Employment Agreement is
for a three-year term commencing as of May 1, 1996; however, the Employment
Agreements of Mr. Komp and Ms. Johnson provide for automatic one-year extensions
on each anniversary thereof unless 120 days' notice of nonrenewal is given by
either party prior to such anniversary date. The current annual base salary
("Base Salary") for each executive is: $285,000 for Mr. Komp; $195,000 for Ms.
Johnson; $150,000 for Mr. Poole; and $135,000 for Mr. Shatterly. Each Employment
Agreement provides that the executive's Base Salary is to be increased annually
by a percentage equal to the percentage increase in the Consumer Price Index
("CPI") and, with respect to each executive other than Mr. Komp, by such
additional amounts as may be determined in the discretion of the Company's
President or Chief Executive Officer. The Base Salary of Mr. Komp may be
increased in the discretion of the Board of Directors. Each executive may also
receive annual cash bonuses in an amount determined in the discretion of the
Board
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<PAGE>
of Directors; provided, however, if the Company meets or exceeds performance
goals specified by the Board of Directors, each executive will receive a
bonus of not less than 30% of Base Salary (50% in the case of Mr. Komp). Mr.
Shatterly's and Mr. Poole's 1996 bonus will be prorated from the date of
their respective Employment Agreements.
Pursuant to the Employment Agreements, each executive is entitled to (a)
comprehensive individual and dependent health insurance, (b) Company paid life
insurance coverage in the amount of $500,000 ($1,000,000 in the case of Mr.
Komp) and accidental death and dismemberment insurance, (c) disability insurance
coverage in a monthly benefit amount equal to the sum of the executive's Base
Salary plus a "Bonus Amount" (as defined in the Employment Agreements), (d) an
annual automobile allowance of $9,600, subject to increase based on the CPI, (e)
a Company paid personal umbrella (excess) insurance policy in the amount of
$2,000,000 ($5,000,000 in the case of Mr. Komp), and (f) participate in any
executive retirement program established and maintained by the Company
(collectively, the "Executive Benefits"). In addition, each executive is
entitled to receive equity-based compensation in the discretion of the
Compensation Committee of the Board of Directors. The Company has also agreed to
reimburse each executive (other than Ms. Johnson) for certain expenses incurred
as a result of their relocation to Florida.
The Employment Agreement with Mr. Komp may be terminated by either party on
90 days' notice. Upon termination of Mr. Komp's employment without Cause, the
expiration of, or the Company's failure to renew, the Employment Agreement, or
the resignation of Mr. Komp for Good Reason, Mr. Komp will be entitled to the
sum of (1) the remaining Base Salary due under his Employment Agreement
(generally three years unless prior notice of nonrenewal has been given) and (2)
the higher of his bonus in the year of termination or in the previous year. In
addition, Mr. Komp will continue to receive his existing level of Executive
Benefits or the level of Executive Benefits received during the preceding year,
whichever is greater, throughout the severance period (generally three years)
and all stock options, other equity-based rights and rights under the Company's
Supplemental Deferred Compensation Plan ("SERP") then held by Mr. Komp will
become fully vested. The Employment Agreements with Ms. Johnson and Messrs.
Poole and Shatterly may each be terminated by either party on 90 days' notice.
Upon termination without Cause, the expiration of the Employment Agreement, or
the resignation of the executive for Good Reason, or, in the case of Ms.
Johnson, the failure to renew the Employment Agreement, the executive will be
entitled to a payment of one and one-half times the sum of (1) the greater of
his or her salary in the year of termination or in the previous year and (2) the
higher of his or her bonus in the year of termination or in the previous year.
In addition, for a period of 18 months following such termination, each of Ms.
Johnson and Messrs. Poole and Shatterly will continue to receive their existing
level of Executive Benefits or the level of Executive Benefits received during
the preceding year, whichever is greater, and all stock options, other
equity-based rights and SERP rights then held by Ms. Johnson and Messrs. Poole
or Shatterly, respectively, will become fully vested.
For purposes of each of the Employment Agreements, "Cause" is defined as (i)
material failure to perform duties, (ii) material breach of confidentiality or
noncompete provisions, (iii) conviction of a felony, or (iv) theft, larceny, or
embezzlement of Company property. "Good Reason" is defined as (i) a material
breach of the agreement by the Company or (ii) resignation of the executive
within one year after a change in control. A "change of control" of the Company
is deemed to occur under the Employment Agreements, in general: (i) when a
person, other than the executive or a group controlled by the executive, becomes
the "beneficial owner" of 20% or more of the Company's Common Stock, (ii) in the
event of certain mergers or consolidations in which the Company is not the
surviving entity, (iii) in the event of the sale, lease or transfer of
substantially all of the Company's assets or the liquidation of the Company or
(iv) if, within any 24-month period, the persons who were members of the Board
of Directors at the beginning of such period cease to constitute a majority of
the Board of Directors of the Company or any successor entity.
Each Employment Agreement contains covenants by the executive to, among other
things, maintain the confidentiality of trade secrets of the Company during the
term of their Employment Agreements and thereafter, as well as covenants not to
solicit employees or customers of the Company and not to be employed or have
certain other relationships with entities which are directly in the business of
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owning, operating or managing facilities which compete with any such facility
then operated by the Company or any of its subsidiaries during the term of their
Employment Agreement and for a 12 month period thereafter.
STOCK OPTIONS
Stock Incentive Plan. The Company adopted the Stock Incentive Plan to enable
the Company and its stockholders to secure the benefits of Common Stock
ownership by key personnel of the Company and its subsidiaries. The Stock
Incentive Plan permits the issuance of restricted stock and the granting of
options to purchase an aggregate of 470,040 shares of the Company's Common Stock
to key employees of and consultants to the Company or any of its subsidiaries.
Directors who perform services for the Company solely in their capacities as
directors are not eligible to receive shares of restricted stock or options
under the Stock Incentive Plan. The number of shares which may be issued under
the Stock Incentive Plan is subject to adjustment in proportion to any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock dividend, split-up, consolidation or any similar capital adjustment.
Options granted under the Stock Incentive Plan may be either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended ("ISOs"), or options which do not qualify as ISOs ("non-ISOs").
The Stock Incentive Plan will be administered by the Compensation Committee
of the Board of Directors (the "Committee"). No member of the Committee may
receive an option or a restricted stock award under the Stock Incentive Plan
within one year prior to his or her becoming a member of the Committee or at any
time while he or she is serving as a member of the Committee. Subject to the
provisions of the Stock Incentive Plan, the Committee has the authority to
determine the individuals to whom shares of restricted stock or stock options
will be granted, the number of shares to be issued or covered by each restricted
stock or option grant, the purchase or option price, the type of option, the
option period, the vesting restrictions or repurchase restrictions, if any, with
respect to the restricted stock or exercise of the option, the terms for the
payment of the restricted stock or the option price and other terms and
conditions. Payment for shares under a restricted stock award or pursuant to the
exercise of an option may be made (as determined by the Committee) in cash or by
shares of Common Stock.
The exercise price for shares covered by an ISO may not be less than 100% of
the fair market value of the Common Stock on the date of grant (110% in the case
of a grant to an employee who owns stock possessing more than 10% of the
combined voting power of all classes of stock of the Company or any subsidiary
entitled to vote (a "10% Stockholder")). The purchase price for shares of
restricted stock and the exercise price for shares covered by a non-ISO may not
be less than the par value of the Common Stock at the date of grant. All options
must expire no later than ten years (five years in the case of an ISO granted to
a 10% Stockholder) from the date of grant. The Stock Incentive Plan also
provides that the options will become exercisable and restricted stock awards
will become fully vested upon a change in control of the Company or if, at any
time within two years following the date any person (as such term is used in
Section 13(d) and 14(d)(2) of the Exchange Act) shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of 30% or more
of the Company's outstanding Common Stock other than pursuant to a plan or
arrangement entered into by such person and the Company, either the Company
terminates the optionee's employment (other than for Cause (as defined in the
Stock Incentive Plan)), or the optionee leaves the employ of the Company for
Good Reason (as defined in the Stock Incentive Plan). A "change in control of
the Company" is deemed to occur if (i) there shall be consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving entity or pursuant to which shares of the Company's
Common Stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of the Company's Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company, or (ii) the stockholders of the Company shall approve any plan or
proposal for liquidation or dissolution of the Company, or (iii) during any
period of two consecutive years, individuals who at the beginning of such period
constitute
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the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who were directors at the
beginning of the period. In general, no option may be exercised more than three
months after the termination of the optionee's service with the Company and its
subsidiaries. However, the three-month period is extended to twelve months if
the optionee's service is terminated by reason of disability or death and the
Committee may in its discretion extend the period of exercise following
termination of employment. No individual may be granted ISOs that become
exercisable for the first time in any calendar year for Common Stock having a
fair market value at the time of grant in excess of $100,000. In addition, the
maximum option grant which may be made to an employee of the Company in a
calendar year shall not cover more than 350,000 shares.
Options may not be transferred during the lifetime of an optionee. Subject to
certain limitations set forth in the Stock Incentive Plan and applicable law,
the Board of Directors may amend or terminate the Stock Incentive Plan. In any
event, no restricted stock awards or stock options may be granted under the
Stock Incentive Plan after May 24, 2006.
On June 10, 1996, each of Ms. Johnson and Messrs. Komp, Poole and Shatterly
was granted an option to purchase 78,000 shares, 157,000 shares, 78,000 shares
and 55,000 shares, respectively, of Common Stock at an exercise price per share
equal to the initial public offering price set forth on the cover page of this
Prospectus. The options become exercisable in five equal annual installments
commencing June 10, 1997. The options expire on the earlier of June 10, 2006 or
three months after the optionee ceases to be an employee of the Company (one
year if by reason of death or disability).
Non-Plan Director Options. On June 10, 1996, each of Ms. Merritt, Dr. Elkins
and Messrs. Bared, Cirka and Laverty was granted an option to purchase 16,000
shares, 235,000 shares, 28,000 shares, 98,000 shares and 28,000 shares,
respectively, of Common Stock at an exercise price per share equal to the
initial public offering price set forth on the cover page of this Prospectus.
These options become exercisable in three equal annual installments, commencing
June 10, 1997, although they will become immediately exercisable upon (i) a
change in control of the Company (as defined below under "Non-Employee Director
Stock Option Plan"), (ii) the removal (other than for justifiable cause (as
defined in the option agreement)) of the optionee as, or the Company's failure
to renominate (other than for justifiable cause) the optionee for election as, a
director of the Company at any time within two years following the date any
person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act)
shall become the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of 30% or more of the Company's outstanding Common Stock other
than pursuant to a plan or arrangement entered into by such person and the
Company, or (iii) the death or disability of the optionee. The options expire on
the earlier to occur of June 10, 2006 or six months after the optionee ceases to
be a director (one year if by reason of death or disability).
Non-Employee Director Stock Option Plan. The Company has adopted the
Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan") to
promote the Company's interests by attracting and retaining highly skilled,
experienced and knowledgeable non-employee directors. Pursuant to the
Non-Employee Director Plan, each non-employee director of the Company will
automatically receive on the date of each annual meeting of stockholders of the
Company (the "Grant Date") following completion of this offering, as long as
such person remains a director following such meeting, an option to purchase
7,500 shares of the Company's Common Stock (the "Option") at a per share
exercise price equal to the fair market value of the Common Stock on the Grant
Date. A total of 75,000 shares are reserved for issuance under the Non-Employee
Director Plan. The number of shares which may be issued under the Non-Employee
Director Plan is subject to adjustment to reflect any increase or decrease in
the number of shares of Common Stock resulting from a stock split, stock
dividend, consolidation or other similar capital adjustment.
Except as set forth below, Options become exercisable in three equal annual
installments commencing on the first anniversary of the Grant Date. In the event
that a director ceases to be a director of the Company, such person may exercise
the Option if it is exercisable by him at the time he ceases to be a
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director of the Company, within six months after the date he ceases to be a
director of the Company (one year if he ceases to be a director by reason of
death or disability). Notwithstanding the foregoing, in the event a "Change of
Control of the Company" shall occur, or the optionee is removed (other than for
justifiable cause (as defined in the Non-Employee Director Plan)) as, or is not
renominated (other than for justifiable cause) for election as, a director of
the Company at any time within two years following the date any person (as such
term is used in Section 13(d) and 14(d)(2) of the Exchange Act) shall become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
30% or more of the Company's outstanding Common Stock other than pursuant to a
plan or arrangement entered into by such person and the Company, then all
options granted under the Non-Employee Director Plan which are then outstanding
shall immediately become exercisable. A "Change in Control of the Company" shall
be deemed to occur if (i) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (y) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or
(ii) the stockholders of the Company shall approve any plan or proposal for
liquidation or dissolution of the Company, or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period. Options granted under the Non-Employee Director Plan
shall have a term of ten years from the Grant Date and shall not be "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended.
The Non-Employee Director Plan will be administered by the Board of Directors
of the Company. However, the Non-Employee Director Plan prescribes the
individuals who would be awarded Options, the number of shares subject to the
Options, and the terms and conditions of each award. The Board of Directors may
at any time terminate the Non-Employee Director Plan and may from time to time
alter or amend the Non-Employee Director Plan or any part thereof, provided that
the rights of a director with respect to an option granted prior to such
termination, alteration or amendment may not be impaired.
Option Grants. The following table sets forth certain summary information
concerning individual grants of stock options to each of the Company's executive
officers. No stock options were granted in the year ended December 31, 1995.
OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
INDIVIDUAL GRANT APPRECIATION FOR
-------------------------------------- OPTION TERM (2)
----------------------
PERCENT OF
TOTAL OPTIONS
NAME NUMBER OF GRANTED
SECURITIES TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN PRICE EXPIRATION
GRANTED(#) 1996 ($/SHARE)(1) DATE 5%($) 10%($)
------------ ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Komp... 157,000 34.9% $14.00 6/10/2006 $1,381,600 $3,502,670
Kayda Johnson ... 78,000 17.3% $14.00 6/10/2006 $ 686,400 $1,740,180
John B. Poole ... 78,000 17.3% $14.00 6/10/2006 $ 686,400 $1,740,180
Kyle D.Shatterly. 55,000 12.2% $14.00 6/10/2006 $ 484,000 $1,227,050
</TABLE>
- ----------
(1) The exercise price per share of all options granted will be the initial
public offering price. Each option becomes exercisable as to 20% of the shares
on June 10, 1997 and as to an additional 20% on each successive June 10.
(2) These amounts represent assumed rates of appreciation in the price of the
Company's Common Stock during the terms of the options in accordance with rates
specified in applicable federal securities regulations. Actual gains, if any, on
stock option exercises will depend on the future price of the Common Stock and
overall stock market conditions. There is no representation that the rates of
appreciation reflected in this table will be achieved.
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<PAGE>
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
The Company's Supplemental Deferred Compensation Plan (the "SERP") is an
unfunded deferred compensation plan which offers certain executive and other
highly compensated employees an opportunity to defer compensation until the
termination of their employment with the Company. Contributions to the SERP by
the Company, which vest over a period of five years, are determined by the Board
upon recommendation of the Committee and are allocated to participants' accounts
on a pro rata basis based upon the compensation of all participants in the SERP
in the year such contribution is made. In addition, a participant may elect to
defer a portion of his or her compensation and have that amount added to his or
her SERP account. Participants may direct the investments in their respective
SERP accounts. All participant contributions and the earnings thereon, plus the
participant's vested portion of the Company's contribution account, are payable
upon termination of a participant's employment with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Luis Bared, Charles A.
Laverty and Lisa Merritt. Each of Messrs. Bared and Laverty and Ms. Merritt
has received options to purchase shares of Common Stock. See "-- Stock
Options -- Non-Plan Director Options."
CERTAIN TRANSACTIONS
The Company was formed in November 1995 as a wholly-owned subsidiary of IHS
to operate the assisted living and other senior housing facilities owned, leased
and managed by IHS. Following the Company's formation, IHS transferred to the
Company as a capital contribution its ownership interest in The Waterside and
The Homestead facilities, sublet to the Company The Shores and Cheyenne Place
facilities, and leased to the Company the assisted living and related portions
of the Treemont and West Palm Beach facilities. IHS also transferred to the
Company all the stock of a company which had agreements to manage nine
facilities (one of which was cancelled by mutual agreement in July 1996 and one
of which the Company has been notified will be cancelled effective October 31,
1996).
To date IHS has provided all required financial, legal, accounting, human
resources and information systems services to the Company, and has satisfied all
the Company's capital requirements in excess of internally generated funds. IHS
has charged the Company a flat fee of 6% of total revenue for these services,
except that with respect to the Waterside facility prior to November 1995, IHS
and the minority owner of the facility each charged the Company a fee of 4.5% of
monthly service fee revenue for these services. The Company estimates that the
cost of obtaining these services from third parties would have been
significantly higher than the fees charged by IHS. IHS has agreed to provide
certain administrative services to the Company after the closing of this
offering until the Company has implemented its own MIS and accounting systems,
which the Company anticipates will occur in the fourth quarter of 1996. See
"Business -- Operations."
Effective June 1, 1996, IHS contributed to the capital of the Company
condominium interests in the assisted living portions of the West Palm Beach,
Treemont and Vintage facilities to the Company as a contribution to capital.
These assisted living facilities are immediately adjacent to or are located
within the same building and share common areas with an existing IHS facility.
Prior to the contribution of condominium interests in the assisted living
portion of each of these facilities, a condominium association was created and a
Declaration of Condominium was filed that governs these facilities. The Company
and IHS are the only members of these condominium associations, and share the
cost of maintaining the common areas of such facilities.
In connection with the Company's operation of the West Palm Beach, Treemont
and Vintage assisted living facilities, the Company and an operating subsidiary
of IHS have entered into Services Agreements whereby IHS provides certain
facility services to the Company. Pursuant to the individual Service Agreements,
IHS provides the Company (and its residents) with a combination of the following
services: building maintenance services (West Palm Beach facility only: $3,200
monthly fee paid to IHS); housekeeping (West Palm Beach facility only: $2,000
monthly fee paid to IHS); laundry services (all
55
<PAGE>
facilities: monthly fees paid to IHS are $850 (West Palm Beach), $1,500
(Vintage) and $3,300 (Treemont)); emergency call services (all facilities: $100
monthly fee paid to IHS); and nutrition (resident meals) services (all
facilities: fees paid to IHS equal $8.00 (Vintage) and $10.00 (West Palm Beach
and Treemont) per resident/per day). In addition, pursuant to each Services
Agreement, the Company pays IHS a monthly general building management and
landscaping services fee equal to $4,583 (Vintage), $14,166 (West Palm Beach)
and $31,083 (Treemont), respectively. In connection with the administration of
the Vintage facility, IHS and the Company share the services of the executive
director and the Company pays IHS an amount equal to thirty percent (30%) of the
total costs and expenses (including all wages, benefits, payroll taxes, and
workers' compensation premiums) of the executive director of the facility. Other
than the general building management and landscaping services fee, each of the
above described fees are subject to an annual increase equal to the Consumer
Price Index for All Urban Consumers--All Cities (not to exceed 4%). Each Service
Agreement has a one-year term and will be automatically renewed for successive
one-year terms unless otherwise terminated. Each Service Agreement may be
terminated by either party upon 180 days' notice or 30 days following the
delivery of a notice of material breach if the breach is not cured to the
satisfaction of the non-breaching party.
The Company and IHS are parties to an Administrative Services Agreement,
dated effective June 1, 1996, pursuant to which IHS provides accounts payable,
accounts receivable, corporate accounting, payroll and payroll tax services,
human resources support and risk management support services (the "Services") to
the Company. The agreement allows the Company to terminate, upon 30 days' prior
notice, any portion of the Services prior to the expiration of the agreement.
The Company will pay IHS a monthly fee equal to 1.2% of the gross revenues of
each of the Company's assisted living facilities (subject to reduction as the
Company terminates Services). The initial term of the Administrative Services
Agreement is 12 months and will be automatically renewed for an additional 12
month period unless terminated.
Pursuant to sublease agreements dated as of June 1, 1996, an operating
subsidiary of the Company subleases The Shores and The Cheyenne Place facilities
from IHS. The subleases provide for the payment of annual rent aggregating $1.7
million, which amount is substantially similar to the amount paid by IHS to the
property owner ($1.4 million in rent plus $321,000 in annual purchase option
deposits representing the facilities' allocable portion of the total annual
purchase option deposit IHS is required to make). In connection with the
execution of each sublease agreement, the Company has executed a guaranty
agreement whereby the Company guarantees the payment of obligations due under
the sublease agreements.
IHS has made available to the Company a $75 million revolving credit
facility. Borrowings under the facility bear interest at the rate of 14% per
annum. All outstanding borrowings, together with all accrued but unpaid
interest, are due at the earlier of (i) the closing of an initial public
offering by ILC or (ii) June 30, 1998. At June 30, 1996 and August 31, 1996,
$3.4 million and $7.4 million, respectively, were outstanding under the
facility. The Company intends to use a portion of the proceeds of this offering
to repay all amounts outstanding under this facility. See "Use of Proceeds."
Borrowings under this facility were used to finance the Company's development
activities.
IHS has agreed to guaranty certain obligations of the Company to HCPI and
to certain of the Company's developers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Properties--Development."
56
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of August 30, 1996 and as
adjusted to reflect the sale of 2,435,700 shares of Common Stock by the Company
and the sale of 2,694,900 shares of Common Stock by IHS, by (i) each person
known by the Company to own beneficially more than 5% of the Common Stock, (ii)
each director of the Company; (iii) each executive officer of the Company and
(iv) all directors and executive officers as a group. Except as otherwise noted,
each named beneficial owner has sole voting and investment power with respect to
the shares owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1)
--------------------- SHARES BEING --------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Integrated Health Services, Inc. (2) ..... 3,897,900 100.0% 2,694,900 1,203,000 19.0%
Robert N. Elkins, M.D. (3)................ 4,132,900 100.0% -- 1,438,000 21.9
Edward J. Komp (4)........................ 157,000 3.9 -- 157,000 2.4
Kayda Johnson (4)......................... 78,000 2.0 -- 78,000 1.2
John B. Poole (4)......................... 78,000 2.0 -- 78,000 1.2
Kyle D. Shatterly (4)..................... 55,000 1.4 -- 55,000 *
Luis Bared (4)............................ 28,000 * -- 28,000 *
Lawrence P. Cirka (4)..................... 98,000 2.5 -- 98,000 1.5
Charles A. Laverty (4).................... 28,000 * -- 28,000 *
Lisa Merritt (4).......................... 16,000 * -- 16,000 *
All executive officers and directors as a
group (9 persons)(5)...................... 4,670,900 100.0% 2,694,900 1,976,000 27.8%
</TABLE>
- ----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, which attribute beneficial ownership of
securities to persons who possess sole or shared voting power and/or investment
power with respect to these securities.
(2) The address of Integrated Health Services is 10065 Red Run Boulevard,
Owings Mills, Maryland 21117.
(3) Consists of the shares of Common Stock owned by IHS and options to
purchase 235,000 shares of Common Stock, none of which are currently
exercisable. Dr. Elkins is Chairman of the Board and Chief Executive Officer of
IHS and, as a result, may be deemed to beneficially own the shares of Common
Stock owned by IHS. Dr. Elkins disclaims beneficial ownership of such shares.
Dr. Elkin's address is c/o IHS, 8889 Pelican Bay Blvd., Naples, Florida 33963.
(4) Consists of options to purchase shares of Common Stock, none of which are
currently exercisable.
(5) Consists of the shares of Common Stock owned by IHS and options to
purchase 773,000 shares of Common Stock, none of which are currently
exercisable.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue up to 100,000,000 shares of Common Stock,
par value $.01 per share, 3,897,900 shares of which are issued and outstanding
as of the date hereof and held of record by IHS, and 5,000,000 shares of
Preferred Stock, $.01 par value, none of which are outstanding as of the date
hereof.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. The Common Stock does not have
cumulative voting rights, and, as a result, the holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may elect
all of the directors standing for election, and, in that event, the holders of
the remaining shares will not be able to elect any directors. Subject to the
rights and preferences of any Preferred Stock which may be issued, the holders
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared by the Board of Directors out of funds legally available therefor
and, upon the liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities. Holders of
Common Stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of Common Stock are, and the shares offered by the
Company in this offering will be, when issued and paid for, fully paid and
nonassessable. The rights, privileges and preferences of holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any shares of Preferred Stock which the Company may designate and issue in
the future.
At present, there is no active trading market for the Common Stock. The
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "ILCC." See "Risk Factors -- No Prior Public Market; Possible
Volatility of Stock Price."
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more series as
determined by the Board of Directors. The Board of Directors is authorized to
issue the shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The Preferred Stock could be issued by the Board of Directors
with voting and conversion rights that could adversely affect the voting power
and other rights of the holders of the Common Stock. In addition, because the
terms of the Preferred Stock may be fixed by the Board of Directors of the
Company without stockholder action, the Preferred Stock could be issued quickly
with terms calculated to defeat or delay a proposed takeover of the Company, or
to make the removal of the management of the Company more difficult. Under
certain circumstances, this could have the effect of decreasing the market price
of the Common Stock. The Company has no present plans to issue any Preferred
Stock. See "Risk Factors -- Effect of Certain Anti-Takeover Provisions."
REGISTRATION RIGHTS
The Company has granted "piggyback" registration rights with respect to the
shares of Common Stock owned by IHS after this offering. As a result, if the
Company proposes to register any of its securities, either for its own account
or for the account of other stockholders, the Company is required, with certain
exceptions, to notify IHS and, subject to certain limitations, to include in
such registration all of the shares of Common Stock requested to be included by
IHS. In addition, the Company has granted to IHS certain demand "shelf"
registration rights which are exercisable beginning one year after the date of
this offering. The Company is generally required to pay all of the expenses of
such registrations other than the underwriting discounts and commissions. See
"Risk Factors -- Shares Eligible for Future Sale; Registration Rights."
58
<PAGE>
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
Number of Directors. The Restated Certificate of Incorporation, as amended
(the "Restated Certificate"), and By-laws of the Company provide that the number
of members of the Board of Directors be fixed from time to time by the Company's
Board of Directors, provided that the number of directors shall not be reduced
so as to shorten the term of any director then in office. This number may be
increased whenever the holders of any other series of Preferred Stock which may
be issued by the Company have the right, voting as a separate class or series,
to elect directors of the Company for so long as such right to elect directors
exists.
Classification of Board of Directors. The Restated Certificate and By-laws of
the Company divide the Board of Directors into three classes, designated Class
I, Class II and Class III, respectively, each class to be as nearly equal in
number as possible. The term of Class I, Class II and Class III directors will
expire at the 1997, 1998 and 1999 annual meetings of stockholders, respectively,
and in all cases directors elected will serve until their respective successors
are elected and qualified. At each annual meeting of stockholders, directors
will be elected to succeed those in the class whose terms then expire, each
elected director to serve for a term expiring at the third succeeding annual
meeting of stockholders after such director's election, and until the director's
successor is elected and qualified. Thus, directors elected stand for election
only once in three years.
Additional Directorships, Vacancies and Removal of Directors. Under the
Delaware General Corporation Law (the "DGCL"), the Restated Certificate and
By-laws, the Board of Directors is authorized to create additional
directorships, elect such additional directors and fill vacancies which may
arise in the Board. Newly-created directorships and vacancies may be filled by a
majority of directors then in office to hold office until the next election of
the class for which such directors have been chosen, and until their successors
shall be elected and qualified. In addition, in accordance with the DGCL
pertaining to a company whose Board of Directors is classified, the Company's
Restated Certificate and By-laws provide that directors may be removed only for
cause by vote of the holders of 75% of the shares entitled to vote at an
election of directors, except that directors elected by holders of Preferred
Stock may only be removed as provided in the Company's Restated Certificate or
the Certificate of Designation of such Preferred Stock.
Stockholder Action and Special Meetings. The Restated Certificate and By-laws
provide that any action of stockholders must be effected at a duly called
meeting and not by written consent in lieu of a meeting unless there are fewer
than two stockholders. The By-laws do not permit stockholders of the Company to
call special meetings of stockholders. A special meeting of stockholders may
only be called by the Chairman of the Board, the President or the Board of
Directors of the Company and are to be held only for the purposes set forth in
the notice of meeting. The affirmative vote of the holders of at least 80% of
the Company's then outstanding capital stock entitled to vote in the election of
directors (considered for this purpose as one class) is required to amend, alter
or repeal, or to adopt any provision inconsistent with, the provisions of the
Restated Certificate and By-laws described herein or to change such required
vote.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") as well as for other stockholder proposals to be considered at
annual stockholders' meetings. Notice to the Company from a stockholder who
proposes to nominate a person at a meeting for election as a director generally
must be given not less than 120 nor more than 150 days prior to the anniversary
of the date notice of the annual meeting of stockholders was given in the
preceding year and contain: (i) the name and record address of the stockholder
who intends to make the nomination; (ii) the name, age and residence address of
the nominee; (iii) the principal occupation or employment of the nominee; (iv)
the class, series and number of shares held of record, beneficially and by
proxy, by the stockholder and the nominee as of the record date of such meeting
(if such record date is publicly available) and as of the date of such notice;
(v) a description of all arrangements or understandings between such stockholder
and each nominee and any other person or persons naming such person or persons
pursuant to which
59
<PAGE>
the nomination or nominations are to be made by such stockholder; (vi) the
written consent of the persons to be named as nominee and to serve if elected;
and (vii) such other information relating to the nominee proposed by such
stockholder as is required to be included in a proxy statement or otherwise
required pursuant to Regulation 14A under the Securities Exchange Act of 1934,
including the written consent of each nominee to being named in the proxy
statement and to serve as a director of the Company if so elected. The presiding
officer of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the Nomination Procedure. Similar advance notice
must be given of any other proposed business which a stockholder proposes to
bring before an annual meeting of stockholders. Such notice must contain (i) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (ii) the name and
record address of the stockholder proposing such business, (iii) the class,
series and number of shares of the Company's stock which are held of record,
beneficially and by proxy by the stockholder as of the record date of such
meeting (if such record date is publicly available) and as of the date of such
notice, (iv) a description of all arrangements or understandings between the
stockholder and any other person or persons (naming such person or persons) in
connection with the proposing of such business by the stockholder, and (v) any
material interest of the stockholder in such business. The purpose of requiring
advance notice is to afford the Board of Directors an opportunity to consider
the qualifications of the proposed nominees or the merits of other stockholder
proposals and, to the extent deemed necessary or desirable by the Board of
Directors, to inform stockholders about those matters. Although the advance
notice provisions do not give the Board of Directors any power to approve or
disapprove of stockholder nominations or proposals for action by the Company,
they may have the effect of precluding a contest for the election of directors
or the consideration of stockholder proposals if the procedures established by
the By-laws are not followed and of discouraging or deterring a third party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposals, without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to the Company and its
stockholders.
Anti-Takeover Effects. The foregoing provisions of the Restated Certificate
and By-laws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the continuity and stability of the Board of Directors and the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change in control of the
Company. These provisions are also designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain tactics
that may be used in proxy fights. However, such provisions may discourage third
parties from making tender offers for the Company's shares. As a result, the
market price of the Common Stock may not benefit from any premium that might
occur in anticipation of a threatened or actual change in control. Such
provisions also may have the effect of preventing changes in the management of
the Company. See "Risk Factors -- Effect of Certain Anti-Takeover Provisons."
DELAWARE ANTI-TAKEOVER LAW
Under Section 203 of the DGCL (the "Delaware anti-takeover law"), certain
"business combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless (i) the
corporation has elected in its certificate of incorporation or bylaws not to be
governed by the Delaware anti-takeover law (the Company has not made such an
election), (ii) either the business combination or the transaction which
resulted in the stockholder becoming an "interested stockholder" was approved by
the board of directors of the corporation before the other party to the business
combination became an interested stockholder, (iii) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers and stock held in employee stock plans in which the employees
do not have a right to determine confidentially whether to tender or vote stock
held by the plan), or (iv) the business combination was approved by the board of
directors of the corporation and ratified by 66 2/3% of the voting stock which
the
60
<PAGE>
interested stockholder did not own. The three-year prohibition does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations between a
Delaware corporation and an interested stockholder, transactions with an
interested stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as a stockholder who becomes the beneficial owner of 15% or
more of a Delaware corporation's voting stock. Section 203 could have the effect
of delaying, deferring or preventing a change in control of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate provides that directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for the unlawful payment of
dividends or unlawful stock repurchases under Section 174 of the DGCL, as the
same exists or hereinafter may be amended, or (iv) for any transaction from
which the director derives an improper personal benefit. The provision does not
apply to claims against a director for violations of certain laws, including
federal securities laws. If the DGCL is amended to authorize the further
elimination or limitation of directors' liability, then the liability of
directors of the Company shall automatically be limited to the fullest extent
provided by law. The Company's Restated Certificate and By-laws also contain
provisions requiring the Company to indemnify the directors, officers, employees
or other agents to the fullest extent permitted by the DGCL. In addition, the
Company has entered into indemnification agreements with its current directors
and executive officers. These provisions and agreements may have the practical
effect in certain cases of eliminating the ability of stockholders to collect
monetary damages from directors. The Company believes that these contractual
agreements and the provisions in its Restated Certificate and By-laws are
necessary to attract and retain qualified persons as directors and officers.
TRANSFER AGENT
The Transfer Agent for the Common Stock is American Stock Transfer & Trust
Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares or the availability of such shares for sale will have on
the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock
and the ability of the Company to raise capital through a sale of its
securities.
Upon completion of this offering, the Company will have 6,333,600 shares of
Common Stock outstanding (7,103,190 shares if the Underwriters' over-allotment
option is exercised in full). Of those shares, the 5,130,600 shares sold in this
offering (5,900,190 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction (except as to
affiliates of the Company) or further registration under the Securities Act. The
remaining 1,203,000 shares, all of which are owned by IHS, are "restricted
securities" within the meaning of Rule 144 under the securities Act.
In general, under Rule 144 under the Securities Act as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
restricted securities within the meaning of Rule 144 ("Restricted Securities")
for at least two years, and including the holding period of any prior owner
except an affiliate, would be entitled to sell within any three-month period a
number of shares
61
<PAGE>
that does not exceed the greater of one percent of the then outstanding shares
of Common Stock or the average weekly trading volume of the Common Stock on the
National Association of Securities Dealers Automated Quotation System during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the three months preceding a sale, and who has
beneficially owned shares for at least three years (including any period of
ownership of preceding non-affiliated holders), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements. An
"affiliate" is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or under common control with,
such issuer.
Rule 144A under the Securities Act as currently in effect generally permits
unlimited resales of certain Restricted Securities of any issuer provided that
the purchaser is a qualified institution that owns and invests on a
discretionary basis at least $100 million in securities (and in the case of a
bank or savings and loan association, has a net worth of at least $25 million)
or is a registered broker-dealer that owns and invests on a discretionary basis
at least $10 million in securities. Rule 144A allows IHS to sell its shares of
Common Stock held prior to this offering to such institutions and registered
broker-dealers without regard to any volume or other restrictions. There can be
no assurance that the availability of such resale exemption will not have an
adverse effect on the trading price of the Common Stock.
The Company, its directors and officers and IHS have agreed not to offer to
sell, sell, distribute, grant any option to purchase, pledge, hypothecate or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock owned by them prior to the expiration of 180 days from the date of
this Prospectus, except (i) with the prior written consent of the Smith Barney
Inc., (ii) in the case of the Company, in certain limited circumstances, (iii)
in the case of the directors and executive officers of the Company, for the
exercise by such individuals of outstanding options and (iv) for the sale of
shares in this offering. Beginning in January 1998, IHS may sell all 1,203,000
of its shares of Common Stock subject to the volume and other limitations of
Rule 144. The Commission has proposed an amendment to Rule 144 under the
Securities Act which, if adopted as currently proposed, would permit the sale of
such 1,203,000 shares of Common Stock held by IHS beginning 181 days after the
date of this Prospectus, rather than January 1998 (i.e., after the expiration of
the "lock-up" period), subject to the volume and other limitations of Rule 144.
IHS has the right to include its shares in any future registration of
securities effected by the Company under the Securities Act. If the Company is
required to include in a Company-initiated registration shares held by IHS
pursuant to the exercise of its piggyback registration rights, such sales may
have an adverse effect on the Company's ability to raise needed capital. See
"Risk Factors -- Shares Eligible for Future Sale; Registration Rights,"
"Principal and Selling Stockholders" and "Description of Capital Stock --
Registration Rights."
The Company intends to file registration statements under the Securities Act
registering the shares of Common Stock reserved for issuance upon the exercise
of options granted under the Stock Incentive Plan and the Non-Employee Director
Stock Option Plan and the options granted to the non-employee directors. See
"Management -- Stock Options." These registration statements are expected to be
filed soon after the date of this Prospectus and will become effective
automatically upon filing. Accordingly, shares registered under such
registration statements will be available for sale in the open market, unless
such shares are subject to vesting restrictions with the Company.
62
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and IHS have each agreed to sell to such
Underwriter, shares of Common Stock which equal the number of shares set forth
opposite the name of such Underwriter below.
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------- ------------
Smith Barney Inc...................................
Alex. Brown & Sons Incorporated....................
Donaldson, Lufkin & Jenrette Securities
Corporation........................................
------------
Total........................................... 5,130,600
============
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Alex. Brown & Sons Incorporated
and Donaldson, Lufkin & Jenrette Securities Corporation are acting as the
representatives (the "Representatives"), propose initially to offer part of the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public offering
price. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to other Underwriters and to certain other dealers.
After the initial public offering, the public offering price and such
concessions may be changed by the Underwriters. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 769,590
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Company and IHS have agreed to indemnify the Underwriters against certain
liabilities under the Securities Act.
The Company, its directors and officers and IHS have agreed that, for a
period of 180 days after the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., sell, offer to sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, any shares of Common
Stock, other than, in the case of the Company, in certain limited circumstances.
Smith Barney Inc. may, in its sole discretion and at any time without prior
notice, release all or any portion of the shares of Common Stock subject to the
"lock-up" agreements.
Prior to this offering, there has not been any public market for the Common
Stock. Consequently, the initial public offering price for the shares of Common
Stock will be determined by negotiations among the Company, IHS and the
Representatives. Among the factors to be considered in determining such price
will be the history of and prospects for the Company's business and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, its past and present earnings and the trend of such
earnings, the prospects for earnings of the Company, the present
63
<PAGE>
state of the Company's development, the general condition of the securities
market at the time of this offering and the market prices and earnings of
similar securities of comparable companies at the time of the offering. The
estimated initial public offering price range set forth on the cover page of
this Prospectus is subject to change as a result of market conditions and other
factors. See "Risk Factors -- No Prior Public Market; Possible Volatility of
Stock Price."
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Fulbright & Jaworski L.L.P., New York, New York. Certain legal matters will be
passed upon for the Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements of Integrated Living Communities, Inc.
and Subsidiaries; the financial statements of Lakehouse East (a partnership) for
the month ended November 30, 1993; the financial statements of Carrington
Pointe, Vintage Health Care Center Retirement Division and Terrace Gardens
Tenants in Common, all of which are included in this Prospectus and elsewhere in
the Registration Statement, have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of such
firm as experts in accounting and auditing.
The financial statements of Lakehouse East (a partnership) for the year ended
October 31, 1993, included in this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and are included here in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 (together with all amendments thereto, the "Registration
Statement"), under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules filed therewith, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference hereby is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and exhibits and schedules thereto. The Registration
Statement filed by the Company, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Midwest Regional Office of the Commission located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material,
when filed, may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of
certain fees prescribed by the Commission. 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.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES PAGE
Independent Auditors' Report F-3
Consolidated Balance Sheets -- December 31, 1994 and 1995 and June 30,
1996 (unaudited) F-4
Consolidated Statements of Operations -- Years ended
December 31, 1993, 1994 and 1995 and six months ended
June 30, 1995 (unaudited) and 1996 (unaudited) F-5
Consolidated Statements of Changes in Stockholder's Equity --
Years endedDecember 31, 1993, 1994 and 1995 and six months ended
June 30, 1996 (unaudited) F-6
Consolidated Statements of Cash Flows -- Years ended
December 31, 1993, 1994 and 1995 and six months ended
June 30, 1995 (unaudited) and 1996 (unaudited) F-7
Notes to Consolidated Financial Statements F-8
ACQUIRED COMPANIES -- PRE-ACQUISITION FINANCIAL STATEMENTS
LAKEHOUSE EAST (A PARTNERSHIP) NOW D/B/A WATERSIDE RETIREMENT ESTATES
Year ended October 31, 1993
Independent Auditors' Report F-21
Statement of Operations F-22
Statement of Cash Flows F-23
Notes to Financial Statements F-24
One Month Period ended November 30, 1993
Independent Auditors' Report F-26
Statement of Operations F-27
Statement of Cash Flows F-28
Notes to Financial Statements F-29
CARRINGTON POINTE
Independent Auditors' Report F-31
Statements of Operations -- Years ended December 31, 1993,
1994 and 1995 F-32
Statements of Cash Flows -- Years ended December 31, 1993, 1994 and 1995
F-33
Notes to Financial Statements F-34
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
Independent Auditors' Report F-36
Balance Sheets -- December 31, 1994 and 1995 F-37
Statements of Operations -- Years ended December 31, 1994 and 1995 F-38
Statements of Changes in Division Equity -- Years ended
December 31, 1994 and 1995 F-39
Statements of Cash Flows -- Years ended December 31, 1994 and 1995 F-40
Notes to Financial Statements F-41
F-1
<PAGE>
PROBABLE ACQUISITIONS
TERRACE GARDENS TENANTS IN COMMON PAGE
Independent Auditors' Report F-44
Balance Sheets -- December 31, 1994 and 1995 F-45
Statements of Operations -- Years ended December 31, 1993,
1994 and 1995 F-46
Statements of Changes in Owner's Deficit -- Years ended
December 31, 1993, 1994 and 1995 F-47
Statements of Cash Flows -- Years ended December 31, 1993,
1994 and 1995 F-48
Notes to Financial Statements F-49
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Living Communities, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Living Communities, Inc. and subsidiaries (wholly-owned by Integrated Health
Services, Inc.) (the Company) as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Living Communities, Inc. and subsidiaries (wholly-owned by Integrated Health
Services, Inc.) as of December 31, 1994 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 12 to the financial statements, in 1995 the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
KPMG Peat Marwick LLP
Baltimore, Maryland
June 5, 1996
F-3
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
(Wholly-Owned by Integrated Health Services, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 786,552 $ 413,362 $ 119,995
Accounts receivable.................................. 177,849 525,555 354,314
Prepaid expenses and other current assets............ 205,494 187,294 406,845
------------- ------------- -------------
Total current assets............................... 1,169,895 1,126,211 881,154
Assets limited as to use (note 3)..................... 735,318 658,726 704,735
Property, plant and equipment, net (note 4) .......... 14,773,241 23,751,175 50,626,382
Goodwill, less accumulated amortization of $43,805 ... 1,573,586 -- --
Other assets.......................................... 47,514 237,650 3,252,310
------------- ------------- -------------
$18,299,554 $25,773,762 55,464,581
============= ============= =============
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable .................................... $ 356,188 510,353 828,438
Accrued expenses (note 8) ........................... 605,318 930,941 1,308,782
------------- ------------- -------------
Total current liabilities.......................... 961,506 1,441,294 2,137,220
Note payable to parent company (note 14).............. -- -- 3,362,870
Refundable deposits (note 11)......................... 4,311,490 5,243,332 5,398,096
Deferred income taxes (note 6)........................ 620,435 -- 324,106
Unearned entrance fees (note 1)....................... 3,687,707 4,316,391 3,911,229
------------- ------------- -------------
Total liabilities.................................. 9,581,138 11,001,017 15,133,521
------------- ------------- -------------
Commitments and contingencies (notes 5, 9, 11, 13,
and 14)
Minority interest (note 2)............................ 2,371,028 -- --
Stockholder's equity:
Preferred stock, $.01 par value. Authorized 5,000,000
shares; none issued and outstanding................. -- -- --
Common stock, $.01 par value. Authorized 100,000,000
shares; issued and outstanding 3,897,900 shares..... 38,979 38,979 38,979
Additional paid-in capital .......................... 6,071,548 17,840,414 42,359,340
Retained earnings (deficit).......................... 236,861 (3,106,648) (2,067,259)
------------- ------------- -------------
Net stockholder's equity........................... 6,347,388 14,772,745 40,331,060
------------- ------------- -------------
$18,299,554 $25,773,762 $55,464,581
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
(Wholly-Owned by Integrated Health Services, Inc.)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
------------ ------------- --------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Monthly service and entrance fees...... $5,009,512 $10,905,925 $15,123,557 $7,471,081 $10,567,605
Management services and other.......... 230,516 738,558 1,145,734 547,499 727,394
------------ ------------- --------------- ------------ -------------
Total revenues....................... 5,240,028 11,644,483 16,269,291 8,018,580 11,294,999
------------ ------------- --------------- ------------ -------------
Expenses:
Facility operations.................... 3,455,602 8,253,851 11,242,938 5,576,065 7,137,967
Facility rents - parent company (note
5).................................... 855,963 1,466,243 2,430,397 1,215,199 1,309,088
Corporate administrative and general
(note 7).............................. 314,541 725,497 1,005,372 498,702 677,700
Depreciation and amortization.......... 23,530 368,657 414,401 206,019 480,181
Loss on impairment of long-lived assets
(note 12)............................. -- -- 5,125,838 -- --
------------ ------------- --------------- ------------ -------------
Total expenses....................... 4,649,636 10,814,248 20,218,946 7,495,985 9,604,936
------------ ------------- --------------- ------------ -------------
Earnings (loss) before income taxes
and minority interest............... 590,392 830,235 (3,949,655) 522,595 1,690,063
Minority interest (note 2).............. 9,633 (28,682) 37,497 22,672 --
------------ ------------- --------------- ------------ -------------
Earnings (loss) before income taxes.. 580,759 858,917 (3,987,152) 499,923 1,690,063
Federal and state income taxes (note
6)..................................... 226,496 322,094 (643,643) 192,470 650,674
------------ ------------- --------------- ------------ -------------
Net earnings (loss).................. $ 354,263 $ 536,823 $(3,343,509) $ 307,453 $ 1,039,389
============ ============= =============== ============ =============
Earnings (loss) per common share ....... $ .09 $ .14 $ (.86) $ .08 $ .27
============ ============= =============== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
(Wholly-Owned by Integrated Health Services, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
--------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992............. $38,979 $ 641,161 $ (654,225) $ 25,915
Net earnings............................. -- -- 354,263 354,263
Net capital contributions from parent
company.................................. -- 4,506,248 -- 4,506,248
--------- ------------- -------------- -------------
Balance at December 31, 1993............. 38,979 5,147,409 (299,962) 4,886,426
Net earnings............................. -- -- 536,823 536,823
Net capital contributions from parent
company.................................. -- 924,139 -- 924,139
--------- ------------- -------------- -------------
Balance at December 31, 1994............. 38,979 6,071,548 236,861 6,347,388
Net loss................................. -- -- (3,343,509) (3,343,509)
Net capital contributions from parent
company.................................. -- 11,768,866 -- 11,768,866
--------- ------------- -------------- -------------
Balance at December 31, 1995............. 38,979 17,840,414 (3,106,648) 14,772,745
Net earnings (unaudited)................. -- -- 1,039,389 1,039,389
Net capital contributions from parent
company (unaudited)...................... -- 24,518,926 -- 24,518,926
--------- ------------- -------------- -------------
Balance at June 30, 1996 (unaudited) .... $38,979 $42,359,340 $(2,067,259) $40,331,060
========= ============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
(Wholly-Owned by Integrated Health Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ --------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................ $ 354,263 $ 536,823 $(3,343,509) $ 307,453 $ 1,039,389
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating
activities:
Deferred income taxes......................... 54,127 162,871 (620,435) (139,136) 324,106
Minority interest............................. 9,633 (28,682) 37,497 22,672 --
Loss on impairment of long-lived assets....... -- -- 5,125,838 -- --
Depreciation and amortization................. 23,530 368,657 414,401 206,019 480,181
Decrease (increase) in accounts receivable ... (80,272) 102,777 (335,601) (337,242) 171,241
Decrease (increase) in prepaid expenses and
other current assets......................... 4,992 (170,051) 31,720 37,649 (219,551)
Earned entrance fees.......................... (87,675) (679,319) (680,409) (285,632) (495,432)
Entrance fees received........................ 80,550 768,798 1,491,593 864,926 383,250
Increase (decrease) in accounts payable and
accrued expenses............................. (165,781) 532,662 264,869 (201,199) 695,926
------------ ------------ --------------- ------------ -------------
Net cash provided by operating activities ...... 193,367 1,594,536 2,385,964 475,510 2,379,110
------------ ------------ --------------- ------------ -------------
Cash flows from financing activities:
Net capital distributions to parent company ... (172,229) (416,371) (2,551,050) (96,238) (2,651,074)
Refundable deposits received................... 57,750 505,865 1,456,709 895,760 242,250
Refunds of deposits and entrance fees.......... (62,275) (370,769) (707,367) (201,966) (380,466)
------------ ------------ --------------- ------------ -------------
Net cash (used) by financing activities ........ (176,754) (281,275) (1,801,708) 597,556 (2,789,290)
------------ ------------ --------------- ------------ -------------
Cash flows from investing activities:
Property, plant and equipment additions........ (11,627) (358,375) (843,902) (232,279) (185,388)
Decrease (increase) in other assets............ -- -- (190,136) 16,864 348,210
Decrease (increase) in assets limited as to
use........................................... (3,817) (169,503) 76,592 92,136 (46,009)
------------ ------------ --------------- ------------ -------------
Net cash (used) by investing activities ........ (15,444) (527,878) (957,446) (123,279) 116,813
------------ ------------ --------------- ------------ -------------
Increase (decrease) in cash..................... 1,169 785,383 (373,190) 949,787 (293,367)
Cash, beginning of period....................... -- 1,169 786,552 786,552 413,362
------------ ------------ --------------- ------------ -------------
Cash, end of period............................. $ 1,169 $ 786,552 $ 413,362 $1,736,339 $ 119,995
============ ============ =============== ============ =============
Noncash investing and financing activities --
acquisitions of facilities: (note 2)
Assets of businesses acquired, net............. $7,068,554 $1,340,510 $11,911,391 $ -- $27,170,000
Capital contributed by parent company and
minority interest............................. $7,068,554 $1,340,510 $11,911,391 $ -- $27,170,000
============ ============ =============== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES
(Wholly-Owned by Integrated Health Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
AND JUNE 30, 1995 AND 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
In November 1995, Integrated Living Communities, Inc. (ILC or the Company)
was formed through a corporate reorganization whereby the assets and liabilities
of the Integrated Living Communities Division (the Division) of Integrated
Health Services, Inc. (IHS or the Parent Company) were transferred or leased
from IHS subsidiaries to ILC and its subsidiaries. ILC was formerly Kingsley
Place Retirement, Inc. until its present name was adopted in January 1996. The
consolidated financial statements of the Company represent the accounts of the
assisted living and other senior living facilities comprising the Division and
operating within the following wholly-owned subsidiaries of IHS:
<TABLE>
<CAPTION>
OWNER/LESSEE
DATE OF ACQUISITION AND IHS OWNED OR
FACILITY AND LOCATION OPERATING ENTITY LEASED
- ------------------------------------ ------------------------------- ------------------------------- ------------
<S> <C> <C> <C>
West Palm Beach December 1, 1993 Central Park Lodges, Inc Leased
Retirement, West Palm Beach, Florida
a 34-unit assisted living
facility
Waterside Retirement Estates December 1, 1993 F.L.C. Lakehouse, Inc. Owned
(formerly Lakehouse East), Sarasota, Florida
a 164-unit continuing care
retirement community
The Homestead, March 18, 1994 I.H.S. of Denton, Inc. Owned
a 50-unit assisted living Denton, Maryland
and adult day care facility
Treemont Retirement February 9, 1989 Cambridge Group of Leased
Community, a 231-unit Dallas, Texas Texas, Inc
continuing care retirement
community, Alzheimer's
and adult day care facility
The Shores, a 260-unit assisted September 1, 1994 Integrated Health Services Leased
living, continuing care Bradenton, Florida of Lester, Inc.
retirement community and
Alzheimer's care facility
Cheyenne Place Retirement, September 1, 1994 Integrated Health Services Leased
a 95-unit congregate care Colorado Springs, Colorado of Lester, Inc.
facility
Carrington Pointe, a December 15,1995 Integrated Management - Owned
172-unit congregate Fresno, California Carrington Pointe, Inc.
care and assisted living
facility
</TABLE>
Also, the statements include accounts of Integrated Living Communities
Retirement Management, Inc., ("ILCRM"), which manages eight facilities, two of
which are scheduled to open in 1996.
F-8
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
Two of the Company's facilities are located on campuses containing both
assisted-living facilities and skilled-nursing facilities which share certain
operating expenses. The facilities are owned by subsidiaries of IHS and have
been leased to the Company (see note 5). Effective June 1, 1996, the Company and
an IHS subsidiary entered into separate condominium agreements and shared
services agreements for these facilities as discussed in note 14. Allocations of
various operating expenses have been made by IHS on a monthly basis in order to
present the separate operating expenses of the assisted-living facilities and
skilled-nursing facilities. The accompanying financial statements reflect the
revenues and expenses (including such allocations) related to the
assisted-living facilities only.
The consolidated financial statements reflect the historical accounts of
the assisted living and other senior living facilities, including allocations of
general and administrative expenses from the IHS corporate office to the
individual facilities. Such corporate office allocations, calculated as a
percentage of revenue, are based on determinations that management believes to
be reasonable. However, IHS has operated certain other businesses and has
provided certain services to the Company, including financial, legal,
accounting, human resources and information systems services. Accordingly,
expense allocations to the Company may not be representative of costs of such
services to be incurred in the future (see note 7). Also, the consolidated
financial statements reflect adjustments made by IHS to establish a new basis of
accounting for the assets and liabilities of businesses acquired, using the
"push down" approach to accounting for business combinations under the purchase
method. The effect of these adjustments was to increase the cost of goodwill,
property, plant and equipment by approximately $6.2 million at December 31, 1995
(before the loss on impairment of long-lived assets (note 12) and to increase
depreciation and amortization expense by $13,000 in 1993 and $140,000 in each of
1994 and 1995.
Revenue Recognition
Resident units are rented on a month to month basis and monthly service fee
revenue is recognized in the months the units are occupied. Service fees paid by
residents for assisted-living and other related services are recognized in the
period such services are rendered as other revenue. In some cases, residents of
the Waterside Retirement Estates facility have entered into life-care contracts
whereby the resident pays an entrance fee as well as a monthly rental payment.
Under most life-care contracts (membership agreements), entrance fees are
partially refundable to the resident. The minimum refund amount pursuant to the
resident's membership agreement (generally 50% of the total entrance fee) is
payable to the resident or the resident's estate within 120 days of termination
of the agreement, which may occur at any time after 30 days notice. In addition,
a portion of the remainder of the entrance fee is payable if the contract is
terminated within 24 months of move-in, determined on a declining pro rata
basis. The minimum refund amount and the estimated amount of the remainder which
is expected to be refunded based on past experience of the facility are
accounted for as refundable deposit liabilities. The remaining amount of the
entrance fees is accounted for as deferred revenue under the caption "unearned
entrance fees." Such deferred revenue is amortized to operations of future
periods based on the estimated life of the resident, adjusted annually based on
the actuarially determined estimated remaining life expectancy of each resident,
on the straight-line method. Unamortized deferred revenue is recorded as revenue
upon the resident's death or contract termination. Earned entrance fees on
life-care contracts were $87,675 in 1993, $679,319 in 1994, and $680,409 in
1995.
F-9
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
estimated useful lives of the assets as follows:
Building and improvements ... 40 years
Land improvements............ 25 years
Equipment.................... 10 years
Leasehold improvements....... Term of the lease
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). The
Company was not a separate taxable entity during the three years ended December
31, 1995; however, under SFAS 109 the current and deferred tax expense has been
allocated among the members of the IHS controlled corporate group including the
Company and its subsidiaries.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are recorded for deferred tax
assets when it is more likely than not that such deferred tax assets will not be
realized.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments with an
original maturity of three months or less. Under a cash management facility
provided by the Parent Company, the Company's operating cash balances of the
facilities are generally transferred to a centralized account and applied to
reduce additional paid-in capital. The Company's cash needs for operating and
other purposes are similarly provided through an increase to additional paid-in
capital. However, in 1994 and 1995 the Waterside Retirement Estates facility
transferred cash to the Parent Company only to the extent needed to satisfy cash
needs for operating expenses. The excess of cash receipts over cash
disbursements of this facility is reflected in the cash and cash equivalents
account as of December 31, 1994 and 1995.
Obligation to Provide Future Services
For life-care contracts, the Company annually calculates the present value
of the net cost of future service and use of facilities to be provided to
current residents and compares that amount with the balance of deferred revenue
from entrance fees. If the present value of the net cost of future service and
use of facilities exceeds the deferred revenue from entrance fees, a liability
is recorded (obligation to provide future service and use of facilities) with a
corresponding charge to income.
Earnings per Common Share
Earnings per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the periods. Common stock
equivalents include options to purchase common stock, assumed to be exercised
using the treasury stock method. Outstanding shares retroactively reflect the
stock split and related surrender of common shares referred to in note 10.
F-10
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Disclosures about Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, prepaid expenses and
other current assets, other assets, assets limited as to use funds, accounts
payable, and accrued expenses approximate fair value because of the short-term
maturity of these instruments.
The carrying amounts of refundable deposits may not approximate fair value
since these liabilities are not short-term in nature. However, since these
liabilities do not have specified maturity dates, management believes it is
not practicable to determine their fair value.
Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. In December 1995, as part of a company- wide adoption by IHS, the
Company adopted SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". In accordance with the provisions
of SFAS No. 121, if there is an indication that the carrying value of an asset
is not recoverable, the Company determines the amount of impairment loss by
comparing the carrying amount of the asset to its estimated fair value.
Estimated fair value is determined through an evaluation of recent financial
performance and projected discounted cash flows of its facilities using standard
industry valuation techniques, including the use of independent appraisals when
considered necessary. If an asset tested for recoverability was acquired in a
business combination accounted for by using the purchase method, the related
goodwill is included as part of the carrying value and evaluated as described
above in determining the recoverability of that asset. Recoverability is
determined by estimating the projected undiscounted cash flows, excluding
interest, of the related business activities.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
the affected assets is allocated over their remaining lives. Estimation of value
and future benefits of intangible assets is made based upon the related
projected undiscounted future cash flows, excluding interest payments.
Prior to adoption of SFAS No. 121 in 1995, the Company performed its
analyses of impairment of long-lived assets by consideration of the projected
undiscounted cash flows on an entity-wide basis, except for goodwill for which
the policy is unchanged.
The effect of the adoption of SFAS No. 121 in December 1995 required the
Company to perform this analysis on a facility-by-facility basis. This resulted
in the recognition of a loss on impairment of long-lived assets (see note 12).
If the facility-by-facility analysis had been adopted prior to December 1995,
the Company may have incurred the loss on impairment of long-lived assets prior
to December 1995.
Interim Financial Information
The unaudited consolidated financial information as of June 30, 1996 and
for the six months ended June 30, 1996 and 1995 has been prepared in conformity
with the accounting principles and practices reflected in the audited financial
statements included herein. In the opinion of the Company, the unau-
F-11
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
dited consolidated financial information contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the Company's
financial position, results of operations and cash flows for the periods
indicated.
(2) BUSINESS ACQUISITIONS
During the three-year period ended December 31, 1995, IHS acquired six of
the seven assisted-living and other senior living facilities which are included
in the consolidated financial statements at December 31, 1995. Each acquisition
was accounted for by the purchase method; accordingly, the assets and
liabilities of the acquired facilities were recorded at their estimated fair
values. The results of operations of the facilities acquired have been included
in the consolidated financial statements from the respective dates of the
acquisitions.
The total costs, by acquisition, have been allocated to the specific assets
and liabilities as follows:
<TABLE>
<CAPTION>
WATERSIDE
WEST PALM (LAKEHOUSE THE CARRINGTON
BEACH EAST) HOMESTEAD THE SHORES POINTE
----------- ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Accounts receivable, net................... $1,086 $ 136,597 $ 36,756 $ -- $ 12,105
Assets limited as to use................... -- 561,998 -- -- --
Property, plant and equipment.............. -- 13,382,609 1,369,012 -- 12,100,685
Goodwill (40 year useful life)............. -- 1,617,391 -- -- --
Other assets............................... -- 40,435 -- 47,514 13,520
Accounts payable and accrued expenses ..... (481,853) (65,258) (47,514) (214,919)
Refundable deposits........................ -- (3,966,688) -- -- --
Deferred income taxes...................... -- (403,437) -- -- --
Unearned entrance fees..................... -- (3,819,584) -- -- --
----------- ------------- ------------ ------------ --------------
Total, representing capital contributed by
Parent Company and minority interest ...... $1,086 $ 7,067,468 $1,340,510 $ -- $11,911,391
=========== ============= ============ ============ ==============
</TABLE>
On December 1, 1993, IHS acquired 100% of the common stock of Central Park
Lodges, Inc. (CPL). Among the facilities acquired in this transaction was West
Palm Beach, a 120-bed skilled nursing facility and 34 unit assisted-living
facility. The Company leases the assisted-living portion of the facility from
IHS (see notes 5 and 14).
In connection with the December 1, 1993 acquisition of CPL, IHS originally
obtained the 60.5% controlling interests in two partnerships, Lakehouse East,
which owns and operates a retirement facility including an assisted care wing,
21 garden apartments and 18 villas, and Lakehouse West, which owns and operates
an adjacent retirement facility consisting of a single building. The 39.5%
minority partners subsequently filed a suit against IHS and CPL alleging that
the CPL acquisition triggered a provision in the partnership agreements
requiring the sale of the minority interests in the partnership. Settlement of
the suit was subsequently reached pursuant to a Partition Agreement between the
parties. Under this agreement, effective October 31, 1995 an IHS subsidiary
became the sole owner of Lakehouse East (now known as Waterside Retirement
Estates) and the former minority partners became the sole partners of the
partnership which is the sole owner of Lakehouse West.
F-12
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
The financial statements have been presented including the Company's
interest in Lakehouse East and excluding the operations of Lakehouse West. The
following represents the summarized financial information of the Lakehouse West
partnership entity which is not included in the consolidated financial
statements of the Company (in thousands)
DECEMBER 31,
---------------
1994 1995
-------- ------
Current assets........................... $ 559 $ --
Non-current assets....................... 13,878 --
Total assets............................. 14,437 --
Current liabilities...................... 528 --
Long-term liabilities.................... 12,243 --
Total liabilities........................ 12,771 --
Partnership capital...................... 1,666 --
Total liabilities and partnership
capital.................................. 14,437 --
------- -----
TEN MONTHS
ENDED
YEARS ENDED DECEMBER 31, OCTOBER 31,
----------------------- -------------
1993 1994 1995
---- ---- ----
Revenues................... $234 $3,214 $2,672
Operating expenses......... 244 3,217 2,581
Earnings (loss)............ (10) (3) 91
On March 18, 1994 IHS acquired The Homestead, a 50 unit assisted-living and
adult daycare facility for a total cost of approximately $1.3 million adjusted
for certain accrued liabilities, prepayments and deposits assumed by IHS. Prior
to the purchase IHS had managed the facility under a management agreement with
the prior owner.
On August 31, 1994 Integrated Health Services of Lester, Inc., an IHS
subsidiary, entered into separate facility operating leases for the 260-unit The
Shores and 95-unit Cheyenne Place facilities. Integrated Health Services of
Lester, Inc. leases these facilities, including the related equipment, furniture
and fixtures, and subleases them to the Company (see note 5.)
On December 15, 1995, IHS acquired Carrington Pointe, a 172 unit congregate
care and assisted-living facility for a total cost of approximately $11,900,000.
Prior to the acquisition, IHS had managed the facility under a management
agreement with the prior owner. The acquisition was recorded effective as of
December 31, 1995; accordingly, results of operations for the period December
15, 1995 to December 31, 1995 are not included in the financial statements. The
effect of not including this period is not material to the results of operations
of the Company. The assets acquired and liabilities assumed have been adjusted
to reflect the new basis of accounting and are included in the December 31, 1995
balance sheet of the Company.
F-13
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
The following summary, prepared on a pro forma basis, combines the results
of operations as if the acquisitions described above, certain acquisitions
consumated subsequent to December 31, 1995 and certain probable acquisitions
(see note 14) had been consummated as of January 1, 1994, after including the
effect of certain adjustments such as depreciation on the new basis of assets
acquired. The pro forma amounts also include adjustments to corporate
administrative and general expenses to reflect management's estimate of the
increase in such costs as if the Company had operated on a stand-alone basis
during these years.
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995
------------- --------------
Revenues.................. $22,514,216 $27,452,000
Net loss.................. $ (221,000) $(3,065,000)
Net loss per common share.. $ (.05) $ (.63)
The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions had been completed as of the
beginning of the periods presented. In addition, they are not intended to be a
projection of future results of operations and do not reflect any of the
business management changes that might be achieved from combined operations.
(3) ASSETS LIMITED AS TO USE
A portion of the entrance fee deposits on life-care contracts is held in
escrow pursuant to Section 651.035 of the statutes of the state of Florida. Such
minimum liquid reserve funds consist of cash equivalents that are required to be
maintained by continuing care facilities. Balances in such reserve funds of
$626,618 and $657,126 at December 31, 1994 and 1995, respectively, exceed the
required minimum liquid reserves at such dates. The remainder represents
entrance fee deposits held by a trustee pursuant to Florida law.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995 JUNE 30, 1996
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements......................... $ 5,166,862 $ 4,010,343 $ 4,012,717
Building and improvements..................... 9,332,822 18,828,646 46,120,290
Equipment..................................... 592,027 1,312,103 1,340,742
Construction in progress...................... 5,574 214,332 227,539
Leasehold improvements........................ 18,570 102,331 121,855
------------- ------------- ----------------
15,115,855 24,467,755 51,823,143
Less accumulated depreciation and
amortization.................................. 342,614 716,580 1,196,761
------------- ------------- ----------------
Total......................................... $14,773,241 $23,751,175 $50,626,382
============= ============= ================
</TABLE>
(5) LEASES
The Company has leased four assisted-living facilities from IHS. With
respect to the West Palm Beach and Treemont facilities, IHS subsidiaries own the
premises of both skilled nursing and assisted living facilities, operate the
respective skilled nursing facilities, and lease the assisted living facilities
to the Company. Rent expense included in the financial statements under these
intercompany leases was $855,963 in 1993, $999,152 in 1994 and $1,029,126 in
1995. The Company has obtained condominium interests in these facilities
effective June 1, 1996 (see note 14).
F-14
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
Cheyenne Place and The Shores are leased from Litchfield Asset Management
Corporation by Integrated Health Services of Lester, Inc. (a subsidiary of IHS)
under separate leases. The Company entered into separate subleases for these
facilities with an IHS subsidiary effective June 1, 1996. The initial term of
the subleases is seven years and provide for various renewal terms at the option
of ILC at fair market rentals. Prior to June 1, 1996, the Company was allocated
rentals based on the lease between Litchfield Asset Management Corporation and
IHS. Rent expense included in the financial statements under these leases was
none in 1993, $467,091 in 1994 and $1,401,271 in 1995. Minimum rent payments
under these noncancellable subleases are summarized as follows for the years
ended December 31:
1996........ $ 1,588,769
1997........ 1,722,696
1998........ 1,722,696
1999........ 1,722,696
2000........ 1,722,696
Thereafter.. 4,163,182
-------------
$12,642,735
=============
(6) INCOME TAXES
The Company is included in IHS's consolidated federal income tax return.
The allocated provision for income taxes on earnings before income taxes is
summarized below:
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ------------ ----------- -----------
(UNAUDITED)
Current... $172,369 $159,223 $ (23,208) $ 331,606 $326,568
Deferred . 54,127 162,871 (620,435) (139,136) 324,106
---------- ---------- ------------ ----------- -----------
$226,496 $322,094 $(643,643) $ 192,470 $650,674
========== ========== ============ =========== ===========
The amount computed by applying the Federal corporate tax rate of 34% to
earnings before income taxes is reconciled to the provision for income taxes as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ ---------------------
1993 1994 1995 1995 1996
---------- ---------- -------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income tax computed at statutory rates ....... $197,458 $292,032 $(1,355,632) $169,974 $574,621
State income taxes, net of Federal tax
benefit....................................... 28,805 32,057 (176,920) 23,470 75,854
Other......................................... 233 (1,995) (2,501) (974) 199
Valuation allowance adjustment................ -- -- 891,410 -- --
---------- ---------- -------------- ---------- ----------
$226,496 $322,094 $ (643,643) $192,470 $650,674
========== ========== ============== ========== ==========
</TABLE>
F-15
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
Deferred income tax liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- -------------
1993 1994 1995 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Excess of book over tax basis of
assets................................. $ 1,981,232 $ 2,032,363 $ 798,083 $ 966,201
Unearned entrance fees................. (1,416,228) (1,382,890) (1,661,811) (1,505,823)
Accrued expenses....................... (77,999) (29,038) (27,682) (27,682)
Other.................................. (29,441) -- -- --
------------- ------------- ------------- -------------
457,564 620,435 (891,410) (567,304)
Valuation allowance.................... -- -- 891,410 891,410
------------- ------------- ------------- -------------
Deferred income tax liability.......... $ 457,564 $ 620,435 $ --$ 324,106
============= ============= ============= =============
</TABLE>
The provision for Federal and state income taxes is recorded using the
overall effective tax rate of the consolidated group applied to the Company's
pre-tax earnings before adjustment for permanent differences. Deferred income
tax (assets) liabilities are recorded for the Company's temporary difference
using the same effective tax rate. The difference between the total provision
for income tax and the deferred income tax provision, both determined as
discussed above, represents income taxes currently payable to the parent company
and has been accounted for as additional paid-in capital. The provision for
income taxes, deferred income taxes and income taxes currently payable may vary
from such amounts that would have been computed on a stand-alone basis.
(7) OTHER RELATED PARTY TRANSACTIONS
Corporate administrative and general expenses represent management fees for
certain services, including financial, legal, accounting, human resources and
information systems services, provided by IHS pursuant to a management services
agreement. Management fees have been provided at 6% of total revenues of each
facility, except for the Lakehouse East partnership facility which has provided
management fees at 9% of monthly service fees revenue pursuant to the
partnership agreement in effect for the period from December 1, 1993 to October
31, 1995 (of which approximately $224,000 was paid to an IHS subsidiary and
approximately $224,000 was paid to the other partner).
Management fees charged by IHS at 6% of total revenues have been determined
based on an allocation of IHS's corporate general and administrative expenses,
which apply to all IHS divisions, including the Integrated Living Communities
Division. Such allocation has been made because specific identification of
expenses is not practicable. Management believes that this allocation method is
reasonable. However, management estimates that the Company's corporate
administrative and general expenses on a stand alone basis (i.e. expenses that
would have been incurred if the Company had operated as an unaffiliated entity)
would have been approximately $3.9 million in 1995.
F-16
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
(8) ACCRUED EXPENSES
Accrued expenses are summarized as follows:
DECEMBER 31, JUNE 30, 1996
---------------------- ------------------
1994 1995 (UNAUDITED)
---------------------- ------------------
Accrued salaries and wages . $188,382 $307,327 $ 392,849
Refundable security
deposits.................... 291,807 370,331 409,583
Other accrued expenses ..... 125,129 253,283 506,350
---------- ---------- ---------------
$605,318 $930,941 $1,308,782
========== ========== ===============
(9) NOTE RECEIVABLE
Integrated Living Communities Retirement Management, Inc. (ILCRM), a
subsidiary of the Company, entered into loan and security agreements dated
August 7, 1995 and amended on February 29, 1996 and July 9, 1996 with an
individual, the president of Elderly Development Company, Inc. Under the
agreements, ILCRM has agreed to loan up to $1,000,000 to the individual at an
annual interest rate of 11.75%. The balance of the loan at December 31, 1995 of
$130,000 is included in other assets. The loan is for the pre-development
activities of five assisted living facilities in California. The loan and
security agreement provide that ILCRM is entitled to the exclusive right to
manage the facilities upon the completion of construction. Also, the individual
has assigned the rights related to real estate purchase agreements to ILCRM. The
loan and security agreements provide ILCRM a security interest in the borrower's
pre-development plans, land contracts, and all licenses, permits and
governmental approvals. The principal balance of the loan, and all accrued and
unpaid interest thereon, is payable on demand.
(10) CAPITAL STOCK
As of December 31, 1995 and 1994, the Company was authorized to issue up to
1,000 shares of common stock, $.01 par value, of which 100 shares were issued
and outstanding. In June 1996, the Company's certificate of incorporation was
restated to increase the authorized shares to 100,000,000 shares of common
stock, $.01 par value and 5,000,000 shares of preferred stock, $.01 par value.
Also, the Company effected a 49,610-for-one common stock split (in the form of a
stock dividend). In August 1996, the Parent Company surrendered 1,063,100 shares
of common stock to the Company. Share and per share data for all periods
presented in the financial statements give retroactive effect to the revised
shares, the common stock split and the related surrender of common shares
referred to above. Accordingly, 3,897,900 shares of common stock are reflected
as issued and outstanding during the three years ended December 31, 1995.
The preferred stock may be issued from time to time in one or more series
as determined by the Board of Directors. The Board of Directors is authorized to
issue the shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The preferred stock could be issued by the Board of Directors
with voting and conversion rights that could adversely affect the voting power
and other rights of the holders of the common Stock. In addition, because the
terms of the preferred stock may be fixed by the Board of Directors of the
Company without stockholder action, the preferred stock could be issued quickly
with terms calculated to defeat or delay a proposed takeover of the Company, or
to make the removal of the management of the Company more difficult.
F-17
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
The Company has adopted two stock option plans. The Stock Incentive Plan
provides for options to be granted to certain employees and consultants at an
exercise price per share not less than 100% of fair market value at the date of
grant (110% in certain cases). In addition, the Company adopted a Stock Option
Plan for Non-Employee Directors which provides for the grant of options at an
exercise price per share equal to the fair market value on the date of grant.
The Board of Directors has authorized the issuance of 950,040 shares of common
stock under the plans. Stock options to purchase an aggregate of 450,500 shares
of common stock under the Stock Incentive Plan have been granted through June
30, 1996. On June 10, 1996, stock options to purchase an aggregate of 405,000
shares of Common Stock in three equal installments, commencing June 10, 1997,
were granted to five directors of the Company.
(11) LIFE-CARE CONTRACTS
The obligation under life-care contracts to provide future service and use
of facilities is calculated as the present value of the net future service and
use costs. Unamortized deferred revenue exceeded the net present value of such
net costs at December 31, 1994 and 1995; accordingly, there was no future
service liability recorded in connection with the life-care contracts at
December 31, 1994 and 1995.
In accordance with the contractual arrangements under certain life-care
contracts, a minimum amount (generally 50%) of the entrance fee is refundable
and a portion of the entrance fee is refundable if the contract is terminated
within a specified time period (potentially refundable entrance fees).
Refundable deposits represent the minimum refunds under the membership
agreements and the estimated amount expected to be refunded of the potentially
refundable entrance fees, based on past experience with contract terminations.
Potentially refundable entrance fees were $871,270 and $882,779 at December 31,
1994 and 1995, respectively, of which $187,281 and $215,627, respectively, is
included in refundable deposits; the remainder is included in unearned entrance
fees. Refunds paid were $62,275 for the period from December 1, 1993 to December
31, 1993, $370,769 in 1994, and $707,367 in 1995, including minimum refunds of
$62,275 in 1993, $343,819 in 1994 and $553,213 in 1995.
(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS
The Company implemented Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 121 in connection with the Parent Company's
implementation in 1995. In connection with the adoption of SFAS No. 121, the
Company performed an evaluation of the recent financial performance and
projected undiscounted cash flows of each of its facilities. Using a recent
independent appraisal, the Company estimated the fair market value of its
Waterside (Lakehouse East) facility and determined that the carrying value of
certain long lived assets, including goodwill, land, buildings and improvements,
exceeded the fair values. The excess carrying value of $5,125,838 (of which
$1,533,152 represented goodwill and $3,592,686 represented buildings and
improvements) was written off and is included in the statement of operations for
1995 as a loss on impairment of long-lived assets. At the time the Company
acquired the controlling interest in the Waterside facility in December 1993,
the Waterside facility and Lakehouse West, a separate adjacent facility, were
operated in a manner whereby the facilities shared certain services and
expenses. The December 1993 valuation assumed that these facilities would
continue their existing cross-referral and joint marketing relationship and
would continue to enjoy other corporate synergies. In 1995, the Company and the
minority partners in the Waterside facility and the Lakehouse West facility
exchanged interests, such that the Company became the sole owner of the
Waterside facility and the minority partners became the sole owner of the
adjacent Lakehouse West facility (see note 2). All joint arrangements were
terminated. The December 1995 appraisal reflected that (i) the benefits
discussed above no longer existed and (ii) the other facility was now a
competitor of the Waterside facility. As a result, the December 1995 valuation
of the Waterside facility was less than the December 1993 valuation used for
purchase accounting purposes.
F-18
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
(13) LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. Management believes that pending or threatened
legal proceedings will have no material adverse effect on the Company's
financial condition or results of operations.
(14) EVENTS SUBSEQUENT TO DECEMBER 31, 1995
Acquisitions
On January 29, 1996, an IHS subsidiary purchased the Vintage Health Care
Center, a 110-unit skilled nursing, 43-unit assisted-living and a 62-unit
congregate care facility located in Denton, Texas and leased the assisted living
and Congregate care portion to the Company. The Company and the IHS subsidiary
subsequently entered into a condominium agreement (discussed more fully below)
for the Vintage Facility whereby the Company owns and operates the
assisted-living and congregate care portion and IHS owns and operates the
skilled-nursing portion. Between January 29, 1996 and the effective date of the
condominium agreement (June 1, 1996), ILC leased the assisted living and
congregate care portion from IHS at a monthly rental of $35,000.
Effective June 1, 1996, the Company and an IHS subsidiary entered into
separate condominium agreements and shared services agreements for the West Palm
Beach, Treemont and Vintage facilities whereby the Company owns and operates the
assisted living and congregate care portions and IHS owns and operates the
skilled-nursing portion of the facilities. Previously, these facilities were
leased from IHS. In connection with the condominium agreements, IHS made capital
contributions of approximately $27.2 million, representing the lesser of IHS's
carryover basis in the assisted living and congregate care assets contributed or
the estimated fair market value of such assets based on independent appraisals.
The capital contributions were $2,260,000 for West Palm Beach, $21,450,000 for
Treemont and $3,460,000 for Vintage. The Company cannot transfer its condominium
interest without the prior consent of IHS. The IHS facility in which the
Treemont facility is located is subject to a mortgage. Should IHS default on its
obligations under the mortgage, the lender could foreclose on the mortgage which
could materially adversely affect the Company's business, results of operations
and financial condition.
Shared services agreements require that IHS provide laundry, housekeeping,
building maintenance, landscaping, emergency call services and common area
maintenance for a combined total of $61,482 per month. In addition, IHS will
provide dietary services to the Company for between $8 and $10 per resident per
day. Utilities and real estate costs will be allocated among the condominium
units according to pre-defined percentages. Finally, at the Vintage, IHS and the
Company will share the services of the executive director; the Company will
reimburse IHS for 30% of the executive director's salary, benefits and other
expenses.
Effective July 1, 1996, the Company entered into a lease agreement for
Homestead of Garden City, a 35 unit assisted living facility in Garden City,
Kansas. Effective July 17, 1996, the Company entered into a lease agreement for
Homestead of Wichita, a 35 unit assisted living facility located in Wichita,
Kansas. The initial term of each lease is 15 years with three five-year renewal
options. Annual rent under each lease is $287,500, subject to increases based on
the consumer price index.
The Company acquired the Cabot Pointe facility in August 1996 for $2.7
million with funds borrowed from IHS. The Company intends to sell and lease it
back from a real estate investment trust in September 1996. Cabot Pointe is a 35
unit assisted living and alzhiemers facility located in Bradenton, Florida.
The Company has entered into a definitive agreement to acquire ownership of
Terrace Gardens, a 258 unit assisted living and senior living facility which
also includes a 100 bed nursing facility. The purchase price for the facility is
$12.2 million. The acquisition is scheduled to close simultaneously with the
initial public offering of ILC common stock. There can be no assurance that this
acquisition and/or the sale/leaseback financing of Cabot Pointe will close as
scheduled or at all.
F-19
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
Note Receivable
Integrated Living Communities Retirement Management, Inc. (ILCRM), a
subsidiary of IHS and on behalf of the Division, entered into a Revolving Credit
and Security Agreement and a Revolving Credit Note dated March 18, 1996 and
amended on July 12, 1996 with an assisted living facility development company,
The Homestead Company, L.C., a Kansas limited liability company. Under such
agreement, ILCRM has agreed to loan up to $1,000,000, on a revolving basis, to
be used for the sole purpose of developing four assisted living facilities in
Kansas and six facilities in Nebraska. The note shall bear interest at an annual
rate of 11.75%. The Revolving Credit and Security Agreement provides ILCRM a
security interest in the borrower's interest in all development plans,
assignments of land contracts, and all licenses, permits and governmental
approvals. The note is also secured by a $250,000 personal guaranty by the
president of The Homestead Company, L.C. The entire outstanding principal
balance of the loan, and all accrued and unpaid interest thereon, is payable on
demand. Also, the individual has assigned the rights related to real estate
purchase agreements to ILCRM.
Employment Agreements
The Company has employment agreements with four of its officers which
provide annual base salaries aggregating $765,000. In addition, the officers
will receive bonuses, if the Company attains certain performance goals, as well
as health, life, disability, and personal unbrella insurance and an annual
automobile allowance. The agreements provide the officers the right to
participate in any executive retirement and equity-based compensation programs
established by the Company in the discretion of the Compensation Committee of
the Board of Directors.
Revolving Credit Note
Effective June 30, 1996, IHS has made available to the Company a $75
million revolving credit facility. Borrowings under the facility bear interest
at the rate of 14% per annum. All outstanding borrowings, together with all
accrued but unpaid interest, are due at the earlier of (i) the closing of an
initial public offering by ILC or (ii) June 30, 1998. At June 30, 1996, $3.4
million was outstanding under this facility. Borrowings under this facility have
been used to finance the Company's development activities.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
F.L.C. Lakehouse, Inc.,
Don Blivas, Janice Blivas, Fred Fiala
and John Rowe
d/b/a Lakehouse East
Sarasota, Florida:
We have audited the accompanying statements of operations and cash flows for the
year ended October 31, 1993 of F.L.C. Lakehouse Inc., Don Blivas, Janice Blivas,
Fred Fiala, and John Rowe d/b/a Lakehouse East (a Partnership). These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lakehouse
East for the year ended October 31, 1993, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
May 15, 1995
F-21
<PAGE>
LAKEHOUSE EAST
(A PARTNERSHIP)
STATEMENT OF OPERATIONS
Year ended
October 31, 1993
----------------
Revenues
Maintenance fees.............................. $2,308,710
Earned entrance fees.......................... 864,941
Interest...................................... 13,053
Other......................................... 60,715
----------
Total revenues................................. 3,247,419
----------
Expenses
Resident care................................. 1,555,138
Selling, general and administrative........... 1,153,555
Utilities..................................... 231,033
Depreciation.................................. 443,352
Interest...................................... 143,091
----------
Total expenses................................. 3,526,169
----------
Net loss....................................... $ (278,750)
==========
See notes to financial statements.
F-22
<PAGE>
LAKEHOUSE EAST
(A PARTNERSHIP)
STATEMENT OF CASH FLOWS
Year ended
October 31, 1993
Operating Activities
Net loss.......................................................... $ (278,750)
Adjustments to reconcile net loss to net cash provided by
operating
activities:
Depreciation..................................................... 443,352
Earned entrance fees............................................. (864,941)
Entrance fees received........................................... 1,009,948
Changes in operating assets and liabilities:
Increase in accounts receivable................................. (10,595)
Decrease in prepaid expenses and other assets................... 4,084
Increase in accounts payable and accrued expenses............... 133,210
Increase in accrued employees' compensation and benefits........ 65,644
Decrease in accrued interest.................................... (23)
----------
Net cash provided by operating activities.......................... 501,929
----------
Investing Activities
Purchases of property and equipment............................... (155,637)
Increase in assets whose use is limited........................... (20,548)
----------
Net cash used in investing activities.............................. (176,185)
----------
Financing Activities
Advances to Partners.............................................. (60,409)
Advances from affiliate........................................... 112,505
Principal payments on long-term debt.............................. (500,000)
Refundable deposits received...................................... 576,303
Refundable deposits paid.......................................... (492,700)
----------
Net cash used in financing activities.............................. (364,301)
----------
Decrease in cash................................................... (38,557)
Cash, beginning of year............................................ 181,744
----------
Cash, end of year.................................................. $ 143,187
==========
See notes to financial statements.
F-23
<PAGE>
LAKEHOUSE EAST
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
F.L.C. Lakehouse, Inc., Don Blivas, Janice Blivas, Fred Fiala, and John Rowe
d/b/a Lakehouse East (the "Partnership") is a partnership organized and existing
under the laws of Florida. The principal business is the management and
maintenance of a life care facility. The financial statements include only those
assets, liabilities and results of operations which relate to the business of
the Partnership. The statements do not include any assets, liabilities, revenues
or expenses attributable to the partners' individual activities.
Ownership Interests
Partners October 31, 1993
-------- ----------------
F.L.C. Lakehouse, Inc................... 60.50%
Donald Blivas........................... 16.50
Janice Blivas........................... 9.00
John Rowe............................... 7.50
Fred Fiala.............................. 6.50
-----
100.00%
------
On December 1, 1993, 100% of the common stock of Central Park Lodges,
Inc., parent company of F.L.C. Lakehouse, Inc., was purchased by Integrated
Health Services, Inc. ("IHS"). This transaction did not have any effect on the
accounts of the Partnership.
The acquisition by IHS is subject to approval of the Florida Department of
Insurance ("DOI"). IHS has applied to the DOI for approval, however, the DOI has
not acted on the application. IHS expects the application to be approved,
however, if it is disapproved, the DOI could take action that would be adverse
to IHS and the Partnership including revocation of the certificate of authority
for operation of the facility or require IHS to divest its ownership interest.
The minority shareholders have filed suit against FLC Lakehouse, Inc. IHS and
others alleging among other matters that the acquisition of FLC Lakehouse, Inc.
by IHS required the consent of the minority partners or that arrangements should
have been made to have the minority partners' interests also purchased. The case
is in the preliminary stages of discovery, however, as it represents litigation
among the partners, it is not expected to have any impact on the financial
position of the partnership.
2. SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment: Property and equipment are stated at historical cost.
Additions and betterments that extend the life of an asset are capitalized.
Maintenance and repair expenditures are expensed as incurred. Depreciation is
computed on the straight-line method based on the following estimated useful
lives:
Building and improvements ... 20-40 years
Furniture and equipment ..... 5-10 years
Unearned Entrance Fees and Refundable Deposits: The Partnership accounts for
the nonrefundable portion of entrance fees related to the sale of certain
residency and care agreements as "unearned entrance fees" and recognizes income
from these fees over the estimated remaining life expectancy of each resident,
with the life expectancy reevaluated annually. The refundable portion is
accounted for as "refundable deposits" and is not amortized. Residency and care
agreements may be terminated by residents at any time for any reason with 30
days notice. Within 120 days of termination, the minimum
F-24
<PAGE>
LAKEHOUSE EAST
(A Partnership)
Notes to Financial Statements--(Continued)
refund amount per contract of the total entrance fee will be refunded to the
resident or the resident's estate. If the contract is terminated within 24
months of move-in, the refunds may be higher. Payments of such refunds are
charged against the resident's unamortized entrance fee and refundable deposit
and any gain or loss is included in revenue or expense.
Income Taxes: The Partnership is not considered a taxable entity for Federal
and State income tax purposes. Any taxable income or losses, investment credits
and certain other items, therefore, are the responsibility of the partners on
their income tax returns in accordance with the partnership agreement. The
Partnership uses a fiscal year ending December 31, for reporting income tax
items to the partners.
3. ASSETS WHOSE USE IS LIMITED
Assets whose use is limited for entrance fee deposits held in escrow are
restricted by the statutes of the State of Florida.
Assets whose use is limited for minimum liquid reserve funds consists of cash
and cash equivalents that are required to be maintained by continuing care
facilities in accordance with Section 651.035, Florida Statutes. The Partnership
has met its required minimum liquid reserves at October 31, 1993.
4. RELATED PARTY TRANSACTIONS
The following transactions between the Partnership and related organizations
have been reflected in the financial statements:
The Partnership records expenses payable to a partner for management fees as
well as payroll costs, data processing fees and miscellaneous other charges paid
on behalf of the Partnership. Through December 1993, these advances from the
partner were charged interest at 2% above the prime rate (which was 6% at
October 31, 1993). The Partnership recognized $116,665 of interest expense in
the year ended October 31, 1993 related to these advances.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
F.L.C. Lakehouse, Inc.,
Don Blivas, Janice Blivas, Fred Fiala
and John Rowe
d/b/a Lakehouse East:
We have audited the accompanying statements of operations and cash flows of
F.L.C. Lakehouse, Inc., Don Blivas, Janice Blivas, Fred Fiala and John Rowe
d/b/a Lakehouse East (a Partnership) for the month ended November 30, 1993.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Lakehouse
East for the month ended November 30, 1993 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
June 5, 1996
F-26
<PAGE>
LAKEHOUSE EAST (A PARTNERSHIP)
STATEMENT OF OPERATIONS
Month ended
November 30, 1993
-----------------
Revenues:
Monthly service fees........... $ 194,661
Earned entrance fees .......... 109,709
Other.......................... 6,797
---------
Total revenues.................. 311,167
---------
Operating expenses:.
Community operations........... 228,267
Management fees (note 3)....... 17,519
Depreciation .................. 37,068
Interest (note 3) ............. 10,846
---------
Total operating expenses........ 293,700
---------
Net earnings................... $ 17,467
=========
See accompanying notes to financial statements.
F-27
<PAGE>
LAKEHOUSE EAST (A PARTNERSHIP)
STATEMENT OF CASH FLOWS
Month ended
November 30, 1993
-----------------
Cash flows from operating activities:
Net earnings...................................................... $ 17,467
Adjustments to reconcile net earnings to net cash used by
operating activities:
Depreciation..................................................... 37,068
Earned entrance fees............................................. (109,709)
Entrance fees received........................................... 20,875
Decrease in accounts receivable ................................. 140,341
Decrease in prepaid expenses and other assets.................... 2,047
Decrease in accounts payable and accrued expenses................ (109,632)
---------
Net cash used by operating activities.............................. (1,543)
---------
Cash flows from financing activities:
Advances from Partners............................................ 27,088
Advances from affiliate........................................... 73,037
Principal payments on long-term debt.............................. (125,000)
Refunds of deposits and entrance fees............................. (112,725)
---------
Net cash used by financing activities.............................. (137,600)
---------
Cash flows from investing activities:
Purchases of property and equipment............................... (9,965)
Decrease in assets limited as to use.............................. 6,671
---------
Net cash used by investing activities ............................ (3,294)
---------
Decrease in cash................................................... (142,437)
Cash, beginning of period.......................................... 143,187
---------
Cash, end of period................................................ $ 750
=========
See accompanying notes to financial statements.
F-28
<PAGE>
LAKEHOUSE EAST (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
MONTH ENDED NOVEMBER 30, 1993
(1) ORGANIZATION
F.L.C. Lakehouse, Inc., Don Blivas, Janice Blivas, Fred Fiala and John Rowe
d/b/a Lakehouse East (the "Partnership") is a partnership organized and existing
under the laws of the state of Florida. The principal business is the management
and maintenance of a 164-unit life care facility. The financial statements
include only the results of operations which relate to the business of the
Partnership. The ownership interests of the partners at November 30, 1993 are as
follows:
F.L.C. Lakehouse, Inc................... 60.50%
Donald Blivas........................... 16.50%
Janice Blivas .......................... 9.00%
John Rowe............................... 7.50%
Fred Fiala.............................. 6.50%
------
100.00%
======
On December 1, 1993, 100% of the common stock of Central Park Lodges, Inc.,
parent company of F.L.C. Lakehouse, Inc., was purchased by Integrated Health
Services, Inc. ("IHS"). In connection with the December 1, 1993 acquisition of
CPL, IHS originally obtained the controlling interests in two partnerships,
Lakehouse East, which owns and operates a retirement facility including an
assisted care wing, 21 garden apartments and 18 villas, and Lakehouse West,
which owns and operates an adjacent retirement facility consisting of a single
building. The 39.5% minority partners subsequently filed a suit against IHS and
CPL alleging that the CPL acquisition triggered a provision in the partnership
agreements requiring the sale of the minority interests in the partnership.
Settlement of the suit was subsequently reached pursuant to a Partition
Agreement between the parties. Under this agreement, an IHS subsidiary became
the sole owner of Lakehouse East and the former minority partners became the
sole partners of the partnership which is the sole owner of Lakehouse West.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
In some cases, residents of the Lakehouse East facility have entered into
life-care contracts whereby the resident pays an entrance fee as well as a
monthly rental payment. Additionally, residents pay a monthly service fee that
is recognized as revenue in the period in which it is earned. Other revenue
represents charges for additional services.
Under most life-care contracts (membership agreements), entrance fees are
partially refundable to the resident. The minimum refund amount pursuant to the
resident's membership agreement (generally 50% of the total entrance fee) is
payable to the resident or the resident's estate within 120 days of termination
of the agreement, which may occur at any time after 30 days notice. In addition,
a portion of the remainder of the entrance fee is payable if the contract is
terminated within 24 months of move-in, determined on a declining pro rata
basis. The minimum refund amount and the estimated amount of the remainder which
is expected to be refunded based on past experience of the facility are
accounted for as refundable deposit liabilities. The remaining amount of the
entrance fee is accounted for as deferred revenue under the caption "unearned
entrance fees." Such deferred revenue is amortized to operations of future
periods based on the estimated life of the resident, adjusted annually based on
the actuarially determined estimated remaining life expectancy of each resident,
on the straight-line method. Unamortized deferred revenue is recorded as revenue
upon the resident's death or contract termination.
F-29
<PAGE>
LAKEHOUSE EAST (A PARTNERSHIP)
Notes to Financial Statements (Continued)
Property and Equipment
Property and equipment are recorded at historical cost. Depreciation of
property and equipment are computed using the straight-line method over the
estimated useful lives of the assets as follows:
Buildings and improvements ... 20-40 years
Furniture and equipment....... 5-10 years
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
The Partnership is not considered a taxable entity for Federal and state
income tax purposes. Any taxable income or losses, investment credits and
certain other items, therefore, are the responsibility of the partners on their
income tax returns in accordance with the partnership agreement. The Partnership
uses a fiscal year ending December 31 for reporting income tax items to the
partners.
(3) RELATED PARTY TRANSACTIONS
The following transactions between the Partnership and related organizations
have been reflected in the financial statements.
The Partnership records expenses payable to a partner for management fees of
$17,519, as well as payroll costs, data processing fees and miscellaneous other
charges paid on behalf of the Partnership. During November 1993, these advances
from the partner were charged interest at 2% above the prime rate (which was 6%
at November 30, 1993). The Partnership recognized approximately $11,000 of
interest expense for the one month period ended November 30, 1993 related to
these advances.
The Partnership shares a centralized cash account with an affiliated
partnership, Lakehouse West, which results in intercompany balances between
Lakehouse East and Lakehouse West.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Liberty/Carrington Pointe Limited Partnership:
We have audited the accompanying statements of operations and cash flows of
Carrington Pointe (a facility owned by Liberty/Carrington Pointe Limited
Partnership) for each of the years in the three-year period ended December 31,
1995. These financial statements are the responsibility of the facility's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, and cash flows of Carrington
Pointe (a facility owned by Liberty/Carrington Pointe Limited Partnership) for
each of the years in the three-year period ended December 31, 1995 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
June 5, 1996
F-31
<PAGE>
CARRINGTON POINTE
(A FACILITY OWNED BY LIBERTY/CARRINGTON POINTE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
Years ended December 31,
--------------------------------------
1993 1994 1995
---- ---- ----
Revenues:
Monthly service fees........ $3,191,293 $3,368,346 $3,485,989
Other ...................... 89,848 81,551 102,412
---------- ---------- ----------
Total revenues............... 3,281,141 3,449,897 3,588,401
---------- ---------- ----------
Facility operating expenses:
Salaries, wages and benefit 1,012,499 1,062,616 1,074,229
Other operating expenses ... 909,755 942,577 862,676
Management fees (note 2) .... 230,895 240,938 249,470
Depreciation ................ 406,166 416,074 425,153
--------- --------- ---------
Total expenses............... 2,559,315 2,662,205 2,611,528
---------- --------- ---------
Net earnings................. $ 721,826 $ 787,692 $ 976,873
========== ========== ==========
See accompanying notes to financial statements.
F-32
<PAGE>
CARRINGTON POINTE
(A FACILITY OWNED BY LIBERTY/CARRINGTON POINTE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................ $ 721,826 $ 787,692 $ 976,873
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation .............................................. 406,166 416,074 425,153
Decrease (increase) in prepaid expenses and other assets... 2,345 4,810 (3,272)
Increase in accounts receivable ........................... (10,490) (5,033) (84)
Increase (decrease) in accounts payable and other
liabilities .............................................. (15,906) (60,595) 125,535
---------- ---------- ---------
Net cash provided by operating activities.................... 1,103,941 1,142,948 1,524,205
Cash flows from financing activities--decrease in amounts
due to affiliates .......................................... (1,045,931) (1,090,218) (1,508,281)
Cash flows from investing activities--purchases of property,
plant and equipment ........................................ (18,268) (99,040) (4,200)
---------- --------- --------
Increase (decrease) in cash.................................. 39,742 (46,310) 11,724
Cash, beginning of period.................................... 13,577 53,319 7,009
---------- --------- ---------
Cash, end of period.......................................... $ 53,319 $ 7,009 $ 18,733
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
CARRINGTON POINTE
(A FACILITY OWNED BY LIBERTY/CARRINGTON POINTE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
Carrington Pointe (the facility) is a 172-unit assisted-living facility
located in Fresno, California. The facility provides various services to its
residents, including meals, social activities and other personal services.
Liberty/Carrington Pointe Limited Partnership (the "Partnership") is a
partnership organized and existing under the laws of Massachusetts which owns
and operates the Carrington Pointe facility.
The partners' interest in the Partnership are as follows:
Partnership Ownership
Partners Interest Interests
-------- -------- ---------
Liberty Real Estate Properties, Inc. ... General 1%
Atlantic Real Estate L.P................ Limited 99%
---
100%
===
On December 15, 1995, a subsidiary of Integrated Health Services, Inc. (IHS)
acquired the facility from Liberty/Carrington Pointe Limited Partnership. The
purchase price was approximately $11,900,000 adjusted for certain accrued
liabilities, prepayments and deposits assumed by IHS. These financial statements
include no adjustments to establish a new basis of accounting for the facility
related to the change in ownership.
IHS recorded the acquisition of Carrington Pointe as of December 31, 1995. In
connection with a corporate reorganization in 1996, Carrington Pointe is now
owned by a subsidiary of Integrated Living Communities, Inc. which is also
wholly-owned by IHS.
Monthly Service Fees
Resident units are rented on a month to month basis and rent is recognized in
the months the units are occupied. Service fees paid by residents for
assisted-living and other related services are recognized in the period such
services are rendered as other revenue.
F-34
<PAGE>
CARRINGTON POINTE
(A Facility Owned by Liberty/Carrington Pointe Limited Partnership)--(Continued)
Property and Equipment
Depreciation and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives of the assets as
follows:
Buildings and improvements ... 40 years
Land improvements............. 25 years
Furniture and equipment....... 10 years
Vehicles ..................... 5 years
Income Taxes
Neither the partnership nor the facility are considered taxable entities for
Federal and state income tax purposes. Accordingly, no provision for income
taxes is reflected in the financial statements. Any taxable income or losses,
investment credits and certain other items, therefore, are reported by the
partners in their income tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) MANAGEMENT FEES
Integrated Health Services, Inc. (IHS) performed management services for the
facility until the date of acquisition by IHS. Pursuant to the management
agreement, the management fee is 6.5% of gross receipts plus a monthly charge of
$15 per employee.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
C.S. Denton Partners, Ltd.:
We have audited the accompanying balance sheets of Vintage Health Care Center
Retirement Division (the Company) (wholly-owned by C.S. Denton Partners, Ltd., a
Partnership) as of December 31, 1994 and 1995, and the related statements of
operations, changes in division equity and cash flows for the years ended
December 31, 1994 and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vintage Health Care Center
Retirement Division as of December 31, 1994 and 1995, and the results of its
operations and cash flows for the years ended December 31, 1994 and 1995 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
June 5, 1996
F-36
<PAGE>
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
(WHOLLY-OWNED BY C.S. DENTON PARTNERS, LTD., A PARTNERSHIP)
BALANCE SHEETS
December 31,
-------------------------
1994 1995
---- ----
Assets
Current assets:
Cash..................................... $ 132,046 $ 168,738
Accounts receivable...................... 4,661 4,828
---------- ----------
Total current assets...................... 136,707 173,566
Property, plant and equipment, net (note
4)....................................... 4,134,082 4,015,263
---------- ----------
$4,270,789 $4,188,829
========== ==========
Liabilities and Division Equity
Rent collected in advance................. $ 6,959 $ 3,673
Security deposits......................... 132,046 168,738
Note payable (note 5)..................... 4,352,000 4,692,000
---------- ----------
Total current liabilities................. 4,491,005 4,864,411
Division equity........................... (220,216) (675,582)
--------- ---------
$4,270,789 $4,188,829
=========== ==========
See accompanying notes to financial statements.
F-37
<PAGE>
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
(WHOLLY-OWNED BY C.S. DENTON PARTNERS, LTD., A PARTNERSHIP)
STATEMENTS OF OPERATIONS
Years ended December 31,
-----------------------
1994 1995
---- ----
Revenues
Monthly service fees.............. $1,514,305 $1,598,439
Other revenue..................... 43,341 22,946
---------- -----------
Total revenues..................... 1,557,646 1,621,385
---------- -----------
Expenses:
Facility Operations............... 1,202,861 1,208,570
Management fees................... 77,882 81,069
Depreciation...................... 192,082 199,687
Interest.......................... 234,491 428,629
--------- ---------
Total expenses..................... 1,707,316 1,917,955
---------- ---------
Net loss........................... $ (149,670) $ (296,570)
========== ==========
See accompanying notes to financial statements.
F-38
<PAGE>
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
(WHOLLY-OWNED BY C.S. DENTON PARTNERS, LTD., A PARTNERSHIP)
STATEMENTS OF CHANGES IN DIVISION EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1994................................................. $(143,221)
Net earnings.............................................................. (149,670)
Net increase in division equity arising from transactions with Parent
Company.................................................................. 72,675
--------
Balance at December 31, 1994............................................... (220,216)
Net earnings.............................................................. (296,570)
Net decrease in division equity arising from transactions with Parent
Company.................................................................. (158,796)
--------
Balance at December 31, 1995............................................... $(675,582)
=========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
(WHOLLY-OWNED BY C.S. DENTON PARTNERS, LTD., A PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
Years ended December 31,
------------------------
1994 1995
----- -----
Cash flows from operating activities:
Net loss......................................................... $(149,670) $(296,570)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation................................................... 192,082 199,687
Decrease (increase) in accounts receivable and rent collected
in advance.................................................... 1,735 (3,453)
Increase in security deposits.................................. 2,486 36,692
-------- ---------
Net cash provided (used) by operating activities.................. 46,633 (63,644)
-------- ---------
Cash flows from financing activities:
Increase (decrease) in division equity representing net, advances
from (distributions to) Parent Company ......................... 72,675 (158,796)
Increase in note payable......................................... -- 340,000
--------- ---------
Net cash flows from financing activities:........................ 72,675 181,204
--------- ---------
Cash flows from investing activities--property, plant and
equipment additions.............................................. (116,822) (80,868)
--------- ---------
Increase in cash................................................. 2,486 36,692
Cash, beginning of period......................................... 129,560 132,046
--------- ---------
Cash, end of period............................................... $ 132,046 $ 168,738
========= =========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
(WHOLLY-OWNED BY C.S. DENTON PARTNERS, LTD., A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
The Vintage Health Care Center Retirement Division (the Retirement Division)
consists of a 43 unit assisted living and a 62 unit congregate care facility
also. The Retirement Division represents an operating Division of the Vintage
Health Care Center, (the Parent Company) )which includes a skilled nursing
facility. Vintage Health Care Center represents substantially all of the assets
of C.S. Denton Partners, Ltd. (the Partnership). The financial statements of the
Retirement Division include the activity of the assisted living and congregate
care facility only and do not include the activity of the skilled nursing
facility. The Partnership was organized under the laws of the State of Texas and
its principal business is to own and operate the Vintage Health Care Center.
The Vintage Health Care Center is located on a campus containing an
assisted-living and congregate care living facility and a skilled-nursing
facility which share certain operating expenses. Allocations of various
operating expenses have been made by management on a monthly basis in order to
present the separate operating expenses of the Retirement Division and the
skilled-nursing facility.
Revenue Recognition
Rent is recognized in the month the units are occupied and service fees paid
by residents are recognized in the period the services are provided.
Income Taxes
Neither the Partnership nor the Vintage Health Care Center Retirement
Division are considered taxable for Federal and State income tax purposes. Any
taxable income or losses, investment credits and certain other items, therefore,
are the reponsibility of the Partners on their income tax returns in accordance
with the Partnership agreement. The Partnership uses a fiscal year ended
December 31 for reporting income tax items to the partners.
Statements of Cash Flow
Under a cash management facility provided by the Partnership, the Retirement
Division's cash balances are transferred to a centralized account and applied to
reduce division equity. The facility's cash needs for operating and other
purposes are similarly provided through an increase in division equity.
Division Equity
Division equity represents net advances from the Partnership to the
Retirement Division less the cumulative deficit (annual losses in excess of
earnings in prior years) of the Retirement Division. Advances from the
Partnership represent the cash paid by the Partnership on behalf of the
Retirement Division in excess of cash received by the Partnership on behalf of
the Retirement division.
F-41
<PAGE>
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
-
(Wholly-Owned by C.S. Denton Partners, Ltd., a Partnership) (Continued)
Property and Equipment
Depreciation and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives of the assets as
follows:
Building and improvements ... 20-30 years
Equipment.................... 5-10 years
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Disclosures about Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, rent collected in advance,
security deposits and notes payables approximate fair value because of the
short-term maturity of these instruments.
(2) MANAGEMENT FEES
Autumn America Retirement, Ltd., wholly-owned by Robert Chilton, performed
management services for the Retirement Division until the date of acquisition by
Integrated Health Services, Inc. (IHS). Pursuant to the management agreement,
the managment fee is 5% of gross receipts. Management fees paid to Autumn
America Retirement, Ltd. were approximately $77,882 and $81,069 for the years
ended December 31, 1994 and 1995, respectively.
(3) OWNERSHIP
The partners' interests in the Partnership during 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
Ownership Interests
---------------------------------------
Partnership January 1, 1994 April 1, 1995 to
Partners Interest to April 1, 1995 December 31, 1995
-------- --------- ---------------- -----------------
<S> <C> <C> <C>
Pinnacle Properties IX, Inc.
(wholly-owned by Thomas Scott)................. Limited 49.5% 99.0%
Robert Chilton................................... Limited 49.5% --
Denton NH, Inc. (50% owned by Pinnacle
Properties IX, Inc., and 50% owned by Robert
Chilton)....................................... General 1.0% 1.0%
----- -----
100.0% 100.0%
===== =====
</TABLE>
On April 1, 1995, Pinnacle Properties IX, Inc. purchased the 49.5%
partnership interest in C.S. Denton Partners, Ltd. held by Robert Chilton and
the 50.0% interest in Denton NH, Inc., held by Robert Chilton. This transaction
effectively gave Thomas Scott a 100% interest in C.S. Denton Partners, Ltd.
F-42
<PAGE>
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
(Wholly-Owned by C.S. Denton Partners, Ltd., a Partnership)--(Continued)
On January 29, 1996, an IHS subsidiary purchased the Vintage Health Care
Center. On June 1, 1996 the IHS subsidiary contributed a condominium interest in
the assisted living and congregate care portion of the Vintage Health Care
Center to Integrated Living Communities, Inc. (ILC). Between January 29, 1996
and June 1, 1996 ILC will lease the assisted and independent living communities
from IHS at a monthly rental of $35,000.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
December 31,
------------------------
1994 1995
---- ----
Land $ 458,620 $ 458,620
Building and improvements .... 3,652,735 3,674,637
Equipment..................... 525,788 584,754
--------- ----------
4,637,143 4,718,011
Less accumulated depreciation.. 503,061 702,748
--------- ----------
Total........................ $4,134,082 $4,015,263
========== ==========
(5) NOTE PAYABLE
On March 31, 1995, CS Denton Partners Ltd. entered into a $6.9 million
promissory note with Nationsbank, of which approximately $4.7 million is
allocated to the retirement division. Proceeds of the note were used to pay off
a $6.4 million note between Chemical Bank and CS Denton Partner Ltd, of which
approximately $4.4 million was allocated to the retirement division. The March
31, 1995 note bears interest at the prime rate plus one percent (9.5% at
December 31, 1995), payable monthly. Interest paid on the note approximates
interest expense included in the financial statements. The March 31, 1995 note
was paid off in connection with the January, 1996 sale of Vintage Health Care
Center.
F-43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Tenants In Common
Terrace Gardens Tenants In Common:
We have audited the accompanying balance sheets of Terrace Gardens Tenants In
Common (d/b/a Terrace Gardens Healthcare and Retirement Center) (the "Company"),
a facility owned by seven tenants in common (see note 1) as of December 31, 1994
and 1995, and the related statements of operations, owners' deficit and cash
flows for each of the years in the three-year period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Terrace Gardens Tenants In
Common (d/b/a Terrace Gardens Healthcare and Retirement Center) as of December
31, 1994 and 1995, and the results of their operations and cash flows for each
of the years in the three-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
June 5, 1996
F-44
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A TERRACE GARDENS HEALTHCARE AND RETIREMENT CENTER)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1995
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................... $ 205,187 $ 319,481
Accounts receivable, less allowance for doubtful accounts of $19,084
in 1995 ........................................................... 498,417 449,025
Other current assets................................................ 54,282 51,597
---------- ----------
Total current assets................................................. 757,886 820,103
Property, plant and equipment, net (note 2).......................... 8,362,121 8,044,779
Deferred financing costs, net of accumulated amortization of
$116,482 at December 31, 1994 and $131,446 in 1995 ................. 154,549 139,585
------- -------
$9,274,556 $9,004,467
========== ==========
Liabilities and Partners' Equity
Current liabilities:
Accounts payable and accrued expenses (note 6)...................... $ 332,719 $ 342,084
Refundable security deposits........................................ 340,802 342,837
Current portion of long-term debt (notes 3 and 4)................... 309,203 314,086
---------- ----------
Total current liabilities............................................ 982,724 999,007
---------- ----------
Long-term debt:
Mortgage payable, less current portion (note 3)..................... 8,197,556 7,977,558
Note payable, less current portion (note 4)......................... 188,000 116,000
---------- ----------
Total liabilities.................................................... 9,368,280 9,092,565
Owner's deficit...................................................... (93,724) (88,098)
---------- ----------
$9,274,556 $9,004,467
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A TERRACE GARDENS HEALTHCARE AND RETIREMENT CENTER)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1993 1994 1995
----- ---- -----
<S> <C> <C> <C>
Revenues:
Nursing facility:
Basic medical services, net.................... $1,819,752 $1,821,085 $1,828,533
Specialty medical services..................... 158,412 165,379 189,793
---------- ---------- ----------
1,978,164 1,986,464 2,018,326
Assisted living and congregate living facilities:
Monthly service fees........................... 3,672,034 3,780,651 3,813,841
Other.......................................... 67,801 79,937 94,150
---------- ---------- ----------
3,739,835 3,860,588 3,907,991
Other .......................................... 16,317 15,138 16,747
---------- ---------- ----------
Total revenues................................... 5,734,316 5,862,190 5,943,064
---------- ---------- ----------
Facility operating expenses:
Salaries, wages and benefits.................... 2,780,287 2,800,350 2,871,205
Other operating expenses........................ 1,031,840 1,177,705 1,196,466
Administrative ................................. 509,349 503,182 545,941
---------- --------- ---------
4,321,476 4,481,237 4,613,612
Interest......................................... 586,376 626,946 738,870
Depreciation and amortization.................... 361,292 367,223 344,956
---------- ---------- ----------
Total expenses................................... 5,269,144 5,475,406 5,697,438
---------- ---------- ----------
Net earnings..................................... $ 465,172 $ 386,784 $ 245,626
========== ========== ===========
</TABLE>
F-46
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A TERRACE GARDENS HEALTHCARE AND RETIREMENT CENTER)
STATEMENTS OF CHANGES IN OWNERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Owners' deficit at December 31, 1992................................ $(325,680)
Net earnings....................................................... 465,172
Distribution to tenants in common.................................. (270,000)
---------
Owners' deficit at December 31, 1993................................ (130,508)
Net earnings....................................................... 386,784
Distribution to tenants in common.................................. (350,000)
---------
Owners' deficit at December 31, 1994................................ (93,724)
Net earnings....................................................... 245,626
Distribution to tenants in common.................................. (240,000)
---------
Owners' deficit at December 31, 1995................................ $ (88,098)
=========
See accompanying notes to financial statements.
F-47
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A TERRACE GARDENS HEALTHCARE AND RETIREMENT CENTER)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................. $ 465,172 $ 386,784 $ 245,626
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................... 361,292 367,223 344,956
Decrease (increase) in other assets..................... 24,698 (15,940) 2,685
Decrease (increase) in accounts receivable.............. (22,528) (72,538) 49,392
Increase in accounts payable and accrued expenses....... 13,580 11,024 9,365
Increase (decrease) in security deposits ............... (27,477) (22,876) 2,035
--------- -------- ---------
Net cash provided by operating activities................. 814,737 653,677 654,059
--------- -------- ---------
Cash flows from financing activities:
Payments on mortgages payable............................ (229,505) (237,203) (215,115)
Payments on note payable................................. (72,000) (72,000) (72,000)
Distributions to tenants in common....................... (270,000) (350,000) (240,000)
--------- ------- -------
Net cash used by financing activities..................... (571,505) (659,203) (527,115)
--------- -------- --------
Cash flows from investing activities--
purchase of property, plant and equipment ............... (76,912) (150,179) (12,650)
--------- -------- -------
Increase (decrease) in cash............................... 166,320 (155,705) 114,294
Cash, beginning of period................................. 194,572 360,892 205,187
--------- --------- --------
Cash, end of period....................................... $ 360,892 $ 205,187 $ 319,481
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A TERRACE GARDENS HEALTHCARE AND RETIREMENT CENTER)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
Terrace Gardens Tenants In Common (a Kansas tenancy in common), hereinafter
referred to as the Company, owns and operates Terrace Gardens Healthcare and
Retirement Center (the Facility) which consists of a 120-unit congregate living
facility, a 122 bed assisted living facility and a 100 bed nursing facility
located in Wichita, Kansas. The Facility provides various services to its
residents, including intermediate nursing care, meals, social activities and
other personal services.
The Facility is owned by seven tenants in common. Ownership interests in the
facility are as follows:
Ownership
Tenants in Common Interest
----------------- --------
Herb Krumsick........................ 33%
Nestor Weigand, Jr................... 17%
Ross Tidemann, Managing co-owner .... 19%
Chester West, Administrator.......... 10%
Dr. Jon Kardatzke, Medical Doctor ... 5%
Terrace Gardens L.P.................. 6%
Louis Weiss.......................... 10%
---
100%
===
In February, 1996, Integrated Living Communities, Inc. (ILC) entered into an
agreement to acquire the facility from the tenants in common above. The purchase
price is approximately $12.20 million adjusted for certain accrued liabilities,
prepayments and deposits to be assumed by ILC. The purchase is scheduled to
close simultaneous with the initial public offering of common stock of ILC.
Basis of Accounting
The accompanying financial statements have been prepared on the accrual basis
of accounting.
Revenue Recognition
Nursing facility revenues include revenues from two nursing units at the
Facility. Basic medical services revenues represent routine service (room and
board) charges of the nursing units. Specialty medical services revenues
represent ancillary service charges of the nursing units.
Assisted living revenues include revenues from a congregate living apartment
building as well as revenues from three assisted living units. Service fees
represent monthly rental charges to residents of the apartment units and daily
room and board charges in the assisted living units.
Revenues are recorded at established rates and adjusted for differences
between such rates and estimated amounts reimbursable by third party payors when
applicable. Revenues are recognized in the period the units are occupied and
service fees paid by residents are recognized in the period that such services
are provided.
F-49
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A Terrace Gardens Healthcare and Retirement Center) (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Disclosures about Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, other current assets,
other assets, accounts payable, and accrued expenses approximate fair value
because of the short-term maturity of these instruments. The carrying amount of
the mortgage payable approximates its fair value because the interest rate is
adjusted quarterly.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
estimated useful lives of the assets as follows:
Buildings............ 40 years
Land improvements ... 25 years
Equipment............ 10 years
Income Taxes
The Facility is not considered taxable for Federal and state income tax
purposes and, accordingly, the Company does not record a provision for income
taxes. Any taxable income or loss, investment tax credits and certain other
items are the responsibility of the tenants in common on their tax returns in
accordance with their ownership interests.
Deferred Financing Costs
Long-term debt financing costs are deferred and amortized over the term of
the financing using the straight-line method.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1994 1995
---- ----
Land and improvements......... $ 458,558 $ 458,558
Building and improvements..... 9,856,692 9,856,692
Furniture and equipment ...... 1,097,723 1,110,373
----------- -----------
11,412,973 11,425,623
Less accumulated depreciation. 3,050,852 3,380,844
----------- ----------
Total........................ $ 8,362,121 $ 8,044,779
=========== ===========
F-50
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A Terrace Gardens Healthcare and Retirement Center)--(Continued)
(3) MORTGAGES PAYABLE
As tenants in common, Herb Krumsick, Ross Tidemann, Chester West, Jon
Kardatzke and Weigand Properties, Inc., borrowed $4,800,000 from Eureka Federal
Savings and Loan Association (Eureka) with a promissory note dated July 21,
1987. The interest rate on the Eureka note is adjusted quarterly to equal the
90-day U.S. Treasury bill rate plus 3%, rounded up to the nearest 1/8 %. The
borrowers are to make monthly payments of principal and interest, adjusted
quarterly, based upon a 25 year fully amortizing schedule of equal monthly
payments. All remaining principal and unpaid interest is due on August 1, 2007.
The promissory note is secured by a mortgage and security interest in the
premises. Any default in the terms and provisions of the Eureka promissory note
shall be construed as an event of default under the Mid-Kansas note described
below.
Also as tenants in common, Herb Krumsick, Ross Tidemann, Chester West, Jon
Kardatzke and Weigand Properties, Inc., borrowed $4,800,000 from Mid-Kansas
Federal Savings and Loan Association of Wichita (Mid-Kansas) with a promissory
note dated July 21, 1987. The interest rate on the Mid-Kansas note is adjusted
quarterly to equal the 90-day U.S. Treasury bill rate plus 3 1/8 %, rounded up
to the nearest 1/8 %. Monthly payments of principal and interest, adjusted
quarterly, are based upon a 25 year fully amortizing schedule of equal monthly
payments. All remaining principal and unpaid interest shall be due on August 1,
2007. The promissory note is secured by a mortgage on and security interest in
the premises. Any default of the borrowers in the terms and provisions of the
Mid-Kansas note shall be construed as an event of default under the Eureka
mortgage note described above.
At December 31, 1995, the annual maturities of the mortgages for the five
years ending December 31, 2000 and thereafter are as follows:
1996........ $ 242,086
1997........ 262,828
1998........ 285,347
1999........ 309,797
2000........ 336,341
Thereafter . 6,783,245
----------
$8,219,644
==========
(4) NOTE PAYABLE
As tenants in common, Ross Tidemann, Herb Krumsick, Chester West, Jon
Kardatzke and Weigand Properties, Inc. entered into a note with E. Stanley
Kardatzke, Jon Kardatzke, E. E. Kardatzke, and Vera L. Kardatzke on December 31,
1986 in the original amount of $2,480,000. This note was subsequently assigned
to Jon Kardatzke as the only payee. This note is secured by a second mortgage
and security agreement covering the property located in Wichita, Kansas. A
default under the promissory notes mentioned in note 3 shall constitute a
default under this note. The note as amended bears interest at a rate of 9.75%.
The principal balance of the note is payable in monthly principal payments of
$6,000 plus accrued interest. Annual maturities are as follows:
1996......... $ 72,000
1997......... 72,000
1998......... 44,000
--------
$188,000
========
Interest paid on the mortgages and note approximated the amount of interest
expense during the three-year period ended December 31, 1995.
F-51
<PAGE>
TERRACE GARDENS TENANTS IN COMMON
(D/B/A Terrace Gardens Healthcare and Retirement Center)-- (Continued)
(5) CONCENTRATIONS OF CREDIT RISK
Receivables from patients and third-party payors at December 31, 1994 and
1995 by payor class are as follows:
1994 1995
---- ----
Medicaid............... 15% 19%
Private and other...... 85% 81%
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1994 and December 31,
1995 are summarized as follows:
1994 1995
---- ----
Accounts payable.............. $170,320 $174,713
Accrued salaries and wages.... 105,556 114,963
Other accrued expenses........ 56,843 52,408
-------- --------
$332,719 $342,084
======== ========
(7) RELATED PARTY TRANSACTIONS
The Facility has recorded a receivable at December 31, 1995 from Chester
West, administrator and a tenant in common, in the amount of $14,000, which is
included in other current assets. In addition, the Facility has recorded
compensation to Mr. West of $106,000 in 1993, $119,943 in 1994 and $116,800 in
1995. Ross Tidemann, the managing co-owner, has been paid management fees of
$24,000 in 1993, $24,000 in 1994 and $24,000 in 1995. Jon Kardatzke, Medical
Director and a Tenant In Common, has been paid compensation of $21,600 in 1993,
$21,600 in 1994 and $21,600 in 1995.
F-52
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations 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 any Underwriter.
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 date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
--------------------
TABLE OF CONTENTS
PAGE
------
Prospectus Summary................................ 3
Risk Factors...................................... 6
Company History................................... 17
Use of Proceeds................................... 18
Dividend Policy................................... 18
Capitalization.................................... 19
Dilution.......................................... 20
Pro Forma Financial Information................... 21
Selected Consolidated Financial Data.............. 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 26
Business.......................................... 33
Management........................................ 48
Certain Transactions.............................. 55
Principal and Selling Stockholders................ 57
Description of Capital Stock...................... 58
Shares Eligible for Future Sale................... 61
Underwriting...................................... 63
Legal Matters..................................... 64
Experts........................................... 64
Additional Information............................ 64
Index to Financial Statements..................... F-1
-------------------
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
5,130,600 SHARES
[Logo]
INTEGRATED LIVING COMMUNITIES, INC.
COMMON STOCK
----------------
PROSPECTUS
, 1996
----------------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
Donaldson, Lufkin & Jenrette
Securities Corporation
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the Company's estimates (other than the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee) of the expenses in connection with the issuance and distribution of the
shares of Common Stock being registered, other than underwriting discounts and
commissions and the Representatives non-accountable expense allowance:
SEC registration fee.............. $ 46,610.69
NASD filing fee .................. 14,017.10
Nasdaq National Market listing fee 43,124.13
Printing and engraving expenses .. 150,000.00*
Legal fees and expenses........... 250,000.00*
Accounting fees and expenses ..... 750,000.00*
Blue sky fees and expenses........ 30,000.00*
Transfer agent and registrar fees. 10,000.00*
Miscellaneous expenses ........... 56,248.08*
----------------
Total:....................... $1,350,000.00*
================
*Estimated
The Selling Stockholder will not pay any of the foregoing expenses, all of
which the Company has agreed to pay.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the General Corporation Law of the State of Delaware
("GCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of an action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith, that
indemnification provided for by Section 145 of the GCL shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the
II-1
<PAGE>
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him or incurred by him in any
such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
such Section 145.
The Company's Restated Certificate of Incorporation provides that the Company
shall indemnify certain persons, including officers, directors, employees and
agents, to the fullest extent permitted by Section 145 of the GCL of the State
of Delaware. Reference is made to the Restated Certificate of Incorporation
filed as Exhibit 3.1. The Company's directors and officers are insured against
losses arising from any claim against them as such for wrongful acts or
omission, subject to certain limitations.
Under Section 9 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify officers, directors and
controlling persons of the Company against certain liabilities, including
liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In January 1996 the Company issued 100 shares of Common Stock to Integrated
Health Services, Inc. ("IHS") in consideration of IHS' contribution to it of
certain assets. In June 1996 the Company issued to IHS 4,960,900 shares of
Common Stock as a dividend to effect a 49,610-for-1 stock split of the Common
Stock on June 10, 1996. The foregoing transaction was exempt from registration
under the Securities Act pursuant to Section 4(2) thereunder. In August 1996,
IHS surrendered 1,063,100 shares of Common Stock to the Company. At June 30,
1996, IHS had paid total consideration of $42,398,000, representing the net book
value of the facilities contributed as capital to the Company by IHS less the
cash distributions received by IHS from the Company.
<TABLE>
<CAPTION>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
No Description
- ----- -----------
<S> <C>
1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement, dated as of , 1996, by and among Terrace Gardens,
L.P., Herbert L. Krumsick, Jon Kardatzke, Louis Weiss, Chester West, Ross G. Tidemann,
Nestor R. Weigand, Jr., and Integrated Living Communities at Terrace Gardens, Inc.+
2.2 Asset Purchase Agreement, dated as of June 1, 1996, between Cabot Pointe I, Inc. and Integrated
Living Communities at Cabot Pointe, Inc. and Certain Shareholders of Cabot Pointe I, Inc.+
3.1 Restated Certificate of Incorporation, as amended.+
3.2 Bylaws.
4.1 Specimen Common Stock Certificate (Description).+
5. Opinion of Fulbright & Jaworski L.L.P.+
10.1 Declaration of Condominium of West Palm Beach, a Condominium, dated as of June 3, 1996,
by Central Park Lodges of West Palm Beach and Integrated Living Communities of West
Palm Beach, Inc.+
10.2 Services Agreement, dated as of June 1, 1996, between Integrated Living Communities of
West Palm Beach, Inc. and Central Park Lodges of West Palm Beach, Inc.+
10.3 Amendment to Services Agreement, dated as of June 1, 1996, between Integrated Living
Communities of West Palm Beach, Inc. and Central Park Lodges of West Palm Beach, Inc.+
10.4 Declaration of Condominium of Treemont, a Condominium, dated as of June 1, 1996, by
Cambridge Group of Texas, Inc. and Integrated Living Communities of Dallas, Inc.+
10.5 Services Agreement, dated as of June 1, 1996, between Integrated Living Communities of
Dallas, Inc. and Cambridge Group of Texas, Inc.+
II-2
<PAGE>
10.6 Amendment to Services Agreement, dated as of June 1, 1996, between Integrated Living
Communities of Dallas, Inc. and Cambridge Group of Texas, Inc.+
10.7 Declaration of Condominium of Vintage, a Condominium, dated as of June 1, 1996, by Integrated
Health Services at Great Bend, Inc. and Integrated Living Communities of Denton (Texas), Inc.+
10.8 Services Agreement, dated as of June 1, 1996, between Integrated Living Communities of Denton
(Texas), Inc. and Integrated Health Services at Great Bend, Inc.+
10.9 Amendment to Services Agreement, dated as of June 1, 1996, between Integrated Living Communities
of Denton (Texas), Inc. and Integrated Health Services at Great Bend, Inc.+
10.10 Administrative Services Agreement, effective June 1, 1996, by and between Integrated Living
Communities, Inc. and Integrated Health Services, Inc.+
10.11 Lease Agreement, dated as of June 18, 1996, between The Hartmoor Homestead, L.C., as Landlord,
and Integrated Living Communities at Wichita, Inc., as Tenant.+
10.12 Purchase Option Agreement, dated as of June 18, 1996, by and between The Hartmoor Homestead, L.C., as
Owner, and Integrated Living Communities at Wichita, Inc., as Optionee.+
10.13 Right of First Refusal Agreement, dated as of June 18, 1996, by and between The Hartmoor Homestead,
L.C. and Integrated Living Communities at Wichita, Inc.+
10.14 Lease Agreement, dated as of June 18, 1996, between The Homestead of Garden City, L.C., as Landlord,
and Integrated Living Communities at Garden City, Inc., as Tenant.+
10.15 Purchase Option Agreement, dated as of June 18, 1996, by and between The Homestead of Garden City,
L.C., as Owner, and Integrated Living Communities at Garden City, Inc., as Optionee.+
10.16 Right of First Refusal Agreement, dated as of June 18, 1996, by and between The Homestead of Garden
City, L.C. and Integrated Living Communities at Garden City, Inc.+
10.17 Sublease, dated as of June 1, 1996, between Integrated Living Communities of Bradenton, Inc. and
Integrated Health Services of Lester, Inc. (relating to "The Shores").+
10.18 Guaranty, dated as of June 1, 1996, by Integrated Living Communities, Inc. for the benefit of
Integrated Health Services of Lester, Inc. and Litchfield Asset Management Corp.+
10.19 Sublease, dated as of June 1, 1996, between Integrated Living Communities of Bradenton, Inc. and
Integrated Health Services of Lester, Inc. (relating to "Cheyenne").+
10.20 Registration Rights Agreement, dated as of June 1, 1996, between Integrated Living Communities, Inc.
and Integrated Health Services, Inc.+
10.21 Purchase and Sale Agreement, dated as of October 4, 1995, between Liberty Carrington Pointe Limited
Partnership, as Seller, and Integrated Management-Carrington Pointe, Inc., as Buyer.+
10.22 First Amendment to Purchase and Sale Agreement, dated as of December 15, 1995, between
Liberty/Carrington Pointe Limited Partnership, as Seller, and Integrated Management-Carrington
Pointe, Inc., as Buyer.+
10.23 Employment Agreement, dated as of May 1, 1996, between the Company and Edward J. Komp.+
10.24 Employment Agreement, dated as of May 1, 1996, between the Company and Kayda Johnson.+
10.25 Employment Agreement, dated as of May 1, 1996, between the Company and John Poole.+
10.26 Employment Agreement, dated as of May 1, 1996, between the Company and Kyle Shatterly.+
10.27 Form of Indemnification Agreement for officers and directors.+
10.28 Stock Incentive Plan.+
10.29 Form of Option Agreement under Stock Incentive Plan.+
10.30 Non-Employee Director Stock Option Plan.+
10.31 Form of Option Agreement under Non-Employee Director Stock Option Plan.+
10.32 Form of Non-Plan Director Option.+
10.33 Integrated Living Communities, Inc. Supplemental Deferred Compensation Plan.
10.34 Revolving Credit Demand Note, dated February 29, 1996, in the principal amount of $750,000,
between Lori Zito d/b/a Elderly Development Company, as Borrower, and Integrated Health
Services Retirement Management, Inc., as Lender, as amended by Allonge and Amendment of
Revolving Credit Demand Note dated as of July 9, 1996.+
II-3
<PAGE>
10.35 Revolving Credit and Security Agreement, dated as of February 29, 1996, between Lori Zito d/b/a
Elderly Development Company, as Borrower, and Integrated Health Services Retirement Management,
Inc., as Lender, as amended by Amendment No. 1 to Revolving Credit and Security Agreement dated as of
July 9, 1996.+
10.36 Development Services Agreement, dated as of June 3, 1996, by and among Integrated Living Communities,
Inc., Integrated Health Services, Inc. and Aguirre, Inc.+
10.37 Letter of Intent Agreement, dated August 23, 1996, among Integrated Living Communities, Inc. and
Capstone Capital Corporation.
10.38 Loan Commitment letter, dated June 11, 1996, from Health Care Property Investors, Inc. to the
Company.+
10.39 Asset Purchase Agreement, dated as of January , 1996, among C.S. Denton Partners, Ltd., Thomas Scott
and Integrated Health Services at Great Bend, Inc.+
10.40 Letter Agreement Re: Options to Receive Assignments of Various Land Contracts dated March 27, 1996
between Integrated Living Communities, Inc. and The Homestead Company, L.C.+
10.41 Letter Agreement Re: Options to Receive Assignments of Various Land Contracts dated March 21, 1996
between Integrated Living Communities, Inc. and Lori Zito d/b/a Elderly Development Company.+
10.42 Revolving Credit Note, dated June 30, 1996, in the principal amount of $75,000,000, between
Integrated Living Communities, Inc., as Maker, and Integrated Health Services, Inc., as Lender.+
10.43 Letter of Intent Agreement, dated as of March 18, 1996, among Integrated Living Communities, Inc. and
The Homestead Company, L.C.+
10.44 Revolving Credit Note, dated March 18, 1996, in the principal amount of $800,000, between The
Homestead Company, L.C., as Borrower, and Integrated Health Services Retirement Management,
Inc., as Lender, as amended by Allonge and Amendment of Revolving Credit Note dated as of July 12, 1996.+
10.45 Revolving Credit and Security Agreement, dated as of March 18, 1996, between The Homestead
Company, L.C., as Borrower, and Integrated Health Services Retirement Management, Inc., as
Lender, as amended by Amendment No. 1 to Revolving Credit and Security Agreement dated as of July 12, 1996.+
10.46 Indemnification Agreement dated August 15, 1996 by and between Integrated Health Services, Inc. and
Integrated Living Communities, Inc.+
10.47 Ancillary Services Agreement dated as of June 3, 1996 by and among Integrated Living Communities,
Inc., Integrated Health Services, Inc. and Aguirre, Inc.+
10.48 Partition Agreement, dated as of October 31, 1996, by and among Donald Ross, Fred Fiala, John E.
Rowe, Integrated Health Services, Inc., Central Park Lodges, Inc., Florida Life Care, Inc., and FLC
Lakehouse Inc. and Janice Blivas.
10.49 Letter Agreement, dated August 23, 1996, between Health Care Property Investors, Inc. and
Integrated Living Communities, Inc., amending certain provisions of that certain Loan Commitment
letter, dated June 11, 1996, from Health Care Property Investors, Inc. to the Company.
21. Subsidiaries of the Registrant.+
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5).+
24.1 Power of Attorney (included on signature page).+
24.2 Certified Resolution.+
27. Financial Data Schedule+
</TABLE>
+ Previously filed.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
ITEM 17. UNDERTAKINGS.
A. The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Owings Mills and State of Maryland on the 20th day of September, 1996.
By: /s/ Edward J. Komp
-------------------------------------
Edward J. Komp
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- --------------------------------------- ----------------------
<S> <C> <C>
/s/ Edward J. Komp President, Chief Executive September 20, 1996
- ------------------------------- Officer and Director
Edward J. Komp principal executive officer)
/s/ John B. Poole* Senior Vice President-- September 20, 1996
- ------------------------------- Chief Financial Officer
John B. Poole (principal financial and
accounting officer)
/s/ Robert N. Elkins* Chairman of the Board of Directors September 20, 1996
- -------------------------------
Robert N. Elkins, M.D.
Director
- -------------------------------
Luis Bared
/s/ Lawrence P. Cirka* Director September 20, 1996
- --------------------------------
Lawrence P. Cirka
/s/ Charles A. Laverty* Director September 20, 1996
- --------------------------------
Charles A. Laverty
/s/ Lisa Merritt* Director September 20, 1996
- --------------------------------
Lisa Merritt
*By: /s/ Edward J. Komp
---------------------------
Edward J. Komp
(as ttorney-in-fact for
each of the ersons indicated)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
----- ----------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1. Form of Underwriting Agreement.
2.1 Asset Purchase Agreement, dated as of , 1996, by and among Terrace Gardens,
L.P., Herbert L. Krumsick, Jon Kardatzke, Louis Weiss, Chester West, Ross G. Tidemann,
Nestor R. Weigand, Jr., and Integrated Living Communities at Terrace Gardens, Inc.+
2.2 Asset Purchase Agreement, dated as of June 1, 1996, between Cabot Pointe I, Inc. and Integrated
Living Communities at Cabot Pointe, Inc. and Certain Shareholders of Cabot Pointe I, Inc.+
3.1 Restated Certificate of Incorporation, as amended.+
3.2 Bylaws.
4.1 Specimen Common Stock Certificate (Description).+
5. Opinion of Fulbright & Jaworski L.L.P.+
10.1 Declaration of Condominium of West Palm Beach, a Condominium, dated as of June 3, 1996,
by Central Park Lodges of West Palm Beach and Integrated Living Communities of West
Palm Beach, Inc.+
10.2 Services Agreement, dated as of June 1, 1996, between Integrated Living Communities of
West Palm Beach, Inc. and Central Park Lodges of West Palm Beach, Inc.+
10.3 Amendment to Services Agreement, dated as of June 1, 1996, between Integrated Living
Communities of West Palm Beach, Inc. and Central Park Lodges of West Palm Beach, Inc.+
10.4 Declaration of Condominium of Treemont, a Condominium, dated as of June 1, 1996, by
Cambridge Group of Texas, Inc. and Integrated Living Communities of Dallas, Inc.+
10.5 Services Agreement, dated as of June 1, 1996, between Integrated Living Communities of
Dallas, Inc. and Cambridge Group of Texas, Inc.+
10.6 Amendment to Services Agreement, dated as of June 1, 1996, between Integrated Living
Communities of Dallas, Inc. and Cambridge Group of Texas, Inc.+
10.7 Declaration of Condominium of Vintage, a Condominium, dated as of June 1, 1996, by Integrated
Health Services at Great Bend, Inc. and Integrated Living Communities of Denton (Texas), Inc.+
10.8 Services Agreement, dated as of June 1, 1996, between Integrated Living Communities of Denton
(Texas), Inc. and Integrated Health Services at Great Bend, Inc.+
10.9 Amendment to Services Agreement, dated as of June 1, 1996, between Integrated Living Communities
of Denton (Texas), Inc. and Integrated Health Services at Great Bend, Inc.+
10.10 Administrative Services Agreement, effective June 1, 1996, by and between Integrated Living
Communities, Inc. and Integrated Health Services, Inc.+
10.11 Lease Agreement, dated as of June 18, 1996, between The Hartmoor Homestead, L.C., as Landlord,
and Integrated Living Communities at Wichita, Inc., as Tenant.+
10.12 Purchase Option Agreement, dated as of June 18, 1996, by and between The Hartmoor Homestead, L.C., as
Owner, and Integrated Living Communities at Wichita, Inc., as Optionee.+
10.13 Right of First Refusal Agreement, dated as of June 18, 1996, by and between The Hartmoor Homestead,
L.C. and Integrated Living Communities at Wichita, Inc.+
10.14 Lease Agreement, dated as of June 18, 1996, between The Homestead of Garden City, L.C., as Landlord,
and Integrated Living Communities at Garden City, Inc., as Tenant.+
<PAGE>
Exhibit
No. Description Page
----- ----------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
10.15 Purchase Option Agreement, dated as of June 18, 1996, by and between The Homestead of Garden City,
L.C., as Owner, and Integrated Living Communities at Garden City, Inc., as Optionee.+
10.16 Right of First Refusal Agreement, dated as of June 18, 1996, by and between The Homestead of Garden
City, L.C. and Integrated Living Communities at Garden City, Inc.+
10.17 Sublease, dated as of June 1, 1996, between Integrated Living Communities of Bradenton, Inc. and
Integrated Health Services of Lester, Inc. (relating to "The Shores").+
10.18 Guaranty, dated as of June 1, 1996, by Integrated Living Communities, Inc. for the benefit of
Integrated Health Services of Lester, Inc. and Litchfield Asset Management Corp.+
10.19 Sublease, dated as of June 1, 1996, between Integrated Living Communities of Bradenton, Inc. and
Integrated Health Services of Lester, Inc. (relating to "Cheyenne").+
10.20 Registration Rights Agreement, dated as of June 1, 1996, between Integrated Living Communities, Inc.
and Integrated Health Services, Inc.+
10.21 Purchase and Sale Agreement, dated as of October 4, 1995, between Liberty Carrington Pointe Limited
Partnership, as Seller, and Integrated Management-Carrington Pointe, Inc., as Buyer.+
10.22 First Amendment to Purchase and Sale Agreement, dated as of December 15, 1995, between
Liberty/Carrington Pointe Limited Partnership, as Seller, and Integrated Management-Carrington
Pointe, Inc., as Buyer.+
10.23 Employment Agreement, dated as of May 1, 1996, between the Company and Edward J. Komp.+
10.24 Employment Agreement, dated as of May 1, 1996, between the Company and Kayda Johnson.+
10.25 Employment Agreement, dated as of May 1, 1996, between the Company and John Poole.+
10.26 Employment Agreement, dated as of May 1, 1996, between the Company and Kyle Shatterly.+
10.27 Form of Indemnification Agreement for officers and directors.+
10.28 Stock Incentive Plan.+
10.29 Form of Option Agreement under Stock Incentive Plan.+
10.30 Non-Employee Director Stock Option Plan.+
10.31 Form of Option Agreement under Non-Employee Director Stock Option Plan.+
10.32 Form of Non-Plan Director Option.+
10.33 Integrated Living Communities, Inc. Supplemental Deferred Compensation Plan.
10.34 Revolving Credit Demand Note, dated February 29, 1996, in the principal amount of $750,000,
between Lori Zito d/b/a Elderly Development Company, as Borrower, and Integrated Health
Services Retirement Management, Inc., as Lender, as amended by Allonge and Amendment of
Revolving Credit Demand Note dated as of July 9, 1996.+
10.35 Revolving Credit and Security Agreement, dated as of February 29, 1996, between Lori Zito d/b/a
Elderly Development Company, as Borrower, and Integrated Health Services Retirement Management,
Inc., as Lender, as amended by Amendment No. 1 to Revolving Credit and Security Agreement dated as of
July 9, 1996.+
10.36 Development Services Agreement, dated as of June 3, 1996, by and among Integrated Living Communities,
Inc., Integrated Health Services, Inc. and Aguirre, Inc.+
<PAGE>
Exhibit
No. Description Page
----- ----------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
10.37 Letter of Intent Agreement, dated August 23, 1996, among Integrated Living Communities, Inc. and
Capstone Capital Corporation.
10.38 Loan Commitment letter, dated June 11, 1996, from Health Care Property Investors, Inc. to the
Company.+
10.39 Asset Purchase Agreement, dated as of January , 1996, among C.S. Denton Partners, Ltd., Thomas Scott
and Integrated Health Services at Great Bend, Inc.+
10.40 Letter Agreement Re: Options to Receive Assignments of Various Land Contracts dated March 27, 1996
between Integrated Living Communities, Inc. and The Homestead Company, L.C.+
10.41 Letter Agreement Re: Options to Receive Assignments of Various Land Contracts dated March 21, 1996
between Integrated Living Communities, Inc. and Lori Zito d/b/a Elderly Development Company.+
10.42 Revolving Credit Note, dated June 30, 1996, in the principal amount of $75,000,000, between
Integrated Living Communities, Inc., as Maker, and Integrated Health Services, Inc., as Lender.+
10.43 Letter of Intent Agreement, dated as of March 18, 1996, among Integrated Living Communities, Inc. and
The Homestead Company, L.C.+
10.44 Revolving Credit Note, dated March 18, 1996, in the principal amount of $800,000, between The
Homestead Company, L.C., as Borrower, and Integrated Health Services Retirement Management,
Inc., as Lender, as amended by Allonge and Amendment of Revolving Credit Note dated as of July 12, 1996.+
10.45 Revolving Credit and Security Agreement, dated as of March 18, 1996, between The Homestead
Company, L.C., as Borrower, and Integrated Health Services Retirement Management, Inc., as
Lender, as amended by Amendment No. 1 to Revolving Credit and Security Agreement dated as of July 12, 1996.+
10.46 Indemnification Agreement dated August 15, 1996 by and between Integrated Health Services, Inc. and
Integrated Living Communities, Inc.+
10.47 Ancillary Services Agreement dated as of June 3, 1996 by and among Integrated Living Communities,
Inc., Integrated Health Services, Inc. and Aguirre, Inc.+
10.48 Partition Agreement, dated as of October 31, 1996, by and among Donald Ross, Fred Fiala, John E.
Rowe, Integrated Health Services, Inc., Central Park Lodges, Inc., Florida Life Care, Inc., and FLC
Lakehouse Inc. and Janice Blivas.
10.49 Letter Agreement, dated August 23, 1996, between Health Care Property Investors, Inc. and
Integrated Living Communities, Inc., amending certain provisions of that certain Loan Commitment
letter, dated June 11, 1996, from Health Care Property Investors, Inc. to the Company.
21. Subsidiaries of the Registrant.+
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5).+
24.1 Power of Attorney (included on signature page).+
24.2 Certified Resolution.+
27. Financial Data Schedule+
</TABLE>
+ Previously filed.
Draft of September 16, 1996
5,130,600 SHARES
INTEGRATED LIVING COMMUNITIES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
, 1996
SMITH BARNEY INC.
ALEX. BROWN & SONS INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Integrated Living Communities, Inc., a Delaware corporation
(the "Company"), proposes to issue and sell an aggregate of 2,435,700 shares of
its common stock, $.01 par value per share (the "Common Stock"), to the several
Underwriters named in Schedule I hereto (the "Underwriters"), and Integrated
Health Services, Inc. (the "Selling Stockholder") proposes to sell to the
several Underwriters 2,694,900 shares of Common Stock. The 2,435,700 shares of
Common Stock to be issued and sold to the Underwriters by the Company and the
2,694,900 shares of Common Stock to be sold to the Underwriters by the Selling
Stockholder are hereinafter referred to as the "Firm Shares." In addition,
solely for the purpose of covering over-allotments, the Company proposes to sell
to the Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an additional 769,590 shares of Common Stock (the "Additional
Shares"). The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares." The Company and the Selling Stockholder are
hereinafter sometimes referred to as the "Sellers."
The Sellers wish to confirm as follows their agreement with
you (the "Representatives") and the other several Underwriters on whose behalf
you are acting, in connection with the several purchases of the Shares by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1 under the Act
(the "registration
<PAGE>
statement"), including a prospectus subject to completion, relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said
post-effective amendment. If an abbreviated registration statement is prepared
and filed with the Commission in accordance with Rule 462(b) under the Act (an
"Abbreviated Registration Statement"), the term "Registration Statement" as used
in this Agreement includes the Abbreviated Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. Subject to such adjustments
as you may determine in order to avoid fractional shares, the Company hereby
agrees, subject to all the terms and conditions set forth herein, to issue and
sell to each Underwriter and, upon the basis of the representations, warranties
and agreements of the Sellers herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $ _______ per share (the
"Purchase Price Per Share"), that number of Firm Shares which bears the same
proportion to the aggregate number of Firm Shares to be issued and sold by the
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number of Firm Shares increased as set
forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be
sold by the Sellers.
Subject to such adjustments as you may determine in order to
avoid fractional shares, the Selling Stockholder agrees, subject to all the
terms and conditions set forth herein, to sell to each Underwriter and, upon the
basis of the representations, warranties and agreements of the Sellers herein
contained and subject to all the terms and conditions set forth herein, each
Underwriter agrees to purchase from the Selling Stockholder at the Purchase
Price Per Share that number of Firm Shares which bears the same proportion to
the number of Firm Shares to be sold by the Selling Stockholder as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto
(or such number of Firm Shares increased as set forth in Section 12 hereof)
bears to the aggregate number of Firm Shares to be sold by the Sellers.
The Company also agrees, subject to all the terms and
conditions set forth herein, to sell to the Underwriters, and, upon the basis of
the representations, warranties and agreements of the Sellers herein contained
and subject to all the terms and conditions set forth herein, the Underwriters
shall have the right to purchase from the Company, at the purchase price per
share, pursuant to an option (the "over-allotment option") which may be
exercised at any time and from time to time prior to 9:00 P.M., New York City
time, on the 30th day after the date of the Prospectus (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day thereafter
when the New York Stock Exchange
2
<PAGE>
is open for trading), up to an aggregate of 769,590 Additional Shares. Upon any
exercise of the over-allotment option, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments as you may determine in order to avoid fractional
shares) which bears the same proportion to the number of Additional Shares to be
purchased by the Underwriters as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares.
3. TERMS OF PUBLIC OFFERING. The Sellers have been advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00
A.M., New York City time, on ___________ , 1996 (the "Closing Date"). The place
of closing for the Firm Shares and the Closing Date may be varied by agreement
between you and the Sellers.
Delivery to the Underwriters of and payment for any Additional
Shares to be purchased by the Underwriters shall be made at the aforementioned
office of Smith Barney Inc. at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
Company of the Underwriters' determination to purchase a number, specified in
such notice, of Additional Shares. The place of closing for any Additional
Shares and the Option Closing Date for such Shares may be varied by agreement
between you and the Company.
Certificates for the Firm Shares and for any Additional Shares
to be purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice, it being understood that a
facsimile transmission shall be deemed written notice, prior to 9:30 A.M., New
York City time, on the second business day preceding the Closing Date or any
Option Closing Date, as the case may be. Such certificates shall be made
available to you in New York City for inspection and packaging not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date or the Option Closing Date, as the case may be. The certificates evidencing
the Firm Shares and any Additional Shares to be purchased hereunder shall be
delivered to you on the Closing Date or the Option Closing Date, as the case may
be, against payment of the purchase price therefor in immediately available
funds.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the registration statement or a post-effective
amendment thereto or any Abbreviated Registration Statement to be declared, or,
in the case of an Abbreviated Registration Statement, to become effective before
the offering of the Shares may commence, the Company will endeavor to cause the
Registration Statement or such post-effective amendment or Abbreviated
Registration Statement to become effective as soon as possible and will advise
you promptly and, if requested by you, will confirm such advice in writing,
3
<PAGE>
when the Registration Statement or such post-effective amendment or Abbreviated
Registration Statement has become effective.
(b) The Company will advise you promptly and, if
requested by you, will confirm such advice in writing: (i) of any request by the
Commission for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus or for additional information; (ii) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of the Shares
for offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to each of you, without
charge, one signed copy of the registration statement as originally filed with
the Commission and of each amendment thereto, including financial statements and
all exhibits to the registration statement and will also furnish to you, without
charge, such number of conformed copies of the registration statement as
originally filed and of each amendment thereto, but without exhibits, as you may
request.
(d) The Company will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus of
which you shall not previously have been advised or to which you shall object
after being so advised or (ii) so long as, in the opinion of counsel for the
Underwriters, a prospectus is required to be delivered in connection with sales
by any Underwriter or dealer, file any information, documents or reports
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), without delivering a copy of such information, documents or reports to
you, as Representatives of the Underwriters, prior to or concurrently with such
filing.
(e) Prior to the execution and delivery of this
Agreement, the Company has delivered or will deliver to you, without charge, in
such quantities as you have requested or may hereafter request, copies of each
form of the Prepricing Prospectus. The Company consents to the use, in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several
Underwriters and by dealers, prior to the date of the Prospectus, of each
Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this
Agreement as possible and thereafter from time to time for such period as in the
opinion of counsel for the Underwriters a prospectus is required by the Act to
be delivered in connection with sales by any Underwriter or dealer, the Company
will expeditiously deliver to each Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be
4
<PAGE>
sold, both in connection with the offering and sale of the Shares and for such
period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
the opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto and will
expeditiously furnish copies thereof to the Underwriters and dealers in such
quantities as you shall request. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus should be
amended or supplemented, the Company, if requested by you, will promptly issue a
press release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel
for the Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such jurisdictions as you may designate and
will file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its
security holders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as soon
as practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the
Company will furnish to you (i) as soon as available, a copy of each report of
the Company mailed to stockholders or filed with the Commission, and (ii) from
time to time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be
terminated after execution pursuant to any provisions hereof (otherwise than
pursuant to the second paragraph of Section 12 hereof or by notice given by you
terminating this Agreement pursuant to Section 12 or Section 13 hereof) or if
this Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company or the Selling Stockholder to comply with the
terms or fulfill any of the conditions of this Agreement, the Company agrees to
reimburse the Representatives for all out-of-pocket expenses (including
reasonable fees and expenses of counsel for the Underwriters) reasonably
incurred by you in connection herewith, but without any further obligation on
the part of the Company for loss of profits or otherwise.
(k) The Company will apply the net proceeds from the sale
of the Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
5
<PAGE>
(m) Except as provided in this Agreement, the Company
will not sell, offer to sell, contract to sell or otherwise transfer or dispose
of any Common Stock (or any securities convertible into or exercisable or
exchangeable for Common Stock), or grant any options or warrants to purchase
Common Stock, for a period of 180 days after the date of the Prospectus, without
the prior written consent of Smith Barney Inc., except for (i) grants of options
pursuant to the Company's Stock Incentive Plan and Non-Employee Director Stock
Option Plan, (ii) issuances of Common Stock upon exercise of options and
warrants outstanding on the date hereof or issued in accordance with the
foregoing clause (i) and the following clause (iii) and (iii) issuances of
Common Stock (or any securities convertible into or exercisable or exchangeable
for Common Stock) in connection with the acquisition of any related business or
assisted living facility (including a leasehold interest therein or a management
agreement therefor), provided that the recipient of such Common Stock or such
other securities convertible into or exercisable or exchangeable for Common
Stock issued in connection with such acquisition agrees not to sell, offer to
sell, contract to sell or otherwise transfer or dispose of such Common Stock or
such other securities (including any underlying Common Stock) for a period of
180 days after the date of the Prospectus without the prior written consent of
Smith Barney Inc.
(n) The Company has furnished or will furnish to you
"lock-up" letters, in form and substance satisfactory to you, signed by each of
its current officers and directors.
(o) Except as stated in this Agreement and in the
Prepricing Prospectus and Prospectus, the Company has not taken, nor will it
take, directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the
Common Stock approved for quotation, subject to notice of issuance, on the
Nasdaq National Market prior to or concurrently with the effectiveness of the
registration statement.
6. AGREEMENTS OF THE SELLING STOCKHOLDER. The Selling Stockholder
agrees with the several Underwriters as follows:
(a) The Selling Stockholder will cooperate to the extent
necessary to cause the registration statement, any Abbreviated Registration
Statement and any post-effective amendment thereto to become effective at the
earliest possible time.
(b) The Selling Stockholder will pay all federal and
other taxes, if any, on the transfer or sale of any Shares that are sold by the
Selling Stockholder to the Underwriters.
(c) The Selling Stockholder will do or perform all things
required to be done or performed by the Selling Stockholder prior to the Closing
Date to satisfy all conditions precedent to the delivery of the Shares by the
Selling Stockholder pursuant to this Agreement.
(d) The Selling Stockholder will not offer, sell,
contract to sell or otherwise dispose of, or grant any option to purchase, any
Common Stock (or any securities convertible into or exercisable or exchangeable
for Common Stock) owned by such Selling Stockholder, except for the sale of
Shares to the Underwriters pursuant to this Agreement, or exercise any
registration rights with respect to the sale of Common Stock, without the prior
written consent of Smith Barney Inc. for a period of 180 days after the date of
the Prospectus.
6
<PAGE>
(e) Except as stated in this Agreement and in the
Prepricing Prospectus and the Prospectus, the Selling Stockholder will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(f) The Selling Stockholder will advise you promptly, and
if requested by you, will confirm such advice in writing, within the period of
time referred to in Section 5(f) hereof, of any change in information relating
to the Selling Stockholder and of any change in the Company's condition
(financial or other), business, prospects, properties, net worth or results of
operations or any other information relating to the Company or relating to any
matter stated in the Prospectus or any amendment or supplement thereto that
comes to the attention of the Selling Stockholder that suggests that any
statement made in the Registration Statement or the Prospectus (as then amended
or supplemented, if amended or supplemented) is or may be untrue in any material
respect or that the Registration Statement or Prospectus (as then amended or
supplemented, if amended or supplemented) omits or may omit to state a material
fact or a fact necessary to be stated therein in order to make the statements
therein not misleading in any material respect.
(g) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982, as amended, with respect to the transactions herein
contemplated, the Selling Stockholder agrees to deliver to you prior to or on
the Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The Commission
has not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The registration statement in the form in which it
became or becomes effective and also in such form as it may be when any
post-effective amendment thereto or any Abbreviated Registration Statement shall
become effective, and the Prospectus and any supplement or amendment thereto
when filed with the Commission under Rule 424(b) under the Act, complied or will
comply in all material respects with the provisions of the Act and did not or
will not at any such times contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the registration
statement or the Prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing by
or on behalf of any Underwriter through you expressly for use therein.
(c) All the outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable, are free of any preemptive or similar rights and have been issued
and sold in compliance with all federal and state securities laws; the Shares to
be issued and sold by the Company have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free of
any preemptive or similar rights; and the capital stock of the Company conforms
to the description thereof in the Registration Statement and the Prospectus.
7
<PAGE>
(d) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse
Effect").
(e) All the Company's subsidiaries (as defined in the
Act) are listed in Exhibit 21 to the Registration Statement and are referred to
herein individually as a "Subsidiary" and collectively as the "Subsidiaries."
Each Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify would not have a Material Adverse Effect. All the
outstanding shares of capital stock of each Subsidiary have been duly authorized
and validly issued, are fully paid and nonassessable, and are wholly owned by
the Company directly or indirectly through one of the other Subsidiaries, free
and clear of any lien, adverse claim, security interest, equity or other
encumbrance, except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto).
(f) There are no legal or governmental proceedings
pending or, to the knowledge of the Company, threatened, against the Company or
any of the Subsidiaries, or to which the Company or any of the Subsidiaries or
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required. There are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement that
are not described or filed as required by the Act. Neither the Company nor any
of the Subsidiaries is involved in any strike, job action or labor dispute, and
to the Company's best knowledge no such action or dispute is threatened.
(g) Neither the Company nor any of the Subsidiaries is in
violation of its certificate of incorporation or by-laws or other organizational
documents, or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries, or in default in the performance of any obligation,
agreement or condition contained in any bond, debenture, note or any other
evidence of indebtedness or in any agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties is bound, except where
such violation or default would not, individually or in the aggregate, have a
Material Adverse Effect.
(h) Neither the issuance and sale of the Shares by the
Company, the execution, delivery or performance of this Agreement by the Company
nor the consummation by the Company of the transactions contemplated hereby (i)
requires any consent, approval, authorization or other order of, or registration
or filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except (1) such as may be required for
the registration of the Shares under the Act and
8
<PAGE>
the Exchange Act, all of which have been or will be effected in accordance with
this Agreement, (2) such as are required under the securities or Blue Sky laws
of various jurisdictions or (3) such as may be required under the healthcare
laws of various jurisdictions, all of which have been obtained) or conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, the certificate of incorporation or bylaws or other organizational
documents of the Company or any of the Subsidiaries or (ii) conflicts or will
conflict with or constitutes or will constitute a breach of, or a default under,
in any material respect, any agreement, indenture, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by which the Company
or any of the Subsidiaries or any of their respective properties is bound which
is material to the Company and its Subsidiaries taken as a whole, or violates or
will violate, in any material respect, any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to the terms of any
agreement or instrument to which any of them is a party or by which any of them
may be bound or to which any of their respective properties or assets is
subject.
(i) The accountants, KPMG Peat Marwick LLP and Deloitte &
Touche LLP, who have certified or shall certify the financial statements filed
or to be filed as part of the Registration Statement or the Prospectus (or any
amendment or supplement thereto), are independent public accountants as required
by the Act.
(j) The historical financial statements, together with related
schedules and notes forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto), comply in all material
respects with the requirements of the Act and present fairly in all material
respects the consolidated financial position, results of operations and changes
in stockholders' equity and cash flows of the Company and the Subsidiaries on
the basis stated in the Registration Statement at the respective dates or for
the respective periods to which they apply, and such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the pro forma financial information included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) has been prepared in accordance with the applicable published rules and
regulations of the Commission with respect to pro forma financial information
and the assumptions used in preparing such information are reasonable; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented in all material respects and, to the extent
such information and data is derived from the financial books and records of the
Company, is prepared on a basis consistent with such financial statements and
the books and records of the Company.
(k) The Company has all requisite power and authority to
execute, deliver and perform its obligations under this Agreement; the execution
and delivery of, and the performance by the Company of its obligations under,
this Agreement have been duly and validly authorized by the Company, and this
Agreement has been duly executed and delivered by the Company and constitutes
the valid and legally binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and by general
equitable principles.
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(l) Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, that is
material to the Company and the Subsidiaries taken as a whole, and there has not
been any change in the capital stock, or material increase in the short-term or
long-term debt, of the Company or any of the Subsidiaries, or any material
adverse change, or any development involving or which could reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole.
(m) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the Prospectus
as being owned by it, free and clear of all liens, claims, security interests or
other encumbrances except such as are described in the Prospectus or are not
material to the business of the Company and the Subsidiaries, taken as a whole;
and all the property described in the Prospectus as being held under lease by
the Company or any of the Subsidiaries is held by it under valid, subsisting and
enforceable leases and the Company and the Subsidiaries enjoy peaceful and
undisturbed possession under all such leases to which any of them is a party as
lessee, subject only to such exceptions as do not interfere in any material
respect with the use made by the Company or such Subsidiary.
(n) The Company has not distributed and, prior to the
later to occur of the Closing Date and completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(o) Each of the Company and the Subsidiaries has such
permits, licenses, franchises, authorizations and clearances ("Permits") of
governmental or regulatory authorities as are necessary to own, lease and
operate its properties and to conduct its business in the manner described in
the Prospectus, including, without limitation, such Permits as are required
under such federal and state healthcare laws as are applicable to the Company
and the Subsidiaries and their respective businesses, subject to such
qualifications as may be set forth in the Prospectus and except where the
failure to have such Permits would not materially interfere with the ownership,
lease or operation of such properties or the conduct of such business; subject
to such qualifications as may be set forth in the Prospectus, each of the
Company and the Subsidiaries has fulfilled and performed in all material
respects its obligations with respect to the Permits, and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the rights of
the holder of any Permit, subject in each case to such qualification as may be
set forth in the Prospectus and except to the extent that any such revocation or
termination would not, singularly or in the aggregate, have a Material Adverse
Effect. Except as described in the Prospectus, none of the Permits contains any
restriction that is materially burdensome to the Company or the Subsidiaries.
The Company's and each Subsidiary's business practices do not violate in any
material respect any federal or state laws regarding physician ownership of (or
financial relationship with) and referral to entities providing healthcare
related goods or services, or laws requiring disclosure of financial interests
held by physicians in entities to which they may refer patients for the
provisions of health care related goods or services.
(p) The Company and the Subsidiaries own or possess all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions,
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trade secrets and rights described in the Prospectus as being owned by any of
them or necessary for the conduct of their respective businesses, and the
Company is not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and the Subsidiaries with respect to the
foregoing.
(q) The property, assets and operations of the Company
and the Subsidiaries comply in all material respects with all applicable
federal, state and local laws, rules, orders, decrees, judgments, injunctions,
licenses, permits or regulations relating to environmental matters (the
"Environmental Laws"), except to the extent that the lack of compliance with
such Environmental Laws would not, singularly or in the aggregate, have a
Material Adverse Effect. To the Company's best knowledge, none of the Company's
or any Subsidiary's property, assets or operations, nor any property presently
under development by the Company, is the subject of any federal, state or local
investigation evaluating whether any remedial action is needed to respond to a
release of any substance regulated by or form the basis of liability under any
Environmental Laws (a "Hazardous Material") into the environment. Neither the
Company nor any Subsidiary has received any notice or claim, nor are there any
pending or, to the Company's best knowledge, threatened or reasonably
anticipated lawsuits against it with respect to violations of an Environmental
Law or in connection with the release of any Hazardous Material into the
environment. To the best knowledge of the Company, neither the Company nor any
Subsidiary has any material contingent liability in connection with any release
of Hazardous Material into the environment.
(r) The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are deemed by it to be adequate for its business and
consistent with insurance coverage maintained by similar companies and
businesses; (ii) all policies of insurance insuring the Company or any of the
Subsidiaries or their respective businesses, assets, employees, officers and
directors are in full force and effect; (iii) the Company and the Subsidiaries
are in compliance with the terms of such policies and instruments in all
material respects; and (iv) there are no material claims by the Company or any
of the Subsidiaries under any such policy or instrument as to which any
insurance company is denying liability or defending under a reservation of
rights clause.
(s) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(t) Neither the Company nor any Subsidiary nor, to the
Company's best knowledge, any employee or agent of the Company or any Subsidiary
has made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
(u) The Company and the Subsidiaries have filed all
federal, state, local and foreign tax returns and tax forms required to be
filed, except where the failure to file would not, singularly or in the
aggregate, have a Material Adverse Effect; such returns and forms are complete
and correct in all material respects; and all taxes shown by such returns or
otherwise assessed that are due or payable have been paid, except such taxes as
are being contested in good faith and as to which adequate reserves have been
provided. All payroll withholdings required to be made by the Company with
respect to employees
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have been made. The charges, accruals and reserves on the books of the Company
and the Subsidiaries in respect of any tax liability for any year not finally
determined are adequate to meet any assessments or reassessments for additional
taxes; and there have been no tax deficiencies asserted and, to the best
knowledge of the Company, no tax deficiency could be reasonably asserted against
the Company or any of the Subsidiaries that could, singularly or in the
aggregate, have a Material Adverse Effect.
(v) No holder of any security of the Company has any
right to require registration of Common Stock or any other security of the
Company because of the filing of the registration statement or the consummation
of the transactions contemplated by this Agreement except for any such rights as
have been complied with or waived and, except as disclosed in the Prospectus
under the caption "Description of Capital Stock -- Registration Rights," no
person has the right to require registration under the Act of any Common Stock
or other securities of the Company. No person has the right, contractual or
otherwise, to cause the Company to permit such person to underwrite the sale of
any of the Shares. Except as described in or contemplated by the Prospectus,
there are no outstanding options, warrants or other rights calling for the
issuance of, and there are no commitments, plans or arrangements to issue, any
shares of capital stock of the Company or any Subsidiary or any security
convertible into or exchangeable or exercisable for capital stock of the Company
or any Subsidiary.
(w) Neither the Company nor any of the Subsidiaries is,
and, upon the sale of the Shares to be issued and sold by it hereunder and
application of the net proceeds from such sale as described in the Prospectus
under the caption "Use of Proceeds," will not be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(x) The Company is in compliance with all provisions of
Florida Statutes ss. 517.075 and the regulations thereunder relating to issuers
doing business with Cuba.
8. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER. The
Selling Stockholder represents and warrants to each Underwriter that:
(a) The Selling Stockholder now has or has the right to
acquire, and on the Closing Date will have, valid and marketable title to the
Shares to be sold by the Selling Stockholder, free and clear of any lien, claim,
security interest or other encumbrance, including, without limitation, any
restriction on transfer or other defect in title.
(b) The Selling Stockholder now has, and on the Closing
Date will have, full legal right, power and authorization, and any approval
required by law (except such as may be required under the Act, the Exchange Act
or state securities or Blue Sky laws governing the purchase and distribution of
the Shares), to sell, assign, transfer and deliver such Shares in the manner
provided in this Agreement, and upon delivery of and payment for such Shares
hereunder, the several Underwriters will acquire valid and marketable title to
such Shares, free and clear of any lien, claim, security interest, or other
encumbrance, restriction on transfer or other defect in title, assuming the
Underwriters have purchased such shares in good faith without notice of any
adverse claim within the meaning of Section 8-302 of the Uniform Commercial Code
as currently in effect in the State of New York.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Stockholder and is the valid and binding agreement of
the Selling Stockholder enforceable against the Selling Stockholder in
accordance with its terms, except as rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or principles of
public policy and except as enforcement
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<PAGE>
hereof may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equitable principles.
(d) Neither the execution and delivery of this Agreement
by the Selling Stockholder nor the consummation of the transactions herein
contemplated by the Selling Stockholder requires any consent, approval,
authorization or order of, or filing or registration with, any court, regulatory
body, administrative agency or other governmental body, agency or official
(except such as may be required under the Act, the Exchange Act or state
securities or Blue Sky laws governing the purchase and distribution of the
Shares) or conflicts or will conflict with or constitutes or will constitute a
breach of, or default under, or violates or will violate, in any material
respect, any material agreement, indenture or other instrument to which the
Selling Stockholder is a party or by which the Selling Stockholder is or may be
bound or to which any of the Selling Stockholder's property or assets is
subject, or any statute, law, rule, regulation, ruling, judgement, injunction,
order or decree applicable to the Selling Stockholder or to any property or
assets of the Selling Stockholder.
(e) The Selling Stockholder has reviewed the Registration
Statement and the Prospectus. The Registration Statement and the Prospectus and
any amendment or supplement thereto do not contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(f) The Selling Stockholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up arrangements
described in the Prospectus.
9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or in
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity with the
information relating to such Underwriter furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any Prepricing Prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of Shares by such Underwriter to any person if (i) a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus and (ii) the Company has
delivered the Prospectus to the several Underwriters in requisite quantity on a
timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company may otherwise
have.
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(b) If any action, suit or proceeding shall be brought
against any Underwriter or any person controlling any Underwriter in respect of
which indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense and employ counsel or (iii) the
named parties to any such action, suit or proceeding (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company and such Underwriter or such controlling person shall have been advised
by its counsel that representation of such indemnified party and the Company by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Company shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Company shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter
and any such controlling person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) The Selling Stockholder agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the indemnity from the Company to each Underwriter set forth
in Section 9(a) hereof (but subject to Section 9(g) hereof). In case any action
or claim shall be brought or asserted against any Underwriter or any such
controlling person in respect of which indemnity may be sought against the
Selling Stockholder pursuant to this paragraph (c), the Selling Stockholder
shall have the rights and duties given to the Company, and each Underwriter and
any such controlling person shall have the rights and duties given to the
Underwriters, under paragraph (b) above. The foregoing indemnity agreement shall
be in addition to any liability which the Selling Stockholder may otherwise
have.
(d) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, the Selling Stockholder and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, to the same extent as the indemnity from the Company to each
Underwriter set forth in Section 9(a) hereof, but only with respect to
information relating to such Underwriter furnished in writing to the Company by
or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Company, any of its directors, any such officer, the Selling
Stockholder or any such controlling person based on the Registration Statement,
the Prospectus or any Prepricing Prospectus, or any amendment or
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supplement thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (d), such Underwriter shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company shall have assumed the defense thereof such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and the Company, its directors, any such officer, the
Selling Stockholder and any such controlling person shall have the rights and
duties given to the Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which the Underwriters may
otherwise have.
(e) If the indemnification provided for in this Section 9
is unavailable to an indemnified party under paragraphs (a), (c) or (d) hereof
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Sellers on the one hand and the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Sellers bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus; provided that, in the event that the
Underwriters shall have purchased any Additional Shares hereunder, any
determination of the relative benefits received by the Company and the
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Company, and the underwriting
discounts and commissions received by the Underwriters, from the sale of such
Additional Shares, in each case computed on the basis of the respective amounts
set forth in the notes to the table on the cover page of the Prospectus. The
relative fault of the Sellers on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Sellers
on the one hand or by the Underwriters on the other hand and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(f) The Sellers and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 9 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in paragraph (e) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (e) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such
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fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several in proportion to the respective numbers
of Firm Shares set forth opposite their names in Schedule I hereto (or such
numbers of Firm Shares increased as set forth in Section 12 hereof) and not
joint.
(g) Notwithstanding any other provision of this Section
9, the liability of the Selling Stockholder for indemnification or contribution
under this Section 9 shall not exceed an amount equal to the number of Shares
sold by the Selling Stockholder hereunder multiplied by the purchase price per
share set forth in Section 2 hereof.
(h) No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened action, suit or proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
(i) Any losses, claims, damages, liabilities or expenses
for which an indemnified party is entitled to indemnification or contribution
under this Section 9 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Sellers set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers, the Selling Stockholder
or any person controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter or any person controlling any Underwriter, or to the Company,
its directors or officers, the Selling Stockholder or any person controlling the
Company, shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 9.
10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares hereunder are
subject to the following conditions:
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the registration statement or a post-effective
amendment thereto or an Abbreviated Registration Statement to be declared
effective before the offering of the Shares may commence, the registration
statement or such post-effective amendment or Abbreviated Registration Statement
shall have become effective not later than 5:30 P.M., New York City time, on the
date hereof, or at such later date and time as shall be consented to in writing
by you, and all filings, if any, required by Rules 424 and 430A under the Act
shall have been timely made.
(b) Subsequent to the effective date of this Agreement,
there shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, prospects, properties, net worth, or results of operations of the
Company not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company, any officer or director of the Company or the Selling
Stockholder, which makes any statement made in the Prospectus untrue or which,
in the opinion of the Company and its counsel or the Underwriters and their
counsel, requires the making of any addition to or change in the Prospectus in
order to state a material fact required by the Act or any other law to be stated
therein or necessary in order to make the statements therein not misleading, if
amending or supplementing the
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Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Shares.
(c) You shall have received on the Closing Date an opinion of
Fulbright & Jaworski L.L.P., counsel for the Company and the Selling
Stockholder, dated the Closing Date and addressed to you, as Representatives of
the several Underwriters, that:
(i) The Company is a corporation duly incorporated
and validly existing in good standing under the laws of the State of
Delaware with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto), and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place
where its ownership, leasing or management of properties requires such
registration or qualification, except where the failure so to register
or qualify does not have a Material Adverse Effect;
(ii) Each Subsidiary is a corporation duly
incorporated and validly existing and in good standing under the laws
of the jurisdiction of its organization, with full corporate power and
authority to own, lease, and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus
(and any amendment or supplement thereto); each Subsidiary is duly
registered and qualified to conduct its business and is in good
standing as a foreign corporation in each jurisdiction or place where
its ownership, leasing or management of properties requires such
registration or qualification, except where the failure so to register
or qualify or to be in good standing would not have a Material Adverse
Effect; and all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and, to the knowledge of such counsel, are
owned of record by the Company directly, or indirectly through one of
the other Subsidiaries, free and clear of any perfected security
interest or any other lien, adverse claim, equity or other encumbrance,
except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement thereto);
(iii) The authorized capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectus, and
the authorized capital stock of the Company conforms in all material
respects as to legal matters to the description contained in the
Prospectus under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be sold by the
Company have been duly authorized and validly issued, are fully paid
and nonassessable and were issued and sold in compliance with all
applicable federal securities laws;
(v) The Shares to be issued and sold to the
Underwriters by the Company have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of (A) any preemptive rights under the
Company's certificate of incorporation or the General Corporation Law
of the State of Delaware or (B) to the knowledge of such counsel,
similar rights that entitle or will entitle any person to acquire any
shares of capital stock of the Company upon the issuance and sale of
the Shares by the Company;
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(vi) The form of certificate for the Shares conforms
in all material respects to the requirements of the General Corporation
Law of the State of Delaware;
(vii) The Registration Statement and all
post-effective amendments, if any, have become effective under the Act
and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(viii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver
the Shares to be sold by it to the Underwriters as provided herein, and
this Agreement has been duly authorized, executed and delivered by the
Company and is a valid, legal and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
enforcement of rights to indemnity and contribution hereunder may be
limited by federal or state securities laws or principles of public
policy and subject to the qualification that the enforceability of the
Company's obligations hereunder may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights generally and by
general equitable principles;
(ix) To the knowledge of such counsel, neither the
Company nor any of the Subsidiaries is in violation of its certificate
of incorporation or bylaws or other organizational documents;
(x) Neither the offer, sale or delivery of the
Shares, the execution, delivery or performance of this Agreement,
compliance by the Company with the provisions hereof nor consummation
by the Company of the transactions contemplated hereby constitutes or
will constitute a breach of, or a default under, in any material
respect, the certificate of incorporation or bylaws or other
organizational documents of the Company or any of the Subsidiaries or
any agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which the Company
or any of the Subsidiaries or any of their respective properties is
bound that is an exhibit to the Registration Statement or to the
knowledge of such counsel will result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or any of the Subsidiaries, nor will any such action result in
any violation in any material respect of any existing law, regulation,
ruling (assuming compliance with all applicable state securities and
Blue Sky laws), judgment, injunction, order or decree known to such
counsel and applicable to the Company or any of the Subsidiaries or any
of their respective properties;
(xi) No consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency, or official
is required on the part of the Company (except as have been obtained
under the Act and the Exchange Act or such as may be required under
state securities or Blue Sky laws governing the purchase and
distribution of the Shares, as to which such counsel need not express
an opinion) for the valid issuance and sale of the Shares to the
Underwriters as contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus
and any supplements or amendments thereto (except for the financial
statements and the notes thereto and the schedules
18
<PAGE>
and other financial and statistical data included therein, as to which
such counsel need not express any opinion) appear on their face to
comply as to form in all material respects with the requirements of the
Act;
(xiii) To the knowledge of such counsel, (A) there
are no legal or governmental proceedings pending or threatened against
the Company or any of the Subsidiaries or to which the Company or any
of the Subsidiaries or any of their respective properties is subject,
which are required to be described in the Registration Statement or
Prospectus (or any amendment or supplement thereto) that are not
described as required and (B) there are no agreements, contracts,
indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (or any
amendment or supplement thereto) or to be filed as an exhibit to the
Registration Statement that are not described or filed as required, as
the case may be;
(xiv) Each of the Company and the Subsidiaries has
all necessary Permits (except where the failure to so have any such
Permits, individually or in the aggregate, would not have a Material
Adverse Effect) to own its properties and to conduct its business as
now being conducted as described in the Prospectus (including such
Permits as are required under such federal and state healthcare laws as
are applicable to the Company and the Subsidiaries);
(xv) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements
or other legal documents, or refer to statements of law or legal
conclusions, are accurate in all material respects and present fairly
the information required to be shown;
(xvi) Except as described in the Prospectus, such
counsel does not know of any holder of any securities of the Company or
any other person who has the right, contractual or otherwise, to cause
the Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Shares or the right to have any
Common Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require the Company to register under the
Act any Common Stock or other securities of the Company, and any
registration rights in connection with the offering contemplated hereby
have been complied with or waived;
(xvii) Neither the Company nor any of the
Subsidiaries is an "investment company" or a person "controlled" by an
"investment company" within the meaning of the Investment Company Act
of 1940, as amended;
(xviii) This Agreement has been duly executed and
delivered by the Selling Stockholder and is a valid and binding
agreement of the Selling Stockholder, enforceable against the Selling
Stockholder in accordance with its terms, except (A) as enforcement of
rights to indemnity and contribution hereunder may be limited by
federal or state securities laws or principles of public policy and (B)
subject to the qualification that the enforceability of its obligations
hereunder may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and by general equitable
principles;
(xix) The Selling Stockholder has full corporate
power and authorization and any approval required by law to sell,
assign, transfer and deliver good and marketable title to the Shares
such Selling Stockholder has agreed to sell pursuant to this Agreement;
and upon delivery
19
<PAGE>
of such Shares pursuant to this Agreement and payment therefor as
contemplated herein, the Underwriters (whom such counsel may assume are
bona fide purchasers) will acquire good and marketable title to such
Shares free and clear of any adverse claim; and
(xx) The execution and delivery of this Agreement by
the Selling Stockholder and the consummation of the transactions
contemplated hereby will not violate, result in a breach of or
constitute a default under the terms or provisions of any agreement,
indenture, mortgage or other instrument to which the Selling
Stockholder is a party or by which it or any of its assets or property
is bound and which is filed as an exhibit to the Selling Stockholder's
Annual Report on Form 10-K for the year ended December 31, 1995, as
amended, or to any subsequent filing under the Exchange Act, or any
court order or decree or any law, rule, or regulation known to such
counsel applicable to the Selling Stockholder or to any of the property
or assets of the Selling Stockholder.
In addition, such counsel shall state that although such
counsel has not undertaken, except as otherwise indicated in their opinion, to
determine independently, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements in the Registration
Statement, such counsel has participated in the preparation of the Registration
Statement and the Prospectus, including review and discussion of the contents
thereof, and, relying as to materiality to a large extent upon the opinions of
officers and other representatives of the Company, nothing has come to the
attention of such counsel that has caused it to believe that the Registration
Statement, at the time the Registration Statement became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or that the Prospectus, as of its date and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or that any amendment or supplement to the Prospectus, as
of its date, and as of the Closing Date or the Option Closing Date, as the case
may be, contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no opinion with
respect to the financial statements and the notes thereto and the schedules and
other financial and statistical data included in the Registration Statement or
the Prospectus).
In rendering their opinion as aforesaid, counsel may rely upon
an opinion or opinions, each dated the Closing Date, of other counsel retained
by them or the Company as to laws of any jurisdiction other than the United
States, the State of New York or the corporation law of the State of Delaware,
provided that (1) each such local counsel is acceptable to the Representatives,
(2) such reliance is expressly authorized by each opinion so relied upon and a
copy of each such opinion is delivered to the Representatives and is, in form
and substance, satisfactory to them and counsel for the Underwriters and (3)
counsel shall state in their opinion that they have no reason to believe that
they and the Underwriters are not justified in relying thereon.
(d) You shall have received on the Closing Date an
opinion of Dewey Ballantine, counsel for the Underwriters, dated the Closing
Date and addressed to you, as Representatives of the several Underwriters, with
respect to the matters referred to in clauses (v) (other than subclause (B)
thereof), (vii), (viii), (xii) and the penultimate paragraph of Section 10(c)
hereof and such other related matters as you may request.
20
<PAGE>
(e) You shall have received letters addressed to you and
dated the date hereof from KPMG Peat Marwick LLP and Deloitte & Touche LLP,
independent certified public accountants, substantially in the forms heretofore
approved by you, and you shall have received a letter addressed to you and dated
the Closing Date from KPMG Peat Marwick LLP, independent certified public
accountants, substantially in the form heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company,
contemplated by the Commission at or prior to the Closing Date and any request
of the Commission for additional information (to be included in the registration
statement or the prospectus or otherwise) shall have been complied with; (ii)
there shall not have been any material change in the capital stock of the
Company nor any material increase in the short-term or long-term debt of the
Company from that set forth or contemplated in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); (iii) there shall not have
been, since the respective dates as of which information is given in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company; (iv) the Company and its
Subsidiaries shall not have any liabilities or obligations, direct or contingent
(whether or not in the ordinary course of business), that are material to the
Company and the Subsidiaries, taken as a whole, other than those reflected in or
contemplated by the Registration Statement or the Prospectus (or any amendment
or supplement thereto); and (v) all the representations and warranties of the
Company contained in this Agreement shall be true and correct on and as of the
date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), as to the matters set
forth in this Section 10(f) and in Section 10(g) hereof.
(g) The Company shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at or
prior to the Closing Date.
(h) You shall have received a certificate dated the
Closing Date signed by the chief accounting officer of the Company substantially
in the form heretofore approved by you, respecting the Company's compliance with
the financial covenants contained in financing agreements to which the Company
is a party.
(i) All the representations and warranties of the Selling
Stockholder contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by or on behalf of the Selling Stockholder as to the matters set
forth in this Section 10(i) and in Section 10(j) hereof.
(j) The Selling Stockholder shall not have failed at or
prior to the Closing Date to have performed or complied with any of its
agreements herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date.
(k) The Shares shall have been approved for quotation
subject to notice of issuance on the Nasdaq National Market.
21
<PAGE>
(l) The Sellers shall have furnished or caused to be
furnished to you such further certificates and documents as you shall have
reasonably requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you, as Representatives of the Underwriters, and
counsel for the Underwriters.
Any certificate or document signed by any officer of the
Company or by or on behalf of the Selling Stockholder and delivered to you, as
Representatives of the several Underwriters, or to counsel for the Underwriters,
shall be deemed a representation or warranty by the Company or the Selling
Stockholder, as the case may be, to each Underwriter as to the statements made
therein.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of any
Option Closing Date of the conditions set forth in this Section 10, except that,
if any Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (f) and paragraphs
(h), (i) and (l) shall be dated the Option Closing Date in question and the
opinions called for by paragraphs (c) and (d) shall be revised to reflect the
sale of Additional Shares.
11. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Shares; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Shares, including any stamp taxes
in connection with the offering of the Shares; (iv) the printing (or
reproduction) and delivery of this Agreement, the preliminary and supplemental
Blue Sky Memoranda and all other agreements or documents printed (or reproduced)
and delivered in connection with the offering of the Shares; (v) the
registration of the Common Stock under the Exchange Act and the listing of the
Shares on the Nasdaq National Market; (vi) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees and the reasonable fees and expenses of counsel for the
Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. in connection with the
offering; (viii) the transportation and other expenses incurred by or on behalf
of representatives of the Company in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and the Selling Stockholder; and (x) the
performance by the Company of its other obligations under this Agreement.
12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto or an
Abbreviated Registration Statement to be declared effective before the offering
of the Shares may commence, when notification of the effectiveness of the
registration statement or such post-effective
22
<PAGE>
amendment or Abbreviated Registration Statement has been released by the
Commission. Until such time as this Agreement shall have become effective, it
may be terminated by the Company, by notifying you, or by you, as
Representatives of the several Underwriters, by notifying the Company.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they have agreed to purchase hereunder, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of Shares which the Underwriters are obligated to purchase on
the Closing Date, each non-defaulting Underwriter shall be obligated, severally,
in the proportion which the number of Firm Shares set forth opposite its name in
Schedule I hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated
(predecessor of Smith Barney Inc.), to purchase the Shares which such defaulting
Underwriter or Underwriters agreed, but failed or refused, to purchase. If any
Underwriter or Underwriters shall fail or refuse to purchase Shares which it or
they are obligated to purchase on the Closing Date and the aggregate number of
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the Underwriters are obligated to purchase on
the Closing Date and arrangements satisfactory to you and the Company for the
purchase of such Shares by one or more non-defaulting Underwriters or other
party or parties approved by you and the Company are not made within 36 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter or the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Company,
purchases Shares which a defaulting Underwriter agreed, but failed or refused,
to purchase.
Any notice under this Section 12 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
13. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Sellers, by notice to the Company and the Selling
Stockholder, if prior to the Closing Date or any Option Closing Date (if
different from the Closing Date and then only as to the Additional Shares), as
the case may be, (i) trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market shall have
been suspended or materially limited, (ii) a general moratorium on commercial
banking activities in New York shall have been declared by either federal or
state authorities, or (iii) there shall have occurred any outbreak or escalation
of hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given by telegram, telecopy or
telephone and shall be subsequently confirmed by letter.
23
<PAGE>
14. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside front cover page and the statements in the first and third paragraphs
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Sections 7(b) and
9 hereof.
15. MISCELLANEOUS. Except as otherwise provided in Sections 5, 12
and 13 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at Bernwood Centre, 24850 Old 41 Road, Suite 10, Bonita Springs, Florida
34135, Attention: Edward J. Komp, with a copy to Fulbright & Jaworski L.L.P.,
666 Fifth Avenue, New York, New York 10103, Attention: Carl E. Kaplan, Esq.;
(ii) if to the Selling Stockholder, at 10065 Red Run Boulevard, Owings Mills,
Maryland 21117, Attention: Robert N. Elkins, M.D., with a copy to Marshall A.
Elkins, Esq.; or (iii) if to you, as Representatives of the several
Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Manager, Investment Banking Division, with a copy to
Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019,
Attention: Frederick W. Kanner, Esq.
This Agreement has been and is made solely for the benefit of
the several Underwriters, the Company, its directors, its officers who sign the
Registration Statement, the Selling Stockholder and the controlling persons
referred to in Section 9 hereof and, to the extent provided herein, their
respective successors and assigns and no other person shall acquire or have any
right under or by virtue of this Agreement. Neither the term "successor" nor the
term "successors and assigns" as used in this Agreement shall include a
purchaser from any Underwriter of any of the Shares in his status as such
purchaser.
16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
24
<PAGE>
Please confirm that the foregoing correctly sets forth the
agreement between the Company and the several Underwriters.
Very truly yours,
INTEGRATED LIVING COMMUNITIES, INC.
By:
--------------------------------
INTEGRATED HEALTH SERVICES, INC.
By:
--------------------------------
Confirmed as of the date first above mentioned
on behalf of themselves and the other several
Underwriters named in Schedule I hereto.
SMITH BARNEY INC.
ALEX. BROWN & SONS INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:
---------------------------------
Managing Director
<PAGE>
SCHEDULE I
INTEGRATED LIVING COMMUNITIES, INC.
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
- ----------- -----------
<S> <C>
Smith Barney Inc....................................................................................
Alex. Brown & Sons Incorporated.....................................................................
Donaldson, Lufkin & Jenrette Securities Corporation.................................................
---------
Total...................................................................................... 5,130,600
=========
</TABLE>
BY-LAWS
of
INTEGRATED LIVING COMMUNITIES, INC.
Article 1
CORPORATION OFFICE
Section 1.1. Registered Office. The registered office of the
Corporation shall be Corporation Trust Center, 1209 Orange Street, Wilmington,
County of New Castle, Delaware, 19801.
Section 1.2. Principal Office. The principal office of the
Corporation shall be in Naples, Florida.
Section 1.3. Other Offices. The Corporation may also have
offices at such other places as the Board of Directors may from time to time
designate or the business of the Corporation may from time to time require.
Article 2
STOCKHOLDERS' MEETINGS
Section 2.1. Place and Time of Meetings. All meetings of the
stockholders shall be held at such time and place as may be fixed from time to
time by the Board of Directors and stated in the notice of meeting or in a duly
executed waiver of notice thereof. If no such place is fixed by the Board of
Directors, meetings of the stockholders shall be held at the principal office of
the Corporation.
-1-
<PAGE>
Section 2.2. Annual Meetings. The annual meeting of the
stockholders shall be held on the third Thursday in April in each year, if not a
legal holiday, and, if a legal holiday, then on the next full business day, at
the Corporation's principal office or at such other place, date and time as
shall be designated from time to time by the Board of Directors and stated in
the notice of meeting or a duly executed waiver of notice thereof.
At such annual meeting, the stockholders shall elect
successors to the directors whose terms shall expire that year to serve for a
term of one year and until their successors shall have been duly elected and
qualified or until their earlier resignation or removal. The stockholders also
shall transact such other business as may properly be brought before the
meeting.
Section 2.3. Nomination and Election of Directors. At each
annual meeting of stockholders, the stockholders entitled to vote shall elect
the directors. No person shall be eligible for election as a director unless
nominated in accordance with the procedures set forth in this Section 2.3.
Nominations of persons for election to the Board of Directors may be made by the
Board of Directors or any committee designated by the Board of Directors or by
any stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section 2.3. Such nominations, other than those made by the Board of
Directors, or any committee designated by the Board of Directors, may be made
only if written notice of a stockholder's intent to nominate one or more persons
for election is given, either by personal delivery or by United States certified
mail, postage prepaid, to the Secretary of the Corporation and received (i) not
less than 120
-2-
<PAGE>
days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders, or (ii) if the applicable annual meeting has been changed by more
than 30 days from the date contemplated at the time of the previous year's proxy
statement, not less than 60 days before the date of the applicable annual
meeting, or (iii) with respect to any special meeting of stockholders called for
the election of directors, not later than the close of business on the seventh
day following the date on which notice of such meeting is first given to
stockholders. Each such stockholder's notice shall set forth (a) as to the
stockholder giving the notice, (i) the name and address, as they appear on the
Corporation's stock transfer books, of such stockholders, (ii) a representation
that such stockholder is a stockholder of record and intends to appear in person
or by proxy at such meeting to nominate the person or persons specified in the
notice, (iii) the class, series and number of shares of stock of the Corporation
held of record, beneficially and by proxy by such stockholder as of the record
date of such meeting (if such record date is publicly available) and as of the
date of such notice, and (iv) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons naming such person or persons pursuant to which the nomination or
nominations are to be made by such stockholder; and (b) as to each person whom
the stockholder proposes to nominate for election as a director, (i) the name,
age, business address and, if known, residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class, series and
number of shares of stock of the Corporation which are held of record,
beneficially and by proxy by such person as of the record date of such meeting
(if such record date is
-3-
<PAGE>
publicly available) and as of the date of such notice, (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors or is otherwise required by
the rules and regulations of the Securities and Exchange Commission promulgated
under the Securities Exchange Act of 1934, as amended, and (v) the written
consent of such person to be named in the proxy statement as a nominee and to
serve as a director if elected. The secretary of the Corporation shall deliver
each such stockholder's notice that has been timely received to the Board of
Directors or a committee designated by the Board of Directors for review. Any
person nominated for election as director by the Board of Directors or any
committee designated by the Board of Directors shall, upon the request of the
Board of Directors or such committee, furnish to the secretary of the
Corporation all such information pertaining to such person that is required to
be set forth in a stockholder's notice of nomination. The chairman of the
meeting of stockholders shall, if the facts warrant, determine that a nomination
was not made in accordance with the procedures prescribed by this Section 2.3,
and if he should so determine, he shall so declare to the meeting and the
defective nomination shall be disregarded.
Section 2.4. Special Meetings. Unless otherwise provided by
law, special meetings of the stockholders may be called by the chairman of the
Board of Directors or the president or by order of the Board of Directors by a
resolution approved by a majority of the entire Board of Directors, whenever
deemed necessary.
Section 2.5. Notice of Meetings. Written notice of all
meetings of stockholders other than adjourned meetings of stockholders, stating
the place, date and hour, and, in the case of special meetings of stockholders,
the purpose or purposes
-4-
<PAGE>
thereof, shall be served upon or mailed, postage prepaid, or telegraphed,
charges prepaid, not less than ten nor more than sixty days before the date of
the meeting to each stockholder entitled to vote thereat at such address as
appears on the books of the Corporation. Such notices may be given at the
discretion of, or in the name of, the Board of Directors, the President, any
Vice President, the Secretary or any Assistant Secretary. When a meeting is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at the adjourned meeting, other than by
announcement at the meeting at which such adjournment is taken.
Section 2.6. Organization and Order of Business. At all
meetings of the stockholders, the chairman of the Board of Directors or, in his
absence, the deputy chairman of the Board of Directors (if any) or, in the
absence of both, the president, shall act as chairman. In the absence of all of
the foregoing officers or, if present, with their consent, a majority of the
shares entitled to vote at such meeting, may appoint any person to act as
chairman. The secretary of the Corporation or, in his absence, an assistant
secretary, shall act as secretary at all meetings of the stockholders. In the
event that neither the secretary nor any assistant secretary is present, the
chairman may appoint any person to act as secretary of the meeting.
The chairman shall have the right and authority to prescribe
such rules, regulations and procedures and to do all such acts and things as are
necessary or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after
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the time prescribed for the commencement thereof and the opening and closing of
the voting polls.
At each annual meeting of stockholders, only such business
shall be conducted as shall have been properly brought before the meeting (a) by
or at the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to vote at such meeting and who complies with
the notice procedures set forth in this Section 2.6. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the secretary of the Corporation. To be timely, a stockholder's
notice must be given, either by personal delivery or by United States certified
mail, postage prepaid, and received at the principal executive offices of the
Corporation (i) not less than 120 days nor more than 150 days before the first
anniversary of the date of the Corporation's proxy statement in connection with
the last annual meeting of stockholders or (ii) if no annual meeting was held in
the previous year or the date of the applicable annual meeting has been changed
by more than 30 days from the date contemplated at the time of the previous
year's proxy statement, not less than 60 days before the date of the applicable
annual meeting. A stockholder's notice to the secretary shall set forth as to
each matter (a) the description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the meeting,
including the complete text of any resolutions to be presented at the annual
meeting, (b) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder proposing such business, (c) a
representation that such stockholder is a stockholder of record and
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intends to appear in person or by proxy at such meeting to bring the business
before the meeting specified in the notice, (d) the class, series and number of
shares of stock of the Corporation, held of record, beneficially and by proxy by
the stockholder as of the record date of such meeting (if such record date is
publicly available) and as of the date of such notice, (e) a description of all
arrangements or understandings between the stockholder and any other person or
persons (naming such person or persons) in connection with the proposing of such
business by the stockholder, and (f) any material interest of the stockholder in
such business. Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this Section 2.6. The chairman of an annual meeting
shall, if the facts warrant, determine that the business was not brought before
the meeting in accordance with the procedures prescribed by this Section 2.6,
and if he should so determine, he shall so declare to the meeting and the
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 2.6, a stockholder
seeking to have a proposal included in the Corporation's proxy statement shall
comply with the requirements of Regulation 14A under the Securities Exchange Act
of 1934, as amended (including, but not limited to, Rule 14a-8 or its successor
provision). The secretary of the Corporation shall deliver each such
stockholder's notice that has been timely received to the Board of Directors or
a committee designated by the Board of Directors for review.
Section 2.7. Quorum of and Action by Stockholders. The
presence, in person, by proxy, of stockholders entitled to cast a majority of
the votes which all stockholders are entitled to cast on the particular matter
shall constitute a quorum for
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purposes of considering such matter, and, unless otherwise specifically provided
by statute, the acts of such stockholders at a duly organized meeting shall be
the acts of stockholders with respect to such matter.
If, however, such quorum shall not be present at any meeting
of the stockholders, the stockholders entitled to vote thereat present in person
or by proxy may, except as otherwise provided by statute, adjourn the meeting
from time to time to such time and place as they may determine, without notice
other than an announcement at the meeting, until a quorum shall be present in
person or by proxy.
At any adjourned meeting at which a quorum had been present,
stockholders present in person or by proxy at a duly organized and constituted
meeting, can continue to do business with respect to any matter properly
submitted to the meeting until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum for the purposes of considering
any particular such matter.
Section 2.8. Voting. Except as may be otherwise provided by
statute or by the Certificate of Incorporation, at every meeting of the
stockholders, every stockholder entitled to vote thereat shall have the right to
one vote for every share having voting power standing in his name on the stock
transfer books of the Corporation on the record date fixed for the meeting. No
share shall be voted at any meeting if any installment is due and unpaid
thereon.
Section 2.9. Voting by Proxy. Every stockholder entitled to
vote at a meeting of the stockholders or to express consent or dissent to
corporate action in writing without a meeting may authorize another person or
persons to act for him by proxy. Every proxy shall be executed in writing by the
stockholder or his duly
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authorized attorney in fact and filed with the Secretary of the Corporation. A
proxy, unless coupled with an interest, shall be revocable at will,
notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until written
notice thereof has been given to the Secretary of the Corporation. No unrevoked
proxy shall be voted or acted upon after three years from the date of its
execution, unless a longer time is expressly provided therein. A proxy shall not
be revoked by the death or incapacity of the maker, unless, before the vote is
counted or the authority is exercised, written notice of such death or
incapacity is given to the Secretary of the Corporation.
Section 2.10. Record Date. The Board of Directors may fix a
time, not more than sixty nor less than ten days prior to the date of any
meeting of the stockholders, or the date fixed for the payment of any dividend
or distribution or distribution, or the date for the allotment of rights or the
date when any change or conversion or exchange of shares will be made or go into
effect, as the record date for the determination of the stockholders entitled to
notice of, or to vote at, such meeting, or to receive any such allotment of
rights or to exercise the rights in respect to any such change or conversion or
exchange of shares. In such case, only such stockholders as shall be
stockholders of record on the date so fixed shall be entitled to notice of, or
to vote at, such meeting or to receive payment of such dividend, or to receive
such allotment of rights or to exercise such rights, as the case may be,
notwithstanding any transfer of any shares on the books of the Corporation after
any record date fixed as aforesaid.
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The Board of Directors may close the books of the Corporation
against transfers of shares during the whole or any part of such period, and in
such case written or printed notice thereof shall be mailed at least ten days
before the closing thereof to each stockholder of record at the address
appearing on the stock transfer books of the Corporation or supplied by him to
the Corporation for the purpose of notice. While the stock transfer books of the
Corporation are closed, no transfer of shares shall be made thereon.
If no record date is fixed by the Board of Directors for the
determination of stockholders who are entitled to receive notice of, or to vote
at, a meeting of the stockholders, or to receive payment of any such dividend or
distribution, or to receive any such allotment of rights or to exercise the
rights in respect to any such change or conversion or exchange of shares,
transferees of shares which are transferred on the stock transfer books of the
Corporation within the ten days immediately preceding the date of such meeting,
dividend, distribution, allotment of rights or exercise of such rights shall not
be entitled to notice of, or to vote at, such meeting, or to receive payment of
any dividend or distribution, or to receive any such allotment of rights or to
exercise the rights in respect to any such change or conversion or exchange of
shares.
Section 2.11. Stockholder's List. The officer or agent having
charge of the stock transfer books for shares of the Corporation shall make, at
least ten days before each meeting of the stockholders, a complete alphabetical
list of the stockholders entitled to vote at the meeting, with their addresses
and the number of shares held by each, which list shall be kept on file either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting or if not so
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specified, at the place where the meeting is to be held and shall be subject to
inspection by any stockholder for any purpose germane to the meeting at any time
during usual business hours for a period of at least ten days prior to the
meeting. Such list shall be produced at the meeting and shall be kept open for
inspection by any stockholder during the entire meeting. The original stock
transfer books of the Corporation shall be prima facie evidence as to who are
the stockholders entitled to exercise the rights of a stockholder.
Section 2.12. Inspectors of Election. In advance of any
meeting of the stockholders, the Board of Directors may appoint inspectors of
election, who need not be stockholders, to act at such meeting or any
adjournment thereof. If inspectors of election are not so appointed, the
chairman of any such meeting may, and on the request of any stockholder or his
proxy, shall make such appointment at the meeting. The number of inspectors
shall be one or three. If appointed at a meeting on the request of one or more
stockholders or proxies, the majority of shares present and entitled to vote
shall determine whether one or three inspectors are to be appointed. No person
who is a candidate for office shall act as an inspector.
The inspectors of election shall do all such acts as may be
proper to conduct the election or vote and such other duties as may be
prescribed by statute with fairness to all stockholders, and, if requested by
the chairman of the meeting or any stockholder or his proxy, shall make a
written report of any matter determined by them and execute a certificate as to
any fact found by them. If there are three inspectors of election, the decision,
act or certificate of a majority shall be the decision, act or certificate of
all.
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Section 2.13. Action by Written Consent of the Stockholders.
Any action required to be taken at an annual or special meeting of stockholders,
or of a class thereof, or any action which may be taken at any annual or special
meeting of such stockholders, or of a class thereof, may be taken without a
meeting, without prior notice and without a vote, only if the number of
stockholders is fewer than two holders. If the number of stockholders is two or
more, then no action by stockholders may be taken by written consent.
Article 3
DIRECTORS
Section 3.1. Powers.
(a) General Powers. The Board of Directors shall have all the
power and authority granted by law to the Board of Directors, including all
powers necessary or appropriate to the management of the business and affairs of
the Corporation.
(b) Specific Powers. Without limiting the general powers
conferred by the last preceding clause and the powers conferred by the
Certificate of Incorporation and these By-laws of the Corporation, it is hereby
expressly declared that the Board of Directors shall have the following powers:
(i) To appoint any person, firm or corporation to accept and
hold in trust for the Corporation any property belonging to the Corporation or
in which it is interested, and to authorize any such person, firm or corporation
to execute any documents and perform any duties that may be requisite in
relation to any such trust;
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(ii) To appoint a person or persons to vote shares of another
corporation held and owned by the Corporation;
(iii) By resolution adopted by a majority of the whole Board
of Directors, to designate one or more committees, each committee to consist of
two or more of the directors of the Corporation. To the extent provided in any
such resolution, and to the extent permitted by law, a committee so designated
shall have and may exercise the authority of the Board of Directors in the
management of the business and affairs of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent of disqualified member at any meeting of
the committee. If specifically granted this power by the Board of Directors in
its resolution establishing the committee, in the absence or disqualification of
any member and all designated alternates of such committee or committees or if
the whole Board of Directors has failed to designate alternate members, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another director to act at the meeting in the place of any such absent or
disqualified member;
(iv) To fix the place, time and purpose of meetings of the
stockholders;
and
(v) To fix the compensation of directors and officers for
their services.
Section 3.2. Number and Terms of Directors. The number of
directors that shall constitute the whole Board of Directors shall be not less
than five nor more than nine, and shall be determined by resolution of the Board
of Directors, except that
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whenever all of the shares of the Corporation are owned beneficially and of
record by either one or two stockholders, the number of directors may be less
than five but not less than the number of stockholders. Directors shall be
natural persons of full age and need not be residents of Delaware or
stockholders of the Corporation. The Board of Directors shall be divided into
three classes, as nearly equal in number as the then total number of directors
constituting the entire Board of Directors permits with the term of office of
one class expiring each year. At the annual meeting of stockholders in 1996,
directors of the first class shall be elected to hold office for a term expiring
at the next succeeding annual meeting, directors of the second class shall be
elected to hold office for a term expiring at the second succeeding annual
meeting and directors of the third class shall be elected to hold office for a
term expiring at the third succeeding annual meeting. Any vacancies in the Board
of Directors for any reason, and any directorships resulting from any increase
in the number of directors, may be filled only by the Board of Directors, acting
by a majority of the directors then in office, although less than a quorum, and
any directors so chosen shall hold office until the next election of the class
for which such directors shall have been chosen and until their successors shall
be elected and qualified. Notwithstanding the foregoing, and except as otherwise
required by law, whenever the holders of any one or more series of Preferred
Stock shall have the right, voting separately as a class, to elect one or more
directors of the Corporation, the terms of the director or directors elected by
such holders shall be governed by the terms of the resolutions adopted by the
Board of Directors pursuant to Article IV of the Restated Certificate of
Incorporation and such directors so elected shall not be divided into classes
pursuant to this Section 3.2. Subject to the foregoing, at each annual
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meeting of stockholders the successors to the class of directors whose term
shall then expire shall be elected to hold office for a term expiring at the
third succeeding annual meeting of stockholders. When the number of directors is
changed, any newly created directorships or any decrease in directorships shall
be so apportioned among the classes by the Board of Directors as to make all
classes as nearly equal in number as possible.
Section 3.3. Vacancies. Except as otherwise provided in the
Certificate of Incorporation, these By-laws or written agreement, vacancies on
the Board of Directors, including vacancies resulting from an increase in the
number of directors, shall be filled by a majority of the remaining members of
the Board of Directors, though less than a quorum, or by the sole remaining
director, as the case may be, irrespective of whether holders of any class or
series of stock or other voting securities of the Corporation are entitled to
elect one or more directors to fill such vacancies or newly created
directorships at the next annual meeting of the stockholders. Each person so
elected shall be a director until his successor is elected by the stockholders
at the annual meeting of the stockholders at which the class of directors to
which he was elected is up for election or at any special meeting of the
stockholders prior thereto duly called for that purpose.
Section 3.4. Organization Meetings. The organization meeting
of each newly elected Board of Directors shall be held immediately following the
meeting of the stockholders at which such directors were elected without the
necessity of notice to such directors to constitute a legally convened meeting
or at such time and place as may be fixed by a notice, or a waiver of notice, or
a consent signed by all of such directors.
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Section 3.5. Regular Meetings. The Board of Directors shall
have the power to fix by resolution the place, date and hour of regular meetings
of the Board of Directors.
Section 3.6. Special Meetings. Special meetings of the Board
of Directors may be called by the President of the Corporation on one day's
notice to each director, either personally or by mail, telephone or telegram.
Special meetings of the Board of Directors shall be called by the President or
the Secretary of the Corporation in like manner and on like notice upon the
written request of any two directors.
Section 3.7. Notices of Meetings. All meetings of the Board of
Directors may be held at such times and places as may be specified in the notice
of meeting or in a duly executed waiver of notice thereof. Notice of regular
meetings of the Board of Directors shall be given to each director at least
three days before each meeting either personally or by mail, telegram or
telephone. One or more directors may participate in any meeting of the Board of
Directors, or of any committee thereof, by means of a conference telephone or
similar communications equipment which enables all persons participating in the
meeting to hear one another, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 3.8. Quorum. At all meetings of the Board of
Directors, the presence, in person or by telephonic or similar communications,
of a majority of the members of the Board of Directors shall constitute a quorum
for the transaction of business, and the acts of a majority of the directors
present at a duly convened meeting at which a quorum is present shall be the
acts of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation of the
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Corporation, these By-laws or written agreement. If a quorum shall not be
present, in person or by telephonic or similar communications equipment, at any
meeting of the Board of Directors, the directors present may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be so present.
Section 3.9. Action by Unanimous Written Consent. Any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if all members of the Board
of Directors or a committee thereof, as the case may be, consent thereto in
writing, and such consent is filed with the minutes of proceedings of the Board
of Directors, or committee.
Section 3.10. Compensation. Directors, as such, may receive a
stated salary for their services, or a fixed sum and expenses for attendance at
regular or special meetings of the Board of Directors, or any committee thereof,
or any combination of the foregoing as may be determined from time to time by
resolution of the Board of Directors, and nothing contained herein shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
Article 4
OFFICERS
Section 4.1. Election and Office. The officers of the
Corporation shall be elected annually by the Board of Directors at its
organization meeting and shall consist of a President, a Secretary and a
Treasurer. The Board of Directors may also elect one
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or more Vice Presidents and such other officers and appoint such agents as it
shall deem necessary. Each officer of the Corporation shall hold office for such
term, have such authority and perform such duties as set forth in these By-laws
or as may from time to time be prescribed by the Board of Directors in
consultation with the President. Any two or more offices may be held by the same
person.
Section 4.2. Salaries. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 4.3. Removal and Vacancies. The Board of Directors may
remove any officer or agent elected or appointed at any time and within the
period, if any, for which such person was elected or employed whenever in the
judgment of the Board of Directors it is in the best interests of the
Corporation, and all persons shall be elected and employed subject to the
provisions hereof. If the office of any officer becomes vacant for any reason,
the vacancy shall be filled by the Board of Directors.
Section 4.4. Powers and Duties of the President. Unless
otherwise determined by the Board of Directors, the President shall have the
usual duties of a chief executive officer with general supervision over and
direction of the affairs of the Corporation. In the exercise of these duties and
subject to the limitations of the laws of the State of Delaware or any other
applicable law, these By-laws and the actions of the Board of Directors, he may
appoint, suspend, and discharge employees, agents and assistant officers, may
fix the compensation of all officers and assistant officers, shall preside at
all meetings of the stockholders at which he shall be present, and, unless there
is a Chairman of the Board of Directors, shall preside at all meetings of the
Board of Directors and shall be a member of all committees. He shall also do and
perform
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such other duties as from time to time may be assigned to him by the Board of
Directors.
Unless otherwise determined by the Board of Directors, the
President shall have full power and authority on behalf of the Corporation to
attend and to act and to vote at any meeting of the stockholders of any
corporation in which the Corporation may hold stock, and, at any such meeting,
shall possess and may exercise any and all the rights and powers incident to the
ownership of such stock and which, as the owner thereof, the Corporation might
have possessed and exercised.
Section 4.5. Powers and Duties of Vice Presidents. Each Vice
President shall have such duties as may be assigned to him from time to time by
the Board of Directors, the Executive Committee, the Chairman of the Board or
the President. In the event of a temporary absence of the President on vacation
or business, the President may designate a Vice President or Vice Presidents who
will perform the duties of the President in such absence. In the event of a
prolonged absence of the President due to illness or disability or for any other
reason, the Board of Directors shall designate a Vice President or Vice
Presidents who will perform the duties of the President during such absence.
Section 4.6. Powers and Duties of the Secretary. The Secretary
of the Corporation shall attend all meetings of the Board of Directors and of
the stockholders and shall keep accurate records thereof in one or more minute
books kept for that purpose, shall give, or cause to be given, the required
notice of all meetings of the stockholders and of the Board of Directors, shall
keep in safe custody the corporate seal of the Corporation and affix the same to
any instrument requiring it, and when so
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affixed, it shall be attested by his signature or by the signature of the
Treasurer or any Assistant Secretary or Assistant Treasurer of the Corporation.
The Secretary also shall keep, or cause to be kept, the stock certificate books,
stock transfer books and stock ledgers of the Corporation, in which shall be
recorded all stock issues, transfers, the dates of same, the names and addresses
of all stockholders and the number of shares held by each, shall, when
necessary, prepare new certificates upon the transfer of shares and the
surrender of the old certificates, shall cancel such surrendered certificates
and shall perform such other duties as may be assigned to him by the President.
Section 4.7. Powers and Duties of the Treasurer. The Treasurer
of the Corporation shall have the custody of the Corporation's funds and
securities, shall keep full and accurate accounts of receipts and disbursements
in books belonging to the Corporation, shall deposit all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as shall be designated by the President, shall disburse the funds
of the Corporation as may be ordered by the President or the Board of Directors,
taking proper vouchers for such disbursements, shall render to the President and
the Board of Directors, at the regular meetings of the Board of Directors or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the Corporation and shall have the right to
affix the seal of the Corporation to any instrument requiring it, and to attest
to the same by his signature and, if so required by the Board of Directors, he
shall give bond in such sum and with such surety as the Board of Directors may
from time to time direct.
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Section 4.8. Designation of a Chief Financial Officer. The
Board of Directors shall have the power to designate from among the Chairman,
any Vice Chairman, the President, any Vice President or the Treasurer of the
corporation, a Chief Financial Officer who shall be deemed the principal
financial and accounting officer. In the event that the Treasurer is not
designated by the Board of Directors as the Chief Financial Officer, the
Treasurer shall report to the Chief Financial Officer from time to time
concerning all duties which the Treasurer is obligated to perform and the Chief
Financial Officer shall, subject to the reasonable direction of the President or
the Board of Directors, at his election, assume such of the duties of the
Treasurer as are provided in Section 4.7 hereof as he shall deem appropriate.
Article 5
INDEMNIFICATION OF DIRECTORS, OFFICERS OR OTHER PERSONS
Section 5.1. The Corporation shall indemnify any director of
the Corporation and any officer of the Corporation holding the position of
Senior Vice President or any higher office of the Corporation who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative, by reason of the fact that he or she is or was a director or
an officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit, or proceeding
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to the fullest extent and in the manner set forth in and permitted by the
General Corporation Law, and any other applicable law, as from time to time in
effect.
Section 5.2. The provisions of Section 5.1 shall be deemed to
be a contract between the Corporation and each director and officer who serves
in such capacity at any time while Section 5.1 and the relevant provisions of
Delaware General Corporation Law and any other applicable law, if any, are in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing, with respect to any state of facts then or
theretofore existing, or any action, suit or proceeding theretofore, or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
Section 5.3. The Corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative by reason of the fact that he or she is or was an officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding to the extent and in the manner set forth in and permitted by
the General Corporation Law, and any other applicable law, as from time to time
in effect.
Section 5.4. To the extent that a director, officer, employee
or agent of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 5.1 or 5.3 of
this by-law, or in defense of any
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claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith.
Section 5.5. Any indemnification pursuant to Sections 5.1 or
5.3 of this by-law (unless ordered by a court) shall be made by the Corporation
only upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he or she has met the
applicable standard of conduct; to-wit, that he or she acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Such determination shall be made (1) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders.
Section 5.6. The Corporation shall, with respect to persons
entitled to indemnification pursuant to Section 5.1, and may, with respect to
persons who may be indemnified pursuant to Section 5.3, pay the expenses
incurred in defending any
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proceeding in advance of its final determination, provided, however, that such
advances may be made only upon the representation that such person believes he
or she is entitled to indemnification thereunder and the receipt of an
undertaking by such person to repay all amounts advanced if it should be
ultimately determined that such person is not entitled to be indemnified
thereunder.
Section 5.7. The indemnification and advancement of expenses
provided by, or granted pursuant to, this by-law shall not be deemed exclusive
of any other rights to which any person seeking indemnification or advancement
of expenses may be entitled under any certificate of incorporation, articles of
incorporation, articles of association, by-law, agreement, vote of stockholders
or disinterested directors, or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office.
Section 5.8. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him or her and incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the Corporation would have the power
to indemnify him or her against such liability under the provisions of this
by-law or of applicable law, if and whenever the Board of Directors of the
Corporation deems it to be in the best interests of the Corporation to do so.
Section 5.9. For purposes of this by-law and indemnification
thereunder, any person who is or was a director or officer of any other
corporation of which the
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<PAGE>
Corporation owns or controls or at the time owned or controlled directly or
indirectly a majority of the shares of stock entitled to vote for election of
directors of such other corporation shall be conclusively presumed to be serving
or to have served as such director or officer at the request of the Corporation.
Section 5.10. The Corporation may provide indemnification
under this by-law to any employee or agent of the Corporation or of any other
corporation of which the Corporation owns or controls or at the time owned or
controlled directly or indirectly a majority of the shares of stock entitled to
vote for election of directors or to any director, officer, employee or agent of
any other corporation, partnership, joint venture, trust or other enterprise in
which the Corporation has or at the time had an interest as an owner, creditor,
or otherwise, if and whenever the Board of Directors of the Corporation deems it
in the best interests of the Corporation to do so.
Section 5.11. For purposes of this by-law, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this by-law with respect to the resulting
or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued.
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<PAGE>
Section 5.12. The Corporation may, to the fullest extent
permitted by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) indemnify any and all persons whom the Corporation shall have power
to indemnify under said law from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said law, if and
whenever the Board of Directors of the Corporations deems it to be in the best
interests of the Corporation to do so.
Section 5.13. The indemnification or advancement of expenses
provided by, or granted pursuant to, this by-law shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Section 5.14. If a claim under this Section 5 is not paid in
full by the Corporation within 30 days after a written claim has been received
by the Corporation, the claimant may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action, other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation, that the claimant has
not met the standards of conduct enumerated above which make it permissible
under the Delaware General Corporation Law for the Corporation to
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<PAGE>
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation,
including its Board of Directors, independent legal counsel, or its
stockholders, to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth above and
in the Delaware General Corporation Law, nor an actual determination by the
Corporation, including its Board of Directors, independent legal counsel, or its
stockholders that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 5.15. If this Section 5 or any portion thereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify, and advance expenses to, each
director, officer, employee or agent of the Corporation to the full extent
permitted by any applicable portion of this Section 5 that shall not have been
invalidated and to the full extent permitted by applicable law.
Article 6
CAPITAL STOCK
Section 6.1. Stock Certificates. The certificates for shares
of the Corporation's capital stock shall be numbered and registered in a share
register as they are issued, shall bear the name of the registered holder, the
number and class of shares represented thereby and the par value of each share
or a statement that such shares are without par value, as the case may be, shall
be signed by the President or any Vice
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<PAGE>
President of the Corporation and the Secretary, any Assistant Secretary or the
Treasurer of the Corporation or any other person properly authorized by the
Board of Directors and shall bear the seal of the Corporation, which seal may be
a facsimile engraved or printed. Where the certificate is signed by a transfer
agent or a registrar, the signature of any corporate officer on such certificate
may be a facsimile engraved or printed. In case any officer who has signed, or
whose facsimile signature has been placed upon, any share certificate shall have
ceased to be such officer because of death, resignation or otherwise, before the
certificate is issued, it may be issued by the Corporation with the same effect
as if the office had not ceased to be such at the date of its issue.
Section 6.2. Transfer of Shares. Upon surrender to the
Corporation of a share certificate duly endorsed by the person named in the
certificate or by an attorney duly appointed in writing and accompanied where
necessary by proper evidence of succession, assignment or authority to transfer,
a new certificate shall be issued to the person entitled thereto and the old
certificate cancelled and the transfer recorded upon the stock transfer books
and share register of the Corporation.
Section 6.3. Lost Certificates. Should any stockholder of the
Corporation allege the loss, theft or destruction of one or more certificates
for shares of the Corporation and request the issuance by the Corporation of a
substitute certificate therefor, the Board of Directors may direct that a new
certificate of the same tenor and for the same number of shares be issued to
such person upon such person's making of an affidavit in form satisfactory to
the Board of Directors setting forth the facts in connection therewith, provided
that prior to the receipt of such request the Corporation
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<PAGE>
shall not have either registered a transfer of such certificate or received
notice that such certificate has been acquired by a bona fide purchaser. When
authorizing such issuance of a new certificate, the Board of Directors may, in
its discretion and as a condition precedent to the issuance of such certificate,
require the owner of such lost, stolen or destroyed certificate, or his heirs or
legal representatives, as the case may be, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such form and for such sum and with such surety or sureties, with fixed or open
penalty, as shall be satisfactory to the Board of Directors, as indemnity for
any liability or expense which it may incur by reason of the original
certificate remaining outstanding.
Section 6.4. Dividends. The Board of Directors may, from time
to time, at any duly convened regular or special meeting or by unanimous
consent, declare and pay dividends upon the outstanding shares of capital stock
of the Corporation in cash, property or shares of the Corporation.
Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Board of Directors from time to time, in its absolute discretion, shall deem
proper as a reserve fund to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation or for such other
purposes as the Board of Directors shall believe to be in the best interests of
the Corporation, and the Board of Directors may reduce or abolish any such
reserve in the manner in which it was created.
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<PAGE>
Article 7
FINANCIAL REPORT TO STOCKHOLDERS
The President of the Corporation and the Board of Directors
shall present at each annual meeting of the stockholders a full and complete
statement of the business and affairs of the Corporation for the preceding year.
Such statement shall be prepared and presented in whatever manner the Board of
Directors shall deem advisable and need not be verified by a certified public
accountant or sent to the stockholders of the Corporation.
Article 8
CHECKS AND NOTES
All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors or the President may from time to time designate.
Article 9
FISCAL YEAR
The fiscal year of the Corporation shall be as determined from
time to time by resolution of the Board of Directors.
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<PAGE>
Article 10
SEAL
The seal of the Corporation shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or in any manner reproduced.
Article 11
NOTICES; COMPUTING TIME PERIODS
Section 11.1. Method and Contents of Notice. Whenever, under
the provisions of statute or of the Certificate of Incorporation or of these
By-laws, written notice is required to be given to any person, it may be given
to such person either personally or by sending a copy thereof through the mail
postage prepaid, or by telegram, charges prepaid, to his address appearing on
the books of the Corporation or supplied by him to the Corporation for the
purpose of notice. If the notice is sent by mail or telegraph, it shall be
deemed to have been given to the person entitled thereto when deposited in the
United States mail or with a telegraph office for transmission to such person.
Such notice shall specify the place, day and hour of the meeting, if any, and,
in the case of a special meeting of the stockholders, the general nature of the
business to be transacted.
Section 11.2. Waiver of Notice. Any written notice required to
be given to any person may be waived in a writing signed by the person entitled
to such notice whether before or after the time stated therein. Attendance of
any person entitled to notice, whether in person or by proxy, at any meeting
shall constitute a
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<PAGE>
waiver of notice of such meeting, except where any person attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened. Where written notice is required
for any meeting, the waiver thereof must specify the purpose only if it is for a
special meeting of the stockholders.
Section 11.3. Computing Time Periods. In computing the number
of days for purposes of these By-laws, all days shall be counted, including
Saturdays, Sundays or holidays; provided, however, that if the final day of any
time period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday. In
computing the number of days for the purpose of giving notice of any meeting,
the date upon which the notice is given shall be counted but the day set for the
meeting shall not be counted.
Article 12
AMENDMENTS
These By-laws may be altered, amended or repealed by a
majority vote of the stockholders entitled to vote thereon at any annual or
special meeting duly convened after notice to the stockholders of that purpose
or by a majority vote of the members of the Board of Directors at any regular or
special meeting of the Board of Directors duly convened after notice to the
Board of Directors of that purpose, subject always to the power of the
stockholders to change such action of the Board of Directors.
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<PAGE>
Article 13
INTERPRETATION OF BY-LAWS
All words, terms and provisions of these By-laws shall be
interpreted and defined by and in accordance with the General Corporation Law of
the State of Delaware, as amended, and as amended from time to time hereafter.
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INTEGRATED LIVING COMMUNITIES, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
Effective as of January 1, 1996
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
Effective as of January 1, 1996
TABLE OF CONTENTS
-----------------
ARTICLE 1
---------
DEFINITIONS
-----------
1.1 ACCOUNT...............................................................1
1.2 BENEFICIARY...........................................................1
1.3 CHANGE OF CONTROL.....................................................1
1.4 CODE..................................................................2
1.5 COMPENSATION..........................................................2
1.6 COMPENSATION DEFERRAL ACCOUNT.........................................2
1.7 COMPENSATION DEFERRALS................................................2
1.8 DESIGNATION DATE......................................................2
1.9 EFFECTIVE DATE........................................................2
1.10 ELIGIBLE EMPLOYEE.....................................................2
1.11 EMPLOYER..............................................................2
1.12 EMPLOYER CONTRIBUTION CREDIT ACCOUNT..................................2
1.13 EMPLOYER CONTRIBUTION CREDITS.........................................2
1.14 ENTRY DATE............................................................2
1.15 PARTICIPANT...........................................................2
1.16 PARTICIPANT ENROLLMENT AND ELECTION FORM..............................3
1.17 PLAN..................................................................3
1.18 PLAN YEAR.............................................................3
1.19 TRUST.................................................................3
1.20 TRUSTEE...............................................................3
1.21 VALUATION DATE........................................................3
ARTICLE 2
---------
ELIGIBILITY AND PARTICIPATION
-----------------------------
2.1 REQUIREMENTS..........................................................3
2.2 RE-EMPLOYMENT.........................................................3
2.3 CHANGE OF EMPLOYMENT CATEGORY.........................................3
i
<PAGE>
ARTICLE 3
---------
CONTRIBUTIONS AND CREDITS
-------------------------
3.1 EMPLOYER CONTRIBUTION CREDITS.........................................4
3.2 PARTICIPANT COMPENSATION DEFERRALS....................................5
3.3 CONTRIBUTIONS TO THE TRUST............................................6
ARTICLE 4
---------
ALLOCATION OF FUNDS
-------------------
4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON
ACCOUNTS..............................................................6
4.2 ACCOUNTING FOR DISTRIBUTIONS..........................................6
4.3 SEPARATE ACCOUNTS.....................................................6
4.4 INTERIM VALUATIONS....................................................7
4.5 EXPENSES..............................................................7
4.6 TAXES.................................................................7
ARTICLE 5
---------
ENTITLEMENT TO BENEFITS
-----------------------
5.1 TERMINATION OF EMPLOYMENT.............................................7
5.2 VESTING...............................................................7
ARTICLE 6
---------
DISTRIBUTION OF BENEFITS
------------------------
6.1 AMOUNT................................................................8
6.2 METHOD OF PAYMENT.....................................................8
6.3 DEATH BENEFITS........................................................8
6.4 PAYMENT IN RESPECT OF CHANGE IN CONTROL
EMPLOYER CONTRIBUTION CREDITS.........................................9
ARTICLE 7
---------
BENEFICIARIES; PARTICIPANT DATA
-------------------------------
7.1 DESIGNATION OF BENEFICIARIES..........................................9
7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND
BENEFICIARIES; INABILITY TO LOCATE PARTICIPANTS OR
BENEFICIARIES.........................................................9
ii
<PAGE>
ARTICLE 8
---------
ADMINISTRATION
--------------
8.1 ADMINISTRATIVE AUTHORITY.............................................10
8.2 UNIFORMITY OF DISCRETIONARY ACTS.....................................11
8.3 LITIGATION...........................................................11
8.4 CLAIMS PROCEDURE.....................................................11
ARTICLE 9
---------
AMENDMENT
---------
9.1 RIGHT TO AMEND.......................................................12
9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION
OF PLAN..............................................................12
ARTICLE 10
----------
TERMINATION
-----------
10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN.......................13
10.2 AUTOMATIC TERMINATION OF PLAN.......................................13
10.3 SUSPENSION OF DEFERRALS.............................................13
10.4 ALLOCATION AND DISTRIBUTION.........................................13
10.5 SUCCESSOR TO EMPLOYER...............................................13
ARTICLE 11
----------
THE TRUST
---------
11.1 ESTABLISHMENT OF TRUST...............................................13
ARTICLE 12
----------
MISCELLANEOUS
-------------
12.1 LIMITATIONS ON LIABILITY OF EMPLOYER.................................14
12.2 CONSTRUCTION.........................................................14
12.3 SPENDTHRIFT PROVISION................................................14
iii
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
Effective as of January 1, 1996
RECITALS
--------
This Integrated Living Communities, Inc. Supplemental Deferred
Compensation Plan (the "Plan") is adopted by Integrated Living Communities, Inc.
(the "Employer") for certain of its executive and/or highly compensated
employees. The purpose of the Plan is to offer those employees an opportunity to
elect to defer the receipt of compensation in order to provide termination of
employment and related benefits taxable pursuant to section 451 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Plan is intended to be a
"top-hat" plan (i.e., an unfunded deferred compensation plan maintained for a
select group of management or highly-compensated employees) under sections
201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act
of 1974 ("ERISA").
Accordingly, the following Plan is adopted.
ARTICLE 1
---------
DEFINITIONS
-----------
1.1 ACCOUNT means the balance credited to a Participant's or
Beneficiary's Plan account, including contribution credits and deemed income,
gains and losses (as determined by the Employer, in its discretion) credited
thereto. A Participant's or Beneficiary's Account shall be determined as of the
date of reference.
1.2 BENEFICIARY means any person or person so designated in
accordance with the provisions of Article 7.
1.3 CHANGE OF CONTROL means the occurrence of one or more of the
following events thirty (30) or more days following the initial public offering
of any class of the Employer's equity securities: (a) the purchase of other
acquisition by any person, entity or group of persons, within the meaning of
section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Act"), or
any comparable successor provisions, of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Act) of thirty percent (30%) or more of
either the outstanding shares of common stock or the combined voting power of
the Employer's then outstanding voting securities entitled to vote generally;
(b) the approval by the stockholders of the Employer of a reorganization,
merger, or consolidation, in each case with respect to which persons who were
stockholders of the Employer immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than fifty percent (50%)
of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged, or consolidated entity's then outstanding
securities; (c) a liquidation or dissolution of the Employer; or (d) the sale of
all or substantially all of the Employer's assets.
1
<PAGE>
1.4 CODE means the Internal Revenue Code of 1986 and the
regulations thereunder, as amended from time to time.
1.5 COMPENSATION means the total compensation paid by the Employer
to an Eligible Employee with respect to his or her service for the Employer in a
Plan Year (as reported on IRS Form W-2); provided, however, that, for purposes
of allocating the ordinary Employer Contribution Credit for the Plan's first
Plan Year (i.e., the Employer Contribution Credit other than the Change in
Control Employer Contribution Credit), each Eligible Employee's annualized base
salary with respect to his or her service for the Employer in such first Plan
Year (as determined by the Employer at its discretion) shall be the Eligible
Employee's Compensation for the first Plan Year, even if the Eligible Employee
is employed for less than the entire first Plan Year.
1.6 COMPENSATION DEFERRAL ACCOUNT is defined in Section 3.2.
1.7 COMPENSATION DEFERRALS is defined in Section 3.2.
1.8 DESIGNATION DATE means the date or dates as of which a
designation of deemed investment directions by an individual pursuant to Section
4.5, or any change in a prior designation of deemed investment directions by an
individual pursuant to Section 4.5, shall become effective. The Designation
Dates in any Plan Year shall be designated by the Employer.
1.9 EFFECTIVE DATE means the effective date of the Plan, which
shall be January 1, 1996.
1.10 ELIGIBLE EMPLOYEE means, for any Plan Year (or applicable
portion thereof), a person employed by the Employer who is determined by the
Employer to be a member of a select group of management or highly compensated
employees of the Employer and whose name appears on Schedule I, attached hereto.
1.11 EMPLOYER means Integrated Living Communities, Inc. and its
successors and assigns unless otherwise herein provided, or any other
corporation or business organization which, with the consent of Integrated
Living Communities, Inc., or its successors or assigns, assumes the Employer's
obligations hereunder, or any other corporation or business organization which
agrees, with the consent of Integrated Living Communities, Inc., to become a
party to the Plan.
1.12 EMPLOYER CONTRIBUTION CREDIT ACCOUNT is defined Section 3.1.
1.13 EMPLOYER CONTRIBUTION CREDITS is defined in Section 3.1.
1.14 ENTRY DATE with respect to an individual means the first day
of the pay period following the date on which the individual first is given
notice that he or she is an Eligible Employee.
1.15 PARTICIPANT means any person so designated in accordance with
the provisions of Article 2, including, where appropriate according to the
context of the
2
<PAGE>
Plan, any former employee who is or may become (or whose Beneficiaries may
become) eligible to receive a benefit under the Plan.
1.16 PARTICIPANT ENROLLMENT AND ELECTION FORM means the form or
forms on which a Participant elects to defer Compensation hereunder and on which
the Participant makes certain other designations as required thereon.
1.17 PLAN means this Integrated Living Communities, Inc.
Supplemental Deferred Compensation Plan, as amended from time to time.
1.18 PLAN YEAR means the twelve (12) month period ending on the
December 31 of each year during which the Plan is in effect.
1.19 TRUST means the Trust established pursuant to Article 11.
1.20 TRUSTEE means the trustee of the Trust established pursuant to
Article 11.
1.21 VALUATION DATE means the last day of each Plan Year and any
other date that the Employer, in its sole discretion, designates as a Valuation
Date.
ARTICLE 2
---------
ELIGIBILITY AND PARTICIPATION
-----------------------------
2.1 REQUIREMENTS. Every Eligible Employee as of the Effective Date
shall be eligible to become a Participant on the Effective Date. Every other
Eligible Employee shall be eligible to become a Participant on the first Entry
Date occurring on or after the date on which he or she is notified by the
Employer that he or she is an Eligible Employee. No individual shall become a
Participant, however, if he or she is not an Eligible Employee on the date his
or her participation is to begin.
Participation in the Participant Compensation Deferral feature
of the Plan is voluntary and available only to select Participants and only at
the discretion of the Compensation Committee of the Employer's Board of
Directors. In order to participate in the Participant Compensation Deferral
feature of the Plan, an otherwise Eligible Employee must, with the consent of
the Compensation Committee, make written application in such manner as may be
required by Section 3.2 and by the Employer and must agree to make Compensation
Deferrals as provided in Article 3.
2.2 RE-EMPLOYMENT. If a Participant whose employment with the
Employer is terminated is subsequently re-employed, he or she shall become a
Participant in accordance with the provisions of Section 2.1.
2.3 CHANGE OF EMPLOYMENT CATEGORY. During any period in which a
Participant remains in the employ of the Employer, but ceases to be an Eligible
Employee, he or she shall not be eligible to make Compensation Deferrals
hereunder.
3
<PAGE>
ARTICLE 3
---------
CONTRIBUTIONS AND CREDITS
-------------------------
3.1 EMPLOYER CONTRIBUTION CREDITS. There shall be established and
maintained a separate Employer Contribution Credit Account in the name of each
Participant. The Participant's Employer Contribution Credit Account shall be
credited or debited, as applicable, with (a) amounts equal to the Employer's
Contribution Credits credited to that Account; and (b) any deemed earnings and
losses (to the extent realized, based upon deemed fair market value of the
Account's deemed assets as determined by the Employer, in its discretion)
allocated to that Account.
For purposes of this Section, the Employer's Contribution
Credits credited to Participants' Employer Contribution Credit Accounts for a
particular Plan Year shall equal three hundred thousand dollars ($300,000) for
the Plan Year beginning on the Effective Date and, for each Plan Year
thereafter, shall be an amount determined by the Compensation Committee of the
Employer's Board of Directors following the Plan Year to which the Employer
Contribution Credit relates. On or before the beginning of each Plan Year
beginning on or after January 1, 1997, the Compensation Committee shall
establish an earnings per share target for the Employer for such forthcoming
Plan Year. If the target earnings per share figure is satisfied by the Employer
during the Plan Year (as determined by the Employer's independent auditor in
accordance with generally accepted accounting principles), the Employer
Contribution Credit amount determined by the Compensation Committee for such
Plan Year shall not be less than one hundred fifty thousand dollars ($150,000).
The amount allocated to each Participant's Employer
Contribution Credit Account each Plan Year for which the Employer makes an
Employer Contribution Credit shall equal the total Employer Contribution Credits
for the Plan Year multiplied by a fraction, the numerator of which is the
Participant's Compensation during the Plan Year for which the Employer
Contribution Credit is made (as determined by the Employer) and the denominator
of which is the total of all Participants' Compensation during such Plan Year.
If a Participant receives an Employer Contribution Credit for
the Plan's first Plan Year and the Participant terminates employment voluntarily
with the Employer during such first Plan Year, the Participant shall forfeit
that Plan Year's Employer Contribution Credit. Any such forfeited amount shall
be allocated (adjusted for deemed earnings or losses) among the remaining
Participants' Employer Contribution Credit Accounts as forfeitures in accordance
with Section 5.2. Participants terminating employment with the Employer on or
after January 1, 1997 shall not share in the allocation of the Employer
Contribution Credit for the Plan Year in which they terminate employment.
In addition to the Participant's Employer Contribution Credit
entitlements set forth above, upon the occurrence of a Change in Control, each
Participant who is employed by the Employer on the day prior to the Change in
Control shall receive as soon as practicable following such Change in Control an
additional Employer Contribution Credit allocation equal to (i) the
Participant's highest Compensation for
4
<PAGE>
the five full calendar years prior to the Change in Control or, if the
Participant has not been employed for an entire calendar year prior to the
Change in Control, the Participant's annualized Compensation for the year in
which the Change in Control occurs, times (ii) three (3).
The Participant's Employer Contribution Credit Account shall
be credited or debited, as applicable, as of each Valuation Date, with deemed
earnings or losses, as applicable. The amount of deemed earnings or losses shall
be as determined by the Employer. The Employer shall have the discretion to
allocate such deemed earnings or losses among Participants' Employer
Contribution Credit Accounts pursuant to such allocation rules as the Employer
deems to be reasonable and administratively practicable.
A Participant shall be vested in amounts credited to his or
her Employer Contribution Credit Account as provided in Section 5.3.
3.2 PARTICIPANT COMPENSATION DEFERRALS. In accordance with rules
established by and only with the consent of the Compensation Committee of the
Employer's Board of Directors, a Participant who is notified by the Compensation
Committee that he or she has the right to make Participant Compensation
Deferrals under the Plan may elect to defer Compensation which is due to be
earned and which would otherwise be paid to the Participant, in a lump sum or in
any fixed periodic dollar amounts designated by the Participant. Amounts so
deferred will be considered a Participant's "Compensation Deferrals."
Ordinarily, a Participant shall make such an election with respect to a coming
twelve (12) month Plan Year during the period beginning on the November 1 and
ending on the December 31 of the prior Plan Year, or during such other period as
is established by the Employer.
Compensation Deferrals shall be made through regular payroll
deductions or through an election by the Participant to defer the payment of a
bonus not yet payable to him or her at the time of the election. The Participant
may change his or her regular payroll deduction Compensation Deferral amount as
of, and by written notice delivered to the Employer at least thirty (30) days
prior to, the beginning of any regular payroll period, with such reduction being
first effective for Compensation to be earned in that payroll period. In the
case of a bonus deferral, the Participant may reduce his or her bonuses due to
be paid by the Employer by giving notice to the Employer of the bonus
Compensation Deferral amount prior to the date the applicable bonus is first due
to be paid.
Once made, a Compensation Deferral regular payroll deduction
election shall continue in force indefinitely, until changed by the Participant
on a subsequent Participant Enrollment and Election Form provided by the
Employer. A bonus payment election shall continue in force only for the Plan
Year for which the election is first effective. Compensation Deferrals shall be
deducted by the Employer from the pay of a deferring Participant and shall be
credited to the Account of the deferring Participant.
There shall be established and maintained by the Employer a
separate Compensation Deferral Account in the name of each Participant to which
shall be
5
<PAGE>
credited or debited: (a) amounts equal to the Participant's Compensation
Deferrals; and (b) amounts equal to any deemed earnings or losses (to the extent
realized, based upon deemed fair market value of the Account's deemed assets, as
determined by the Employer, in its discretion) attributable or allocable
thereto. A Participant shall at all times be 100% vested in amounts credited to
his or her Participant Compensation Deferral Account.
3.3 CONTRIBUTIONS TO THE TRUST. An amount shall be contributed by
the Employer to the Trust maintained under Section 11.1 equal to the amount(s)
required to be credited to the Participants' Accounts under Sections 3.1 and 3.2
as soon as practicable after such amount(s) are determined.
ARTICLE 4
---------
ALLOCATION OF FUNDS
-------------------
4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON ACCOUNTS. Subject
to such limitations as may from time to time be required by law, imposed by the
Trustee or contained elsewhere in the Plan, the Employer shall direct the
Trustee to invest the account maintained in the Trust on behalf of the
Participant in a manner determined by the Employer in its discretion. The
Employer shall be permitted to invest the account maintained in the Trust on
behalf of any Participant in a manner that is different from the manner in which
it directs the investment of the account maintained in the Trust on behalf of
any one or more other Participants, or the Employer shall be permitted to invest
all Participants' Accounts as a whole with each Participant having a deemed
percentage interest in the entirety of the Trust assets that corresponds to the
value of the Participant's Plan Account as a percentage of the value of all
Participants' Plan Accounts. The value of the Participant's Account shall be
equal to the value of the account maintained under the Trust on behalf of the
Participant. As of each valuation date of the Trust, the Participant's Account
will be credited or debited to reflect the Participant's deemed investments of
the Trust. The Participant's Plan Account will be credited or debited with the
increase or decrease in the realizable net asset value or credited interest, as
applicable, of the deemed investments, as follows. As of each Valuation Date, an
amount equal to the net increase or decrease in realizable net asset value or
credited interest, as applicable (as determined by the Trustee), of each deemed
investment option within the Account since the preceding Valuation Date shall be
allocated among all Participants' Accounts deemed to be invested in that
investment option in accordance with the ratio which the portion of the Account
of each Participant which is deemed to be invested within that investment
option, determined as provided herein, bears to the aggregate of all amounts
deemed to be invested within that investment option.
4.2 ACCOUNTING FOR DISTRIBUTIONS. As of the date of any
distribution hereunder, the distribution made hereunder to the Participant or
his or her Beneficiary or Beneficiaries shall be charged to such Participant's
Account. Such amounts shall be charged on a pro rata basis against the
investments of the Trust in which the Participant's Account is deemed to be
invested.
6
<PAGE>
4.3 SEPARATE ACCOUNTS. A separate account under the Plan shall be
established and maintained by the Employer to reflect the Account for each
Participant with sub-accounts to show separately the deemed earnings and losses
credited or debited to such Account, and the applicable deemed investments of
the Account.
4.4 INTERIM VALUATIONS. If it is determined by the Employer that
the value of a Participant's Account as of any date on which distributions are
to be made differs materially from the value of the Participant's Account on the
prior Valuation Date upon which the distribution is to be based, the Employer,
in its discretion, shall have the right to designate any date in the interim as
a Valuation Date for the purpose of revaluing the Participant's Account so that
the Account will, prior to the distribution, reflect its share of such material
difference in value.
4.5 EXPENSES. Expenses, including Trustee fees, allocable to the
administration or operation of an Account maintained under the Plan shall be
paid by the Employer.
4.6 TAXES. Any taxes payable by the Employer allocable to an
Account (or portion thereof) maintained under the Plan which are payable prior
to the distribution of the Account (or portion thereof) shall be paid by the
Employer and shall not be charged against that Account, as an expense of the
Account or otherwise.
ARTICLE 5
---------
ENTITLEMENT TO BENEFITS
-----------------------
5.1 TERMINATION OF EMPLOYMENT. A Participant who terminates
employment with the Employer shall receive payment of his or her vested Account
as soon as practicable following his or her termination of employment with the
Employer, such vested Account to be valued and payable at such termination
according to the provisions of Article 6.
5.2 VESTING. A Participant shall at all times be one hundred
percent (100%) vested in amounts credited to his or her Compensation Deferral
Account. Amounts credited to a Participant's Employer Contribution Credit
Account shall vest according to the following schedule:
Years of Service Vested Percentage
---------------- -----------------
Less than 1 0%
1 20%
2 40%
3 60%
4 80%
5 or more 100%
For purposes of this Section, a Participant's years of service
shall equal the Participant's total number of completed twelve (12) month
periods of
7
<PAGE>
employment with the Employer as of the date of reference, whether continuous or
noncontinuous and including periods of service prior to the Effective Date.
If a Participant terminates employment because of death, total
and permanent disability (as determined by the Employer in its discretion) or
termination by the Employer without cause (as determined by the Employer) or for
any reason within one (1) year following a Change of Control, the Participant
shall become one hundred percent (100%) vested in his or her Employer
Contribution Credit Account. If a Participant terminates employment under any
other circumstance, he or she shall become vested in his or her Employer
Contribution Account, if at all, under the vesting schedule set forth above.
Any amount of a Participant's Employer Contribution Credit
Account that is forfeited by a Participant because of his or her failure to
satisfy the above vesting schedule in full shall be forfeited as of the last day
of the Plan Year of the Participant's termination of employment, and such
forfeiture amount shall be allocated to the Employer Contribution Credit Account
of each Participant who remains employed by the Employer on the last day of such
Plan Year by multiplying the amount of the forfeiture by a fraction, the
numerator of which is the value of the remaining Participant's Employer
Contribution Credit Account as of such date and the denominator of which is the
value of the Employer Contribution Credit Accounts of all remaining Participants
as of such date.
ARTICLE 6
---------
DISTRIBUTION OF BENEFITS
------------------------
6.1 AMOUNT. A Participant (or his or her Beneficiary) shall become
entitled to receive, on or about the date of the Participant's termination of
employment with the Employer, a distribution in an aggregate amount equal to the
Participant's vested Account. Any payment due hereunder from the Trust which is
not paid by the Trust for any reason will be paid by the Employer from its
general assets.
6.2 METHOD OF PAYMENT.
-----------------
(a) Cash Or In-Kind Payments. Payments under the Plan shall be
made in cash or in-kind, as elected by the Participant, as permitted by the
Employer in its sole and absolute discretion and subject to applicable
restrictions on transfer as may be applicable legally or contractually.
(b) Timing and Manner of Payment. An aggregate amount equal to
the Participant's vested Account will be paid by the Trust or the Employer upon
a Participant's termination of employment with the Employer, as provided by
Section 6.1, in a lump sum.
6.3 DEATH BENEFITS. If a Participant dies before terminating his
or her employment with the Employer and before the commencement of payments to
the Participant hereunder, the entire value of the Participant's Account (which
may include credits for insurance contract death benefits deemed to be received
by the Account)
8
<PAGE>
shall be paid, as provided in Section 6.2(a), to the person or persons
designated in accordance with Section 7.1, in a cash lump sum.
6.4 PAYMENT IN RESPECT OF CHANGE IN CONTROL EMPLOYER CONTRIBUTION
CREDITS. Notwithstanding the preceding, the Participant and the Employer may
agree, prior to any termination of the Participant's employment, that the
Participant will receive, in lieu of a payment from the Participant's Employer
Contribution Credit Account in respect of a Change in Control of the Employer, a
payment the present value of which, computed at the time required by section
4999 of the Code, is below the threshold necessary to trigger applicability of
section 4999 of the Code. Upon the date that the Employer and the Participant
enter into a written agreement providing for such reduced payments in accordance
with the previous sentence, the Employer's obligations to the Participant under
Section 6.1 shall be extinguished to the extent such payments are made as
agreed. If the Participant and Employer are unable to negotiate a mutually
satisfactory agreement concerning the amount of payment pursuant to this Section
6.4, then the Participant shall receive payments in accordance with Section 6.1.
ARTICLE 7
---------
BENEFICIARIES; PARTICIPANT DATA
-------------------------------
7.1 DESIGNATION OF BENEFICIARIES. Each Participant from time to
time may designate any person or persons (who may be named contingently or
successively) to receive such benefits as may be payable under the Plan upon or
after the Participant's death, and such designation may be changed from time to
time by the Participant by filing a new designation. Each designation will
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Employer, and will be effective only when filed in writing
with the Employer during the Participant's lifetime.
In the absence of a valid Beneficiary designation, or if, at
the time any benefit payment is due to a Beneficiary, there is no living
Beneficiary validly named by the Participant, the Employer shall pay any such
benefit payment to the Participant's spouse, if then living, but otherwise to
the Participant's then living descendants, if any, per stripes, but, if none, to
the Participant's estate. In determining the existence or identity of anyone
entitled to a benefit payment, the Employer may rely conclusively upon
information supplied by the Participant's personal representative, executor or
administrator. If a question arises as to the existence or identity of anyone
entitled to receive a benefit payment as aforesaid, or if a dispute arises with
respect to any such payment, then, notwithstanding the foregoing, the Employer,
in its sole discretion, may distribute such payment to the Participant's estate
without liability for any tax or other consequences which might flow therefrom,
or may take such other action as the Employer deems to be appropriate.
7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES;
INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES. Any communication, statement
or notice addressed to a Participant or to a Beneficiary at his or her last post
office address as shown on the Employer's records shall be
9
<PAGE>
binding on the Participant or Beneficiary for all purposes of the Plan. The
Employer shall not be obliged to search for any Participant or Beneficiary
beyond the sending of a registered letter to such last known address. If the
Employer notifies any Participant or Beneficiary that he or she is entitled to
an amount under the Plan and the Participant or Beneficiary fails to claim such
amount or make his or her location known to the Employer within three (3) years
thereafter, then, except as otherwise required by law, if the location of one or
more of the next of kin of the Participant is known to the Employer, the
Employer may direct distribution of such amount to any one or more or all of
such next of kin, and in such proportions as the Employer determines. If the
location of none of the foregoing persons can be determined, the Employer shall
have the right to direct that the amount payable shall be deemed to be a
forfeiture, except that the dollar amount of the forfeiture, unadjusted for
deemed gains or losses in the interim, shall be paid by the Employer if a claim
for the benefit subsequently is made by the Participant or the Beneficiary to
whom it was payable. If a benefit payable to an unlocated Participant or
Beneficiary is subject to escheat pursuant to applicable state law, the Employer
shall not be liable to any person for any payment made in accordance with such
law.
ARTICLE 8
---------
ADMINISTRATION
--------------
8.1 ADMINISTRATIVE AUTHORITY. Except as otherwise specifically
provided herein, the Employer shall have the sole responsibility for and the
sole control of the operation and administration of the Plan, and shall have the
power and authority to take all action and to make all decisions and
interpretations which may be necessary or appropriate in order to administer and
operate the Plan, including, without limiting the generality of the foregoing,
the power, duty and responsibility to:
(a) Resolve and determine all disputes or questions arising
under the Plan, and to remedy any ambiguities, inconsistencies or omissions in
the Plan.
(b) Adopt such rules of procedure and regulations as in its
opinion may be necessary for the proper and efficient administration of the Plan
and as are consistent with the Plan.
(c) Implement the Plan in accordance with its terms and the
rules and regulations adopted as above.
(d) Make determinations with respect to the eligibility of any
Eligible Employee as a Participant and make determinations concerning the
crediting of Plan Accounts.
(e) Appoint any persons or firms, or otherwise act to secure
specialized advice or assistance, as it deems necessary or desirable in
connection with the administration and operation of the Plan, and the Employer
shall be entitled to rely conclusively upon, and shall be fully protected in any
action or omission taken by it in good faith reliance upon, the advice or
opinion of such firms or persons. The Employer shall have the power and
authority to delegate from time to time by written instrument
10
<PAGE>
all or any part of its duties, powers or responsibilities under the Plan, both
ministerial and discretionary, as it deems appropriate, to any person or
committee, and in the same manner to revoke any such delegation of duties,
powers or responsibilities. Any action of such person or committee in the
exercise of such delegated duties, powers or responsibilities shall have the
same force and effect for all purposes hereunder as if such action had been
taken by the Employer. Further, the Employer may authorize one or more persons
to execute any certificate or document on behalf of the Employer, in which event
any person notified by the Employer of such authorization shall be entitled to
accept and conclusively rely upon any such certificate or document executed by
such person as representing action by the Employer until such notified person
shall have been notified of the revocation of such authority.
8.2 UNIFORMITY OF DISCRETIONARY ACTS. Whenever in the
administration or operation of the Plan discretionary actions by the Employer
are required or permitted, such actions shall be consistently and uniformly
applied to all persons similarly situated, and no such action shall be taken
which shall discriminate in favor of any particular person or group of persons.
8.3 LITIGATION. Except as may be otherwise required by law, in any
action or judicial proceeding affecting the Plan, no Participant or Beneficiary
shall be entitled to any notice or service of process, and any final judgment
entered in such action shall be binding on all persons interested in, or
claiming under, the Plan.
8.4 CLAIMS PROCEDURE. Any person claiming a benefit under the Plan
(a "Claimant") shall present the claim, in writing, to the Employer, and the
Employer shall respond in writing. If the claim is denied, the written notice of
denial shall state, in a manner calculated to be understood by the Claimant:
(a) The specific reason or reasons for the denial, with
specific references to the Plan provisions on which the denial is based;
(b) A description of any additional material or information
necessary for the Claimant to perfect his or her claim and an explanation of why
such material or information is necessary; and
(c) An explanation of the Plan's claims review procedure.
The written notice denying or granting the Claimant's claim
shall be provided to the Claimant within ninety (90) days after the Employer's
receipt of the claim, unless special circumstances require an extension of time
for processing the claim. If such an extension is required, written notice of
the extension shall be furnished by the Employer to the Claimant within the
initial ninety (90) day period and in no event shall such an extension exceed a
period of ninety (90) days from the end of the initial ninety (90) day period.
Any extension notice shall indicate the special circumstances requiring the
extension and the date on which the Employer expects to render a decision on the
claim. Any claim not granted or denied within the period noted above shall be
deemed to have been denied.
11
<PAGE>
Any Claimant whose claim is denied, or deemed to have been
denied under the preceding sentence (or such Claimant's authorized
representative), may, within sixty (60) days after the Claimant's receipt of
notice of the denial, or after the date of the deemed denial, request a review
of the denial by notice given, in writing, to the Employer. Upon such a request
for review, the claim shall be reviewed by the Employer (or its designated
representative) which may, but shall not be required to, grant the Claimant a
hearing. In connection with the review, the Claimant may have representation,
may examine pertinent documents, and may submit issues and comments in writing.
The decision on review normally shall be made within sixty
(60) days of the Employer's receipt of the request for review. If an extension
of time is required due to special circumstances, the Claimant shall be
notified, in writing, by the Employer, and the time limit for the decision on
review shall be extended to one hundred twenty (120) days. The decision on
review shall be in writing and shall state, in a manner calculated to be
understood by the Claimant, the specific reasons for the decision and shall
include references to the relevant Plan provisions on which the decision is
based. The written decision on review shall be given to the Claimant within the
sixty (60) day (or, if applicable, the one hundred twenty (120) day) time limit
discussed above. If the decision on review is not communicated to the Claimant
within the sixty (60) day (or, if applicable, the one hundred twenty (120) day)
period discussed above, the claim shall be deemed to have been denied upon
review. All decisions on review shall be final and binding with respect to all
concerned parties.
ARTICLE 9
---------
AMENDMENT
---------
9.1 RIGHT TO AMEND. The Employer, by written instrument executed
by the Employer, shall have the right to amend the Plan, at any time and with
respect to any provisions hereof, and all parties hereto or claiming any
interest hereunder shall be bound by such amendment; provided, however, that no
such amendment shall deprive a Participant or a Beneficiary of a right accrued
hereunder prior to the date of the amendment.
9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN.
Notwithstanding the provisions of Section 9.1, the Plan may be amended by the
Employer at any time, retroactively if required, if found necessary, in the
opinion of the Employer, in order to ensure that the Plan is characterized as
"top-hat" plan of deferred compensation maintained for a select group of
management or highly compensated employees as described under ERISA sections
201(2), 301(a)(3), and 401(a)(1), and to conform the Plan to the provisions and
requirements of any applicable law (including ERISA and the Code). No such
amendment shall be considered prejudicial to any interest of a Participant or a
Beneficiary hereunder.
12
<PAGE>
ARTICLE 10
----------
TERMINATION
-----------
10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN. The Employer
reserves the right to terminate the Plan and/or its obligation to make further
credits to Plan Accounts. The Employer also reserves the right to suspend the
operation of the Plan for a fixed or indeterminate period of time.
10.2 AUTOMATIC TERMINATION OF PLAN. The Plan automatically shall
terminate upon the dissolution of the Employer, or upon its merger into or
consolidation with any other corporation or business organization if there is a
failure by the surviving corporation or business organization to adopt
specifically and agree to continue the Plan.
10.3 SUSPENSION OF DEFERRALS. In the event of a suspension of the
Plan, the Employer shall continue all aspects of the Plan, other than
Compensation Deferrals and Employer Contribution Credits, during the period of
the suspension, in which event payments hereunder will continue to be made
during the period of the suspension in accordance with Articles 5 and 6.
10.4 ALLOCATION AND DISTRIBUTION. This Section shall become
operative on a complete termination of the Plan. The provisions of this Section
also shall become operative in the event of a partial termination of the Plan,
as determined by the Employer, but only with respect to that portion of the Plan
attributable to the Participants to whom the partial termination is applicable.
Upon the effective date of any such event, notwithstanding any other provisions
of the Plan, no persons who were not theretofore Participants shall be eligible
to become Participants and the value of the interest of all Participants and
Beneficiaries shall be fully vested and determined and, after paying Plan
benefits, paid to them as soon as is practicable after such termination.
10.5 SUCCESSOR TO EMPLOYER. Any corporation or other business
organization which is a successor to the Employer by reason of a consolidation,
merger or purchase of substantially all of the assets of the Employer shall have
the right to become a party to the Plan by adopting the same by resolution of
the entity's board of directors or other appropriate governing body. If, within
ninety (90) days from the effective date of such consolidation, merger or sale
of assets, such new entity does not become a party hereto, as above provided,
the Plan automatically shall be terminated, and the provisions of Section 10.4
shall become operative.
ARTICLE 11
----------
THE TRUST
---------
11.1 ESTABLISHMENT OF TRUST. The Employer shall establish the Trust
with the Trustee pursuant to such terms and conditions as are set forth in the
Trust agreement to be entered into between the Employer and the Trustee. The
Trust is intended to be treated as a "grantor" trust under the Code and the
establishment of
13
<PAGE>
the Trust is not intended to cause the Participant to realize current income on
amounts contributed thereto, and the Trust shall be so interpreted.
ARTICLE 12
----------
MISCELLANEOUS
-------------
12.1 LIMITATIONS ON LIABILITY OF EMPLOYER. Neither the
establishment of the Plan nor any modification thereof, nor the creation of any
account under the Plan, nor the payment of any benefits under the Plan shall be
construed as giving to any Participant or other person any legal or equitable
right against the Employer, or any officer or employer thereof except as
provided by law or by any Plan provision. The Employer does not in any way
guarantee any Participant's Account from loss or depreciation, whether caused by
poor investment performance of a deemed investment or the inability to realize
upon an investment due to an insolvency affecting an investment vehicle or any
other reason. In no event shall the Employer, or any successor, employee,
officer, director or stockholder of the Employer, be liable to any person on
account of any claim arising by reason of the provisions of the Plan or of any
instrument or instruments implementing its provisions, or for the failure of any
Participant, Beneficiary or other person to be entitled to any particular tax
consequences with respect to the Plan, or any credit or distribution hereunder.
12.2 CONSTRUCTION. If any provision of the Plan is held to be
illegal or void, such illegality or invalidity shall not affect the remaining
provisions of the Plan, but shall be fully severable, and the Plan shall be
construed and enforced as if said illegal or invalid provision had never been
inserted herein. For all purposes of the Plan, where the context admits, the
singular shall include the plural, and the plural shall include the singular.
Headings of Articles and Sections herein are inserted only for convenience of
reference and are not to be considered in the construction of the Plan. The laws
of the State of Maryland shall govern, control and determine all questions of
law arising with respect to the Plan and the interpretation and validity of its
respective provisions, except where those laws are preempted by the laws of the
United States. Participation under the Plan will not give any Participant the
right to be retained in the service of the Employer nor any right or claim to
any benefit under the Plan unless such right or claim has specifically accrued
hereunder.
The Plan is intended to be and at all times shall be
interpreted and administered so as to qualify as an unfunded deferred
compensation plan, and no provision of the Plan shall be interpreted so as to
give any individual any right in any assets of the Employer which right is
greater than the rights of a general unsecured creditor of the Employer.
12.3 SPENDTHRIFT PROVISION. No amount payable to a Participant or a
Beneficiary under the Plan will, except as otherwise specifically provided by
law, be subject in any manner to anticipation, alienation, attachment,
garnishment, sale, transfer, assignment (either at law or in equity), levy,
execution, pledge, encumbrance, charge or any other legal or equitable process,
and any attempt to do so will be void; nor will any benefit be in any manner
liable for or subject to the debts, contracts, liabilities, engagements or torts
of the person entitled thereto. Further, (i) the
14
<PAGE>
withholding of taxes from Plan benefit payments, (ii) the recovery under the
Plan of overpayments of benefits previously made to a Participant or
Beneficiary, (iii) if applicable, the transfer of benefit rights from the Plan
to another plan, or (iv) the direct deposit of benefit payments to an account in
a banking institution (if not actually part of an arrangement constituting an
assignment or alienation) shall not be construed as an assignment or alienation.
In the event that any Participant's or Beneficiary's benefits
hereunder are garnished or attached by order of any court, the Employer or
Trustee may bring an action or a declaratory judgment in a court of competent
jurisdiction to determine the proper recipient of the benefits to be paid under
the Plan. During the pendency of said action, any benefits that become payable
shall be held as credits to the Participant's or Beneficiary's Account or, if
the Employer or Trustee prefers, paid into the court as they become payable, to
be distributed by the court to the recipient as the court deems proper at the
close of said action.
IN WITNESS WHEREOF, the Employer has caused the Plan to be
executed and its seal to be affixed hereto, effective as of the 1st day of
January, 1996.
ATTEST/WITNESS INTEGRATED LIVING
COMMUNITIES, INC.
By:
- ----------------------------------- --------------------------------------
(SEAL)
Print Name:
Print: ------------------------------
-----------------------------
Date:
-----------------------------------
15
<PAGE>
SCHEDULE I
(Effective January 1, 1996)
Edward J. Komp
John B. Poole
Kyle Shatterly
Kayda Johnson
16
John W. McRoberts
President/CEO
Capstone Capital
August 23, 1996
Mr. John B. Poole
Senior Vice President & CFO
Integrated Living Communities, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Dear John:
This letter confirms the conditional approval of Capatone Capital Corporation, a
Maryland Corporation ("CCT") for the proposed acquisition of several senior
housing facilities on terms herein described. CCT's intention to purchase the
senior housing facilities is subject to Integrated Living Communities, Inc.
("ILC") compliance with and acceptance of the terms and conditions of each lease
as herein set forth and of the terms and conditions set forth in an agreement of
sale and purchase for each facility, each of which are to be prepared in
accordance with CCT's customary documentation and with the terms of this letter.
This conditional approval shall be withdrawn if it has not been accepted by
Integrated by September 15, 1996.
<TABLE>
<CAPTION>
<S> <C>
Purchaser/Lessor: Capstone Capital Corporation, or wholly-owned
subsidiary, ("CCT")
Lessee: Integrated Living Communities, Inc. ("ILC")
Maximum Commitment: $40,000,000 ("Commitment")
Commitment Fee: 0.25% of maximum commitment within 1 business
day of signing as an Expense Deposit, and 1%
of total project cost at takedown as a fee to
CCT. The Expense Deposit is to be used as a
credit against the legal, survey, title and
other expenses of closing each facility.
Leased Facilities: Various senior housing residences
("Facilities") which may provide either
congregate care services, assisted living
services, Alzheimer's care services, skilled
nursing services, or some combination thereof.
Capstone Approval: CCT maintains the absolute right to
pre-approve each Facility funded by this
Commitment.
Initial Term: Not less than twelve years nor more than
fifteen years (all leases funded under this
Commitment shall have the same initial term
expiration date).
Optional Renewal Term: Three separate five year periods (total of
fifteen years); however, no lease may be
extended unless all leases are extended. The
Lease payment for the first year of each
optional period will be based upon a fair
market rental value.
Initial Lease Rate: 350 basis points in excess of the yield on
U.S. Treasury bills of the same maturity as
that of the lease (or closest maturity to that
of the lease). However, the Initial Lease Rate
will not be less than 10%.
Annual Lease Payment
Adjustment: Equal to the positive change in CPI; however,
with the exception of the first year of each
renewal option period, in no event will the
change be less that 2% nor more than 5% of the
previous year's lease payment.
Lease Covenants: Rent Coverage (EBITDAR + rent) for each
Facility equal to or greater than 1.25x.
Gross Defaults: All leases between CCT and ILC shall be
cross-defaulted.
<PAGE>
Lease Guaranty: All leases between CCT and ILC (subsidiary)
shall be guaranteed by ILC (parent).
Guarantor, or Lessee in the case of ILC
(parent), shall maintain a minimum net worth
of at least $55,000,000 and shall maintain
rent and interest coverage EBITDAR % (rent +
interest) of 1.5x or greater.
First Right of Refusal: Granted to ILC.
Triple Net: Lessee is responsible for all maintenance,
upkeep, insurance, taxes, etc. with respect to
the Facilities.
Capital Replacement Reserve: Lessee will fund a Capital Replacement Reserve
Account equal to $_________ (to be negotiated
for each transaction, depending upon the age
of the Facility, its current condition and its
intended use).
Annual Inspection Fee: Lessee to reimburse CCT for up to $2,000 per
year for each year of the lease for an
independent third party inspection of each
Facility.
Closing Cost: Lessee shall pay for all cost of documenting
the Commitment as well as all costs associated
with each transaction pursuant to the
Commitment, including, but not limited to,
initial inspection report, environmental
surveys, title, land survey, property transfer
fees and attorney fees (Lessor's and
Lessee's). Upon acceptance of this term sheet,
ILC will deposit $20,000 with CCT to be
credited against closing costs incurred by
CCT, $5,000 of which shall be non-refundable.
Conditions Precedent: ILC shall have successfully completed the
issuance of 2,000,000 shares of its common
stock and shall have received net proceeds
therefrom of not less than $25,000,000.
</TABLE>
Sincerely,
/s/ John W. McRoberts
John W. McRoberts
President and CEO
Approved and Accepted this
_____ day of July, 1996
Integrated Living Communities, Inc., a ___________________________ Corporation
By /s/ John Poole
_____________________________
Its _SVP - CFO
___________________________
PARTITION AGREEMENT
-------------------
DONALD ROSS BLIVAS, FRED FIALA, and JOHN E. ROWE (herein collectively
called "BFR"), whose mailing address is 1266 First Street, Sarasota, Florida
34236, and INTEGRATED HEALTH SERVICES, INC., a Delaware corporation (herein
called "IHS") and its wholly-owned subsidiaries CENTRAL PARK LODGES, INC., a
Delaware corporation (herein called "CPL"), FLORIDA LIFE CARE, INC., a Florida
corporation (herein called "ILC"), and FLC LAKEHOUSE, INC., a Florida
corporation (herein called "FLC Lakehouse") (IHS, CPL, FLC and FLC Lakehouse are
sometimes herein called collectively the "IHS Parties"), whose mailing address
is 10065 Red Run Boulevard, Owings Mills, Maryland 21117, and JANICE BLIVAS
execute this Partition Agreement this 31st day of October, 1995
Background Information
----------------------
FLC Lakehouse is the majority partner, owning a 60.5% partnership
interest, and BFR are minority partners, owning (collectively) a 39.5%
partnership interest, in each of two Florida general partnerships known as
Lakehouse West (the "West Partnership") and The Lakehouse (also known as
Lakehouse East and referred to herein as the "East Partnership") (collectively,
the "Partnerships"). The West Partnership owns and operates a retirement
facility in Sarasota, Florida, consisting of a single building, known as
Lakehouse West ("Lakehouse West"). The East Partnership owns and operates a
retirement facility in Sarasota, Florida, consisting of a main building
including an assisted care wing, 21 garden apartments, and 18 villas, known as
Lakehouse East ("Lakehouse East"). FLC Lakehouse is a wholly owned subsidiary of
FLC, which is a wholly owned subsidiary of CPL, which is a wholly owned
subsidiary of IHS . IHS acquired all of the issued and outstanding shares of
capital stock of CPL in December, 1993, from Triangle Realty Investments, Inc.
(the "CPL Acquisition").
BFR filed a six-count complaint against the IHS Parties in July, 1994,
in the Circuit Court of Sarasota County, Florida, Case No. 94-3484-CA-01 (the
"Suit"), seeking damages, an accounting, and an injunction. Three of the damages
counts allege that the CPL Acquisition constituted a breach of the Lakehouse
West and Lakehouse East partnership agreements, as amended, claiming that the
CPL Acquisition was, in effect, a sale of the partnership interests in the
Partnerships held by FLC Lakehouse and that the CPL Acquisition triggered a
provision in the Partnership Agreements that allegedly required FLC Lakehouse to
sell BFR's interests in the Partnerships. A fourth damage claim is based on an
allegation that IHS, by purchasing the stock of CPL, tortiously interfered with
the contractual rights of BFR under the Partnership Agreements. The fifth count
is for an accounting, and the sixth
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count is for an injunction to prevent IHS from committing acts that could
prevent the Partnerships from operating continuing care facilities under their
certificates of authority issued by the State of Florida. The IHS Parties have
denied these allegations and have filed defenses to BFR's claims.
BFR and the IHS Parties have reached an amicable settlement of BFR's
claims. The settlement, generally, calls for a division of the property of the
Partnerships so that, after the division, (a) FLC Lakehouse will be the sole
owner of Lakehouse East (including the minimum liquid reserve for Lakehouse
East), (b) BFR will be the only partners of the West Partnership, which will own
Lakehouse West, free and clear of any liens or indebtedness in excess of
$250,000, together with the minimum liquid reserve for Lakehouse West, and (c)
upon the consummation of the division, the West Partnership will have $1.8
million in cash. The parties have agreed, generally, upon the following sequence
of events (which will occur in the following sequence but at the same closing)
for the purpose of achieving the foregoing result: (1) first, the East
Partnership will totally redeem FLC Lakehouse's partnership interest in the East
Partnership, by conveying to FLC Lakehouse all cash of the East Partnership
(including the minimum liquid reserve and certain other reserves and deposits)
and all real estate and improvements owned by the East Partnership, (2) second,
the East Partnership will merge into the West Partnership; and (3) third, the
West Partnership will totally redeem FLC Lakehouse's partnership interest in the
West Partnership, by distributing to FLC Lakehouse all remaining assets of
Lakehouse East. AS a result of these events, BFR will become the sole partners
of the West Partnership, which will own Lakehouse West.
The purpose of this Partition Agreement is to document in detail the
terms and conditions applicable to the division of the property.
Terms
-----
NOW THEREFORE, in consideration of the mutual promises contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, BFR and the IHS Parties agree as follows:
Section 1. Confirmation of Recitals. The IHS Parties and BFR acknowledge and
agree that, to the best of their knowledge, each of the statements in the
Background Information section of this Partition Agreement is true and correct.
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Section 2. Definitions.
"ACLF" means the adult congregate living facility located at the East
Premises and operated by the East Partnership.
"BFR" means Donald Ross Blivas, John E. Rowe, and Fred Fiala,
collectively.
"BFR Account" means a bank account of the West Partnership over which
BFR have signing authority, as identified (by bank and account number) in a
written notice signed by Messrs. Blivas, Fiala, and Rowe and delivered to FLC
Lakehouse no later than noon on the business day immediately preceding the
Closing Date.
"Closing" means the completion of the First Redemption, the Merger, and
the Second Redemption contemplated by this Partition Agreement.
"Closing Date" means the date of the Closing, which shall be on or
before October 31, 1995 (or such other date as the parties agree), at a time and
on a specific date determined by agreement of the parties.
"Code" means the Internal Revenue Code of 1986, as amended.
"CPL" means Central Park Lodges, Inc., a Delaware corporation.
"CPL Acquisition" means the acquisition by IHS of all the issued and
outstanding shares of capital stock of CPL in December, 1993, from Triangle
Realty Investments, Inc.
"East Accounts Receivable" means all accounts and notes receivable of
the East Partnership.
"East Assets" means all assets, rights, and real and personal property,
wherever located, and whether tangible or intangible, of the East Partnership,
and the business owned, managed, and operated by the East Partnership at and
from the East Premises and the goodwill of that business, including (but not
limited to) (1) the East Premises, (2) the East Cash, (3) the East Reserves, (4)
the East Deposits, (5) the East Accounts Receivable, (6) the East Fixtures,
Furniture and Equipment, (7) all East Inventories, (8) all repurchased
residential units at Lakehouse East, (9) motor vehicles owned by the East
Partnership, (10) all rights to warranties (express or implied) and licenses
received from manufacturers, lessors, or sellers of the assets of the East
Partnership and any related claims, credits and rights of recovery or set-off
with respect to those warranties, (11) all rights to all transferable licenses
and permits with respect to the Lakehouse East, (12) all books and records of
the East Partnership, (13) all rights, title, and interest in, to, and under the
East Contracts,
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and (14) all rights to telephone numbers used by Lakehouse East but excluding
(a) rights to the name, Lakehouse East, (b) personal property of residents, and
(c) personal property of employees. The East Assets include those items listed
on Exhibit B to this Partition Agreement that are located at the West Premises.
"East Cash" means the cash on hand and cash in banks of the East
Partnership as of the Closing Date.
"East Contracts" means all contracts, leases, and other agreements to
which the East Partnership is a party, including (without limitation) vendor
contracts, residents' contracts, and those listed on Exhibit C hereto.
"East Deposits" means deposits and prepayments or residents of
Lakehouse East.
"East Fixtures, Furniture and Equipment" means all equipment,
furniture, furnishings, fixtures, machinery, tools, appliances, vehicles, spare
and replacement parts, and similar property owned or leased by the East
Partnership.
"East Inventories" means all office supplies, food inventories, medical
supplies, and similar items on hand or on order by the East Partnership.
"East Liabilities: means all of the East Partnership's accounts
payable; contracts; leases; accrued real and personal property taxes; accrued
water, fuel, electricity, telephone, garbage collection, sewage, and other
utility service charges and expenses; accrued payroll taxes; accrued salaries,
wages, vacation and holiday pay, sick pay, and other employee benefit
obligations; and other debts, obligations, and liabilities of any kind, whether
known or unknown, absolute or contingent, direct or indirect, liquidated or
unliquidated, including (without limitation) the obligations of the East
Partnership under the East Contracts.
"East Partnership" means a Florida general partnership known as The
Lakehouse.
"East Partnership Agreement" means the Joint Venture Agreement, dated
May 8, 1979, as amended, among FLC Lakehouse and BFR, governing the East
Partnership.
"East Permitted Encumbrances" means such real estate taxes on the East
Premises for the year in which the Closing occurs as have not become due and
payable on the Closing Date; any Liens that have been placed upon the East
Premises by any of the IHS Parties; and those title matters relevant to the East
Premises described in Exhibit D hereto.
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"East Premises" means the land and other real property described in
Exhibit D to this Partition Agreement.
"East Reserves" means the Minimum Liquid Reserve maintained by the East
Partnership pursuant to Chapter 651, Florida Statutes, and any debt service
reserves maintained by the East Partnership.
"Excess West Liabilities" means all West Liabilities in excess of
$250,000, excluding (a) any liabilities caused, made, or authorized by BFR or
any of them, and (b) liabilities or obligations incurred after the Closing Date
under the West Contracts disclosed in Exhibit A.
"Facilities" means Lakehouse East and Lakehouse West.
"First Redemption" means the redemption of the FLC East Interest in
accordance with Section 3.1 of this Partition Agreement.
"FLC" means Florida Life Care, Inc., a Florida corporation.
"FLC Lakehouse" means F.L.C. Lakehouse, Inc., a Florida corporation.
"FLC East Interest" all of the FLC Lakehouse's partnership interest and
partnership rights in and with respect to the East Partnership.
"FLC West Interest" all of FLC Lakehouse's partnership interest and
partnership rights in and with respect to the West Partnership (or, after the
Merger, the Surviving Partnership).
"IHS" means Integrated Health Services, Inc., a Delaware corporation.
"IHS Parties" means IHS, CPL, FLC, and FLC Lakehouse, collectively.
"Interim Period" means the period of time between the execution of this
Partition Agreement and the Closing Date.
"Lakehouse East: means a retirement facility located at the East
Premises in Sarasota, Florida, owned and operated by the East Partnership.
"Lakehouse West" means a retirement facility located at the West
Premises in Sarasota, Florida, owned and operated by the West Partnership.
"Lakehouse West Employees" means those persons who are employed by the
IHS Parties and work primarily at Lakehouse West, and to whom BFR wishes to
offer employment by the Surviving
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Partnership from and after the Closing. Exhibit E to this Partition Agreement is
a list of the Lakehouse West Employees and their current rates of compensation
and a description of all vacation pay, employee benefits, and other compensation
rights to which they are entitled as employees of an IHS Party.
"Lien" means (i) any encumbrance, mortgage, pledge, lien, charge or
other security interest of any kind upon any property or assets of any
character, or upon the income or profits therefrom; or (ii) any arrangement or
agreement which prohibits the creation of such encumbrances, mortgages, pledges,
liens, charges or other security interest or which restricts transfer of any
property or assets.
"Merger" means the merger of the East Partnership with and into the
West Partnership under the terms and conditions set forth in Section 3.2 of this
Partition Agreement.
"Partnerships" means the East Partnership and the West
Partnership.
"Refurbishment Expenses" means expenses for the refurbishment of
apartments at Lakehouse West in connection with changes of occupancy of the
apartments, including expenses for cleaning, painting, and repairs.
"Second Redemption" means the redemption of the FLC West Interest in
accordance with Section 3.3 of this Partition Agreement.
"Suit" means the law suit brought by BFR against the IHS Parties
pursuant to the six-count complaint filed in July, 1994, in the Circuit Court of
Sarasota County, Florida, Case No. 94-3484-CA- 01.
"Surviving Partnership" means the West Partnership, in its capacity as
the partnership surviving the Merger.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including Taxes under Section 59A of
the Code, customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
added-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Title Company" means Chicago Title Insurance Company, Lawyers Title
Insurance Company, or another title insurer acceptable to FLC Lakehouse.
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"West Cash" means the cash on hand and cash in banks of the West
Partnership as of the Closing Date.
"West Contracts" means the contracts, leases, and other agreements
identified on Exhibit A to this Partition Agreement to which the West
Partnership is a party.
"West Deposits" means deposits and prepayments of residents of
Lakehouse West.
"West Liabilities" means all of the West Partnership's accounts
payable; contracts; leases; accrued real and personal property taxes; accrued
water, fuel, electricity, telephone, garbage collection, sewage, and other
utility service charges and expenses; accrued payroll taxes; accrued salaries,
wages, vacation and holiday pay, sick pay, and other employee benefit
obligations; accrued management fees; and other debts, obligations, and
liabilities of any kind, whether known or unknown, absolute or contingent,
direct of indirect, liquidated or unliquidated, existing on the Closing Date or
arising from the operation of Lakehouse West prior to the Closing Date,
excluding any Refurbishment Expenses other than those that the IHS Parties are
required to pay pursuant to Section 3.6.
"West Partnership" means a Florida general partnership known as
Lakehouse West.
"West Partnership Agreement" means the Joint Venture Agreement, dated
December 28, 1978, as amended, among FLC Lakehouse and BFR, governing Lakehouse
West.
"West Permitted Encumbrances" means such real estate taxes on the West
Premises for the year in which the Closing occurs as have not become due and
payable on the Closing Date; any Liens that have been placed upon the West
Premises by any of BFR; and those title matters relevant to the West Premises
described in Exhibit F hereto.
"West Premises" means the land and other real property described in
Exhibit F to this Partition Agreement.
"West Reserves" means the Minimum Liquid Reserve maintained by the West
Partnership pursuant to Chapter 651, Florida Statutes, and any debt service
reserves maintained by West Partnership.
Section 3. Redemptions and Merger. On the Closing Date, the parties shall cause
the Partnerships to effect the First Redemption, followed immediately by the
Merger, followed immediately by the Second Redemption (in that sequence), in
accordance with this Section 3. All documents to be executed and
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delivered by the parties at the Closing shall be in such form and substance as
are reasonably satisfactory to all parties.
3.1 First Redemption. On the Closing Date, prior to the Merger and the
Second Redemption, the East Partnership shall redeem from FLC Lakehouse, and FLC
Lakehouse shall surrender to the East Partnership, the FLC East Interest, in
accordance with this Section 3.1. The consideration for the FLC East Interest
shall consist of the East Cash, East Deposits, East Reserves, and East Premises.
(a) Delivery of Documents by East Partnership. On the Closing
Date, the East Partnership shall deliver to FLC Lakehouse the following:
(i) A special warranty deed, in form and substance
satisfactory to FLC Lakehouse, conveying the East Premises to FLC Lakehouse,
subject to no Liens except the East Permitted Encumbrances;
(ii) An affidavit of the East Partnership, in form and substance
satisfactorily to FLC Lakehouse, stating that the East Partnership is not a
"foreign person" within the meaning of Section 1445 et seq., of the Code, and an
affidavit of the East Partnership, in form and substance satisfactory to FLC
Lakehouse, as to the absence of parties in possession of, and of Liens (other
than East Permitted Encumbrances) upon, the East Premises;
(iii) An assignment of the East Reserves and East
Deposits, and all other documents required to effect the transfer to FLC
Lakehouse of the East Reserves and East Deposits;
(iv) All East Cash and all assignments and other
documents required to effect the transfer to FLC Lakehouse of the East
Partnership's bank accounts; and
(v) All other agreements or documents required to be
delivered by the East Partnership on the Closing Date to effect the First
Redemption.
(b) Delivery of Documents by FLC Lakehouse. On the Closing
Date, FLC Lakehouse shall execute and deliver to the East Partnership the
following:
(i) An Assignment of Partnership Interest, in form
and substance reasonably satisfactory to the East Partnership, by which FLC
Lakehouse assigns the FLC East Interest to the East Partnership; and
(ii) All other agreements or documents required to
be delivered by FLC Lakehouse on the Closing Date to effect the First
Redemption.
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3.2 Merger of Partnerships. The East Partnership, the West Partnership,
FLC Lakehouse, and BFR hereby adopt the following Plan of Partnership Merger.
(a) Merger. On the Closing Date, following the First Redemption and
prior to the Second Redemption, the East Partnership shall merge with and into
the West Partnership, which shall survive the merger as the Surviving
Partnership.
(b) Effect of Merger. Upon the effectiveness of the Merger, (i) the
separate existence of the East Partnership shall terminate, (ii) the Surviving
Partnership shall succeed to all the rights and property of the East Partnership
remaining after the First Redemption, and (iii) all of BFR's partnership
interests and partnership rights in and with respect to the East Partnership as
a separate partnership shall terminate, subject to the continuation of BFR's
partnership interests and partnership rights in and with respect to the
Surviving Partnership, which shall continue following the Merger and the Second
Redemption. The Surviving Partnership shall thereafter be responsible and liable
for all liabilities and obligations of the West Partnership and, until the
Second Redemption, all liabilities and obligations of the East Partnership
remaining after the First Redemption. The West Partnership Agreement, as in
effect on the Closing Date, shall be the Partnership Agreement of the Surviving
Partnership from and after the Closing Date. The name of the Surviving
Partnership shall be "Lakehouse West." The Surviving Partnership shall be
governed by the laws of the State of Florida.
(c) Effectiveness. The Merger will become effective upon the
Partnerships' execution and delivery of a Certificate of Merger in substantially
the form of Exhibit G to this Partition Agreement. Upon the effectiveness of the
Merger, and to confirm the Surviving Partnership's succession to all rights,
property, liabilities, and obligations of the East Partnership, the Partnerships
shall, upon the effectiveness of the Merger, execute and deliver the following:
(i) Bills of Sale and Assignments conveying to the West
Partnership all of the East Partnership's rights, title, and interest in and to
the East Inventories, the East Fixtures, Furniture and Equipment, warranties
(express or implied) and licenses received from manufacturer, lessors, or
sellers of the East Inventories and East Fixtures, Furniture and Equipment and
any related claims, credits and rights of recovery or set-off with respect to
those warranties, and all other East Assets remaining after the First
Redemption;
(ii) An Assignment and Assumption Agreement by which (A) the
East Partnership assigns to the West Partnership all of the East Partnership's
interest in, to, and under the East Contracts, and (B) the West Partnership
assumes all of the East Partnership's
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obligations under the East Liabilities and East Contracts (subject to the
assumption of such obligations by FLC Lakehouse in connection with the Second
Redemption); and
(iii) All other agreements or documents that any party may
reasonably request to vest in the Surviving Partnership all the rights and
property of the East Partnership remaining after the First Redemption.
3.3 Second Redemption. On the Closing Date, immediately following the
Merger, the Surviving Partnership shall redeem from FLC Lakehouse, and FLC
Lakehouse shall surrender to the Surviving Partnership, the FLC West Interest,
in accordance with the terms and conditions of this Section 3.3.
(a) Consideration. The consideration for the FLC West Interest shall
consist of the Surviving Partnership's entire right and interest in and to the
East Assets remaining after the First Redemption.
(b) Delivery of Documents by Surviving Partnership. On the Closing
Date, the Surviving Partnership shall execute and deliver to FLC Lakehouse the
following:
(i) Quitclaim deeds, bills of sale, and assignments, in form
and substance satisfactory to FLC Lakehouse, executed by each Messrs. Blivas,
Fiala, and Rowe, conveying to FLC Lakehouse all of their rights, title, and
interest, in and to the East Premises and all other rights, property, and assets
of the East Partnership;
(ii) Bills of Sale and Assignments conveying to FLC Lakehouse
all of the Surviving Partnership's rights, title, and interest in and to the
East Inventories, the East Fixtures, Furniture and Equipment, warranties
(express or implied) and licenses received from manufacturers, lessors, or
sellers of the East Inventories and East Fixtures, Furniture and Equipment and
any related claims, credits and rights of recovery or set-off with respect to
those warranties, and all other rights, property, and assets of the East
Partnership to which the Surviving Partnership succeeded pursuant to the Merger;
(iii) An Assignment and Assumption Agreement by which (A) the
Surviving Partnership assigns to FLC Lakehouse all of the Surviving
Partnership's rights and interests in, to, and under the East Contracts, and (B)
FLC Lakehouse assumes all of the Surviving Partnership's obligations under the
East Liabilities and East Contracts, whenever incurred, and all of the unpaid
Excess West Liabilities (the "Assignment and Assumption Agreement");
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(iv) All other agreements or documents reasonably requested by
FLC Lakehouse to confirm and vest in FLC Lakehouse all rights, title, and
interest in and to the East Assets; and
(v) The originals of all licenses, permits, authorizations,
and approvals issued by governmental authorities having jurisdiction over
Lakehouse East, including the Certifcates of Occupancy and Certificate of
Authority relating to the East Premises and all records with respect to
residents of Lakehouse East.
(c) Delivery of Documents by FLC Lakehouse. On the Closing Date, FLC
Lakehouse shall execute and deliver to the East Partnership the following:
(i) The Assignment and Assumption Agreement;
(ii) An Assignment of Partnership Interest by which FLC
Lakehouse assigns the FLC West Interest to the Surviving Partnership; and
(iii) All other agreements or documents required to be
delivered by FLC Lakehouse on the Closing Date to effect the Second Redemption.
3.4 West Partnership Cash. FLC Lakehouse shall cause the West
Partnership, immediately after completion of the Closing (and after payment of
all closing costs other than those for which BFR is responsible), to have cash
of $1.8 million, less any expenditures of West Cash caused, made, or authorized
by BFR or any of them (the "Funding Requirement"). FLC Lakehouse will cooperate
with BFR in transferring the West Cash remaining on the Closing Date to the BFR
Account. To the extent that the West Cash available on the Closing Date is less
than the Funding Requirement, FLC Lakehouse shall either cause the remainder of
the Funding Requirement to be deposited in the BFR Account or pay the remainder
of the Funding Requirement by a check payable to the Surviving Partnership.
3.5 Excess West Liabilities. On the Closing Date, FLC Lakehouse shall
cause the West Partnership to produce a list of known West Liabilities
(excluding any liabilities caused, made, or authorized by BFR or any of them and
liabilities or obligations under the West Contracts disclosed in Exhibit A),
based on the West Partnership's balance sheet and underlying records as of the
Closing Date or an earlier date as near to the Closing Date as is practicable.
On the Closing Date, based on that list, FLC Lakehouse shall pay, or shall
provide funds to the Surviving Partnership sufficient to pay, the Excess West
Liabilities that are not in dispute. To the extent that FLC Lakehouse pays
Excess West Liabilities directly to the creditor (instead of providing funds
therefor to the Surviving Partnership), FLC Lakehouse shall select
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the liabilities that it pays, BFR and the Surviving Partnership shall be
responsible for payment of the remaining $250,000 of such West Liabilities
(those for which FLC Lakehouse is not obligated to pay or provide funding). FLC
Lakehouse shall remain responsible for settling and paying any Excess West
Liabilities that are in dispute. To the extent that the IHS Parties dispute any
Excess West Liabilities that remain unpaid after the Closing Date, FLC Lakehouse
shall (a) give BFR written notice of the Excess West Liabilities that are in
dispute and (b) identify to the applicable creditor, in writing, the specific
claims of that creditor that the IHS Parties dispute.
3.6 Refurbishment Expenses. IHS shall pay all Refurbishment Expenses
for cleaning, painting, repairs, and similar refurbishment of apartments at
Lakehouse West authorized by an IHS Party for which the West Partnership or the
IHS Party has received an invoice on or before the Closing Date. IHS shall pay
all 60.5% of Refurbishment Expenses for cleaning, painting, repairs, and similar
refurbishment of apartments at Lakehouse West authorized by an IHS Party prior
to the Closing Date for which the Surviving Partnerships or the IHS Party
receives an invoice after the Closing Date. BFR or the Surviving Partnership
shall pay all Refurbishment Expenses for cleaning, painting, repairs, and
similar refurbishment of apartments at Lakehouse West authorized by Mr. Blivas,
Fiala, or Rowe, regardless of when the invoices for the Refurbishment Expenses
are or were received.
Section 4. Governmental Filings. Promptly after the execution of this Partition
Agreement, BFR and FLC Lakehouse shall complete and file with the Florida
Department of Insurance, the Florida Agency for Health Care Administration, and
any other applicable governmental agencies such applications and filings as are
necessary, under applicable Florida, federal, and local laws and regulations, in
connection with the transactions contemplated by this Partition Agreement. Each
party shall provide each other party with such cooperation and assistance as
such other party reasonably requests in making such application and filings.
Without limiting the generality of the foregoing, the parties shall take such
actions as are necessary to transfer to FLC Lakehouse the minimum liquid reserve
and all resident deposits and debt service reserves (if any) with respect to
Lakehouse East. The Surviving Partnership shall retain the minimum liquid
reserve and all resident deposits and debt service reserves (if any) with
respect to Lakehouse West. The following shall be subject to BFR's prior
approval, which BFR shall not unreasonably withhold or delay: (a) any filing
with any such governmental agency relating to Lakehouse West; (b) any discussion
or negotiations initiated by the IHS Parties with such governmental agency
concerning any such filing relating to Lakehouse West; and (c) the form and
substance of any consent or approval of any such agency as it relates
specifically to Lakehouse West.
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Section 5. Information Concerning Lakehouse West. During the Interim Period, BFR
shall have (a) full access to all information in the possession of the IHS
Parties concerning Lakehouse West, and (b) full cooperation from the manager and
staff of Lakehouse West to provide information and to arrange for an orderly
transition of the ownership of the West Partnership. FLC Lakehouse shall cause
each of its officers to provide to BFR prompt responses to reasonable requests
by them for information concerning Lakehouse West.
Section 6. Further Agreements.
6.1 Collection of Receivables. BFR shall promptly remit, and shall
cause the Surviving Partnership promptly to remit to FLC Lakehouse, all payments
of accounts and notes receivable and any other amounts attributable to Lakehouse
East that any of them receives after the Closing Date. The IHS Parties shall
promptly remit to the Surviving Partnership all payments of accounts and notes
receivable and any other amounts attributable to Lakehouse West that any of them
receives after the Closing Date.
6.2 Third Party Notices and Consents. During the Interim Period the
parties shall give any notices to third parties, and use their best efforts to
obtain any third-party consents, required in connection with the transactions
contemplated by this Partition Agreement.
6.3 Conduct of Business Pending Closing. During the Interim Period, the
parties shall cause the Partnerships to operate only in the ordinary course of
business, shall take all necessary actions to keep available the services of the
present employees of the Partnerships and to preserve the Partnerships and their
goodwill and relationships with residents, vendors, and employees, and shall
make no material change in the operation of the Partnerships nor enter into any
material contract other than in the ordinary course of business. During the
Interim Period, the IHS Parties shall not, without the prior consent of BFR, (a)
initiate at the West Premises any business activity by any affiliate of IHS in
addition to activities of the kind currently engaged in at the West Premises by
Central Health Services, Inc. and IntegreCare, Inc.; (b) amend any agreement to
which the West Partnership is a party; (c) cause or permit the West Partnership
to make any prepayments of indebtedness or any other payments not in the
ordinary course of business; (d) make any capital improvement at or material
repair of the West Premises; (e) make any change in key personnel at Lakehouse
West (except in the case of an emergency that, in FLC Lakehouse's judgment,
threatens the safety or well being of a Lakehouse West resident or employee);
(f) make any material change in any employee benefit to which employees at
Lakehouse West are entitled; or (g) cause the West Partnership to engage in any
other transaction not in the ordinary course of business.
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6.4 Certain Employees.
(a) Lakehouse West Employees. On the Closing Date, the IHS
Parties shall terminate the employment of each of the Lakehouse West Employees,
to the extent that the IHS Parties may terminate their employment without a
breach of any contract or other legal obligation, and BFR may offer or cause the
Surviving Partnership to offer to the Lakehouse West Employees employment at
Lakehouse West, under the same compensation arrangements as those set forth in
Exhibit E.
(b) Lakehouse East Employees. The parties shall take such actions as are
necessary and appropriate to transfer to FLC Lakehouse, from and after the
Closing Date, those employees of the Partnerships who are employed primarily at
Lakehouse East and agree to become employed by FLC Lakehouse.
(c) Employees of IHS Affiliates. IHS shall cause all employees of its
subsidiaries, Central Health Services, Inc. and IntegreCare, Inc., who occupy
office space at the West Premises (if any) to vacate their offices at the West
Premises; provided that nothing herein prohibits employees of Central Health
Service, Inc. from entering any residential unit at Lakehouse West, at the
request of the resident or the resident's physician or other health care
professional, for purposes of providing home health care services to the
resident, as long as such entry is consistent with the policies of Lakehouse
West in effect from time to time.
6.5 Certain Records. FLC Lakehouse shall cause the originals or copies of
all documents, records, contracts, computer programs, and databases of or
related to Lakehouse West that are in the possession of any IHS Entity to be
delivered to the Surviving Partnership on or before the Closing Date; provided
that nothing herein requires any of the IHS Parties to deliver or disclose to
the Surviving Partnership, BFR, or any other party any computer programs or
databases licensed by any IHS Entity from any other party or any proprietary or
confidential computer programs or databases of any IHS Entity.
6.6 Lakehouse Name. Within 90 days after the Closing Dater, FLC Lakehouse
shall cease operating Lakehouse East (or otherwise conducting business) under
the name, "Lakehouse East" or any other name that includes the word,
"Lakehouse," "Lake," or "House," or that is confusingly similar to "Lakehouse."
During such 90-day period, FLC Lakehouse may use the name, "Lakehouse East" in
the operation of Lakehouse East and in advertising and publicizing a new name
for the Lakehouse East facility.
6.7 Certain Lakehouse West Property. Exhibit H to this Partition Agreement
identifies certain property of the West Partnership that is not located at the
West Premises. On or before
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the Closing Date, FLC Lakehouse and IHS shall cause such property to be placed
in the possession of the West Partnership.
6.8 Tax Returns. FLC Lakehouse and BFR shall cause the West Partnership
and the East Partnership to close their books on the Closing Date. FLC Lakehouse
shall prepare and file the final federal income tax return for the East
Partnership (which will be for the 10 month period ending October 31, 1995), and
BFR shall prepare and file the 1995 federal income tax return for the West
Partnership. Each party shall prepare the federal income tax return that it
hereby undertakes to prepare in accordance with all applicable laws and
regulations and provisions of the Partnership Agreements in effect on the
Closing Date. At least 30 days before filing the federal income tax return that
it hereby undertakes to prepare and file, each party shall send a copy of the
tax return to the other party for review and comment.
6.9 Nonsolicitation by BFR. Blivas, Fiala, and Rowe each agrees that,
during the Interim Period and for two years after the Closing, he shall not,
directly or indirectly, for himself or for or on behalf of the West Partnership
or any other partnership, corporation, joint venture, or other person or entity,
or otherwise, (a) seek to employ or solicit for employment any employee of any
of the IHS Entities, including (without limitation) any person employed at
Lakehouse East, or in any manner encourage or induce any such person to leave
his or her employment; or (b) divert or attempt to divert any resident of
Lakehouse East or FLC Lakehouse to any competitive establishment (including
Lakehouse West). Blivas, Fiala, and Rowe each acknowledges that he has had
access to information concerning the employees and residents of Lakehouse East
and that the use of such information for the solicitation of Lakehouse East
employees or residents would cause irreparable injury to the IHS Entities for
which no adequate remedy at law would be available, entitling the IHS Entities
to appropriate injunctive relief and to such other relief as a court of
competent jurisdiction deems proper.
6.10 Nonsolicitation by IHS Parties. Each of the IHS Parties agrees
that, during the Interim Period and for two years after the Closing, it shall
not, directly or indirectly, for itself or for or on behalf of any other
partnership, corporation, joint venture, or other person or entity, or
otherwise, (a) seek to employ or solicit for employment any employee of the
Surviving Partnership, including (without limitation) any person employed by the
Surviving Partnership at Lakehouse West, or in any manner encourage or induce
any such person to leave his or her employment; or (b) divert or attempt to
divert any resident of Lakehouse West or the Surviving Partnership to any
competitive establishment (including Lakehouse East). The IHS Parties
acknowledge that they have had access to information concerning the employees
and residents of Lakehouse West and that the use of such information for the
solicitation of Lakehouse West employees or residents would cause irreparable
15
<PAGE>
injury to the Surviving Partnership for which no adequate remedy at law would be
available, entitling the Surviving Partnership to appropriate injunctive relief
and to such other relief as a court of competent jurisdiction deems proper.
Section 7. Representations and Warranties,
7.1 Representations and Warranties of BFR. BFR, severally and not
jointly, each represents and warrants as follows:
(a) He has the full right, power, legal capacity and authority
to enter into, and to perform his obligations under, this Partition Agreement
and all other agreements, instruments, and documents to be executed by him
pursuant to this Partition Agreement. This Partition Agreement is, and the other
documents to be delivered by him pursuant hereto (when executed and delivered)
will be, his valid and enforceable obligations, binding on him in accordance
with their terms.
(b) Neither the execution and delivery of this Partition
Agreement nor the transactions contemplated by this Partition Agreement will (i)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any government, governmental agency,
or court to which he is subject, or (ii) conflict with, result in a breach of,
constitute a default under, any contractor other arrangement to which he is a
party or by which he is bound.
7.2 Representations and warranties of IHS Parties. The IHS
Parties, severally and not jointly, each represents and warrants as follows:
(a) It has the full right, power, legal capacity and authority
to enter into, and to perform its obligations under, this Partition Agreement
and all other agreements, instruments, and documents to be executed by it
pursuant to this Partition Agreement. This Partition Agreement is, and the other
documents to be delivered by it pursuant hereto (when executed and delivered)
will be, its valid and enforceable obligations, binding on it in accordance with
their terms.
(b) It is a corporation duly organized, validly existing, and
in good standing under the laws of the state in which it is incorporated, with
the legal power to own and operate its assets and to carry on its business as
presently conducted.
(c) Neither the execution and delivery of this Partition
Agreement nor the transactions contemplated by this Partition Agreement will (i)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any government, governmental agency,
or court to which it is subject, or (ii) conflict with, result in a breach of,
16
<PAGE>
constitute a default under, any contractor other arrangement to which it is a
party or by which it is bound.
(d) Exhibit A contains a complete and accurate list of all material
contracts to which the West Partnership is a party or by which the West
Partnership is bound.
Section 8. Conditions Precedent to Closing.
8.1 Conditions to Obligations of IHS Parties. The obligations of each of
the IHS Parties to consummate the First Redemption, the Merger, and the Second
Redemption are subject to satisfaction or waiver of the following conditions on
or before the Closing Date:
(a) Representations and Covenants. (i) The representations and warranties
of BFR contained herein shall be true and correct when made and shall continue
to be true and correct on the Closing Date as if then made, and (ii) BFR shall
have performed all material obligations herein required to be performed by them
on or before the Closing Date.
(b) No Litigation. There shall be no effective injunction, writ, or
preliminary restraining order of any nature issued by a court or governmental
agency of competent jurisdiction restraining or prohibiting the consummation or
implementation of the transactions contemplated by this Partition Agreement, nor
shall any action be threatened by any governmental or regulatory agency or any
other person that the IHS Parties, in good faith and with the advice of counsel,
believe (i) is likely to result in any of the foregoing or (ii) may result in
the payment of substantial damages by an IHS Entity.
(c) Title Policy. At Closing, FLC Lakehouse shall have (without
exception) good, marketable, and insurable fee simple title to the East
Premises, free and clear of all Liens, except the East Permitted Encumbrances.
Title to the East Premises shall be insurable by the Title Company at no more
than standard rates, on a standard ALTA policy, without exception, other than
the East Permitted Encumbrances and standard exceptions to an ALTA policy. At
Closing, FLC Lakehouse shall have received, at its expense, a commitment for an
owner's policy of title insurance (standard ALTA Form) for the East Premises in
the amount of $12 million from the Title Company, pursuant to which the Title
Company agrees to issue such a policy of title insurance to FLC Lakehouse
insuring FLC Lakehouse's title to the East Premises at Closing, free and clear
of all matters other than the East Permitted Encumbrances. In connection
therewith, on or before Closing, BFR and the Partnerships shall execute and
deliver to the Title Company all necessary certificates, affidavits and
indemnities to delete any exceptions. FLC Lakehouse shall promptly take all
necessary action and pay all necessary costs to obtain the title commitment on
or before the Closing Date.
17
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(d) Certain Partnership Debt. On or before the Closing Date, each of
the Partnerships shall have paid to the IHS Parties, in full, the indebtedness
due from such Partnership to the IHS Parties ( as determined based on the
Partnership's books and records).
8.2 Conditions to Obligations of BFR. The obligations of each of BFR to
consummate the First Redemption, the Merger, and the Second Redemption are
subject to satisfaction or waiver of the following conditions on or before the
Closing Date:
(a) Representations and Covenants. (i) The representations and
warranties of the IHS Parties contained herein shall be true and correct when
made and shall continue to be true and correct on the Closing Date as if then
made, and (ii) the IHS Parties shall have performed all material obligations
herein required to be performed by them on or before the Closing Date.
(b) No Litigation. There shall be no effective injunction, writ, or
preliminary restraining order of any nature issued by a court or governmental
agency of competent jurisdiction restraining or prohibiting the consummation or
implementation of the transactions contemplated by this Partition Agreement, nor
shall any action be threatened by any governmental or regulatory agency or any
other person that BFR, in good faith and with the advice of counsel, believes
(i) is likely to result in any of the foregoing or (ii) may result in the
payment of substantial damages by BFR.
(c) Title. At Closing, the West Partnership shall have (without
exception) good, marketable, and insurable fee simple title to the West
Premises, free and clear of all Liens, except the West Permitted Encumbrances.
Title to the West Premises shall be insurable by the Title Company at no more
than standard rates, on a standard ALTA policy, without exception, other than
the West Permitted Encumbrances and standard exceptions to an ALTA Policy.
(d) Certain Partnership Debt. On or before the Closing Date, (i) FLC
Lakehouse shall have made capital contributions to each of the Partnerships in
an amount equal to such Partnership's indebtedness to the IHS Parties on the
date of the capital contribution (as determined based on the Partnership's books
and records), and (ii) each of the Partnerships shall have paid to the IHS
Parties, in full, the indebtedness due from such Partnership to the IHS Parties.
Section 9. Survival; Indemnification.
9.1 Survival of Representations, Warranties and Covenants. The
representations, warranties, covenants, indemnification provisions and
agreements of the parties made or set forth in this Partition Agreement or in
any certificate or document delivered
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<PAGE>
pursuant hereto, shall survive the execution and delivery of this Partition
Agreement and the Closing and shall continue in full force and effect
thereafter.
9.2 Indemnification.
(a) The IHS Parties, jointly and severally, shall indemnify BFR and the
West Partnership from, and hold them harmless against and in respect of, (i) any
and all East Liabilities, whenever incurred, (ii) any and all Excess West
Liabilities incurred on or before the Closing Date, (iii) all Liens upon the
West Premises existing on or before the Closing Date, other than West Permitted
Encumbrances, (iv) all loss, liability, and expense resulting from the material
breach by the IHS Parties of any warranty, representation, or covenant contained
in this Partition Agreement, and (v) any and all actions, suits, judgments,
costs, and legal and other expenses incident to the foregoing.
(b) BFR and the Surviving Partnership, jointly and severally, shall
indemnify the IHS Parties from, and hold them harmless against and in respect
of, (i) all liabilities of the Surviving Partnership incurred after the Closing
Date (excluding liabilities for which BFR and the West Partnership are entitled
to indemnification under Section 9.2 (a)), (ii) all liabilities of the West
Partnership incurred after the Closing Date under the West Contracts, (iii)
accounts payable of the West Partnership in existence on the Closing Date, but
not in excess of $250,000, (iv) all loss, liability, and expense resulting from
the material breach by BFR of any warranty, representation, or covenant
contained in this Partition Agreement, and (v) any and all actions, suits,
judgments, costs, and legal and other expenses incident to the foregoing.
9.3 Settlement or Defense. Within ten days after receipt by a party seeking
indemnification hereunder (hereinafter referred to as the "Indemnitee") of
written notice of the commencement of any action or the assertion of any claim,
liability or obligation by a third party (whether by legal process or
otherwise),against which claim, liability, or obligation the other party to this
Partition Agreement (hereinafter, the "Indemnitor") is , or may be, required
under this Partition Agreement to indemnify the Indemnitee, the Indemnitee
shall, if a claim thereon is to be made or may be made against the Indemnitor,
notify the Indemnitor in writing of the commencement or assertion thereof and
give the Indemnitor a copy of the claim, process and all legal pleadings. The
Indemnitor shall have the right to participate in and assume the defense of the
action with counsel of reputable standing reasonably acceptable to the
Indemnitee. If the Indemnitee is required by judgment or a settlement agreement
to pay any amount in respect of any obligation or liability against which the
Indemnitor has agreed to indemnify the Indemnitee under this Partition
Agreement, the Indemnitor shall pay to the Indemnitee such amount plus all
reasonable expenses.
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incurred by the Indemnitee (including legal fees and expenses at both trial and
appellate levels) in accordance with such obligation or liability. The
Indemnitee shall not settle or compromise any claim, action or proceeding
without the prior written consent of the Indemnitor, which consent will not be
unreasonably withheld or delayed.
Section 10. Termination
10.1 Rights to Terminate Agreement. Certain of the parties may
terminate this Partition Agreement as provided below:
(a) The parties may terminate this Partition Agreement by
mutual written consent of all parties at any time prior to the Closing Date;
(b) BFR may terminate this Partition Agreement by written
notice to the IHS Parties if, on or before the Closing Date, all or any material
part of Lakehouse West is condemned or taken by power of imminent domain, or
materially damaged or destroyed by fire or other casualty.
(c) The IHS Parties may terminate this Partition Agreement by
written notice to BFR if, on or before the Closing Date, all or any material
part of Lakehouse East is condemned or taken by power of imminent domain, or
materially damaged or destroyed by fire or other casualty.
(d) BFR may terminate this Partition Agreement by giving
written notice to the IHS Parties if the Closing has not occurred on or before
October 31, 1995, because of the failure of any condition precedent under
Section 8.2 (unless the failure results primarily from the material breach by
any of BFR of a representation, warranty, or covenant contained in this
Partition Agreement);
(e) The IHS Parties may terminate this Partition Agreement by
giving written notice to BFR if the Closing has not occurred on or before
October 31, 1995, because of the failure of any condition precedent under
Section 8.1 (unless the failure results primarily from the material breach by
any of the IHS Parties of a representation, warranty, or covenant contained in
this Partition Agreement); and
(f) Either BFR or the IHS Parties may terminate this Partition
Agreement by giving written notice to the other parties if the Closing has not
occurred on or before October 31, 1995, unless such date is extended by
agreement of the parties.
10.2 Effect of Termination or Breach. Except as provided in the
following sentence, if any party terminates this Partition
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<PAGE>
Agreement pursuant to Section 10.1, all obligations of the parties hereunder
shall terminate without any liability of any party to any other party, except
for any liability of any party then in breach. The parties hereby acknowledge
and agree that any breach of this Partition Agreement by any other party that
results in the failure to consummate the First Redemption, Merger, and Second
Redemption would cause serious and irreparable harm to the other parties for
which there would be no adequate remedy at law. Therefore, in the event of such
a breach by any party, the other parties to this Partition Agreement are
entitled to specific enforcement and to all other remedies available hereunder
and under applicable law.
Section 11 Dismissal of Suit. Upon consummation of the Closing contemplated
hereby, BFR and the IHS Parties shall jointly request the Circuit Court of
Sarasota County, Florida, to enter an order approving this settlement and
dismissing the Suit with prejudice, but reserving jurisdiction to enter such
orders and judgment as may be necessary to enforce this Partition Agreement. BFR
and IHS Parties agree to waive the Suit dismissed if no activity has occurred
within one year pursuant to Rule 1.420, Florida Rules of Civil Procedure. BFR
and the IHS Parties shall cooperate and, to the extent necessary, execute
further stipulations or motions which continue the pendency of the Suit but only
for the purpose of the court enforcing this Partition Agreement.
Section 12 Release of Claims by BFR. BFR, and each of them, hereby release and
discharge the IHS Parties and all of their present, past, and future officers,
directors, employees, and agents, jointly and severally, from any and all
claims, demands, causes of action, suits, debts, covenants, representations,
contracts, agreements, damages, and liability arising prior to the date of this
Partition Agreement out of or in connection with the Partnerships and the
Facilities (including, without limitation, the CPL Acquisition or any other
claim, act, or omission alleged in connection with the Suit) excepting only
obligations contemporaneously or hereafter arising under the Partnership
Agreements, as amended, and this Partition Agreement.
Section 13 Release of Claims by the IHS Parties. The IHS Parties, and each of
them, hereby release and discharge BFR individually, and Blivas, Fiala, Rowe,
Chartered, and all of their present, past, and future officers, directors,
employees, and agents, jointly and severally, from any and all claims, demands,
causes of actions, suits, debts, covenants, representations, contracts,
agreements, damages, and liability arising prior to the date of this Partition
Agreement out of or in connection with the Partnerships and the Facilities
(including, without limitation, any claim, act, or omission alleged in
connection with the Suit) excepting only obligations contemporaneously or
hereafter arising under the Partnership Agreements, as amended, and this
Partition Agreement.
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Section 14. Confidentiality. The IHS Parties and BFR hereby agree to keep the
terms and conditions of this Partition Agreement confidential and will not
divulge the terms and conditions of this Partition Agreement to any other person
or entity, unless required by law; provided that any of the parties may disclose
the terms and conditions of this Partition Agreement to any of the following
parties who has a right or reasonable need to know such terms and conditions:
Janice Blivas; governmental agencies; the parties' employees, agents, attorneys,
accountants, financial advisors, banks, and prospective lenders, investors, and
partners; and offerees of public or private placements of the securities of any
of the parties.
Section 15. Legal Representation. Both the IHS Parties and BFR acknowledge and
agree that (a) they have participated in the negotiation of this Partition
Agreement and no provision of this Partition Agreement shall be construed
against or interpreted to the disadvantage of either the IHS Parties or BFR by
any court or governmental or judicial authority by reason of such parties'
having been deemed to have structured or drafted such provisions; (b) the IHS
Parties and BFR have at all times had access to and utilized attorneys in the
negotiation, preparation, and execution of this Partition Agreement; and (c) the
IHS Parties and BFR and their attorneys have had an opportunity to review and
analyze this Partition Agreement for sufficient periods of time prior to
execution and delivery hereof.
Section 16. Notices. To be effective, a notice or other communication required
or permitted under this Partition Agreement must be given in writing or by
telecopy or similar electronic means. A notice or other communication is
considered effectively given when it is delivered to the intended recipient or,
if mailed by certified or registered United States mail, on the date of the
postmark when deposited in the United States mail, with postage prepaid, and
addressed to the intended recipient at its or his address set forth above or at
such other address as the intended recipient may have specified in a notice
previously delivered to the sender.
Section 17. Miscellaneous.
17.1 Expenses. Except as expressly provided in this Partition
Agreement, each of the parties shall bear its own expenses and costs (including
legal and accounting fees) that its incurs in connection with the negotiation,
execution, and delivery of this Partition Agreement and the Closing of the
transactions contemplated hereby. The IHS Parties, jointly and severally, shall
pay 60.5%, and BFR, jointly and severally, shall pay 39.5%, of (a) all
documentary stamp taxes and surtaxes incident to the First Redemption, the
Merger, and the Second Redemption, and the conveyances of property incident
thereto, and (b) the cost of
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obtaining and recording any documents to clear title to the East Premises.
17.2 Public Announcements. Each of the parties agrees not to make or
permit any announcement or public disclosure, and not to issue or permit
issuance of any press release, concerning this Partition Agreement or the
transactions contemplated hereby prior to the Closing, without the prior
approval of the other parties, except to the extent necessary in connection with
regulatory filings or as required by law.
17.3 Governing Law. This Partition Agreement shall be interpreted and
enforced in all respects in accordance with the laws of Florida, except any
choice of law rules of Florida that may direct the interpretation or enforcement
of this Partition Agreement to the laws of a different jurisdiction.
17.4 Successors and Assigns. This Partition Agreement shall inure to
the benefit of, and be binding upon, the heirs, successors, permitted assigns,
and legal and personal representatives of the parties. A party shall not assign
any of his or its rights or delegate any of his or its obligations under this
Partition Agreement without the prior, written consent of the other parties.
17.5 Entire Agreement. This Partition Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior negotiations and agreements concerning such subject matter,
all of which are merged into this Partition Agreement. Nothing in this Partition
Agreement, express or implied, is intended to confer upon any party, other than
the parties hereto and their respective heirs, successors, and permitted
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Partition Agreement.
17.6 Amendment. A modification or amendment of this Partition
Agreement is effective only if it is in writing and executed by all the parties.
17.7 Counterparts. This Partition Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
17.8 Titles and Subtitles. The titles of the sections and subsections
of this Partition Agreement are for convenience of reference only and are not to
be considered in construing this Partition Agreement.
17.9 Attorneys' Fees. Should any litigation or arbitration be
commenced by any party concerning any provision of this Partition Agreement or
the rights and duties of any party, the prevailing party in such litigation or
arbitration shall be
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entitled to recover from the other party, in addition to such other relief as
may be granted, reasonable fees and costs of attorneys, accountants, and expert
witnesses, and other costs, incurred in connection with such arbitration or
litigation, including such fees and costs at both trial and appellate levels.
17.10 Further Assurances. At any time and from time to time at the
request of any party, the other parties shall execute and deliver to the
requesting party any new, additional, or confirming instrument, and any other
document necessary to effect the transactions contemplated by this Partition
Agreement, or to carry into effect the intent and purposes of this Partition
Agreement.
17.11 Waiver. No waiver of any rights or remedies or of any default
hereunder shall operate as a waiver of any other right or remedy or of any other
default or of the same right or remedy or of the same default on a future
occasion. No delay in the exercise of any right or remedy shall operate as a
waiver thereof, and no single or partial exercise of any right or remedy shall
preclude any other or future exercise thereof or the exercise of any other right
or remedy.
17.12 Severability. If any one or more of the provisions of this
Partition Agreement is determined to be invalid, illegal, or unenforceable in
any respect as to one or more of the parties, all remaining provisions
nevertheless shall remain effective and binding on the parties, and the
validity, legality, and enforceability thereof shall not be affected or impaired
thereby.
17.13 Time of the Essence. Time is of the essence of the transactions
contemplated by this Partition Agreement.
17.14 Janice Blivas Consent. By her execution of this Partition
Agreement, Janice Blivas confirms her knowledge of and consent to the terms of
and transactions contemplated by this Partition Agreement.
IN WITNESS WHEREOF, in the parties have executed this Partition
Agreement as of the 31st day of October, 1995.
WITNESSES:
/s/ Bill Lambrecht /s/ Donald Ross Blivas
- ------------------------------- -------------------------------
Name: Bill Lambrecht Donald Ross Blivas
/s/ David Singleton Address: 1266 1st Street
- ------------------------------- Sarasota, Florida 34236
Name: David Singleton
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/s/ Bill Lambrecht /s/ Fred Fiala
- ------------------------------- -------------------------------
Name: Bill Lambrecht Fred Fiala
Address: 1266 First St.
/s/ David Singleton Sarasota, Florida 34236
- -------------------------------
Name: David Singleton
/s/ Bill Lambrecht /s/ John E. Rowe
- ------------------------------- -------------------------------
Name: Bill Lambrecht John E. Rowe
/s/ David Singleton Address: 1266 First St.
- ------------------------------- Sarasota, Florida 34236
Name: David Singleton
/s/ Bill Lambrecht /s/ Janice Blivas
- ------------------------------- -------------------------------
Name: Bill Lambrecht Janice Blivas
Address: 238 Morningside Drive
/s/ Jacqueline Schindowski Sarasota, Florida 34236
- -------------------------------
Name: Jacqueline Schindowski
FLC LAKEHOUSE, INC.
/s/ James H. Shimberg, Jr. By: Daniel J. Booth
- ------------------------------- ---------------------------
Name: James H. Shimberg, Jr. Name: Daniel J. Booth
As its: Vice President
/s/ David Singleton Address: 10065 Red Run Blvd.
- ------------------------------- Owings Mills, Maryland 21117
Name: David Singleton
INTEGRATED HEALTH SERVICES, INC.
/s/ Michael Drusano By: /s/ David N. Chichester
- ------------------------------- ------------------------------
Name: Michael Drusano Name: David N. Chichester
As its: Senior Vice President
/s/ Michael W. Tan Address: 10065 Red Run Blvd.
- ------------------------------- Owings Mills, Maryland 21117
Name: Michael W. Tan
CENTRAL PARK LODGES, INC.
/s/ James H. Shimberg, Jr. By: /s/ Daniel J. Booth
- ------------------------------- ---------------------------
Name: James H. Shimberg, Jr. Name: Daniel J. Booth
As its: Vice President
/s/ David Singleton Address: 10065 Red Run Blvd.
- ------------------------------- Owings Mills, Maryland 21117
Name: David Singleton
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FLORIDA LIFE CARE, INC.
/s/ James H. Shimberg, Jr. By: /s/ Daniel J. Booth
- ------------------------------- ---------------------------
Name: James H. Shimberg, Jr. Name: Daniel J. Booth
As its: Vice President
/s/ David Singleton Address: 10065 Red Run Blvd.
- ------------------------------- Owings Mills, Maryland 21117
Name: David Singleton
STATE OF FLORIDA
COUNTY OF SARASOTA
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by Donald Ross Blivas, who is personally known to me/has produced
_____________________________ as identification, and who did/did not take an
oath.
/s/Jacqueline Schindowski
Printed/Typed Name:Jacqueline Schindowski
Notary Public State of Florida
Commission Number: 384923
STATE OF FLORIDA
COUNTY OF SARASOTA
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by Fred Fiala, who is personally known to me/has produced
_____________________________ as identification, and who did/did not take an
oath.
/s/Jacqueline Schindowski
Printed/Typed Name:Jacqueline Schindowski
Notary Public State of Florida
Commission Number: 384923
26
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STATE OF FLORIDA
COUNTY OF SARASOTA
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by John E. Rowe, who is personally known to me/has produced
_______________________________ as identification, and who did/did not take an
oath.
/s/Jacqueline Schindowski
Printed/Typed Name:Jacqueline Schindowski
Notary Public State of Florida
Commission Number: 384923
STATE OF FLORIDA
COUNTY OF SARASOTA
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by Janice Blivas, who is personally known to me/has produced a drivers
license as identification, and who did/did not take an oath.
/s/Jacqueline Schindowski
Printed/Typed Name:Jacqueline Schindowski
Notary Public State of Florida
Commission Number: 384923
STATE OF FLORIDA
COUNTY OF SARASOTA
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by Daniel J. Booth, as Vice President of Florida Life Care, Inc., a
Florida corporation, on behalf of the corporation. He/she is personally known to
me/has produced drivers license as identification, and did/did not take an oath.
/s/Jacqueline Schindowski
Printed/Typed Name:Jacqueline Schindowski
Notary Public State of Florida
Commission Number: 384923
27
<PAGE>
STATE OF FLORIDA
COUNTY OF __________
The foregoing instrument was acknowledged before me this _______ day of
_______________________, 1995, by _____________, as ________________ of
Integrated Health Services, Inc., a Delaware corporation, on behalf of the
corporation. He/she is personally known to me/has produced
_______________________________ as identification, and did/did not take an oath.
------------------------------
Printed/Typed Name:___________
Notary Public State of Florida
Commission Number:
STATE OF FLORIDA
COUNTY OF SARASOTA
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by Daniel J. Booth, as Vice President of Central Park Lodges, Inc., a
Delaware corporation, on behalf of the corporation. He/she is personally known
to me/has produced drivers license as identification, and did/did not take an
oath.
/s/Jacqueline Schindowski
Printed/Typed Name:Jacqueline Schindowski
Notary Public State of Florida
Commission Number: 384923
STATE OF FLORIDA
COUNTY OF __________
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by Daniel J. Booth, as Vice President of FLC Lakehouse, Inc., a Florida
corporation, on behalf of the corporation. He/she is personally known to me/has
produced drivers license as identification, and did/did not take an oath.
/s/Jacqueline Schindowski
Printed/Typed Name:Jacqueline Schindowski
Notary Public State of Florida
Commission Number: 384923
28
<PAGE>
STATE OF MARYLAND
COUNTY OF __________
The foregoing instrument was acknowledged before me this 31st day of October,
1995, by David N. Chichester, as Senior Vice President of Integrated Health
Services, Inc., a Delaware corporation, on behalf of the corporation. He is
personally known to me/has produced himself as identification, did not take an
oath.
/s/ Sara L. Beck
------------------------------
Printed/Typed Name: Sara L. Beck
Notary Public State of Maryland
Commission Number: N/A
My commission expires 11/1/99
STATE OF FLORIDA
COUNTY OF __________
The foregoing instrument was acknowledged before me this _______ day of
______________________, 1995, by _________________, as _______________ of
Central Park Lodges, Inc., a Delaware corporation, on behalf of the corporation.
He/she is personally known to me/has produced _____________________________ as
identification, and did/did not take an oath.
------------------------------
Printed/Typed Name:___________
Notary Public State of Florida
Commission Number:
STATE OF FLORIDA
COUNTY OF __________
The foregoing instrument was acknowledged before me this _______ day of
______________________, 1995, by _________________, as _______________ of FLC
Lakehouse, Inc., a Florida corporation, on behalf of the corporation. He/she is
personally known to me/has produced _____________________________ as
identification, and did/did not take an oath.
------------------------------
Printed/Typed Name:___________
Notary Public State of Florida
Commission Number:
29
August 23, 1996
Health Care Property Investors, Inc.
10990 Wilshire Boulevard, Suite 1200
Los Angeles, California 90024
(810) 475-1990
Fax: (810) 444-7017
VIA TELECOPY & FEDERAL EXPRESS
Mr. Edward Komp
Chief Executive Officer
Integrated Living Communities, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Dear Ed:
The purpose of this letter is to amend in certain particulars that certain
June 11, 1996 letter (the "Original Letter") between Integrated Living
Communities, Inc., a Delaware corporation ("ILC") and Health Care Property
Investors, Inc., a Maryland corporation ("HCPI"), pursuant to which the parties
confirmed their mutual intent and agreement in principle with respect to the
general terms and conditions of a master agreement whereby ILC or an affiliate
thereof would enter into a series of agreements with HCPI or an affiliate
thereof to develop and lease, purchase and lease, or sell and lease back the
land, improvements and personal property of certain congregate, assisted living,
alzheimer and skilled nursing Facilities. All capitalized terms used herein and
not otherwise defined herein shall have the meanings given to such terms in the
Original Letter.
Item #10 on page 3 of the Original Letter shall be amended to read as
follows:
"HCPI's funding of the New Facilities will be contingent upon
receipt of the guarantee from Integrated Health Systems, Inc., a
Delaware Corporation and parent of ILC as described in Exhibits I
and II, or ILC completing an initial public offering which results
in shareholders' equity as determined using generally accepted
accounting principles of not less than $55 million dollars.
Exhibits I and II to the Original Letter are hereby amended as follows:
1. The definition of "Developer" in Exhibit I is hereby amended to read
"ILC" or an affiliate thereof."
2. The provision for "Land Contract of Acquisition and Development
Agreement Guarantees" in Exhibit I shall be amended to read as follows:
"If ILC is not the Developer, by ILC, including completion of the
Facilities, at no cost to HCPI in excess of each of their Maximum
Costs. In addition, such agreements shall
<PAGE>
Mr. Edward Komp
August 23, 1996
Page 2
be guaranteed by Integrated Health Systems, Inc., a Delaware
corporation and parent of ILC ("IHS"), except that IHS's obligations
thereunder shall be discontinued (subject to reinstatement as set
forth below) when and only when (a) ILC shall consummate an initial
public offering of ILC's stock which (i) constitutes a bona fide
public distribution of such stock pursuant to a firm commitment
underwriting registered under the Securities and Exchange Act of
1933, (b) results in such stock being listed for trading on the
American Stock Exchange or the New York Stock Exchange or authorized
for quotation on the NASDAQ National Market immediately upon
completion of such public offering and (c) results in ILC's
shareholders' equity or ILC's net worth being equal to or greater
than $55 million, in either case as determined in accordance with
generally accepted accounting principles and as demonstrated by such
financial information as is reasonably satisfactory to HCPI.
3. The phrase "Integrated Living Communities, Inc. ("ILC") appearing in the
definition of "Lessee" in Exhibit II is hereby amended to read "ILC or an
affiliate thereof."
4. The phrase "six months lease payments" appearing in the provision for
the "Letter of Credit" in Exhibit II is hereby amended to read "four months
lease payments" and the third sentence of such provision is hereby deleted.
5. The provision for "Land Contract of Acquisition, Development Agreement
and Lease Obligation Guarantees" in Exhibit II shall be amended to read as
follows:
"If ILC is not the Lessee, a full guarantee by ILC. In addition,
such agreements shall be guaranteed by IHS subject to discontinuance
thereof under the same terms as provided in Exhibit I with respect
to IHS's guarantee of the Contract of Acquisition and Development
Agreement."
6. A new provision will be added which reads as follows:
"Right of First Refusal": By Lessee during the entire lease term and during
any renewal term.
Except as hereby amended, the understandings and agreements set forth in
the Original Agreement remain in full force and effect.
Very truly yours,
/s/ Stephen Maulbersch
Stephen Maulbersch
Senior Vice President
<PAGE>
Mr. Edward Komp
August 23, 1996
Page 3
Agreed and confirmed this 22 day of August, 1996.
INTEGRATED LIVING COMMUNITIES, INC.
By: /s/ Edward J. Komp
------------------------------
Its: CEO and President
------------------------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Integrated Living Communities, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report on the consolidated financial statements of Integrated Living
Communities, Inc. and subsidiaries dated June 5, 1996 refers to the adoption of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
September 20, 1996
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 3 to Registration Statement No. 333-05877
of Integrated Living Communities, Inc. on Form S-1 of our report dated May 15,
1995, on the financial statements of F.I.C. Lakehouse Inc., Don Blivas, Janice
Blivas, Fred Fiala, and John Rowe d/b/a Lakehouse East (a Partnership),
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
Tampa, Florida
September 20, 1996
