AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1996
REGISTRATION NO. 333-05877
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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) 974-7200
(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.: 941-974-7200
(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.
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INTEGRATED LIVING COMMUNITIES, INC.
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CROSS-REFERENCE SHEET
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FORM S-1 ITEM AND CAPTION PROSPECTUS CAPTIONS
- ------------------------- -------------------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page of Prospectus
Inside Front and Outside Back Cover Pages of
2. 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 of 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
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FORM S-1 ITEM AND CAPTION PROSPECTUS CAPTIONS
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(h) Management's Discussion and Analysis of Management's Discussion and Analysis of Financial
Financial Condition and Results of Operations. 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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SUBJECT TO COMPLETION, DATED AUGUST 26, 1996
PROSPECTUS
5,130,600 SHARES
[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.
================================================================================
Price to Underwriting Proceeds to Proceeds to
Public Discounts(1) Company(2) IHS
Per Share $ $ $ $
Total (3) $ $ $ $
================================================================================
(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 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
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--------------------
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
--------------------- ----------------------
1993 1994 ACTUAL PRO 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 ....... 24 369 414 1,671 206 480 912
Loss on impairment of long-lived
assets(3)............................. -- -- 5,126 5,126 -- -- --
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Earnings (loss) before income taxes .. 590 830 (3,949) (3,532) 522 1,690 997
Federal and state income taxes ...... 230 311 (629) (468) 201 651 384
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Net earnings (loss) .................. $ 360 $ 519 $(3,320) $(3,064) $ 321 $ 1,039 $ 613
======== ========= ========== ============ ======== ========= =============
Earnings (loss) per common share ..... $ 0.09 $ 0.13 $ (0.85) $ (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)
------ ------------ --------------
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
- -----------------
(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 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
4
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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 September 1996,
because such facilities were not in operation at June 30, 1996. See
"Company History," "Use of Proceeds," "Pro Forma Financial Information"
and "Business -- Properties."
(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 Cabot Pointe, Garden City
and Homestead Wichita facilities because such acquisitions 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 $(3,320,000) 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
September 1996, the acquisition of the Carrington Pointe 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 $(3,064,000) and $613,000, respectively. See "Pro Forma
Financial Information."
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."
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
6
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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, 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
restric-
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tions. 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 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."
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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 September 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 September 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 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 man-
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agement 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 15, 1996 aggregated $6.7 million. See
"--Potential Conflicts of Interest with IHS," "Company History" and "Use of
Proceeds."
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
infor-
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mation 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 $6.7 million at August 15, 1996. The Company expects to use the
remaining net proceeds (approximately $11.5 million, assuming an initial public
offering price of $14.00 per share (approximately $14.2 million if the
sale/leaseback transaction for the Cabot Pointe facility is consummated prior to
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
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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 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. 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."
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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 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."
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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 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
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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
November 1997, 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, 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
15
<PAGE>
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 forseeable 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
Retirement Estates ("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). 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 941-974-7200.
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 partnership
interest in the Waterside facility, a continuing care retirement community; IHS
subsequently acquired the remaining partnership interests in Waterside. 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.
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.
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.
17
<PAGE>
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 September 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 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 $6.7 million at August 15, 1996.
The remainder of the net proceeds, approximately $11.5 million (approximately
$14.2 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) 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....................... 42,348 54,539 72,687
Accumulated deficit ............................. (2,056) (2,056) (2,056)
--------- ----------- -------------
Total stockholders' equity..................... 40,331 52,531 70,694
--------- ----------- -------------
Total capitalization............................... $43,694 $55,894 $70,694
========= =========== =============
- ------------
(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."
</TABLE>
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
=========
(1) After deduction of estimated underwriting discounts 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."
</TABLE>
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% $42,387,000 55.4% $10.87
New investors . 2,435,700 38.5 34,099,800 44.6 $14.00
----------- --------- ------------- --------- ------------
Total......... 6,333,600 100.0% $76,486,800 100.0%
=========== ========= ============= =========
- -----------------
(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. 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 September 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 October 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" and "Certain Transactions."
21
<PAGE>
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
<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; issued and outstanding 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.............................. 42,348 -- 12,191 54,539
Retained earnings (deficit)............................. (2,056) (187) 187 (2,056)
--------- --------- --------------- ---------------
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>
ILC TERRACE GARDENS VINTAGE CARRINGTON POINTE GARDEN CITY
ADJUST- ADJUST- ADJUST- ADJUST- ADJUST- PRO FORMA
ACTUAL MENTS ACTUAL MENTS ACTUAL MENTS ACTUAL MENTS ACTUAL MENTS CONSOLIDATED
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
MONTHLY SERVICE AND
ENTRANCE FEES........ $15,123 $5,642 $1,598 $3,486 $ 31 $ 25,880
MANAGEMENT SERVICES
AND OTHER............ 1,146 301 23 102 -- 1,572
-------- -------- -------- -------- ----- --------
TOTAL REVENUES....... 16,269 5,943 1,621 3,588 31 27,452
-------- -------- -------- -------- ------ --------
EXPENSES:
FACILITY OPERATIONS... 11,243 4,068 1,208 1,937 66 18,522
FACILITY RENTS........ 2,430 $ (708)(B) -- -- -- -- $ 48 (G) 1,770
CORPORATE
ADMINISTRATIVE AND
GENERAL ............. 1,005 2,008 (C) 546 81 249 6 3,895
DEPRECIATION AND
AMORTIZATION......... 414 593 (B) 345 $ (47)(D) 200 $(113)(B) 425 $(146)(F) 14 (14)(G) 1,671
LOSS ON IMPAIRMENT OF
LONG-LIVED ASSETS.... 5,126 -- -- -- -- 5,126
INTEREST.............. -- 739 (739)(D) 429 (429)(E) -- 16 (16)(G) --
-------- ----------- -------- ---------- -------- --------- -------- --------- ------ ------- ---------
TOTAL EXPENSES....... 20,218 1,893 5,698 (786) 1,918 (542) 2,611 (146) 102 18 30,984
-------- ----------- -------- ---------- -------- --------- -------- --------- ------ ------- ---------
EARNINGS (LOSS) BEFORE
INCOME TAXES......... (3,949) $(1,893) $ 245 $ 786 $ (297) $ 542 $ 977 $ 146 $(71) $(18) (3,532)
=========== ======== ========== ======== ========= ======== ========= ====== =======
FEDERAL AND STATE
INCOME TAXES ........ (629) (468)(H)
-------- -----------
NET LOSS.............. $(3,320) $(3,064)
======== ===========
NET EARNINGS PER
COMMON SHARE......... $ (.85) $ (.63)
======== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING... 3,898 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 TERRACE GARDENS VINTAGE GARDEN CITY
ADJUST- ADJUST- ADJUST- ADJUST- PRO FORMA
ACTUAL MENTS ACTUAL MENTS ACTUAL MENTS ACTUAL MENTS 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 (h)
--------- -------
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 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...... -- -- 24 369 414 206 480
Loss on impairment of long-lived
assets(2)......................... -- -- -- -- 5,126 -- --
--------- --------- --------- ---------- ----------- --------- ----------
Total expenses.................... 4,082 4,125 4,650 10,815 20,218 7,496 9,605
--------- --------- --------- ---------- ----------- --------- ----------
Earnings (loss) before income
taxes.............................. 883 604 590 830 (3,949) 522 1,690
Federal and state income taxes ..... 228 230 230 311 (629) 201 651
--------- --------- --------- ---------- ----------- --------- ----------
Net earnings (loss)................. $ 655 $ 374 $ 360 $ 519 $(3,320) $ 321 $ 1,039
========= ========= ========= ========== =========== ========= ==========
Earnings (loss) per common share ... $ 0.17 $ 0.10 $ 0.09 $ 0.13 $ (0.85) $ 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
Stockholder's equity.......... 27 26 7,286 8,718 14,773 40,331
(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."
</TABLE>
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 October 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."
RESULTS OF OPERATIONS
The following table presents selected financial data as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED 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 ... 11.3 7.2 (24.3) 6.5 15.0
Federal and state income taxes......... 4.4 2.7 (3.9) 2.5 5.8
-------- -------- ---------- -------- --------
Net earnings (loss).................... 6.9% 4.5% (20.4)% 4.0% 9.2%
======== ======== ========== ======== ========
</TABLE>
27
<PAGE>
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 an 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 October 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 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 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
28
<PAGE>
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
$414,000 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
and 12 of Notes to Consolidated Financial Statements.
Earnings (loss) before income taxes decreased from earnings of $830,000 in
1994 to loss of $3,949,000 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.
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.
29
<PAGE>
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 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.
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.
30
<PAGE>
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 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.
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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, 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 September 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
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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 September 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.
40
<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 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((4)) Bradenton 8/96 35 56 ALZ Owned
The Shores((5)) Bradenton 9/94 260 287 CCRC,ALZ Leased
Waterside Retirement Estates Sarasota 12/93 164 201 CCRC Owned
West Palm Beach Retirement((6)) 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((7)) Louisville 3/93 267 290 CCRC Managed
MARYLAND
- --------
The Homestead((8)) Denton 12/92 50 50 AL,ADC(42) Owned
TEXAS
- -----
Treemont Retirement Community((6)) Dallas 2/89 231 251 CCRC,ALZ,ADC(25) Owned
Vintage Retirement Community((6)(9)) Denton 4/95 105 111 C,AL Owned
- ----------
(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; 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."
<PAGE>
(4) 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 September 1996. There can be no assurance this transaction will
occur as anticipated or at all.
(5) Includes 21 skilled nursing beds.
(6) 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."
(7) Includes 60 skilled nursing beds.
(8) IHS managed the facility from December 1992 until its purchase by IHS in
March 1994.
(9) IHS managed the facility from April 1995 until its purchase by IHS in
January 1996.
</TABLE>
41
<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.
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 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:
SERVICES
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.
44
<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 July 30, 1996, the Company had 482 employees, including 270 full-time
employees, of which 21 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
46
<PAGE>
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.
47
<PAGE>
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
Kyle D. Shatterly .... 35 Senior Vice President -- Acquisitions and
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
49
<PAGE>
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
50
<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
51
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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 500,000 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
INDIVIDUAL GRANTS RATES OF STOCK PRICE
------------------------------ APPRECIATION FOR
OPTION TERM (2)
PERCENT ------------------
OF
TOTAL
OPTIONS
NUMBER OF GRANTED
SECURITIES TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN PRICE EXPIRATION
NAME 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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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 ten 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).
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 October 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 facilities: monthly fees paid to
IHS are $850 (West Palm Beach), $1,500 (Vintage) and $3,300
55
<PAGE>
(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 15, 1996,
$3.4 million and $6.7 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."
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<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 22, 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 -------------------
NAME 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%
- -------------
* 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 Boulevard, 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.
</TABLE>
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<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 "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."
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<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
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<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
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<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 that does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the
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<PAGE>
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.
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<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 ended December 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-20
Statement of Operations F-21
Statement of Cash Flows F-22
Notes to Financial Statements F-23
One Month Period ended November 30, 1993
Independent Auditors' Report F-25
Statement of Operations F-26
Statement of Cash Flows F-27
Notes to Financial Statements F-28
CARRINGTON POINTE
Independent Auditors' Report F-30
Statements of Operations -- Years ended December 31, 1993, 1994
and 1995 F-31
Statements of Cash Flows -- Years ended December 31, 1993, 1994
and 1995 F-32
Notes to Financial Statements F-33
VINTAGE HEALTH CARE CENTER RETIREMENT DIVISION
Independent Auditors' Report F-35
Balance Sheets -- December 31, 1994 and 1995 F-36
Statements of Operations -- Years ended December 31, 1994 and 1995 F-37
Statements of Changes in Division Equity -- Years ended December 31,
1994 and 1995 F-38
Statements of Cash Flows -- Years ended December 31, 1994 and 1995 F-39
Notes to Financial Statements F-40
F-1
<PAGE>
PROBABLE ACQUISITIONS
TERRACE GARDENS TENANTS IN COMMON PAGE
Independent Auditors' Report F-43
Balance Sheets -- December 31, 1994 and 1995 F-44
Statements of Operations -- Years ended December 31, 1993, 1994
and 1995 F-45
Statements of Changes in Owner's Deficit -- Years ended December 31,
1993, 1994 and 1995 F-46
Statements of Cash Flows -- Years ended December 31, 1993, 1994
and 1995 F-47
Notes to Financial Statements F-48
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)
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 .......................... 8,454,626 17,829,403 42,348,329
Retained earnings (deficit).......................... 224,811 (3,095,637) (2,056,248)
------------- ------------- -------------
Net stockholder's equity........................... 8,718,416 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.. 590,392 830,235 (3,949,655) 522,595 1,690,063
Federal and state income taxes (note
6)..................................... 230,253 311,338 (629,207) 201,199 650,674
------------ ------------- --------------- ------------ -------------
Net earnings (loss).................. $ 360,139 $ 518,897 $(3,320,448) $ 321,396 $ 1,039,389
============ ============= =============== ============ =============
Earnings (loss) per common share ....... $ .09 $ .13 $ (.85) $ .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............................. -- -- 360,139 360,139
Net capital contributions from parent
company.................................. -- 6,900,082 -- 6,900,082
--------- ------------- -------------- -------------
Balance at December 31, 1993............. 38,979 7,541,243 (294,086) 7,286,136
Net earnings............................. -- -- 518,897 518,897
Net capital contributions from parent
company.................................. -- 913,383 -- 913,383
--------- ------------- -------------- -------------
Balance at December 31, 1994............. 38,979 8,454,626 224,811 8,718,416
Net loss................................. -- -- (3,320,448) (3,320,448)
Net capital contributions from parent
company.................................. -- 9,374,777 -- 9,374,777
--------- ------------- -------------- -------------
Balance at December 31, 1995............. 38,979 17,829,403 (3,095,637) 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 $42,348,329 $(2,056,248) $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)............................ $ 360,139 $ 518,897 $(3,320,448) $ 321,396 $ 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
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 ...... 189,610 1,605,292 2,371,528 466,781 2,379,110
------------ ------------ --------------- ------------ -------------
Cash flows from financing activities:
Net capital distributions to parent company ... (168,472) (427,127) (2,536,614) (87,509) (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 ........ (172,997) (292,031) (1,787,272) 606,285 (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.......... $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
a 50-unit assisted living Denton, Maryland I.H.S. of Denton, Inc. Owned
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
a 95-unit congregate care Colorado Springs, Colorado of Lester, Inc. Leased
facility
Carrington Pointe, a December 15,1995 Integrated Management -
172-unit congregate Fresno, California Carrington Pointe, Inc. Owned
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 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
analysis 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 unaudited
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.
F-11
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
(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............................. $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, 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. These events have been
accounted for as if the settlement had occurred effective as of the December 1,
1993 acquisition date. Accordingly, the financial statements include the
operations of Lakehouse East and exclude the operations of Lakehouse West from
December 1, 1993.
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.)
F-12
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
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.
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) $(3,064,000)
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>
F-13
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
(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).
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... $176,126 $148,467 $ (8,772) $ 340,335 $326,568
Deferred . 54,127 162,871 (620,435) (139,136) 324,106
---------- ---------- ------------ ----------- -----------
$230,253 $311,338 $(629,207) $ 201,199 $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 ....... $200,733 $282,280 $(1,342,883) $177,682 $574,621
State income taxes, net of Federal tax
benefit....................................... 29,287 31,053 (175,233) 24,491 75,854
Other......................................... 233 (1,995) (2,501) (974) 199
Valuation allowance adjustment................ -- -- 891,410 -- --
---------- ---------- -------------- ---------- ----------
$230,253 $311,338 $ (629,207) $201,199 $650,674
========== ========== ============== ========== ==========
</TABLE>
F-14
<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-15
<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-16
<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 one of its
facilities 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.
(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
F-17
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
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.
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
F-18
<PAGE>
INTEGRATED LIVING COMMUNITIES, INC AND SUBSIDIARIES -
(Wholly-Owned by Integrated Health Services, Inc.) (Continued)
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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<PAGE>
LAKEHOUSE EAST (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
MONTHS 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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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 $42,387,000, 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>
<S> <C>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
No. Description
- --- -----------
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.
II-3
<PAGE>
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.
10.37 Letter of Intent Agreement, dated as of June 26, 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.
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>
- ----------
* To be filed by amendment.
+ 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. 2 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 22nd day of August, 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. 2 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
Edward J. Komp Officer and Director
(principal executive officer) August 22, 1996
/s/ John B. Poole*
- ----------------------------- Senior Vice President--
John B. Poole Chief Financial Officer
(principal financial and accounting officer) August 22, 1996
/s/ Robert N. Elkins*
- ----------------------------- Chairman of the Board of Directors August 22, 1996
Robert N. Elkins, M.D.
- ----------------------------- Director
Luis Bared
/s/ Lawrence P. Cirka*
- ----------------------------- Director August 22, 1996
Lawrence P. Cirka
/s/ Charles A. Laverty*
- ----------------------------- Director August 22, 1996
Charles A. Laverty
/s/ Lisa Merritt*
- ----------------------------- Director August 22, 1996
Lisa Merritt
*By: /s/ Edward J. Komp
--------------------------
Edward J. Komp
(as attorney-in-fact for
each of the persons 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.+
<PAGE>
Exhibit
No. Description Page
- --- ----------- ----
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.+
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.+
<PAGE>
Exhibit
No. Description Page
- --- ----------- ----
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 as of June 26, 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.
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>
- ----------
* To be filed by amendment.
+ Previously filed.
RESTATED CERTIFICATE OF
OF
INCORPORATION
OF
INTEGRATED LIVING COMMUNITIES, INC.
INTEGRATED LIVING COMMUNITIES, INC. (the "Corporation", a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware (the "GCL"), in order to amend and restate its Certificate of
Incorporation pursuant to Sections 242 and 245 of the GCL, certifies as follows:
1. The name of the Corporation is Integrated Living Communities, Inc. The
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of Delaware on November 17, 1995 and was amended on
January 11, 1996.
2. This Restated Certificate of Incorporation restates and amends the
provisions of the Certificate of Incorporation as heretofore amended or
supplemented.
3. The Board of Directors of the Corporation, acting at a meeting duly
noticed and held pursuant to Section 141 of the GCL adopted a resolution
proposing and declaring advisable the adoption of a Restated Certificate of
Incorporation of the Corporation in the form hereinafter set forth in Item 6.
4. The stockholders of the Corporation, acting by written consent pursuant to
the provisions of Section 228 of the GCL, duly adopted this Restated Certificate
of Incorporation in the form hereinafter set forth in Item 6.
5. The aforesaid Restated Certificate of Incorporation was duly adopted in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
GCL.
6. The text of the Certificate of Incorporation, as amended or supplemented
heretofore, is hereby amended and restated so as to read in its entirety as
follows:
<PAGE>
ARTICLE I
Name
----
The name of the Corporation is: Integrated Living Communities, Inc.
ARTICLE II
Purposes
-------
The purpose of the Corporation is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of the
State of Delaware as set forth in Title 8 of the GCL.
ARTICLE III
Agent for Service
-----------------
The name and address in the State of Delaware of the Corporation's registered
agent for service of process is: Corporation Trust Center, 1209 Orange Street,
in the City of Wilmington, County of New Castle 19801.
ARTICLE IV
Capital Stock
-------------
A. The total number of shares of stock which the Corporation is authorized to
issue is fifty-five million (55,000,000) shares, of which fifty million
(50,000,000) shares, par value $.01 per share. Thereof shall be Common
Stock and five million (5,000,000) shares, par value $.01 per share thereof
shall be Preferred Stock.
B. The Board of Directors is hereby expressly authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of the
Preferred Stock in series and to fix and state, to the extent not fixed by
the provisions hereinabove set forth and subject to limitations prescribed
by law, the voting powers, designations, preferences and relative,
participating, optional and other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof,
including, but not limited to, determiniation of any of the following:
(a) the distinctive serial designation and the number of shares
constituting the series;
2
<PAGE>
(b) the dividend rate, whether dividends shall be cumulative and, if so,
from which date, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(c) the voting powers, full or limited in addition to the voting powers
provided by law;
(d) whether the shares shall be redeemable, and, if so, the price or
prices at which, and the terms and conditions on which, the shares may
be redeemed;
(e) the amount or amounts payable upon the shares in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
(f) whether the shares shall be entitled to the benefit of a sinking or
retirement fund to be applied to the purchase or redemption of shares
of the series, and, if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which the
shares may be redeemed or purchased through the applications of such
fund; and
(g) whether the shares shall be convertible into, or exchangeable for,
shares of any other class or classes or of any other series of the
same or any other class or classes of stock of the Corporation and, if
so convertible or exchangeable, the conversion price or prices, or the
rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made and any other terms and conditions
of such conversion or exchange.
Each share of each series of Preferred Stock shall have the same relative
rights as and be identical in all respects with all the other shares of the same
series.
ARTICLE V
By-Laws
-------
In furtherance and not in limitation of the objects, purposes and powers
conferred by statute, the Board of Directors is expressly authorized to make,
alter or repeal the By-Laws of the Corporation.
3
<PAGE>
ARTICLE VI
Certain Rights of Creditors and Stockholders
--------------------------------------------
Whenever a compromise or arrangement is proposed between the Corporation and its
creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of Title 8 of the GCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of Title 8 of the GCL, order a meeting of the
creditors or class of creditors and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE VII
Indemnification
---------------
The Corporation shall have the power to 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 tht 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, 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 in connection with such action, suit or proceeding if he acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, upon a plea of nolo
4
<PAGE>
contendere or equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
ARTICLE VIII
Limitation of Liability
-----------------------
A director of the Corporation shall have no personal liability to the
Corporation or its stockholders for monetary damages for breach of his fiduciary
duty as a director, provided, however, this Article shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of a law;
(iii) for the unlawful payment of dividends or unlawful stock repurchases under
Section 174 of the GCL or (iv) for any transaction from which the director
derived an improper personal benefit. This Article shall not eliminate or limit
the liability of a director for any act or omission occurring prior to the
effective date of this Article.
ARTICLE IX
Board of Directors
------------------
A. Subject to the rights of the holders of any one or more series of Preferred
Stock, the number of directors constituting the entire Board of Directors
shall be as fixed from time to time by vote of a majority of the directors
constituting the entire Board of Directors, provided, however, that the
number of directors shall not be reduced so as to shorten the term of any
director at the time in office.
B. 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.
5
<PAGE>
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 hereof
and such directors so elected shall not be divided into classes pursuant to
this Article IX unless expressly provided by such terms. Subject to the
foregoing, at each annual 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.
C. Notwithstanding any other provisions of this Restated Certificate of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that some lesser percentage may be specified by law, this Restated
Certificate of Incorporation or the By-Laws of the Corporation), any
director or the entire Board of Directors of the Corporation may be removed
at any time, but only for cause and only by the affirmative vote of the
holders of 75% or more of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose. 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 provisions of
section (c) of this Article shall not apply with respect to the director or
directors elected by such holders of Preferred Stock.
D. The provisions of this Article shall not be amended or repealed, nor shall
any provision of this Restated Certificate of Incorporation be adopted that
is inconsistent with this Article, unless such action shall have been
approved by the affirmative vote of the holders of at least
6
<PAGE>
75% of the outstanding shares of capital stock of the Corporation entitled
to vote thereon cast at a meeting of the stockholders called for that
purpose.
ARTICLE X
Duration
--------
The Corporation is to have perpetual existence.
ARTICLE XI
Stockholder Meetings; Books
---------------------------
Meetings of the stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the Corporation may be kept,
subject to any provisions contained in the statutes, outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors in the By-Laws of the Corporation. Any action required or
permitted to be taken at any annual or special meeting of stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing by the
stockholders, unless the number of stockholders is fewer than two. At any annual
or special meeting of stockholders only such business shall be conducted as
shall have been brought before such meeting in the manner provided from time to
time in the By-Laws of the Corporation. Except as otherwise required by law and
subject to the rights of holders of Preferred Stock, if any, special meetings of
stockholders may only be called by the Board of Directors of the Corporation
pursuant to a resolution approved by a majority of the entire Board of
Directors, the Chairman of the Board of Directors or the President.
Notwithstanding anything contained in this Restated Certificate of Incorporation
to the contrary, the affirmative vote of the holders of at least eighty percent
(80%) of the Corporation entitled to vote generally in the election of Directors
voting together as a single class shall be required to alter, amend, adopt any
provision inconsistent with or repeal this Article XI.
ARTICLE XII
Amendments
----------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereinafter prescribed by
7
<PAGE>
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation.
7. This Restated Certificate of Incorporation was duly adopted by the
stockholders of the Corporation on May 24, 1996, in accordance with the
provisions of Sections 228, 242 and 245 of the GCL.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seal
this 4th day of June 1996.
INTEGRATED LIVING COMMUNITIES, INC.
By: /s/ Edward J. Komp
-------------------------------
Edward J. Komp
President
ATTEST:
Kyle Shatterly
- -------------------------
Asst. Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
* * * * *
Integrated Living Communities, Inc. a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY;
FIRST: That at a meeting of the Board of Directors of Integrated Living
Communities, Inc., resolutions were duly adopted setting forth a proposed
amendment to the Restated Certificate of Incorporation of said corporation,
declaring said amendment to be advisable and calling a meeting of the
stockholders of said corporation for consideration thereof. The resolution
setting forth the proposed amendment as follows:
RESOLVED, that the Restated Certificate of
Incorporation of Integrated Living Communities, Inc.
be amended by changing the Fourth Article Section A
thereof sot that, as amended, saind Article shall be
and read as follows:
The total number of shares of stock which the
Corporation is authorized to issue is one hundred
five million (105,000,000) shares, of which one
hundred million (100,000,000) shares, par value $.01
per share thereof shall be Common Stock and five
million (5,000,000) shares, par value $.01 per share
thereof shall be Preferred Stock.
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of said corporation was duly called and
held, upon written waiver of notice signed by all stockholders at which meeting
the necessary number of shares as required by statute were voted in favor of
the.
THIRD: That said was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware. That this
Certificate of Amendment of the
<PAGE>
Restated Certificate of Incorporation shall be effective on June 12, 1996.
IN WITNESS WHEREOF, said Integrated Living Communities, Inc. has caused
this certificate to be signed by Edward J. Komp, its President, this Twelth day
of June, 1996.
Integrated Living Communities, Inc.
By: /s/ Edward Komp
--------------------------------
Edward J. Komp
President
2
FULBRIGHT & JAWORSKI
L.L.P.
A REGISTERED FIFTH AVENUE
NEW YORK, NEW YORK 10103-3198
HOUSTON
WASHINGTON, D.C.
AUSTIN
SAN ANTONIO
DALLAS
TELEPHONE: 212/318-3000 NEW YORK
FACSIMILE: 212/752-5958 LOS ANGELES
WRITER'S INTERNET ADDRESS: LONDON
HONG KONG
WRITER'S DIRECT DIAL NUMBER:
August 26, 1996
Integrated Living Communities, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Re: Registration Statement on Form S-1
Registration No. 333-05877
Dear Ladies and Gentlemen:
In connection with the Registration Statement on Form S-1, Registration
No. 333-05877 (the "Registration Statement") filed by Integrated Living
Communities, Inc., a Delaware corporation (the "Company"), under the Securities
Act of 1933, as amended (the "Act"), relating to the public offering of an
aggregate of up to 5,900,190 shares of the Company's Common Stock, par value
$.01 per share (the "Common Stock"), of which 3,205,290 shares of authorized but
heretofore unissued shares of Common Stock (including up to 769,590 shares of
Common Stock which will be purchased by the underwriters if the underwriters
exercise in full the option granted to them by the Company to cover
over-allotments) are being offered by the Company and up to 2,694,900 presently
issued and outstanding shares of Common Stock are being offered by Integrated
Health Services, Inc. ("IHS"), we, as counsel for the Company, have examined
such corporate records, other documents and questions of law as we have
considered necessary or appropriate for the purposes of this opinion. Our
opinion set forth below is limited to the General Corporation Law of the State
of Delaware.
We assume that appropriate action will be taken, prior to the offer and
sale of the shares of Common Stock, to register and qualify such shares for sale
under all applicable state securities or "blue sky" laws.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the originals
of such latter documents.
Based on the foregoing, we advise you that in our opinion (i) the
shares of Common Stock being issued and sold by the Company have been duly and
validly authorized and, when issued and sold in the manner contemplated by the
Underwriting
<PAGE>
Integrated Living Communities, Inc.
August 26, 1996
Page 2
Agreement, a form of which will be filed as an exhibit to the Registration
Statement (the "Underwriting Agreement"), and upon receipt by the Company of
payment therefor as provided in the Underwriting Agreement, will be legally
issued, fully paid and non-assessable, and (ii) the shares of Common Stock being
sold by IHS have been duly and validly authorized and are legally issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the Prospectus contained therein. This consent is not to be
construed as an admission that we are a party whose consent is required to be
filed with the Registration Statement under the provisions of the Act or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
The opinion expressed herein is solely for your benefit, and may be
relied upon only by you.
Very truly yours,
/s/ Fulbright & Jaworski L.L.P.
REGISTRATION RIGHTS AGREEMENT
AGREEMENT, dated as of June 1, 1996, by and between Integrated
Living Communities, Inc. (the "Company"), a Delaware corporation, and Integrated
Health Services, Inc., a Delaware corporation ("IHS").
RECITALS:
---------
WHEREAS, the Company, a wholly-owned subsidiary of IHS,
proposes to offer shares of its Common Stock to the public pursuant to a
registration statement filed with, and declared effective by, the Commission (as
hereinafter defined) under the Securities Act (as hereinafter defined).
WHEREAS, the Company and IHS desire to establish certain terms
and conditions upon which the Company will register the shares of the Company's
Common Stock owned by IHS.
NOW, THEREFORE, in consideration of the premises and mutual
covenants and agreements of the parties as set forth herein and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
Section 1. Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, $.01 par
value per share.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, and shall include any
successor statute.
"Holder" shall mean any holder of outstanding Registrable
Securities.
"Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registered Securities" shall mean Registrable Securities
which have been registered under the Securities Act pursuant to a registration
statement filed with and declared effective by the Commission.
"Registrable Securities" shall mean shares of Common Stock now
owned or hereafter acquired by IHS or its assignees pursuant to Section 10
hereof which have
<PAGE>
not been (a) registered under the Securities Act pursuant to an effective
registration statement filed thereunder and disposed of in accordance with the
registration statement covering them or (b) publicly sold pursuant to Rule 144.
"Registration Expenses" shall mean all expenses incurred by
the Company in compliance with Sections 2, 4 and 5 hereof, including, without
limitation, all registration, filing and National Association of Securities
Dealers fees, all fees and expenses of complying with securities or blue sky
laws, all word processing, duplicating and printing expenses, messenger,
telecommunications, mailing and delivery expenses, the fees and disbursements of
counsel for the Company and of its independent public accountants, including the
expenses of any special audits or "cold comfort" letters required by or incident
to such performance and compliance, the fees and disbursements incurred by the
holders of Registrable Securities to be registered (including the fees and
disbursements of one law firm and one accounting firm retained by such Holders
in accordance with Section 2 hereof), premiums and other costs of policies of
insurance against liabilities arising out of the public offering of the
Registrable Securities being registered and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
Selling Expenses, if any, provided that, in any case where Registration Expenses
are not to be borne by the Company, such expenses shall not include salaries of
Company personnel or general overhead expenses of the Company, auditing fees,
premiums or other expenses relating to liability insurance required by
underwriters of the Company or other expenses for the preparation of financial
statements or other data normally prepared by the Company in the ordinary course
of its business or which the Company would have incurred in any event.
"Rule 144" shall mean Rule 144 promulgated under the
Securities Act, or any successor rule then in force.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations thereunder, and shall include any
successor statute.
"Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities.
Section 2. Piggyback Registration.
-----------------------
(a) If the Company shall determine to register any of its
securities either for its own account or the account of a security holder or
holders exercising their respective demand registration rights, other than a
registration on any form which does not permit secondary sales or does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Registrable Securities, the
Company will:
(i) promptly give to each Holder written notice
thereof (which shall include a list of the jurisdictions in
which the Company intends to
-2-
<PAGE>
attempt to qualify such securities under the applicable blue
sky or other state securities laws); and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in
any underwriting involved therein, all the Registrable
Securities specified in a written request or requests made by
any Holder within twenty-five (25) days after receipt of the
written notice from the Company described in clause (i) above.
Such written request may specify all or a part of a Holder's
Registrable Securities.
For purposes of any registration pursuant to this Section 2 the Holders of a
majority-in-interest of the Registrable Securities to be registered shall choose
the counsel for all of the selling Holders. Notwithstanding the foregoing
provisions, the Company may withdraw any registration statement referred to in
this Section 2 for any reason without thereby incurring any liability to the
Holders requesting inclusion of their Registrable Securities in such
registration.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise each Holder as a part of the written notice given
pursuant to Section 2(a)(i). If any Holder proposes to distribute its securities
through such underwriting it shall (together with the Company and the other
persons who, by virtue of agreements with the Company, are entitled to include
their securities in any such registration (the "Other Stockholders")
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected by the Company. Notwithstanding any other provision of this Section 2,
if the managing underwriter advises the Company that marketing factors require a
limitation on the number of shares to be underwritten, the Company shall so
advise all holders of securities requesting registration, and the number of
shares of securities that are entitled to be included in the registration and
underwriting shall be allocated in the following manner: the securities of the
Company held by officers and directors of the Company shall be excluded from
such registration and underwriting to the extent required by such limitation
(pro rata based upon the number of securities requested to be included in such
registration by each such person), and, if further limitation on the number of
shares is required, the securities of the Company held by Other Stockholders
(other than Other Stockholders exercising demand registration rights) shall be
excluded from such registration to the extent required by such limitation (pro
rata based upon the number of securities requested to be included in such
registration by each such person), and if a further limitation on the number of
shares is required, the Registrable Securities that may be included in the
registration and underwriting shall be allocated among all such Holders
requesting inclusion in the registration pursuant to this Section 2 in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities which they had requested to be included in such registration at the
time of filing the registration statement. If any Holder or any officer or
director of the Company or Other Stockholder disapproves of the terms of any
such underwriting, he may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any Registrable Securities or other
securities
-3-
<PAGE>
excluded or withdrawn from such underwriting shall, subject to the provisions of
Section 2(c), be withdrawn from such registration.
Section 3. Expenses of Registration. All Registration Expenses
incurred in connection with any registration, qualification or compliance
pursuant to this Agreement shall be borne by the Company, and all Selling
Expenses shall be borne by the Holders of the securities so registered pro rata
on the basis of the number of their shares so registered
Section 4. Registration on Form S-3. After the Company has
qualified for the use of Form S-3 or any successor form, in addition to the
rights contained in the foregoing provisions of this Agreement, the Holders of
Registrable Securities shall have the right to request registrations on Form S-3
(such requests shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended methods of disposition
of such shares by such Holder or Holders); provided, however, that the Company
shall not be obligated to file more than one Form S-3 in any six-month period.
Notwithstanding the foregoing, the Company shall not be
required to effect registration under this Section 4 if counsel for the Company,
reasonably acceptable to the Holders requesting registration, shall deliver an
opinion reasonably acceptable to the Holders requesting registration that,
pursuant to Rule 144 under the Securities Act or otherwise, such Holders can
publicly sell the Registrable Securities as to which registration has been
requested without registration under the Securities Act and without any
limitation with respect to offerees, manner of offering or the size of the
transaction.
Section 5. Registration Procedures. In the case of each
registration effected by the Company pursuant to this Agreement, the Company
will keep each Holder advised in writing as to the initiation of each
registration and as to the completion thereof. Whenever the holders of
Registrable Securities have requested that any Registrable Securities be
registered pursuant to this Agreement, the Company will use its best efforts to
effect the registration and the sale of such Registrable Securities in
accordance with the intended method of disposition thereof, and pursuant thereto
the Company will at its expense and as expeditiously as possible:
(a) Prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective; provided that before
filing a registration statement or prospectus or any amendment or supplement
thereto, including documents incorporated by reference after the initial filing
of any registration statement, the Company shall furnish to the Holders of the
Registrable Securities covered by such registration statement and the
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be subject to the review of such Holders and underwriters;
-4-
<PAGE>
(b) Prepare and file with the Commission such amendments and
post-effective amendments to a registration statement as may be necessary to
keep such registration effective for a period of twelve (12) months or until the
Holder or Holders have completed the distribution described in the registration
statement relating thereto, whichever first occurs; provided, however, that the
Company, in good faith, may delay the filing of any amendment or supplement to
the Registration Statement for a reasonable period of time, not to exceed 120
days, in order to permit the Company (A) to effect disclosure or disposition or
consummation of any transaction requiring confidential treatment which is being
actively pursued at such time and which would require disclosure in the
Registration Statement or (B) to negotiate, effect or complete any transaction
which the Company reasonably believes might be jeopardized, delayed or made more
costly to the Company by disclosure in the Registration Statement; and provided
further, however, that (i) such 12 month period shall be extended for a period
of time equal to the period the Holder refrains from selling any securities
included in such registration in accordance with the provisions of Section 11
hereof; (ii) such 12 month period shall be extended by the number of days during
the period from and including the date of the giving of notice pursuant to
Section 5(e) hereof to and including the date when each Holder of Registrable
Securities covered by such registration statement shall have received the copies
of the supplemented or amended prospectus contemplated by Section 5(e) hereof;
and (iii) in the case of any registration of Registrable Securities on Form S-3
which are intended to be offered on a continuous or delayed basis, such 12 month
period shall be extended, if necessary, to keep the registration statement
effective until all such Registrable Securities are sold, provided that Rule
415, or any successor rule under the Securities Act, permits an offering on a
continuous or delayed basis, and provided further that applicable rules under
the Securities Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment which (y) includes any
prospectus required by Section 10(a)(3) of the Securities Act or (z) reflects
facts or events representing a material or fundamental change in the information
set forth in the registration statement, the incorporation by reference in the
registration statement of periodic reports filed pursuant to Section 13 or 15(d)
of the Exchange Act that contain the information required to be included in (y)
and (z) above;
(c) Cause the related prospectus to be supplemented by any
required prospectus supplement, and as so supplemented, to be filed pursuant to
Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement during such period in accordance with the intended
methods of disposition by the sellers thereof set forth in such registration
statement or supplement to such prospectus;
(d) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus as
a Holder from time to time may reasonably request;
(e) Notify each seller of Registered Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an
-5-
<PAGE>
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances then existing, and at the request of any such
seller, prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such shares, such prospectus shall not
include 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 in the light of the circumstances then existing;
(f) Cause all such Registered Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed or, if not then listed, cause such Registered Securities to be included
in a national automated quotation system;
(g) Provide a transfer agent and registrar for all Registered
Securities and a CUSIP number for all such Registered Securities, in each case
not later than the effective date of such registration;
(h) Make available for inspection during regular business
hours by any seller of Registrable Securities, any underwriter participating in
any disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such seller or underwriter
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company (collectively the "Records")
as shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors, employees and
independent accountants to supply all information reasonably requested by such
seller, underwriter, attorney or accountant in connection with such registration
statement. Records which the Company determines, in good faith, to be
confidential and which it notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (A) the disclosure of such Records is
necessary to avoid or correct any misstatement or omission in the registration
statement, (B) the release of such Records is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction, or (C) the disclosure of
such Records is required by any governmental regulatory body with jurisdiction
over any seller of Registrable Securities. Such seller, upon learning, that
disclosure of such Records is sought in a court of competent jurisdiction, shall
notify the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of the Records deemed confidential;
(i) Cooperate with the sellers of Registered Securities and
the managing underwriter(s), if any, to facilitate the timely preparation and
delivery of certificates representing the Registered Securities to be sold,
without any restrictive legends, in such denominations and registered in such
names as the managing underwriter(s) may request at least two business days
prior to any sale thereof to the underwriters, if applicable;
(j) Obtain from its accountants "cold-comfort" letters, dated
the effective date of the registration statement and the date of the closing of
the sale of the
-6-
<PAGE>
Registered Securities, and addressed to the Company and the selling Holders, in
form and substance as are customarily issued in connection with underwritten
public offerings and otherwise reasonably satisfactory to the Company and a
majority-in-interest of the selling Holders;
(k) Obtain from its counsel an opinion, addressed to the
selling Holders, with respect to the offering in form and substance reasonably
satisfactory to a majority-in-interest of the selling Holders;
(l) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
(m) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 4 hereof, the Company will
enter into any underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting, indemnification and contribution provisions; provided,
however, that no Holder will be liable for indemnification or contribution in
excess of the net proceeds such Holder received in the offering;
(n) Use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller (provided that the Company will not be required
to (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph, (ii) subject itself
to taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction);
(o) Use its best efforts to cause such Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
sellers thereof to consummate the disposition of such Registrable Securities;
and
(p) Take all such other actions as the Holders of a majority
of the Registrable Securities being sold and the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or combination of shares).
-7-
<PAGE>
Section 6. Indemnification; Contribution.
-----------------------------
(a) To the extent permitted by law, the Company will indemnify
each Holder, each of its officers, directors, members and partners, and each
person controlling such Holder, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, each
director and controlling person of the Company and each officer of the Company
who signed the registration statement, and each underwriter, if any, and each
person who controls any underwriter, against all claims, losses, damages and
liabilities (or actions, proceedings or settlements, if such settlements are
effected with the written consent of the Company, in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance, or 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, or any
violation by the Company of the Securities Act or the Exchange Act or any rule
or regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of its
officers, directors, members and partners, and each person controlling such
Holder, each such director, controlling person and officer, each such
underwriter and each person who controls any such underwriter, for any legal and
any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, action or
proceeding; provided, however, that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected,
indemnify the Company, each of its directors, officers and controlling persons,
and each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such underwriter
within the meaning of the Securities Act or the Exchange Act or the rules and
regulations thereunder, each other such Holder and Other Stockholder (if and to
the extent such Other Stockholder has agreed to indemnify the Holders as set
forth in this clause (b)) including Registrable Securities and other securities
in the securities as to which such registration, qualification or compliance is
being effected, and each of their officers, directors, members and partners, and
each person controlling such Holder or Other Stockholder, against all claims,
losses, damages and liabilities (or actions, proceedings or settlements in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or 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, and will reimburse
the Company and such Holders, Other Stockholders,
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<PAGE>
directors, officers, members, partners, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred in connection with
investigating and defending or settling any such claim, loss, damage, liability,
action or proceeding, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein; provided, however, that the obligations of each such Holder hereunder
shall be limited to an amount equal to the net proceeds to each such Holder of
securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section
6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, unless such failure
to notify materially adversely affects the Indemnifying Party's ability to
defend such action. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 6
shall for any reason be unenforceable by an Indemnified Party, although
otherwise available in accordance with its terms, then each Indemnifying Party
shall, in lieu of indemnifying such Indemnified Party, contribute to the amount
paid or payable by such Indemnified Party as a result of the losses, claims,
damages, liabilities or expenses with respect to which such Indemnified Party
has claimed indemnification, in such proportion as is appropriate to reflect the
relative fault of the Indemnified Party on the one hand and the Indemnifying
Party on the other in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault, in the case of an untrue
statement, alleged untrue statement, omission or alleged omission, shall be
determined by, among other things, whether such statement, alleged statement,
omission or alleged omission relates to information supplied by the Indemnifying
Party or the Indemnified Party, and such parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement,
alleged statement, omission or alleged omission. The Company and each Holder
agree that it would not be just and equitable
-9-
<PAGE>
if contribution pursuant hereto were to be determined by pro rata allocation or
by any other method of allocation which does not take into account such
equitable considerations. The amount paid or payable by an Indemnified Party as
a result of the losses, claims, damages, liabilities or expenses referred to
herein shall be deemed to include any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or defending
against any action or claim which is the subject hereof. In no case, however,
shall a Holder be responsible for a portion of the contribution obligation in
excess of the net proceeds to such Holder of securities sold as contemplated
herein. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation.
(e) Anything to the contrary contained in this Section 6
notwithstanding, no Holder shall be liable for any indemnification or
contribution in excess of the net proceeds received by it from any sale of
Registrable Securities which has been registered hereunder.
Section 7. Obligations of Holder.
----------------------
(a) Each Holder of Registrable Securities included in any
registration shall furnish to the Company such information regarding such Holder
and the distribution proposed by such Holder as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Agreement.
(b) Each Holder of the Registrable Securities agrees by
acquisition of such Registered Securities that upon receipt of any notice from
the Company pursuant to Section 5(e), such Holder will forthwith discontinue
such Holder's disposition of Registered Securities pursuant to the registration
statement relating to such Registered Securities until such Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by Section
5(e) and, if so directed by the Company, will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies, then in such
Holder's possession of the prospectus relating to such Registered Securities at
the time of receipt of such notice.
Section 8. Limitations on Registration of Issues of
Securities. Any right given by the Company to any holder or prospective holder
of the Company's securities in connection with the registration of securities
shall be conditioned such that it shall be consistent with the rights of the
Holders provided in this Agreement.
Section 9. Rule 144 Reporting. With a view to making available
to the Holders the benefits of certain rules and regulations of the Commission
which may permit a Holder to sell securities of the Company to the public
without registration, the Company agrees to:
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<PAGE>
(a) Make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities
Act, at all times following the effective date of the first
registration under the Securities Act filed by the Company for an
offering of its securities to the general public;
(b) Use its best efforts to file with the Commission
in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act at any time
following registration of any of its securities under the Securities
Act or Exchange Act; and
(c) So long as a Holder owns any Registrable
Securities, furnish to such Holder forthwith upon request a written
statement by the Company as to its compliance with the reporting
requirements of Rule 144 (at any time following the effective date of
the first registration statement filed by the Company for an offering
of its securities to the general public), and of the Securities Act and
the Exchange Act following registration of any of its securities under
the Securities Act or Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents
so filed as a Holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
Section 10. Transfer or Assignment of Registration Rights. The
rights to cause the Company to register the securities granted to IHS by the
Company under Sections 2 and 4 may be transferred or assigned by IHS to a
transferee or assignee of any of IHS' Registrable Securities; provided, however,
that the Company is given written notice by IHS at the time of or within a
reasonable time after said transfer or assignment, stating the name and address
of said transferee or assignee and identifying the securities with respect to
which such registration rights are being transferred or assigned; and provided,
further, that the transferee or assignee of such rights assumes the obligations
of IHS under this Agreement.
Section 11. "Market Stand-off" Agreement. Each Holder agrees,
if requested by the Company and an underwriter of Common Stock (or other
securities) of the Company, not to sell or otherwise transfer or dispose of any
Common Stock (or other securities) of the Company held by such Holder during the
period required by such underwriter following the effective date of a
registration statement of the Company filed under the Securitie Act without the
prior consent of such underwriter, provided, however, that all Holders, Other
Stockholders and officers and directors of the Company enter into similar
agreements on substantially similar terms.
Such agreement shall be in writing in a form reasonably
satisfactory to the Company and such underwriter. The Company may impose
stop-transfer instructions with respect to the shares (or securities) subject to
the foregoing restriction until the end of said period.
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<PAGE>
Section 12. Adjustments Affecting Registrable Securities. The
Company will not take any action, or permit any change to occur, with respect to
the Registrable Securities which would adversely affect the ability of the
Holders of Registrable Securities to include such Registrable Securities in a
registration undertaken pursuant to this Agreement or which would adversely
affect the marketability of such Registrable Securities in any such
registration.
Section 13. Governing Law. This Agreement shall be governed in
all respects by the laws of the State of Delaware, without application of the
conflicts of laws principles thereof.
Section 14. Successors and Assigns. This Agreement shall be
binding upon, and inure to the benefit of, the successors, assigns, heirs,
executors and administrators of the parties hereto.
Section 15. Entire Agreement; Amendment. This Agreement
constitutes the full and entire understanding and agreement between the parties
with regard to the subjects hereof. Neither this Agreement nor any term hereof
may be amended, waived, discharged or terminated, except by a written instrument
signed by the Company and the Holders of not less than a majority-in-interest of
the Registrable Securities. Notwithstanding the foregoing, no amendment,
modification, supplement or waiver of, or departure from, Section 6 or this
sentence of this Section 15 shall be effective without the written consent of
all Holders then holding Registrable Securities.
Section 16. Attorney's Fees. In any action or proceeding
brought to enforce any provision of this Agreement, or where any provision
hereof or thereof is validly asserted as a defense, the successful party shall
be entitled to recover reasonable attorney's fees in addition to any other
available remedy.
Section 17. Notices, etc. All notices or other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered personally
or sent by telex, telefax or telegraphic communication, by recognized overnight
courier marked for overnight delivery, or by registered or certified mail,
postage prepaid, addressed as follows: (a) if to IHS, at 10065 Red Run
Boulevard, Owings Mills, Maryland 21117, Attention: Chairman of the Board or at
such other address as IHS shall have furnished to the Company in writing,if to
an Investor, as indicated on Schedule 1 attached hereto, or at such other
address as such Investor shall have furnished to the Company in writing; (b) if
to any other holder of any shares of Common Stock at such address as such holder
shall have furnished the Company in writing, or, until any such holder so
furnishes an address to the Company, then to and at the address of the last
holder thereof who has so furnished an address to the Company; or (c) if to the
Company, at 10065 Red Run boulevard, Owings Mills, Maryland 21117, Attention:
President, or such other addresses as shall be furnished by like notice by such
party. All such notices and communications shall, when telexed (provided the
correct answerback has been received) or telefaxed (immediately thereafter
confirmed by telephone) or telegraphed, be effective when telexed, telefaxed or
delivered to the telegraph company, respectively, or if sent by nationally
recognized overnight courier service, be effective one business day after the
same has been delivered to such courier service marked for overnight delivery,
or, if mailed, be effective when received.
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<PAGE>
Section 18. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner so as to be effective and
valid under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision of this Agreement. If any provision contained in
this Agreement is determined to be invalid, illegal or unenforceable as written,
a court of competent jurisdiction shall, at any party's request, reform the
terms of this Agreement to the extent necessary to cause such otherwise invalid
provisions to be enforceable under applicable law.
Section 19. Titles and Subtitles. The titles of the sections,
paragraphs and subparagraphs of this Agreement are for convenience of reference
only and are not to be considered in construing this Agreement.
Section 20. Counterparts. This 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.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day, month and year first written above.
INTEGRATED LIVING COMMUNITIES, INC.
By: /S/ Edward J. Komp
------------------------------------
Name: Edward J. Komp
Title: President/CEO
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Lawrence P. Cirka
------------------------------------
Name: Lawrence P. Cirka
Title: President
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INTEGRATED LIVING COMMUNITIES, INC.
1996 STOCK INCENTIVE PLAN
1. Purpose. The purpose of the Integrated Living
Communities, Inc. 1996 Stock Incentive Plan (the "Plan") is to enable Integrated
Living Communities, Inc. (the "Company") and its stockholders to secure the
benefits of common stock ownership by key personnel of the Company and its
subsidiaries. The Board of Directors of the Company (the "Board") believes that
the granting of restricted stock and options under the Plan will foster the
Company's ability to attract, retain and motivate those individuals who will be
largely responsible for the continued profitability and long-term future growth
of the Company.
2. Stock Subject to the Plan. The Company may issue and sell
a total of 470,040 shares of its common stock, $.01 par value (the "Common
Stock"), pursuant to the Plan. Such shares may be either authorized and unissued
or held by the Company in its treasury. Awards of restricted stock or options to
purchase stock ("Awards") may be granted under the Plan with respect to shares
of Common Stock (i) which are covered by the unexercised portion of an option
which has terminated or expired by its terms, by cancellation or otherwise, or
(ii) which were unvested shares of restricted stock subsequently reacquired by
the Company.
3. Administration. The Plan will be administered by a
committee (the "Committee") consisting of at least two directors appointed by
and serving at the pleasure of the Board. To the extent required by the
applicable provisions of Rule 16(b)-3 under the Securities Exchange Act of 1934,
the members of the Committee shall be "disinterested directors" within the
meaning and for the purposes of said Rule. Subject to the provisions of the
Plan, the Committee, acting in its sole and absolute discretion, will have full
power and authority to grant Awards under the Plan, to interpret the provisions
of the Plan, to fix and interpret the provisions of Award agreements made under
the Plan, to supervise the administration of the Plan, and to take such other
action as may be necessary or desirable in order to carry out the provisions of
the Plan. A majority of the members of the Committee will constitute a quorum.
The Committee may act by the vote of a majority of its members present at a
meeting at which there is a quorum or by unanimous written consent. The decision
of the Committee as to any disputed question, including questions of
construction, interpretation and administration, will be final and conclusive on
all persons. The Committee will keep a record of its proceedings and acts and
will keep or cause to be kept such books and records as may be necessary in
connection with the proper administration of the Plan.
4. Eligibility. Awards may be granted under the Plan to
present or future key employees of the Company or a subsidiary of the Company (a
"Subsidiary") within the meaning of Section 424(f) of the Internal Revenue Code
of 1986 (the "Code"), and to consultants to the Company or a Subsidiary who are
not employees. Awards may not be granted to directors of the Company or a
Subsidiary who are not also employees of or consultants to the Company and/or a
Subsidiary. Subject to the
<PAGE>
provisions of the Plan, the Committee may from time to time select the persons
to whom Awards will be granted, and will fix the number of shares covered by
each such Award and establish the terms and conditions thereof, including,
without limitation, the exercise price of options, restrictions on
exercisability of options or on the disposition of the shares of Common Stock
issued upon exercise of options, and whether or not the option is to be treated
as an incentive stock option within the meaning of Section 422 of the Code (an
"Incentive Stock Option"), and the purchase price, vesting provisions,
restrictions on transfer and repurchase price of restricted stock.
5. Terms and Conditions of Option Awards. Each option
granted under the Plan will be evidenced by a written agreement in a form
approved by the Committee. Each such option will be subject to the terms and
conditions set forth in this paragraph and such additional terms and conditions
not inconsistent with the Plan (and, in the case of an Incentive Stock Option,
not inconsistent with the provisions of the Code applicable thereto) as the
Committee deems appropriate.
(a) Option Exercise Price. In the case of an
option which is not treated as an Incentive Stock Option, the exercise price per
share may not be less than the par value of a share of Common Stock on the date
the option is granted; and, in the case of an Incentive Stock Option, the
exercise price per share may not be less than 100% of the fair market value of a
share of Common Stock on the date the option is granted (110% in the case of an
optionee who, at the time the option is granted, owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company or
a Subsidiary (a "ten percent shareholder")). For purposes hereof, the fair
market value of a share of Common Stock on any date will be equal to the closing
sale price per share as published by a national securities exchange on which
shares of the Common Stock are traded on such date or, if there is no sale of
Common Stock on such date, the average of the bid and asked prices on such
exchange at the closing of trading on such date or, if shares of the Common
Stock are not listed on a national securities exchange on such date, the closing
price or, if none, the average of the bid and asked prices in the over the
counter market at the close of trading on such date, or if the Common Stock is
not traded on a national securities exchange or the over the counter market, the
fair market value of a share of the Common Stock on such date as determined in
good faith by the Committee.
(b) Option Period. The period during which an
option may be exercised will be fixed by the Committee and will not exceed 10
years from the date the option is granted (5 years in the case of an Incentive
Stock Option granted to a "ten percent shareholder").
(c) Exercise of Options. No option will become
exercisable unless the person to whom the option is granted remains in the
continuous employ or service of the Company or a Subsidiary for at least one
year (or for such other period as the Committee may designate) from the date the
option is granted. Vesting or other restrictions on the exercisability of an
option will be set forth in the related option agreement.
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<PAGE>
All or part of the exercisable portion of an option may be exercised at
any time during the option period. An option may be exercised by transmitting to
the Company (1) a written notice specifying the number of shares to be
purchased, and (2) payment of the exercise price in cash or by personal check or
by such other means or in such other manner of payment as the Committee may
permit, together with the amount, if any, deemed necessary by the Committee to
enable the Company to satisfy its income tax withholding obligations with
respect to such exercise (unless other arrangements acceptable to the Company
are made with respect to the satisfaction of such withholding obligations).
(d) Payment of Exercise Price. The purchase
price of shares of Common Stock acquired pursuant to the exercise of an option
granted under the Plan may be paid in cash and/or such other form of payment as
may be permitted under the option agreement, including, without limitation,
previously-owned shares of Common Stock.
(e) Rights as a Stockholder. No shares of Common
Stock will be issued in respect of the exercise of an option granted under the
Plan until full payment therefor has been made (and/or provided for where all or
a portion of the purchase price is being paid in installments), and the
applicable income tax withholding obligation has been satisfied or provided for.
The holder of an option will have no rights as a stockholder with respect to any
shares covered by an option until the date a stock certificate for such shares
is issued to him or her. Except as otherwise provided herein, no adjustments
shall be made for dividends or distributions of other rights for which the
record date is prior to the date such stock certificate is issued.
(f) Nontransferability of Options. No option
granted under the Plan may be assigned or transferred except by will or by the
applicable laws of descent and distribution; and each such option may be
exercised during the optionee's lifetime only by the optionee.
(g) Termination of Employment or Other Service.
If an optionee ceases to be employed by or to perform services for the Company
and any Subsidiary for any reason other than death or disability (defined
below), then, unless extended by the Committee acting in its sole discretion,
each outstanding option granted to him or her under the Plan will terminate on
the date three months after the date of such termination of employment or
service, or, if earlier, the date specified in the option agreement. If an
optionee's employment or service is terminated by reason of the optionee's death
or disability (or if the optionee's employment or service is terminated by
reason of his or her disability and the optionee dies within one year after such
termination of employment or service), then, unless extended by the Committee
acting in its sole discretion, each outstanding option granted to the optionee
under the Plan will terminate on the date one year after the date of such
termination of employment or service (or one year after the later death of a
disabled optionee) or, if earlier, the date specified in the option agreement.
For purposes hereof, the term "disability" means the inability of an optionee to
perform the customary duties of his or her
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<PAGE>
employment or other service for the Company or a Subsidiary by reason of a
physical or mental incapacity which is expected to result in death or be of
indefinite duration.
(h) Incentive Stock Options. In the case of an
Incentive Stock Option granted under the Plan, at the time the option is
granted, the aggregate fair market value (determined at the time of grant) of
the shares of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by the optionee during any calendar year may not
exceed $100,000.
(i) Maximum Option Grant. The maximum option
grant which may be made to an executive officer of the Company in any calendar
year shall not cover more than 350,000 shares.
(j) Other Provisions. The Committee may impose
such other conditions with respect to the exercise of options, including,
without limitation, any conditions relating to the application of federal or
state securities laws, as it may deem necessary or advisable.
6. Terms and Conditions of Restricted Stock Awards. Each
restricted stock Award granted under the Plan will be evidenced by a written
agreement in a form approved by the Committee. Each such Award will be subject
to the terms and conditions set forth in this paragraph and such additional
terms and conditions not inconsistent with the Plan as the Committee deems
appropriate.
(a) Purchase Price. The purchase price per share
of restricted stock may not be less than the par value of a share of Common
Stock on the date the Award is granted.
(b) Vesting and Transferability of Restricted
Stock. No shares of Restricted Stock may be transferred unless the person to
whom the Award is granted remains in the continuous employ or service of the
Company or a Subsidiary for at least one year (or for such other period as the
Committee may designate) from the date the Award is granted. Vesting or other
restrictions on the transferability of shares of restricted stock and the
Company's right to repurchase unvested restricted stock will be set forth in the
related restricted stock agreement.
(c) Payment. Payment of the purchase price of
restricted stock may be made in cash or by personal check or by such other means
or in such other manner of payment as the Committee may permit, including,
without limitation, previously-owned shares of Common Stock, and shall be
accompanied by the amount, if any, deemed necessary by the Committee to enable
the Company to satisfy its income tax withholding obligations with respect to
such exercise (unless other arrangements acceptable to the Company are made with
respect to the satisfaction of such withholding obligations).
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<PAGE>
(d) Maximum Restricted Stock Grant. The maximum
restricted stock grant which may be made to an executive officer of the Company
in any calendar year shall not cover more than 350,000 shares.
(e) Other Provisions. The Committee may impose
such other conditions with respect to the restricted stock Awards, including,
without limitation, any conditions relating to the application of federal or
state securities laws, as it may deem necessary or advisable.
7. Capital Changes, Reorganization, Sale.
(a) Adjustments Upon Changes in Capitalization.
The aggregate number and class of shares for which Awards may be granted under
the Plan, the number and class of shares covered by each outstanding Award and
the exercise price, purchase price and repurchase price per share shall all be
adjusted proportionately for any increase or decrease in the number of issued
shares of Common Stock resulting from a split-up or consolidation of shares or
any like capital adjustment, or the payment of any stock dividend.
(b) Acceleration of Exercisability and Vesting
Upon Change in Control of the Company. If there is a change of control of the
Company (as defined in subparagraph (g) below), then (A) all outstanding options
shall become fully exercisable whether or not the exercisability conditions, if
any, set forth in the related option agreements have been satisfied, and each
optionee shall have the right to exercise his or her options prior to such
change of control and for as long thereafter as the option shall remain in
effect in accordance with its terms and the provisions hereof, and (B) all
restricted stock Awards shall become fully-vested, and all restrictions on
transferability and all rights of the Company to repurchase shares of restricted
stock shall terminate at the effective time of such change in control.
(c) Acceleration of Exercisability and Vesting
Upon Termination of Employment. If at any time within two years after any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended (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
Common Stock other than pursuant to a plan or arrangement entered into by such
person and the Company and either (1) the Company terminates the optionee's
employment other than for Cause (as defined in subparagraph (h) below) or (2)
the optionee leaves the employ of the Company for Good Reason (as defined in
subparagraph (i) below), then (A) all outstanding options held by such optionee
shall become fully exercisable whether or not the exercisability conditions, if
any, set forth in the related option agreements have been satisfied, and such
optionee shall have the right to exercise his or her options prior to such
change of control and for as long thereafter as the option shall remain in
effect in accordance with its terms and the provisions hereof, and (B) all
restricted stock Awards of such person shall become fully-vested, and all
restrictions on transferability and all rights
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<PAGE>
of the Company to repurchase shares of restricted stock shall terminate at the
effective time of such termination of employment.
(d) Conversion of Options on Stock for Stock
Exchange. If the stockholders of the Company receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of Common Stock in
any transaction involving a merger (other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation
or reorganization (other than a mere reincorporation or the creation of a
holding company), all options granted hereunder shall be converted into options
to purchase shares of Exchange Stock unless the Company and the corporation
issuing the Exchange Stock, in their sole discretion, determine that any or all
such options granted hereunder shall not be converted into options to purchase
shares of Exchange Stock but instead shall terminate, subject to the provisions
of subparagraph (b) above and the optionees' prior exercise rights thereunder.
The amount and price of converted options shall be determined by adjusting the
amount and price of the options granted hereunder in the same proportion as used
for determining the number of shares of Exchange Stock the holders of the Common
Stock receive in such merger, consolidation, acquisition of property or stock,
separation or reorganization. In accordance with subparagraph (b) above, the
converted options shall be fully exercisable whether or not the exercisability
requirements set forth in the option agreement have been satisfied.
(e) Fractional Shares. In the event of any
adjustment in the number of shares covered by any option pursuant to the
provisions hereof, any fractional shares resulting from such adjustment will be
disregarded and each such option will cover only the number of full shares
resulting from the adjustment.
(f) Determination of Board to be Final. All
adjustments under this paragraph 7 shall be made by the Board, and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. Unless an optionee agrees otherwise, any
change or adjustment to an Incentive Stock Option shall be made in such a manner
so as not to constitute a "modification" as defined in Section 424(h) of the
Code and so as not to cause the optionee's Incentive Stock Option issued
hereunder to fail to continue to qualify as an Incentive Stock Option.
(g) Change of Control Defined. For purposes
hereof, a change in control of the Company is deemed to occur if (1) there
occurs (a) any consolidation or merger in which the Company is not the
continuing or surviving entity or pursuant to which shares of the Common Stock
would be converted into cash, securities or other property, other than a merger
of the Company in which the holders of the Common Stock immediately prior to the
merger have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (b) any sale, lease, exchange or
other transfer (in one transaction or a series of
-6-
<PAGE>
related transactions) of all or substantially all the Company's assets; (2) the
Company's stockholders approve any plan or proposal for the liquidation or
dissolution of the Company; or (3) 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 of the Board
unless the election, or nomination for election by the Company's stockholders,
of each new 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.
(h) Cause Defined. For purposes hereof, "Cause"
shall mean any or all of the following: (i) the optionee materially fails to
perform his duties; (ii) the optionee materially breaches his obligation not to
disclose confidential information of the Company; (iii) the optionee materially
breaches any non-competition covenant the optionee may be subject to; (iv) the
optionee is convicted of any felony; (v) the optionee commits theft, larceny or
embezzlement of the Company's tangible or intangible property; or (vi) the
optionee's employment is terminated for cause under any employment agreement he
has with the Company or any subsidiary of the Company.
(i) Good Reason Defined. For purposes hereof,
"Good Reason" shall mean any one or more of the following: (i) a material
diminution of the optionee's responsibilities, title, authority or status; (ii)
a reduction in salary or material reduction in benefits (other than a reduction
in salary permitted by any employment agreement to which the optionee is a
party); or (iii) the occurrence of any event which would constitute good reason
under any employment agreement the optionee has with the Company or any
subsidiary of the Company.
8. Amendment and Termination of the Plan. The Board may
amend or terminate the Plan. Except as otherwise provided in the Plan with
respect to equity changes, any amendment which would increase the aggregate
number of shares of Common Stock as to which Awards may be granted under the
Plan, materially increase the benefits under the Plan, or modify the class of
persons eligible to receive Awards under the Plan shall be subject to the
approval of the Company's stockholders. No amendment or termination may affect
adversely any outstanding Award without the written consent of the grantee.
9. No Rights Conferred. Nothing contained herein will be
deemed to give any individual any right to receive an Award under the Plan or to
be retained in the employ or service of the Company or any Subsidiary.
10. Governing Law. The Plan and each Award agreement shall be
governed by the laws of the State of Delaware.
11. Decisions and Determinations of Committee to be Final.
Except to the extent rights or powers under this Plan are reserved specifically
to the discretion of the Board, the Committee shall have full power and
authority to interpret the Plan and any Award agreement made under the Plan and
to determine all issues which arise
-7-
<PAGE>
thereunder or in connection therewith, and the decision of the Board or the
Committee, as the case may be, shall be binding and conclusive on all interested
persons.
12. Term of the Plan. The Plan shall be effective as of June
10, 1996, the date on which it was adopted by the Board and the sole stockholder
of the Company. The Plan will terminate on June 10, 2006, the date ten years
after the date of adoption by the Board, unless sooner terminated by the Board.
The rights of grantees under Awards outstanding at the time of the termination
of the Plan shall not be affected solely by reason of the termination and shall
continue in accordance with the terms of the Award (as then in effect or
thereafter amended).
-8-
INTEGRATED LIVING COMMUNITIES, INC.
STOCK OPTION AGREEMENT
----------------------
AGREEMENT made as of the ____ day of _______, 199__, by and
between Integrated Living Communities, Inc., a Delaware corporation (the
"Company"), and ________________________ (the "Optionee").
W I T N E S S E T H:
--------------------
WHEREAS, pursuant to the Integrated Living Communities, Inc.
1996 Stock Incentive Plan (the "Plan"), the Company desires to grant to the
Optionee and the Optionee desires to accept an option to purchase shares of
common stock, $.01 par value, of the Company (the "Common Stock") upon the terms
and conditions set forth in this agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant. The Company hereby grants to the Optionee an
option to purchase ______ shares of Common Stock, at a purchase price per share
of $____. This option is intended to be treated as an option which does [not]
qualify as an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
2. Restrictions on Exercisability. Except as specifically
provided otherwise herein, the option will become exercisable in accordance with
the following schedule based upon the period of the Optionee's continuous
employment or service with the Company or a subsidiary thereof following the
date hereof:
Period Incremental Cumulative
of Continuous Percentage of Percentage of
Employment/ Option Option
Service Exercisable Exercisable
------- ----------- -----------
[Less than 1 year 0% 0%
1 year 20% 20%
2 years 20% 40%
3 years 20% 60%
4 years 20% 80%
5 or more years 20% 100%]
<PAGE>
No shares of Common Stock may be purchased hereunder unless the Optionee shall
have remained in the continuous employ or service of the Company or a subsidiary
thereof for at least one year from the date hereof. If the Optionee performs
services for the Company or a subsidiary thereof in a capacity other than as a
director or employee, then, for purposes hereof, those services will be deemed
to be continuous until they are terminated, and they will be deemed to be
terminated at the time provided therefor in the consulting or other agreement
governing the performance of such services or, if there is no such agreement, at
the time the Company or such subsidiary notifies the Optionee that it no longer
contemplates the utilization of such services. Unless sooner terminated, the
option will expire if and to the extent it is not exercised within ten years
from the date hereof.
3. Exercise. The option may be exercised in whole or in part
in accordance with the above schedule by delivering to the Secretary of the
Company (a) a written notice specifying the number of shares to be purchased,
and (b) payment in full of the exercise price, together with the amount, if any,
deemed necessary by the Company to enable it to satisfy any income tax
withholding obligations with respect to the exercise (unless other arrangements
acceptable to the Company are made for the satisfaction of such withholding
obligations). The exercise price shall be payable in cash or by bank or
certified check. The Company may (in its sole and absolute discretion) permit
all or part of the exercise price to be paid with previously-owned shares of
Common Stock, or in installments (together with interest) evidenced by the
Optionee's secured promissory note.
4. Rights as Stockholder. No shares of Common Stock shall be
sold or delivered hereunder until full payment for such shares has been made
(or, to the extent payable in installments, provided for). The Optionee shall
have no rights as a stockholder with respect to any shares covered by the option
until a stock certificate for such shares is issued to the Optionee. Except as
otherwise provided herein, no adjustment shall be made for dividends or
distributions of other rights for which the record date is prior to the date
such stock certificate is issued.
5. Nontransferability. The option is not assignable or
transferable except upon the Optionee's death to a beneficiary designated by the
Optionee or, if no designated beneficiary shall survive the Optionee, pursuant
to the Optionee's will and/or the laws of descent and distribution. During an
Optionee's lifetime, the option may be exercised only by the Optionee or the
Optionee's guardian or legal representative.
6. Termination of Service, Disability or Death. If the
Optionee ceases to be employed by or to perform services for the Company and any
subsidiary thereof for any reason other than death or disability (as defined
below), then, unless sooner terminated under the terms hereof, the option will
terminate on the date three months after the date of the Optionee's termination
of employment or service. If the Optionee's employment or service is terminated
by reason of the Optionee's death or disability (or if the Optionee's employment
or service is terminated by reason of disability and the Optionee dies within
one year after such termination of employment
-2-
<PAGE>
or service), then, unless sooner terminated under the terms hereof, the option
will terminate on the date one year after the date of such termination of
employment or service (or one year after the Optionee's later death). For
purposes hereof, the term "disability" means the inability of Optionee to
perform the customary duties of Optionee's employment or other service for the
Company or a subsidiary thereof by reason of a physical or mental incapacity
which is expected to result in death or be of indefinite duration.
7. Securities Laws Compliance Required. Notwithstanding
anything herein to the contrary, if the shares of Common Stock issuable upon
exercise of options granted under the Plan have not been registered under the
Securities Act of 1933, as amended, the committee appointed by the Board of
Directors to administer the Plan may condition the exercisability of the option
upon compliance with applicable federal and state securities laws.
8. Change in Control; Capital Changes.
(a) If any event constituting a "Change in Control of the
Company" shall occur, the options shall, unless sooner terminated under the
terms hereof, 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 of the Company 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 of the directors then still in office who were
directors at the beginning of the period.
(b) If at any time within two years after any person (as
such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (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
Common Stock other than pursuant to a plan or arrangement entered into by such
person and the Company and either (1) the Company terminates the optionee's
employment other than for "Cause" or (2) the optionee leaves the employ of the
Company for "Good Reason", then all outstanding options held by such optionee
shall become fully exercisable whether or not the exercisability conditions set
forth in Section 2 hereof have been satisfied, and the Optionee shall have the
right to exercise this option prior to such change of control and for as long
thereafter as the option shall remain in effect in accordance with its
-3-
<PAGE>
terms and the provisions hereof and the Plan. For purposes hereof, "Cause" shall
mean any or all of the following: (i) the Optionee materially fails to perform
his duties; (ii) the Optionee materially breaches his obligation not to disclose
confidential information of the Company; (iii) the Optionee materially breaches
any non-competition covenant the Optionee may be subject to; (iv) the Optionee
is convicted of any felony; (v) the Optionee commits theft, larceny or
embezzlement of the Company's tangible or intangible property; or (vi) the
Optionee's employment is terminated for cause under any employment agreement he
has with the Company or any subsidiary of the Company. For purposes hereof,
"Good Reason" shall mean any one or more of the following: (i) a material
diminution of the Optionee's responsibilities, title, authority or status; (ii)
a reduction in salary or material reduction in benefits (other than a reduction
in salary permitted by any employment agreement to which the Optionee is a
party); or (iii) the occurrence of any event which would constitute good reason
under any employment agreement the Optionee has with the Company or any
subsidiary of the Company.
(b) In the event of any stock split, stock dividend or
similar transaction which increases or decreases the number of outstanding
shares of Common Stock, appropriate adjustment shall be made by the Board of
Directors of the Company to the number and option exercise price per share of
Common Stock which may be purchased under the option. In the case of a merger,
consolidation or similar transaction which results in a replacement of the
Company's Common Stock with stock of another corporation but does not constitute
a Change in Control of the Company, the Company will make a reasonable effort,
but shall not be required, to replace the option granted hereunder with
comparable options to purchase the stock of such other corporation, or will
provide for immediate exercisability of the option, with the option being
terminated if not exercised within the time period specified by the Board of
Directors of the Company.
(c) In the event of any adjustment in the number of
shares covered by any option pursuant to the provisions hereof, any fractional
shares resulting from such adjustment will be disregarded and each such option
will cover only the number of full shares resulting from the adjustment.
(d) All adjustments under this Section 8 shall be made by
the Board of Directors of the Company, and its determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding and
conclusive.
9. No Employment Rights. Nothing in this agreement shall give
the Optionee any right to continue in the employ or service of the Company or a
subsidiary thereof, or interfere in any way with the right of the Company or a
subsidiary thereof to terminate the employment or service of the Optionee.
10. Provisions of Plan. The provisions of the Plan shall
govern if and to the extent that there are inconsistencies between those
provisions and the provisions hereof. The Optionee acknowledges receipt of a
copy of the Plan prior to the execution of this agreement.
-4-
<PAGE>
11. Administration. The committee appointed by the Board of
Directors of the Company to administer the Plan will have full power and
authority to interpret and apply the provisions of this agreement and act on
behalf of the Company in connection with this agreement, and the decision of
said committee as to any matter arising under this agreement shall be binding
and conclusive as to all persons.
12. Miscellaneous.
(a) This agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
(b) This agreement shall be governed by and
construed in accordance with the laws of the State of Delaware. This agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof and may not be modified except by written instrument executed by
the parties.
IN WITNESS WHEREOF, this agreement has been executed as of the
date first above written.
INTEGRATED LIVING COMMUNITIES, INC.
By: ________________________________
____________________________________
Optionee
-5-
INTEGRATED LIVING COMMUNITIES, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose.
The purpose of this Non-Employee Director Stock Option Plan
(the "Plan") of Integrated Living Communities, Inc. (the "Corporation") is to
strengthen the Corporation's ability to attract and retain the services of
knowledgeable and experienced persons who, through their efforts and expertise,
can make a significant contribution to the success of the Corporation's business
by serving as members of the Corporation's Board of Directors and to provide
additional incentive for such directors to continue to work for the best
interests of the Corporation and its stockholders through ownership of its
Common Stock, $.01 par value (the "Common Stock"). Accordingly, the Corporation
will compensate its non-employee directors through the annual grant of options
to purchase shares of the Corporation's Common Stock on the terms and conditions
hereafter established.
2. Stock Subject to Plan.
The Corporation may issue and sell a total of 75,000 shares
of its Common Stock pursuant to the Plan. Such shares may be either authorized
and unissued or held by the Corporation in its treasury. New options may be
granted under the Plan with respect to shares of Common Stock which are covered
by the unexercised portion of an option which has terminated or expired by its
terms, by cancellation or otherwise.
3. Administration of the Plan.
The Plan shall be administered by the Board of Directors of
the Corporation (the "Board"). The interpretation and construction by the Board
of any provisions of the Plan or of any other matters related to the Plan shall
be final. The Board may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem advisable. No member of the Board shall be
liable for any action or determination made in good faith with respect to the
Plan.
The Board of Directors may at any time amend, alter, suspend
or terminate the Plan; provided, however, that any such action would not impair
any option to purchase Common Stock theretofore granted under the Plan; and
provided further that without the approval of the Corporation's stockholders, no
amendments or alterations would be made which would (i) increase the number of
shares of Common Stock that may be purchased by each non-employee director under
the Plan (except as permitted by Paragraph 9), (ii) increase the aggregate
number of shares of Common Stock as to which options may be granted under the
Plan (except as permitted by Paragraph 9), (iii) decrease the option exercise
price (except as permitted by Paragraph
<PAGE>
9), or (iv) extend the period during which outstanding options granted under the
Plan may be exercised; and provided further that Paragraph 5 of the Plan shall
not be amended more than once every six months other than to comply with changes
in the Internal Revenue Code of 1986, as amended, or the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder.
4. Eligibility.
All non-employee directors of the Corporation shall be
eligible to receive options under the Plan. Receipt of stock options under any
other stock option plan maintained by the Corporation or any subsidiary shall
not, for that reason, preclude a director from receiving options under the Plan.
5. Grants.
(i) Each non-employee director shall be issued an
option to purchase 7,500 shares of the Corporation's Common Stock (the
"Option") on the date of each annual meeting of stockholders of the Corporation
(each such date being a "Grant Date") held after the completion of the
Corporation's initial public offering of Common Stock to the public pursuant to
a registration statement filed with, and declared effective by, the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended, if,
immediately following such meeting, such person remains a director of the
Corporation, at the following price for the following term and otherwise in
accordance with the terms of the Plan:
(a) The option exercise price per share of Common
Stock shall be the Fair Market Value (as defined below) of the
Common Stock covered by such Option on the Grant Date.
(b) Except as provided herein, the term of an Option
shall be for a period of ten (10) years from the Grant Date.
(ii) "Fair Market Value" shall mean, for each Grant Date,
(A) if the Common Stock is listed or admitted to trading on the New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "ASE"), the average of
the high and low sale price of the Common Stock on such date or, if no sale
takes place on such date, the average of the highest closing bid and lowest
closing asked prices of the Common Stock on such exchange, in each case as
officially reported on the NYSE or the ASE, or (B) if no shares of Common Stock
are then listed or admitted to trading on the NYSE or the ASE, the average of
the high and low sale prices of the Common Stock on such date on the Nasdaq
National Market or, if no shares of Common Stock are then quoted on the Nasdaq
National Market, the average of the closing bid and asked prices of the Common
Stock on such date on the NASDAQ Small Cap Market or, if no shares of Common
Stock are then quoted on NASDAQ Small Cap Market, the average of the highest bid
and lowest asked prices of the Common Stock on such date as
-2-
<PAGE>
reported in the over-the-counter system. If no bid and asked prices thereof are
then so quoted or published in the over-the-counter market, "Fair Market Value"
shall mean the fair value per share of Common Stock (assuming for the purposes
of this calculation the economic equivalence of all shares of classes of capital
stock), as determined on a fully diluted basis in good faith by the Board, as of
a date which is 15 days preceding such Grant Date.
(iii) Options granted hereunder shall not be "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended.
6. Regulatory Compliance and Listing.
The issuance or delivery of any Option may be postponed by the
Corporation for such period as may be required to comply with the Federal
securities laws, any applicable listing requirements of any applicable
securities exchange and any other law or regulation applicable to the issuance
or delivery of such Options, and the Corporation shall not be obligated to issue
or deliver any Options if the issuance or delivery of such options would
constitute a violation of any law or any regulation of any governmental
authority or applicable securities exchange.
7. Restrictions on Exercisability.
(i) Except as provided in Section 7(ii) below, each
Option granted under the Plan shall become exercisable as to 2,500 shares
of Common Stock on the first anniversary of the Grant Date of such Option, as to
an additional 2,500 shares of Common Stock on the second anniversary of the
Grant Date of such Option and as to the remaining 2,500 shares of Common Stock
on the third anniversary of the Grant Date of such Option.
(ii) If any event constituting a "Change in
Control of the Corporation" shall occur, all Options granted under the Plan
which are outstanding at the time a Change in Control of the Corporation shall
occur shall immediately become exercisable in full. A "Change in Control of the
Corporation" shall be deemed to occur if (i) there shall be consummated (x) any
consolidation or merger of the Corporation in which the Corporation is not the
continuing or surviving corporation or pursuant to which shares of the
Corporation's Common Stock would be converted into cash, securities or other
property, other than a merger of the Corporation in which the holders of the
Corporation'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 Corporation, or (ii) the stockholders of the Corporation
shall approve any plan or proposal for liquidation or dissolution of the
Corporation, or (iii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the
-3-
<PAGE>
entire Board of Directors shall cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Corporation's
stockholders, of each new 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.
(iii) If at any time within two years after any
person (as such term is used in Section 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (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 Corporation's outstanding Common Stock other than pursuant to
a plan or arrangement entered into by such person and the Corporation, the
holder of an Option is removed as a director of the Corporation (other than for
justifiable cause) or the Corporation does not renominate the holder for
election as a director (other than for justifiable cause), then all Options of
such holder granted under the Plan which are outstanding shall immediately
become exercisable in full. For purposes hereof, justifiable cause shall mean
any or all of the following: (i) the optionee materially fails to perform his
duties as a director; (ii) the optionee is convicted of any felony; or (iii)
the optionee commits theft, larceny or embezzlement of the Corporation's
tangible or intangible property.
8. Cessation as Director.
In the event that the holder of an Option granted pursuant to
the Plan shall cease to be a director of the Corporation for any reason such
holder may exercise any portion of the Option that is exercisable by him at the
time he ceases to be a director of the Corporation, but only to the extent such
Option is exercisable as of such date, within six months after the date he
ceases to be a director of the Corporation (one year if he ceases to be a
director by reason of death or disability). For purposes hereof, the term
"disability" means the inability of Optionee to perform the customary duties of
a director by reason of a physical or mental incapacity which is expected to
result in death or be of indefinite duration.
9. Stock Splits, Mergers, etc.
In the event of any stock split, stock dividend or similar
transaction which increases or decreases the number of outstanding shares of
Common Stock, appropriate adjustment shall be made by the Board of Directors,
whose determination shall be final, to the number and option exercise price per
share of Common Stock which may be purchased under any outstanding Options. In
the case of a merger, consolidation or similar transaction which results in a
replacement of the Corporation's Common Stock with stock of another corporation
but does not constitute a Change in Control of the Corporation, the Corporation
will make a reasonable effort, but shall not be required, to replace any
outstanding Options granted under the Plan with comparable options to purchase
the stock of such other corporation, or will provide for immediate maturity
of all outstanding Options, with all Options not being exercised within the time
period specified by the Board of Directors being terminated.
-4-
<PAGE>
10. Transferability.
Options are not assignable or transferable, except upon the
optionholder's death to a beneficiary designated by the optionee in accordance
with procedures established the Board or, if no designated beneficiary shall
survive the optionholder, pursuant to the optionholder's will or by the laws of
descent and distribution, to the extent set forth in Paragraph 8 and during the
optionholder's lifetime, may be exercised only by him.
11. Exercise of Options.
An optionholder electing to exercise an Option shall give
written notice to the Corporation of such election and of the number of shares
of Common Stock that he has elected to acquire. An optionholder shall have no
rights of a stockholder with respect to shares of Common Stock covered by his
Option until after the date of issuance of a stock certificate to him upon
partial or complete exercise of his option.
12. Payment.
The Option exercise price shall be payable in cash, check or
in shares of Common Stock upon the exercise of the Option. If the shares of
Common Stock are tendered as payment of the Option exercise price, the value of
such shares shall be the Fair Market Value as of the date of exercise. If such
tender would result in the issuance of fractional shares of Common Stock, the
Corporation shall instead return the difference in cash or by check to the
employee.
13. Obligation to Exercise Option.
The granting of an Option shall impose no obligation on the
director to exercise such option.
14. Continuance as Director.
Nothing in the Plan shall be deemed to create any obligation
on the part of the Board to nominate any director for reelection by the
Corporation's stockholders.
15. Term of Plan.
The Plan shall be effective on June 10, 1996, the date of its
adoption by the Board and sole stockholder of the Corporation. The Plan will
terminate on the date ten years after the date of adoption by the Board, unless
sooner terminated by the
-5-
<PAGE>
Board. The rights of optionees under options outstanding at the time of the
termination of the Plan shall not be affected solely by reason of the
termination and shall continue in accordance with the terms of the option (as
then in effect or thereafter amended).
-6-
INTEGRATED LIVING COMMUNITIES, INC.
STOCK OPTION AGREEMENT
----------------------
AGREEMENT made as of the _________ day of _________________,
____, by and between Integrated Living Communities, Inc., a Delaware corporation
(the "Company"), and _____________________________________ (the "Optionee").
W I T N E S S E T H
-------------------
WHEREAS, pursuant to the Integrated Living Communities, Inc.
Non- Employee Directors Stock Option Plan (the "Plan"), the Company desires to
grant to the Optionee and the Optionee desires to accept an option to purchase
shares of common stock, $.01 par value, of the Company (the "Common Stock") upon
the terms and conditions set forth in this agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant. The Company hereby grants to the Optionee an option
to purchase 7,500 shares of Common Stock at a purchase price per share of
$______. This option is intended to be treated as an option which does not
qualify as an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
2. Restrictions on Exercisability. Except as specifically
provided otherwise herein, the option will become exercisable as to 2,500 shares
on the first anniversary of the date hereof, as to an additional 2,500 shares on
the second anniversary of the date hereof and as to the remaining 2,500 shares
on the third anniversary of the date hereof. Unless sooner terminated, the
option will expire if and to the extent it is not exercised within ten years
from the date hereof.
3. Exercise. The option may be exercised in whole or in part
in accordance with the above schedule by delivering to the Secretary of the
Company (a) a written notice specifying the number of shares to be purchased,
and (b) payment in full of the exercise price, together with the amount, if any,
deemed necessary by the Company to enable it to satisfy any income tax
withholding obligations with respect to the exercise (unless other arrangements
acceptable to the Company are made for the satisfaction of such withholding
obligations). The exercise price shall be payable in cash or by bank or
certified check. The Company may (in its sole and absolute discretion) permit
all or part of the exercise price to be paid with previously-owned shares of
Common Stock, or in installments (together with interest) evidenced by the
Optionee's secured promissory note.
4. Rights as Stockholder. No shares of Common Stock shall be
sold or delivered hereunder until full payment for such shares has been made
(or, to the extent payable in installments, provided for). The Optionee shall
have no rights as a stockholder with respect to any shares covered by the option
until a stock certificate
<PAGE>
for such shares is issued to the Optionee. Except as otherwise provided herein,
no adjustment shall be made for dividends or distributions of other rights for
which the record date is prior to the date such stock certificate is issued.
5. Nontransferability. The option is not assignable or
transferable except upon the Optionee's death to a beneficiary designated by the
Optionee or, if no designated beneficiary shall survive the Optionee, pursuant
to the Optionee's will and/or the laws of descent and distribution. During an
Optionee's lifetime, the option may be exercised only by the Optionee or the
Optionee's guardian or legal representative.
6. Termination of Service. If the Optionee ceases to be a
non-employee director of the Company for any reason other than death or
disability, then, unless sooner terminated under the terms hereof, the option
will terminate on the date six months after the date of the Optionee's
termination of service as a non-employee director. If the Optionee's service as
a non-employee director is terminated by reason of the Optionee's death or
disability, then, unless sooner terminated under the terms hereof, the option
will terminate on the date one year after the date of death or disability,
respectively. For purposes hereof, the term "disability" means the inability of
Optionee to perform the customary duties of a director by reason of a physical
or mental incapacity which is expected to result in death or be of indefinite
duration.
7. Compliance With Securities Laws. Notwithstanding anything
herein to the contrary, the option may not be exercised if in the opinion of
counsel to the Company, such exercise and/or issuance would result in a
violation of federal or state securities laws.
8. Acceleration of Exercisability; Capital Changes.
(a) If any event constituting a "Change in Control
of the Company" shall occur, the option shall, unless sooner terminated under
the terms hereof, 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 of the Company shall cease for any
reason to constitute a majority thereof unless the election, or the nomination
for election by the Company's
-2-
<PAGE>
stockholders, of each new 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.
(b) If, at any time within two years after any
person (as such term is used in Section 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (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, the Optionee is
removed as a director of the Company (other than for justifiable cause) or the
Company does not renominate the Optionee for election as a director (other than
for justifiable cause), then the option shall, unless sooner terminated under
the terms hereof, become immediately exercisable in full. For purposes hereof,
justifiable cause shall mean any or all of the following: (i) the Optionee
materially fails to perform his duties as a director; (ii) the Optionee
is convicted of any felony; or (iii) the Optionee commits theft, larceny or
embezzlement of the Company's tangible or intangible property.
(c) In the event of any stock split, stock dividend
or similar transaction which increases or decreases the number of outstanding
shares of Common Stock, appropriate adjustment shall be made by the Board of
Directors of the Company to the number and option exercise price per share of
Common Stock which may be purchased under the option. In the case of a merger,
consolidation or similar transaction which results in a replacement of the
Company's Common Stock with stock of another corporation but does not constitute
Change in Control of the Company, the Company will make a reasonable effort, but
shall not be required, to replace the option granted hereunder with comparable
options to purchase the stock of such other corporation, or will provide for
immediate maturity of the option, with the option being terminated if not
exercised within the time period specified by the Board of Directors of the
Company.
(d) In the event of any adjustment in the number of
shares covered by any option pursuant to the provisions hereof, any fractional
shares resulting from such adjustment will be disregarded and each such option
will cover only the number of full shares resulting from the adjustment.
(e) All adjustments under this Section 8 shall be
made by the Board of Directors of the Company, and its determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding and
conclusive.
9. No Rights to Continue Service. Nothing in this
agreement shall give the Optionee any right to continue in the service of the
Company, or interfere in any way with the right of the Company to terminate the
service of the Optionee.
10. Provisions of Plan. The provisions of the Plan shall
govern if and to the extent that there are inconsistencies between those
provisions and the provisions
-3-
<PAGE>
hereof. The Optionee acknowledges receipt of a copy of the Plan prior to the
execution of this agreement.
11. Administration. The Board of Directors of the
Company will have full power and authority to interpret and apply the provisions
of this agreement and act on behalf of the Company in connection with this
agreement, and the decision of the Board of Directors of the Company as to any
matter arising under this agreement shall be binding and conclusive as to all
persons.
12. Miscellaneous.
(a) This agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
(b) This agreement shall be governed by and
construed in accordance with the laws of the State of Delaware. This agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof and may not be modified except by written instrument executed by
the parties.
IN WITNESS WHEREOF, this agreement has been executed as of the
date first above written.
INTEGRATED LIVING COMMUNITIES, INC.
By: ________________________________
------------------------------------
Optionee
-4-
INTEGRATED LIVING COMMUNITIES, INC.
STOCK OPTION AGREEMENT
----------------------
AGREEMENT made as of the 10th day of June, 1996, by and
between Integrated Living Communities, Inc., a Delaware corporation (the
"Corporation"), and _____________________________ (the "Optionee").
W I T N E S S E T H:
--------------------
WHEREAS, the Corporation desires to grant to the Optionee, in
order to obtain and retain the services of the Optionee as a director of the
Corporation, and the Optionee desires to accept, an option to purchase shares of
common stock, $.01 par value, of the Corporation (the "Common Stock") upon the
terms and conditions set forth in this agreement.
NOW, THEREFORE, the parties hereto agree as follows:
(1) Grant. The Corporation hereby grants to the Optionee,
subject to approval by the stockholders of the Corporation, an option to
purchase ____________ shares of Common Stock, at a purchase price per share
equal to the initial public offering price per share of the Common Stock
pursuant to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Initial Public Offering"). This option is intended to be treated
as an option which does not qualify as an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
(2) Restrictions on Exercisability. Except as specifically
provided otherwise herein, the option will become exercisable as to _______1/ on
shares on June 10, 1997, as to an additional _______1/ shares on June 10, 1998
and as to the remaining _______1/ shares on June 10, 1999; provided, however,
that this option shall not be exercisable unless and until the closing of the
Initial Public Offering occurs. Unless sooner terminated, the option will expire
if and to the extent it is not exercised within ten years from the date hereof.
(3) Exercise. The option may be exercised in whole or in part
in accordance with the above schedule by delivering to the Secretary of the
Corporation (a) a written notice specifying the number of shares to be
purchased, and (b) payment
- --------
1/ that number of shares equal to one-third of the total number of shares
granted.
<PAGE>
in full of the exercise price, together with the amount, if any, deemed
necessary by the Corporation to enable it to satisfy any income tax withholding
obligations with respect to the exercise (unless other arrangements acceptable
to the Corporation are made for the satisfaction of such withholding
obligations). The exercise price shall be payable in cash or by bank or
certified check. The Corporation may (in its sole and absolute discretion)
permit all or part of the exercise price to be paid with previously-owned shares
of Common Stock, or in installments (together with interest) evidenced by the
Optionee's secured promissory note.
(4) Rights as Stockholder. No shares of Common Stock shall
be sold or delivered hereunder until full payment for such shares has been made
(or, to the extent payable in installments, provided for). The Optionee shall
have no rights as a stockholder with respect to any shares covered by the option
until a stock certificate for such shares is issued to the Optionee. Except as
otherwise provided herein, no adjustment shall be made for dividends or
distributions of other rights for which the record date is prior to the date
such stock certificate is issued.
(5) Nontransferability. The option is not assignable or
transferable except upon the Optionee's death to a beneficiary designated by the
Optionee or by the Optionee's will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code. During
an Optionee's lifetime, the option may be exercised only by the Optionee or the
Optionee's guardian or legal representative.
(6) Termination of Service. If the Optionee ceases to be a
director of the Corporation for any reason other than death or disability, then,
unless sooner terminated under the terms hereof, the option will terminate on
the date six months after the date of the Optionee's termination of service as a
director. If the Optionee's service as a director is terminated by reason of the
Optionee's death or disability, then, unless sooner terminated under the terms
hereof, the option will terminate on the date one year after the date of death
or disability, respectively. For purposes hereof, the term "disability" means
the inability of Optionee to perform the customary duties of a director by
reason of a physical or mental incapacity which is expected to result in death
or be of indefinite duration.
(7) Compliance With Securities Laws. Notwithstanding
anything herein to the contrary, the option may not be exercised if in the
opinion of counsel to the Corporation, such exercise and/or issuance would
result in a violation of federal or state securities laws.
-2-
<PAGE>
(8) Acceleration of Exercisability; Capital Changes.
(A) If any event constituting a "Change in Control of the
Corporation" shall occur, the option shall, unless sooner terminated under the
terms hereof, immediately become exercisable in full. A "Change in Control of
the Corporation" shall be deemed to occur if (i) there shall be consummated (x)
any consolidation or merger of the Corporation in which the Corporation is not
the continuing or surviving corporation or pursuant to which shares of the
Corporation's Common Stock would be converted into cash, securities or other
property, other than a merger of the Corporation in which the holders of the
Corporation'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 Corporation, or (ii) the stockholders of the Corporation
shall approve any plan or proposal for liquidation or dissolution of the
Corporation, or (iii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the entire Board of Directors of
the Corporation shall cease for any reason to constitute a majority thereof
unless the election, or the nomination for election by the Corporation's
stockholders, of each new 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.
(B) If, at any time within two years after any person (as
such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (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
Corporation's outstanding Common Stock other than pursuant to a plan or
arrangement entered into by such person and the Corporation, the Optionee is
removed as a director of the Corporation (other than for justifiable cause) or
the Corporation does not renominate the Optionee for election as a director
(other than for justifiable cause), then the option shall, unless sooner
terminated under the terms hereof, become immediately exercisable in full. For
purposes hereof, justifiable cause shall mean any or all of the following: (i)
the Optionee materially fails to perform his duties as a director; (ii) the
Optionee is convicted of any felony; or (iii) the Optionee commits theft,
larceny or embezzlement of the Corporation's tangible or intangible property.
(C) If the Optionee dies or suffers a disability (as
defined in Section 6 hereof), the option shall, unless sooner terminated under
the terms hereof, immediately become exercisable in full.
(D) In the event of any stock split, stock dividend or
similar transaction which increases or decreases the number of outstanding
shares of Common Stock, the number of shares and option exercise price per share
of Common Stock which may be purchased under this option each shall be adjusted
automatically to the nearest whole share (disregarding any fractional shares)
and nearest whole cent to reflect such transaction. In the case of a merger,
consolidation or similar transaction
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<PAGE>
which results in a replacement of the Corporation's Common Stock with stock of
another corporation but does not constitute a Change in Control of the
Corporation, the Corporation will make a reasonable effort, but shall not be
required, to replace this option, to the extent then outstanding, with
comparable options to purchase the stock of such other corporation, or will
provide for immediate exercisability in full of this option, with which, to the
extent not exercised within the time period specified by the Board of Directors,
will thereafter terminate.
(9) No Rights to Continue Service. Nothing in this agreement
shall give the Optionee any right to continue in the service of the Corporation,
or interfere in any way with the right of the Corporation to terminate the
service of the Optionee.
(10) Miscellaneous.
(a) This agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
permitted assigns.
(b) This agreement shall be governed by and construed in
accordance with the laws of the State of Delaware. This agreement constitutes
the entire agreement between the parties with respect to the subject matter
hereof and may not be modified except by written instrument executed by the
parties.
IN WITNESS WHEREOF, this agreement has been executed as of the
date first above written.
INTEGRATED LIVING COMMUNITIES, INC.
By: _______________________________________
___________________________________________
-4-
DEVELOPMENT SERVICES AGREEMENT
------------------------------
THIS DEVELOPMENT SERVICES AGREEMENT (this "Agreement") is made and
entered into as of (although not necessarily on) June 3, 1996 by and among
INTEGRATED LIVING COMMUNITIES, INC. a Delaware corporation ("Company"),
INTEGRATED HEALTH SERVICES, INC., a Delaware corporation ("IHS"), which is a
party to this Agreement for the purposes and to the extent set forth in Section
7.D. of this Agreement, and AGUIRRE, INC., a Texas corporation ("Developer").
Preliminary Statement
A. Company desires to investigate and review such various factors as
Company, in its sole discretion, may deem necessary and appropriate pertaining
to the desirability and feasibility of entering into "build to suit" leases
pursuant to which Company would become the tenant, occupant and operator of
certain assisted living housing facilities to be constructed on the hereinafter
referred to Sites (collectively, the "Projects") designed with the assistance of
Developer in consultation with Company and/or Company's advisers so as to
address Company's needs and requirements (to meet minimum licensure requirements
for personal care facilities), such facilities to be acquired by and leased to
Company by Developer or an approved designee of Developer;
B. Developer has counseled and shall continue to counsel and advise
Company in respect of the investigation and selection of sites, the review and
evaluation of the various engineering, architectural, design, construction, and
other pertinent issues that arise in connection with the site acquisition, and
the development and construction of the Projects, and Developer has provided and
shall continue to provide Company with the benefit of Developer's expertise and
capacity to provide architectural, engineering, construction management and
other professional personnel and/or consultants whose expertise is utilized in
connection with such development activities, and Developer has incurred and
shall continue to incur a variety of costs and expenses in connection with the
rendition of such services;
C. Company desires to retain Developer to provide certain services to
Company in order to advise and assist Company in its investigation and review of
matters pertaining to the acquisition of the Sites and development and
construction of the contemplated Projects, and for the benefit of Company,
Developer may as hereinafter provided review and pursue the various forms of
financing arrangements and transactions which could be utilized in connection
with such contemplated development so as to devise appropriate financing
arrangements and transactions pursuant to which the Sites can be acquired and
the Projects constructed and leased to Company;
<PAGE>
D. Company envisions that Company shall make a public offering and
sale of securities (the "Offering") on or around September 1, 1996 (the date on
which the Company's initial public offering is declared effective by the
Securities and Exchange Commission being hereinafter referred to as the
"Offering Date");
E. Company desires to negotiate with Developer in regard to the
possibility of entering into a "build to suit" lease agreement with Developer or
its approved designee pursuant to which Developer or its approved designee would
acquire the land for each Project and would develop and construct each Project,
which would thereupon be leased to and occupied by Company (the entity acquiring
a Project, which shall be Developer or a designee approved by Company as
hereinafter provided, being hereinafter sometimes referred to as an "Owner");
F. Developer and Company desire to set forth their mutual agreements
in regard to the services which Developer shall from time to time provide to
Company, the procedures to be followed by Developer and Company in connection
with the submittal by Developer to Company and Company's review and response to
information, studies, and other data pertaining to the acquisition and
development of sites for the Projects and the various matters pertaining
thereto;
G. In recognition of the fact that Company shall have no obligation to
enter into the contemplated Leases (as hereinafter defined) and the fact that at
Company's behest Developer has furnished and shall hereinafter furnish valuable
services, devote extensive resources to designing the Prototypes (as hereinafter
defined), to conducting the preliminary "due diligence" activities to be
conducted by Developer as hereinafter provided and to develop a proposed form of
Lease to be submitted by Company for Developer's review and input as hereinafter
provided, and in recognition of the fact that (i) in connection with the
foregoing described services and activities, Developer has foregone and is
likely to forego the opportunity to participate in other business opportunities
due to the time and effort anticipated to be devoted by Developer's staff in
connection with this Agreement and the transactions contemplated herein;
provided, however, that Developer shall not be entitled to recover any
compensation not provided for in this Agreement by virtue of having foregone any
such opportunities) and (ii) Developer shall from time to time incur various
costs and expenses, including without limitation interest on funds borrowed by
Developer to pay for such costs and expenses and to fund labor and overhead
necessary in the performance of Developer's responsibilities under this
Agreement (it being acknowledged that Developer intends to borrow funds to
enable Developer to fund labor, overhead and other costs and expenses which
shall be incurred by Developer in connection with Developer's performance of its
responsibilities hereunder and attempts to consummate the transactions
contemplated herein), Company and Developer wish to provide for the
reimbursement to Developer of Approved Costs (as hereinafter defined) incurred
by Developer and for the payment to Developer of a fee for Developer's services
in connection with the investigation, review and analysis of the various matters
which Developer shall address in performing Developer's responsibilities
hereunder; and IHS, which is affiliated with Company and wishes to induce
DEVELOPMENT AGREEMENT - Page 2
- ---------------------
<PAGE>
Developer to enter into this Agreement with Company and recognizes that
Developer will incur substantial costs and expenses (and will likely incur
material indebtedness in order to fund such costs and expenses) in connection
with this Agreement, desires to guaranty certain obligations of Company to
Developer in the manner and to the extent provided in Section 7.D. of this
Agreement; and
H. It is contemplated that in addition to the services to be rendered
hereunder, the parties shall hereinafter endeavor to negotiate a further
agreement (the "National Agreement") pursuant to which Developer or its
affiliate shall assist Company in managing the development of projects other
than the Projects and performing Project maintenance and physical plant
management services in connection with such projects; provided, however, that no
party shall be under any obligation to enter into any such National Agreement
and the failure of any such National Agreement to be consummated shall not
affect or in any way impair the parties' respective obligations under this
Agreement.
NOW, THEREFORE, for and in consideration of the mutual
covenants herein contained and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Company
and Developer hereby agree as follows:
1. Appointment of Developer. Company appoints and authorizes Developer
as an independent contractor to perform on behalf of Company such site
investigation and development evaluation activities as directed by Company in
its sole discretion as it relates to the evaluation of the desirability,
feasibility, and cost of developing the Projects upon the various sites from
time to time considered by Company for the location of the Projects. Developer
agrees to perform such services on Company's behalf and for Company's account,
as an independent contractor, subject to and upon the terms and conditions of
this Agreement, and in connection therewith to engage and coordinate the efforts
of such professionals as Developer reasonably determines to be experienced,
reputable and appropriate for the performance of the various responsibilities to
be undertaken pursuant to this Agreement including such personnel and/or
consultants as engineers, architects, designers, landscape architects, soils
consultants, construction contractors, environmental (with the environmental
consultant(s) engaged by Developer to be satisfactory to Company), traffic,
legal and other professional consultants for the investigation, evaluation,
financing, design, and construction of the Projects.
2. Site Identification and Purchase Activities.
A. The Projects will be constructed upon the sites (collectively, the
"Sites") identified on Exhibit A attached hereto and any additional sites
designated by Developer and Company pursuant to a written agreement to such
effect executed by and between Developer and Company.
B. Developer shall assist Company in conducting and coordinating site
purchase
DEVELOPMENT AGREEMENT - Page 3
- ---------------------
<PAGE>
contract negotiations with the various owners of the respective Sites and other
additional potential sites designated by Developer and Company pursuant to a
written agreement to such effect executed by and between Developer and Company,
and, in connection therewith, coordinate the activities of architects,
engineers, contractors, and other consultants for the purpose of analyzing and
reviewing the Site locations and such potential additional site locations and
development alternatives so as to facilitate the planning and development of the
Projects.
C. Company and Developer acknowledge that it is essential that they
cooperate together in structuring arrangements for the acquisition of the Sites
so as to render them readily financeable and thus enable Company (or, subject to
Section 4 below, Developer) to secure financing for the acquisition of the Sites
and the construction and development of the Projects thereon. Accordingly,
Company shall forthwith provide Developer with a complete copy of any contract
to acquire a Site for any Project from time to time entered into by Company
(each, a "Contract"), and any such Contract shall be assignable to Developer or
its approved designee at such time, if ever, as a Lease with respect to such
Project is entered into by Developer or such designee with Company or its
affiliate, as tenant.
D. Company shall remit to the title company or other escrow agent the
amount of any "earnest money" or "option fee" or other form of deposit or
initial contract consideration or escrow payment required to be made pursuant to
each Contract but Company's failure to do so shall not constitute a default
hereunder. Company shall immediately furnish to Developer a true and correct
copy of any amendment to or modification of any Contract from time to time
entered into by Company.
E. It is anticipated that the date of closing for the acquisition of
all of the Sites shall occur on or before September 15, 1996 (the "Acquisition
and Financing Closing Date") unless Company and Developer agree otherwise in
writing. Notwithstanding the foregoing or anything else to the contrary
contained in this Agreement, it is understood and agreed that the closing for
the acquisition of any Site shall be subject to the prior or simultaneous
unconditional execution of the Lease for such Project, the closing of the
Construction and Acquisition Financing for such Project and the satisfaction of
the conditions to closing under the Contract for such Project, the conditions to
effectiveness, if any, under such Lease and the conditions to the initial
funding under such Construction and Acquisition Financing. It is further
understood and agreed that except for payment of its Termination Development Fee
pursuant to Section 7 below and reimbursement of all Approved Costs incurred by
Developer (and, if applicable, payment of any sums from time to time due to
Developer pursuant to Section 4 and/or Section 7 and/or Section 9 of this
Agreement, as the case may be), Company shall have no liability to Developer and
Developer shall have no liability to Company in the event that a contract for
any Site is not entered into or in the event that a Contract for any Site does
not close, for any reason whatsoever, including without limitation, Company's or
its affiliate's or Developer's or its designee's failure or refusal to close.
3. Acquisition Due Diligence Activities.
DEVELOPMENT AGREEMENT - Page 4
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<PAGE>
A. Upon Company or its affiliate entering into a Contract, or if
request by Company prior to Company's or its affiliate entering into a Contract,
to the extent that the same has not been previously performed, Developer shall
conduct or arrange for the performance by Developer or, at Developer's election,
experienced, reputable and appropriate professionals engaged by Developer (and
in the case of any environmental consultants, approved by Company, of such tests
and reviews as Developer determines to be necessary or desirable (as well as
such tests and reviews, if any, as Company reasonably requests), including
without limitation studies and analysis relating to title and survey, zoning,
required permits and/or licenses, access (including ingress and egress),
utilities, environmental matters, drainage, civil and geotechnical engineering
matters, soils conditions, water rights, site improvement cost estimates,
Project tax burdens, and matters anticipated to affect the timing and
feasibility of construction and development activities. Developer shall
coordinate with Company to refine conceptual planning of the Projects, finalize
the schematic designs of the relevant portions thereof, and, following the
execution and delivery of the Leases, Developer shall prepare preliminary design
development documents and thereupon prepare and submit requests for proposals
and bid materials to potential contractors and vendors in accordance with the
respective Leases. Based upon such reviews and responses to requests for
proposals and bid solicitations and Developer's analysis thereof, Developer
shall prepare and submit for Company's review a preliminary budget of
construction and development costs and a preliminary schedule for various
material phases and activities in connection with the contemplated construction
and development of the Project. Ultimately, following the execution and delivery
of a Lease and the financing documents for the Project subject thereto,
Developer or the other applicable Owner shall enter into a construction contract
(which shall provide for the establishment of a payment and performance bond
covering the work subject thereto) with a general contractor whose performance
shall be reviewed by Developer in its capacity as the construction management
coordinator (pursuant to a construction management services agreement generally
in the form of promulgated by the American Institute of Architects ["AIA"])
whose scope of work shall be consistent with the scope of work to be performed
by a general construction manager utilizing AIA guidelines and practices.
B. In the event that a Contract or a Lease is never executed for a Site
or if the acquisition of title under a Contract does not close, following
Developer's receipt of full payment of all sums due to Developer under this
Agreement, Developer shall upon request of Company promptly deliver to Company
all reports, studies, records, files, books and accounts with respect to such
Site and/or the Project to be built thereon then in Developer's possession
(provided, that Developer may retain copies thereof for its own internal use and
shall not be required to provide any internal working papers or documents
intended for the use of or distribution to Developer's staff); it being
understood that the same were prepared or obtained by Developer for Company's
benefit and account and at Company's expense and accordingly, that following
Developer's receipt of full payment of all sums due to Developer under this
Agreement, Company shall be entitled to receive the same upon request or upon
termination of this Agreement.
DEVELOPMENT AGREEMENT - Page 5
- ---------------------
<PAGE>
4. Financing Arrangements.
A. Following the selection of the Site for each Project and the
refinement of Developer's and Company's review and analysis of the anticipated
cost of acquiring the Site and constructing the Project thereon, and the
finalization of design, preliminary budgets, etc., Developer and Company may
each negotiate with and solicit quotations and offers for financing from various
institutional sources of financing ("Financial Institutions") such as investment
banking firms, life insurance companies, venture capital companies and such
other potential sources of funding for real estate investment as Developer or
Company may deem appropriate, provided that before Developer contacts any
Financial Institution it shall have registered in writing with Company the name
of any such Financial Institution that Developer desires to contact with regard
to any of the Projects and shall have secured Company's written consent to
Developer's contacting such Financial Institution (such registered and consented
to Financial Institutions being hereinafter referred to individually as a
"Registered Financial Institution" and collectively as "Registered Financial
Institutions" ). In connection therewith, Company agrees to promptly provide or
cause to be provided to Developer such information and data as Developer may
reasonably request in order to provide Developer with sufficient detailed
information to provide to a Registered Financial Institution and Developer
agrees to promptly provide or cause to be provided to Company such information
and data as Company may reasonably request in order to provide Company with
sufficient detailed information to provide to a Financial Institution. Developer
shall furnish Company with a copy of any proposed information package
contemplated to be provided to a Registered Financial Institution prior to the
submittal thereof, and Company shall endeavor to promptly review the matters
contained therein and advise Developer in writing of any respect in which such
information package or any matters contained therein may be inaccurate or
misleading and shall furnish any information reasonably necessary or appropriate
to cure any defect therein. Developer shall cause any Registered Financial
Institution to which it submits any such information package to agree to
maintain the confidentiality of the proprietary information furnished in
connection therewith, subject to the ability of such Financial Institution to
divulge such information to its accountants, legal counsel, and other
consultants.
B. It is understood that Company, as well as Developer, is soliciting
financing commitments and that Developer shall not contact or negotiate with any
Financial Insitution that is not a Registered Financial Institution.
Furthermore, in order to coordinate all efforts to solicit and obtain financing,
it is essential that Developer only contact, and Developer agrees to only
contact, Registered Financial Institutions. Developer shall deliver to Company a
copy of any offer or commitment for financing obtained by Developer from any
Registered Financial Institution. In the event that Company or any affiliate
thereof does not enter into a Lease for a particular Project with Developer or
an approved designee of Developer, but within one year from the Acquisition and
Financing Closing Date or within one year from the date on which Developer
delivered a copy of any offer or commitment to Company from a Registered
Financial Institution for the financing of such Project or has most recently
conducted negotiations with such Financial Institution, whichever shall later
occur, as the
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case may be, Company enters into a commitment or transaction with such
Registered Financial Institution for the financing of such Project, then in such
case, in addition to any otherpayment which may be due to Developer hereunder,
Company shall pay to Developer upon the closing and initial funding of the loan
under such commitment an advisory fee (the "Financing Advisory Fee") in the
amount of one percent (1.0%) of the aggregate sum of the maximum amount of all
funds advanced or funded or committed by such Registered Financial Institution
to be advanced or funded for the financing of such Project.
C. As employed herein the term "financing" shall mean and refer to all
sources of funding of any and every nature and kind including, without
limitation, equity investments (whether direct or in the form of proceeds from
the issuance and sale of securities) and direct and indirect forms of credit
enhancement (e.g., the issuance of letters of credit) as well as the making of a
loan. Company agrees to provide Developer with a copy of any offer or commitment
for financing of any Project and any documents or instruments executed by
Company and/or any affiliate thereof in connection therewith. The obligations of
Company under this Section 4 shall survive the termination or expiration of this
Agreement for a period of one year.
D. Company shall be responsible for the payment of any commitment fee
which may be due in respect of any financing in regard to any Project, which
amount shall be credited against the rental which would otherwise be due and
payable under the Lease to be entered into in respect of such Project.
E. As noted above, Company reserves the right to independently seek to
obtain financing for any of the Projects from sources identified by Company. If
Company desires Developer to assist Company in securing and coordinating such
financing, Company and Developer shall enter into a mutually satisfactory
consulting agreement pursuant to which Developer shall render such services for
an agreed upon financing advisory fee.
5. Presentation of Lease.
A. Following or concurrently with the execution and delivery of a
Contract for a Site and the refinement of Developer's and Company's review and
analysis of the anticipated cost of acquiring the Site and constructing the
Project thereon, Company and Developer shall seek to negotiate a mutually
satisfactory "build to suit" lease agreement (a "Lease") for such Project. Upon
execution of the Lease for such Site, Company will assign its rights under the
Contract for such Site to Developer or to a designee approved by Company (herein
referred to as an "approved designee"), it being agreed that any wholly owned
subsidiary of Developer is hereby approved by Company and shall for all purposes
be deemed to be an approved Designee and in respect of any other contemplated
designee Company's approval thereof shall not be unreasonably withheld or
delayed provided that in no event shall such designee be an Operator (as
hereinafter defined in Section 16), and such Owner will acquire the Site for the
Project and Developer (and such Owner if other than Developer) shall develop and
construct the Project in accordance with the Lease [or a separate development
DEVELOPMENT AGREEMENT - Page 7
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<PAGE>
and construction agreement for such Project], which would thereupon be occupied
and operated by Company or its affiliate, as tenant under such Lease. In this
regard, Developer and Company shall endeavor as soon as possible to enter into
an agreement approving a standard base lease form to serve as the model for each
respective Lease to be entered into for each Project, subject to the
modification of such lease form to address economic issues or matters particular
to the Project or lease transaction in question.
B. Company and Developer shall use reasonable efforts to negotiate and
enter into the Leases for each Project on or before the Acquisition and
Financing Closing Date; provided, however, that neither Company or its affiliate
nor Developer or its designee shall have any obligation to enter into any Lease
and either Company or its affiliate or Developer or its designee may decline to
do so for any reason that either such party may in its sole and absolute
discretion deem appropriate. In the event that Company or its affiliate and
Developer or its designee execute and deliver a Lease for a Project on or before
the date set forth in Section 7 below, then in such case no Termination
Development Fee with respect to such Project shall be payable pursuant to
Section 7 below.
C. Although the terms of the respective Leases shall be subject to
negotiation and shall be mutually satisfactory to each of the parties in its
sole discretion, it is contemplated that the following matters shall be
reflected therein:
(1) All sums advanced by Company pursuant to this Agreement
through the Acquisition and Financing Closing Date shall be
applied in reduction of the amount of rental that would
otherwise be payable pursuant to the Leases;
(2) The base and renewal rental shall be determined on a basis
that is mutually satisfactory to the parties;
(3) The initial term of each Lease shall be no less than ten (10)
years, with the tenant to be granted four five year renewal
options;
(4) The Lease shall be a "triple net" lease, with the tenant
responsible for the payment of all costs and expenses
(including, without limitation, taxes, insurance, and
maintenance expenses) in connection with the Site and the
Project in question; and
(5) The Lease may not be assigned by the tenant, nor may the
tenant sublet the premises, except for a subletting to an
affiliate or an assignment to an equally creditworthy and
responsible successor tenant in connection with a merger,
consolidation or sale of all or substantially all of tenant's
assets, without the prior written consent of the landlord,
which shall not be unreasonably withheld, delayed or
conditioned, and the prior approval of the landlord's
mortgagee, and may not be assigned by the landlord without the
consent of the tenant if the proposed assignee is an Operator
(as hereinafter defined) but shall
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otherwise be freely assignable by the landlord. The landlord
under the Lease shall not be an Operator at any time during
the term thereof. The Lease shall be made subjectand
subordinate to any first fee mortgage or deed of trust on the
Project held by a Financial Institution, provided that such
Financial Institution enters into a recognition,
nondisturbance, subordination and attornment agreement between
tenant and such Financial Institution in form and substance
mutually satisfactory to such parties;
(6) Each respective Lease shall provide for Developer or a
designee that is a wholly owned subsidiary of Developer to
enter into a written agreement to provide architectural,
construction management, furniture, fixture and equipment
procurement, and Project maintenance and physical plant
management services (at prevailing market rates of
compensation) in respect of the applicable Project in
question; and
(7) Each Lease shall contain a right of first refusal in favor of
the tenant and shall also grant to tenant an option to
purchase the Site and the Project on a basis that is mutually
satisfactory to the parties.
6. Reimbursement of Expenses.
A. Attached hereto as Exhibit B for the purposes of illustration
is a spreadsheet prepared by Developer to illustrate Developer's calculation of
various anticipated costs and expenses to be reimbursed to Developer pursuant to
this Agreement. Exhibit B is furnished for the purposes of illustration only, it
being acknowledged that the nature and extent of the Approved Costs (as
hereinafter defined) to be incurred is not yet readily ascertainable and has not
yet been determined. Developer has incurred Approved Costs (as defined below)
through the end of May, 1996 in an amount equal to approximately Four Hundred
Thousand Dollars ($400,000.00), and Developer has heretofore received partial
reimbursement for such Approved Costs in the amount of Two Hundred Thousand
Dollars ($200,000.00) from Company. Company hereby agrees to pay Developer the
additional sum of Two Hundred Thousand Dollars ($200,000.00) immediately
following the date of Company's and Developer's execution and delivery of this
Agreement to reimburse Developer for additional Approved Costs incurred by
Developer. On or before September 10, 1996, Developer shall submit to Company a
request for payment (the "First Draw Request") which shall contain an itemized
specification of the amount of all then unreimbursed Approved Costs previously
incurred by Developer in the performance of Developer's responsibilities under
this Agreement (the "Reimbursable Costs"). Company shall pay to Developer the
amount of the Reimbursable Costs covered by such Draw Request within ten (10)
days from the delivery to Company thereof or by September 20, 1996, whichever
shall occur later. In the event that the execution of the Leases, the
acquisitions of the Sites, and the closing and initial funding of the
Acquisition and Construction Financing do not occur on or before October 31,
1996, then in such case Developer shall submit to Company a request for payment
(the "Final Draw Request")
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which shall contain an itemized specification of the amount of all then
unreimbursed Approved Costs incurred by Developer in the performance of
Developer's responsibilities under this Agreement (the "Final Draw"). Such Final
Draw shall be due and payable within ten (10) days from the delivery to Company
thereof. Upon the full payment of the sums due hereunder, this Agreement shall
terminate unless Company and Developer otherwise agree in writing. Developer
shall provide Company with a semimonthly report of the amount of costs and
expenses incurred by Developer and shall permit Company to inspect Developer's
books and records in respect of Approved Costs for which Developer was
reimbursed at any reasonable time within one year from the date of the payment
of the Final Draw. In recognition of the fact that Developer is incurring
substantial costs and expenses in connection with this Agreement and the
transactions contemplated herein (and will be obtaining financing in respect
thereof), Company shall promptly pay to Developer the full amount of the First
Draw Request and the Final Draw Request and any other sum due pursuant to this
Section 6 without offset or deduction or set off of any kind and notwithstanding
any dispute which may arise in regard to any item which may be included within
any such draw request, but in the event that any audit performed by Company
reveals that Company has made an overpayment to Developer, Developer shall
forthwith refund the amount of any such overpayment. Notwithstanding any term or
provision of this Agreement to the contrary, in the event that Company fails to
make any payment to Developer when due under this Section 6, then in addition to
any other right or remedy enjoyed by Developer, from and after such time until
such time as Developer has received payment in full, Developer may suspend
performance of any or all of its duties and obligations under this Agreement and
in such case Developer shall not be liable nor responsible in any way for any
damage or injury or loss arising from or in any way related to Developer's
failure to perform any such duties or obligations.
B. As used herein, "Approved Costs" means all costs or expenses (the
aggregate amount of which shall not exceed the Maximum Approved Sum (as
hereinafter defined) unless otherwise approved in writing by Company) incurred
by Developer in connection with the performance by Developer of its
responsibilities under this Agreement and in respect of the transactions
contemplated herein including, without limitation of the generality of the
foregoing, the direct labor, overhead, and out of pocket costs and expenses
attributable thereto, as well as all third party environmental, engineering, or
other consultants or professionals engaged by Developer and any interest costs
incurred by Developer on funds borrowed by Developer from any bank to fund costs
and expenses incurred by Developer in connection with this Agreement and the
transactions contemplated hereby, it being understood that Approved Costs shall
specifically include all such costs and expenses incurred in respect of the
review and evaluation of any potential additional sites pursuant to Section 2.B.
hereof. For the purposes hereof, the Maximum Approved Sum shall mean the total
amount for the various line items and their costs as shown on Exhibit B and
shall be an amount equal to the greater of (i) the total sum shown on Exhibit B
or (ii) such other greater amount, if any, as is hereafter approved in writing
by Company. If Developer anticipates that Approved Costs may be incurred by
Developer in connection with the performance by Developer of its
responsibilities under this Agreement in excess of the Maximum Approved
DEVELOPMENT AGREEMENT - Page 10
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Sum, Developer may request approval of an increase in the Maximum Approved Sum
in writing and if Company approves such increase of the Maximum Approved Sum in
writing, then such increased Maximum Approved Sum so expressly approved by
Company shall also constitute the Maximum Approved Sum under this Agreement for
Approved Costs for which Developer may request reimbursement as provided in
Paragraph A above. In the event that Company does not approve Developer's
request for any increase in the Maximum Approved Sum, then in such case,
notwithstanding any term or provision of this Agreement to the contrary,
Developer shall not be required to incur any costs or expenses in excess of the
Maximum Approved Sum and shall not be required to perform any duty or obligation
hereunder which could entail Developer's incurring any costs or expenses in
excess of the Maximum Approved Sum.
C. Developer hereby represents and certifies to Company that all costs
and expenses which form the basis of a Draw Request are (i) Approved Costs, (ii)
fair, reasonabe and necessary costs and expenses actually incurred by Developer
in connection with the performance of its responsibilities under this Agreement
with respect to the Projects, and (iii) if such cost or expense is for payment
to a third party for services performed or materials rendered, such services
were actually performed and/or materials rendered in a manner satisfactory to
Developer so that such third party was entitled to payment. Developer further
represents and warrants that it will not engage any person or entity, unless
such person or entity in Developer's judgment is experienced and reputable and
charges competitive rates. Developer agrees to consider engaging or using a
contractor or vendor recommended by Company in an effort to reduce costs unless
Developer has a reasonable objection to doing so.
D. By its signature below, to induce Developer to enter into this
Agreement with Company, Integrated Health Services, Inc. ("IHS") hereby
unconditionally guarantees to Developer the payment of Approved Costs and any
Termination Development Fee or any other sum due to Developer which Company is
obligated to pay pursuant to this Agreement, as this Agreement may be hereafter
from time to time amended, without the joinder or approval of IHS. If following
the Offering Date (i) the Offering is consummated and IHS receives the proceeds
from the sale thereof, (ii) Company's creditworthiness is satisfactory to
Developer and its lender, and (iii) no default by Company in the performance of
its obligations under this Agreement has occurred and is continuing, then
Developer shall executed a written release and discharge of IHS from its
guaranty hereunder (the "Release"), and from and after Developer's execution and
delivery of the Release, IHS shall have no further liability hereunder and shall
thereupon be released from any and all of its guarantee obligations hereunder.
For the purposes of clause (ii) of the immediately preceding sentence, Company's
creditworthiness shall be deemed to be satisfactory to Developer and its lender
if on the Offering Date or on the date of the first quarterly Form 10-Qfiling of
the Company with the Securities and Exchange Commission the following conditions
have been fulfilled: (i) the prospectus or Form 10-Q declares or contains a
financial statement evidencing that Company's net worth is at least
$50,000,000.00 and (ii) the prospectus or Form 10-Q declares or contains a
financial statement evidencing that the Company has no less than
DEVELOPMENT AGREEMENT - Page 11
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<PAGE>
$25,000,000.00 in cash.
7. Termination Development Fee. In the event that for any reason the
execution of the Leases, the acquisitions of the Sites, and the closing and
initial funding of the Acquisition and Construction Financing of the Projects do
not occur with respect to any Project(s) on or before October 31, 1996 or the
date this Agreement is terminated, whichever is earlier (the "Termination
Development Fee Payment Date"), then in such case (unless this Agreement has
been terminated for cause (as hereinafter defined) by Company for any reason
other than gross negligence), Developer shall be entitled to a fee (the
"Termination Development Fee") in an amount equal to fifteen percent (15%) of
the total aggregate sum of the Approved Costs incurred by Developer through the
Termination Development Fee Payment Date which are to be reimbursed to Developer
pursuant to Section 6 above with respect to such Project(s), to compensate
Developer for its services hereunder. The parties acknowledge that because it
will be difficult (if not impossible) to allocate with any accuracy the Approved
Costs between the various Projects, for the purposes of determining the
Termination Development Fee that Developer would be entitled to for a Project,
the aggregate sum of the Approved Costs incurred by Developer shall be divided
evenly between all Projects. Company shall pay the Termination Development Fee
to Developer within ten (10) days after the Termination Development Fee Payment
Date. Notwithstanding the foregoing, in the event that the execution of the
Leases, the acquisitions of the Sites, and the closing and initial funding of
the Acquisition and Construction Financing of such Project(s) occur on or before
March 31, 1997, any Termination Development Fee paid by Company to Developer
hereunder shall be credited against the rental which would otherwise be due and
payable under the Leases.
In the event that within three years from the termination date of this
Agreement Company (or any entity controlled by or under common control with
Company) goes forward in developing any Project (or any similar type of project
utilizing design concepts derived from work performed by Developer) without the
involvement and participation of Developer, in recognition of the material
assistance provided by Developer, Company shall also pay to Developer an
additional Termination Development Fee in an amount equal to two percent (2%) of
the aggregate total sum of all construction costs incurred in respect of the
construction of any such Project or other project in which Developer is not
involved; provided, however, that no such additional Termination Development Fee
shall be due or payable in the event that Developer was asked to serve as the
construction management coordinator in respect of the construction of any such
project whose design utilizes or is derived from a Prototype and declined to so
serve (unless such declination was in good faith, such as, for example, because
Company would not enter into an AIA standard form of construction management
agreement or if Company is not willing to agree to pay Developer at the then
prevailing rate of compensation charged by high quality architects and/or
construction managers in Dallas, Texas for such services) or if this Agreement
is terminated for cause by Company for any reason other than gross negligence.
DEVELOPMENT AGREEMENT - Page 12
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8. Cooperation; Contact Persons. Developer and Company shall use all
reasonable efforts to cooperate with each other in selecting the site for each
Project, evaluating and reviewing the various alternatives from time to time
presented to Company for its consideration, and meeting with each other upon
request and responding to each other's requests for information. To facilitate
the cooperation and coordination of Company andDeveloper, the parties agree that
Kyle Shatterly of Company and C. Earl Dedman of Developer shall be the
respective initially designated "Contact Persons" to whom inquiries and requests
for information. on a day-to-day basis, should be directed.
9. Prototype Design. Company has requested Developer to design two
prototype facilities (collectively, the "Prototypes"). Developer shall secure
and retain a copyright in respect of the design of each Prototype, but Developer
shall convey its copyright interests to Company following its receipt of full
payment of the design fee for each Prototype pursuant to a written agreement
between Developer and Company providing that unless Developer serves as the
construction management coordinator, or was asked to serve as the construction
management coordinator and declined (unless such declination was in good faith,
such as, for example, because Company would not enter into an AIA standard form
of construction management agreement or if Company is not willing to agree to
pay Developer at the then prevailing rate of compensation charged by high
quality architects and/or construction managers in Dallas, Texas for such
services), in respect of the construction of any Project (or any other similar
project) whose design utilizes or is derived from a Prototype, Company shall pay
to Developer a fee in an amount equal to one and one half percent (1.5%) of the
total construction costs incurred in respect of the construction of any such
Project. Upon Developer's conveyance to Company of its copyright interest in the
design of the Prototypes, Developer may not use or authorize any other person to
use such design except for work performed for the Company or any affiliate
thereof. Until such time as Developer shall have been paid in full pursuant to
this Agreement, Developer shall have and retain full and exclusive ownership and
all rights to and in respect of all designs of all Projects performed by
Developer and all drawings, sketches and materials pertaining thereto. If
Developer was asked to serve as the construction management coordinator in
respect of the construction of any Project (or any other similar project) whose
design utilizes or is derived from a Prototype and declined to so serve (unless
such declination was in good faith, such as, for example, because Company would
not enter into an AIA standard form of construction management agreement or if
the parties fail to agree upon the amount of compensation to be payable to
Developer for its services) , no such fee shall be due or payable.
10. Termination of this Agreement. This Agreement shall be in effect
for a period of one (1) year from the date hereof, provided, however, that:
A. This Agreement may be terminated at any time, without cause, for any
reason or for no reason, by Company, which termination shall be effective least
thirty (30) days from the date on which written notice thereof from Company is
received by Developer. Upon any such termination of this Agreement, then Company
shall pay to Developer any
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sums due under this Agreement, and unless otherwise provided in this Agreement,
neither party shall have any other or further obligation or liability to the
other.
B. This Agreement may be terminated by Company at any time for cause,
which termination shall be effective three (3) business days following the date
on which Company's written notice of such termination is received by Developer.
For the purpose of thisAgreement, "cause" shall be deemed to mean gross
negligence, fraud, malfeasance, bad faith material breach of this Agreement by
Developer or its approved designee or the bankruptcy or insolvency of Developer
or its approved designee.
C. Upon termination of this Agreement and the full payment to Developer
of all sums due under this Agreement, Developer shall promptly deliver to
Company all reports, studies, records, files, books and accounts with respect to
the Projects and/or Sites then in Developer's possession or control (provided,
that Developer may retain copies thereof for its own internal use and shall not
be required to provide any internal working papers or records of Developer nor
any document intended for the internal use of and/or distribution to Developer's
staff) and release and transfer to Company or its affiliate any and all right,
title or interest it or any of its affiliates may have in and to the Sites or
any agreements relating thereto .
11. Notices and Communications. All notices, demands, approvals and
requests given by either party to the other hereunder shall be in writing and
shall be delivered via a reputable overnight delivery service or sent by
telecopy (with hard copy to follow by registered or certified mail, postage
prepaid), to the parties at the following addresses:
If to Company:
- --------------
Integrated Living Communities, Inc.
c/o Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Kyle Shatterly
Senior Vice President
Telecopier No.: (410) 998-8501
Telephone No.: (410) 998-8927
With a copy to:
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Marshall A. Elkins
Telecopier No.: (410) 998-8747
Telephone No.: (410) 998-8408
DEVELOPMENT AGREEMENT - Page 14
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If to Developer:
- ----------------
Aguirre, Inc.
12750 Park Central Drive, Suite 1508
Dallas, Texas 75231
Attention: C. Earl Dedman
Telecopier No. (214) 788-1583
Telephone No.: 214-788-1508
With a copy to:
Bennett I. Abramowitz, Esq.
Fernandez, Forgerson & Knebel
1717 Main Street, Suite 2100
Dallas, Texas 75201
Telecopier No. (214) 747-2144
Telephone No.: (214) 747-2100
Either party may at any time change its respective address by sending
written notice of such change to the other party, which notice shall be
effective five (5) business days from the date of the other party's receipt
thereof. Any other type of notice shall be deemed to have been given upon the
earlier to occur of the actual receipt thereof or the third business day
following the mailing thereof in accordance with the terms hereof (provided,
however, that notice of termination of this Agreement shall not be effective
until the day when it is actually received by the non-terminating party).
12. General Provisions
A. Developer represents and warrants that it has personnel who are
members of its staff who will perform services to be rendered by Developer
hereunder and are experienced in advising and consulting owners and operators in
all phases of developing housing, residential, health care facility and assisted
living projects in a variety of locations throughout the United States of
America, including, but not limited to, the purchasing, financing, planning, and
constructing of such projects from inception to obtaining certificates of
occupancies therefor.
B. Developer shall maintain a comprehensive system of office records,
files, books and accounts with respect to the Projects and the Sites in a manner
consistent with the practices and procedures customarily employed by Developer
and in an manner reasonably satisfactory to Company, which records shall be
subject to examination by Company at reasonable hours. The obligations of this
Paragraph B shall survive the expiration or earlier termination of this
Agreement for a period of one year.
C. Comply with present and future laws, ordinances, orders, rules,
regulations
DEVELOPMENT AGREEMENT - Page 15
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and requirements of all federal, state and municipal governments, courts,
departments, commissions, boards and officers, or any other body exercising the
functions similar to those of any of the foregoing, which are applicable to
Developer and the performance of Developer's duties hereunder and promptly give
notice to Company of any condition at any of the Projects which, to the actual
knowledge of Developer, violates any such law,ordinance, order, rule, regulation
or requirement.
D. Developer shall promptly give notice to Company of any condition or
circumstance of which Developer has actual knowledge, concerning any of the
Sites or Projects which Developer believes could have a material adverse effect
on Company or on the consummation of the transactions contemplated by Company as
to any Project.
E. Developer agrees to perform the activities and duties required of it
under this Agreement in conformance with the professional standards customarily
observed by advisors and consultants engaged in performing such activities and
duties. Developer shall make available to Company its knowledge, skills, ideas,
experience and abilities with respect to all matters pertaining to the Projects
and their development and shall be available to consult with, advise and inform
Company and Company's consultants at reasonable times during the term of this
Agreement.
F. It is the intention of the parties that Developer shall be, and
remain, an independent contractor. The parties do not intend to create a
partnership, co-tenancy, joint venture or agency of any kind.
G. Developer and IHS have heretofore entered into that certain letter
agreement (the "Confidentiality Agreement"), a copy of which is attached as
Exhibit C to this Agreement, with respect to the confidentiality of certain
information pertaining to the transactions contemplated herein. Developer, IHS,
and Company hereby ratify, adopt and affirm the Confidentiality Agreement, which
is incorporated herein by this reference and which shall govern Developer's
obligations in respect of the disclosure of confidential information, and agree
that the termination of this Agreement shall not terminate or impair the
effectiveness of the Confidentiality Agreement..
H. Developer shall not, without the prior written approval of Company,
make any news release, public announcement, denial or confirmation of any part
of the subject matter of this Agreement or any Contract or other agreement
entered into with respect to any of the Projects, or disclose to any third party
any privileged or confidential information obtained in connection with this
Agreement or any of the Projects except incident to the performance of its
duties hereunder. Notwithstanding anything herein to the contrary, however, from
and after the acquisition of the Sites, Developer shall be able to disclose to
the public that Developer has performed design and development services for
Company in respect of the Projects.
I. Except for costs and expenses reimbursable to Developer pursuant to
this
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Agreement, each party hereto shall bear its own costs and expenses in connection
with this Agreement and the transactions contemplated hereby.
13. Lack of Authority.
A. Notwithstanding any other provision of this Agreement, Developer
shall have no authority to take any of the following actions, except upon the
prior written approval of Company:
(1) Acquire any land or Project or interest therein in
the name of Company or any subsidiary or nominee thereof, or as agent of Company
or any subsidiary or nominee thereof;
(2) Prior to the acquisition of the Sites, sell or
otherwise transfer, mortgage or encumber any part of the Projects or consent to
the placing of any encumbrance on any Project or any part thereof.
(3) Make any contract or agreement in the name of Company
or any subsidiary or nominee thereof, or as agent of Company or any subsidiary
or nominee thereof, or which in any way purports to bind or obligate Company or
any subsidiary or nominee thereof in any way;
(4) Make any expenditure or incur any obligation on
behalf of Company or any subsidiary or nominee thereof, or as agent of Company
or any subsidiary or nominee thereof; and
(5) Take any action which by any provision of this
Agreement is required to be approved in advance in writing by Company.
B. Nothing in this Agreement shall be construed as an authorization by
Company to Developer of any act restricted by law or any covenant or restriction
encumbering or affecting any Project.
14. Indemnification. Developer hereby indemnifies and agrees to hold
harmless Company against and from any and all liabilities, claims, suits, fines,
penalties, damages, losses, fees, costs and expenses (including reasonable
attorneys' fees and disbursements) up to an aggregate amount not to exceed One
Million Dollars ($1,000,000.00) which result from (i) Developer's grossly
negligent acts, errors or omissions or misconduct in the performance of
Developer's duties under this Agreement, or (ii) the gross negligence, willful
misconduct, or willful material breach of this Agreement by Developer or any of
its employees. Company agrees to indemnify, defend and hold Developer and its
employees
DEVELOPMENT AGREEMENT - Page 17
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<PAGE>
harmless from and against any and all liabilities, claims, suits, fines,
penalties, damages, losses, fees, costs and expenses (including reasonable
attorneys' fees and disbursements) up to an aggregate amount not to exceed One
Million Dollars ($1,000,000.00) arising out of or in connection with any willful
material breach by Company of this Agreement or the gross negligence or willful
misconduct of Company or any of Company's employees. The provisions of
thisSection shall survive the expiration or termination of this Agreement for
claims arising or accruing prior to such expiration or termination.
15. Litigation. In the event that any litigation arises in respect of
this Agreement or any matter pertaining hereto, the prevailing party in any such
proceedings shall be entitled to recover court costs and the costs of its
attorneys fees and related legal expenses as part of any judgment awarded to
such prevailing party.
16. Covenant Not To Compete and Right of First Opportunity
A. During the term of this Agreement and, if Developer or its approved
designee and Company enter into any Lease in respect of any Project, for a
period of one and one half (1-1/2) years after the date of the termination of
this Agreement, neither Developer nor any corporation, partnership or other
business entity or person controlling, controlled by or under common control
with Developer ("Restricted Party"), shall, directly or indirectly, operate,
manage, own, control, be a consultant (except for arranging or providing
financing) for or enter into a service contract (except to arrange or provide
financing) with, any entity existing or to be formed that competes with Company
(any such person or entity being herein referred to as an "Operator") by
providing assisted living care in a facility (i) whose primary function is to
provide assisted living care and (ii) which is located within twenty five (25)
miles from the exterior boundaries of the Project subject to such Lease (a
"Competing Facility"); provided, however, that the foregoing terms and
provisions shall not preclude any Restricted Party from (1) providing services
to or otherwise doing business with an Operator in respect of any facility that
is not a Competing Facility or (2) providing financing (or assisting an Operator
in securing financing) for any facility, including any Competing Facility.
B. For a period of two years from the date of execution of this
Agreement, except incident to the performance of Developer's duties under this
Agreement, no Restricted Party shall disclose, directly or indirectly, to any
person outside of Company's employ, without the express written authorization of
Company, any resident lists, pricing strategies, resident files and records,
proprietary data or trade secrets relating to any of the Projects or any
financial or other information about the Projects not then in the public domain.
The foregoing limitations shall not be applicable in respect of any disclosures
made to any Registered Financial Institution and shall be subject to and
superseded by any conflicting or inconsistent provisions of the Leases or any
financing related documents hereafter executed by Company and/or any affiliate
of Company.
C. For a period of three (3) years from the date of this Agreement, no
Restricted
DEVELOPMENT AGREEMENT - Page 18
- ---------------------
<PAGE>
Party shall solicit any of the physicians, customers, vendors, suppliers,
associates, employees, independent contractors, residents or families of
residents admitted to, or employed at a Project, or by Company or its affiliate,
as tenant under the respective Leases, to take any action or to refrain from
taking any action or inaction that would be disadvantageous to Company or such
tenant or the Project, including (but not limited to) the solicitation of
theirrespective physicians, suppliers, customers, vendors, associates,
employees, independent contractors, residents or families of residents to cease
doing business, or their association or employment with the Company or such
tenant or the Project. Notwithstanding the foregoing, for purposes of this
Section, any advertisement prepared for and disseminated to the public in
general, which advertises the services of any facility of a Restricted Party not
otherwise in violation of this Section or advertises the need for services to be
supplied to such a facility, shall not be deemed to be an inducement or
solicitation with respect to any such residents, physicians, suppliers or
independent contractors.
D. Developer acknowledges that the restrictions contained in this
Section are reasonable and necessary to protect the legitimate business
interests of Company and that any violation thereof by any of the Restricted
Parties would result in irreparable harm to Company. Accordingly, Developer
agrees that upon the violation by any of the Restricted Parties of any of the
restrictions contained in this clause, Company shall be entitled to obtain from
any court of competent jurisdiction a preliminary and permanent injunction as
well as any other relief provided at law, equity, under this Agreement or
otherwise (provided, however that Developer shall in no event be liable for any
special, consequential or punitive damages, and Company hereby waives any claim
or right thereto which it might otherwise enjoy). In the event any of the
foregoing restrictions are adjudged unreasonable in any proceeding, then the
parties agree that the period of time or the scope of such restrictions (or
both) shall be adjusted to such a manner or for such a time (or both) as is
adjudged to be reasonable.
E. During the term of this Agreement, except for opportunities
presented to Developer by any Operator, Developer shall offer to Company the
opportunity to participage in the acquisition and development and operation of
any additional potential site identified by Developer for any personal care,
Alzheimer's disease care, or assisted living care facility prior to offering any
such opportunity to any Operator.
F. Developer and Company recognize and acknowledge that they may
hereafter enter into one or more written agreements including, without
limitation, the National Agreement and the Leases, and hereby agree that in the
event of any conflict or inconsistency between any of the provisions of this
Agreement and any such subsequent written agreement, the provisions of such
subsequent written agreement shall govern and supersede any conflicting or
inconsistent provisions of this Agreement.
17. Conditional Limitation. Notwithstanding anything to the contrary
contained in this Agreement, in the event that by June 30, 1996 Developer is
unable to obtain a line of credit or other financing to fund the costs and
expenses that Developer will be incurring in
DEVELOPMENT AGREEMENT - Page 19
- ---------------------
<PAGE>
the performance of its responsibilities under this Agreement despite good faith
efforts on the part of Developer to obtain such financing, Developer shall
notify Company of its inability and shall have the right to terminate this
Agreement upon fifteen days notice to Company, and upon the giving of such
notice this Agreement shall automatically terminate unless prior to the
expiration of such fifteen day notice period Company or IHS agrees to provide
suchfunding or financing to Developer, in which event this Agreement shall
remain in full force and effect and Developer's termination notice shall be
deemed nullified.
18. Miscellaneous Provisions. This Agreement sets forth the entire
agreement of the parties hereto and supersedes any prior oral or written
understanding or agreement, which shall be null and void. No purported amendment
or modification of this Agreement shall be effective unless and until such
amendment or modification is set forth in a writing signed by each of Company
and Developer. This Agreement has been jointly negotiated by Company and
Developer with the assistance of their respective legal counsel and accordingly,
notwithstanding any rule or principle of construction to the contrary, no term
or provision of this Agreement shall be construed in favor of or against either
party by virtue of the authorship or purported authorship thereof. The headings
and captions of the sections and paragraphs of this Agreement are for convenient
reference only and shall not be considered in construing or interpreting this
Agreement. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original hereof and no party shall be required to
account for the presence or absence of any other such counterpart. This
Agreement is performable in and shall be governed by the laws of the State of
Texas. This Agreement may not be assigned by Company except to an affiliate or
in connection with a merger, consolidation or sale of all or substantially all
of tenant's assets without the prior written consent of Developer and neither
this Agreement nor any duties or rights hereunder may be delegated or assigned
or transferred by Developer; provided, however, that Developer may assign its
rights to payments due hereunder to any party providing a line of credit or
other financial accommodations to Developer. All the provisions of this
Agreement are intended to bind and to benefit only the parties hereto and their
permitted successors and assigns. It is not intended that any such provisions
benefit, and it shall not be construed that these provisions benefit or are
enforceable by, any creditors (other than the enforcement of Company's and/or
IHS's payment obligations hereunder by any creditor providing a line of credit
to Developer), contractors or other third parties.
IN WITNESS WHEREOF, this Agreement has been executed by
Company and Developer and IHS effective as of (although not necessarily on) June
3, 1996 on the attached Signature Page.
DEVELOPMENT AGREEMENT - Page 20
- ---------------------
<PAGE>
SIGNATURE PAGE
to
DEVELOPMENT AGREEMENT
---------------------
COMPANY:
- --------
EXECUTED on June 12, 1996
INTEGRATED LIVING COMMUNITIES, INC.
a Delaware corporation
By: /s/ Edward J. Komp
-------------------------------------
Edward J. Komp,
President and Chief Executive Officer
IHS:
The undersigned, Integrated Health Services, Inc., is executing this Agreement
for the purposes set forth in Section 6 (D) hereof.
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Edward J. Komp
------------------------
Edward J. Komp,
Executive Vice President
<PAGE>
DEVELOPER:
- ----------
EXECUTED on June 5, 1996
AGUIRRE, INC.,
a Texas corporation
By: /s/ C. Earl Dedman
------------------------
C. Earl Dedman,
Executive Vice President
<PAGE>
EXHIBIT A
---------
TEXAS LOUISIANA
- ----- ---------
Bedford/Colleyville Baton Rouge-O'Neil
Dallas Baton Rouge-Audubon
Fort Worth Alexandria
Grand Prairie Bossier City
Henderson Lafayette
New Brannfels
Plano
Southlake
San Antonio - Deerfield
San Antonio - Medical Center
San Antonio - Oakwell
Note: The development budget assumes that 16 sites will be
selected and implemented.
Executed on June 6, 1996 Executed on ____________, 1996
AGUIRRE, INC. INTEGRATED LIVING COMMUNITIES,INC.
A Texas Corporation A Delaware Corporation
By: /s/ Earl Dedman By: /s/ Edward Komp
------------------------------ -------------------------------
L. Earl Dedman Edward T. Komp
Executive Vice President President/Chief Executive Officer
<PAGE>
EXHIBIT B
------------
[Intentionally Omitted]
<PAGE>
EXHIBIT C
---------
CONFIDENTIALITY AGREEMENT
<PAGE>
March 22, 1996
Mr. John R. Lanier
Aguirre, Inc.
12700 Park Central Drive
Dallas, Texas 75251
Re: Confidentiality Agreement
Dear John:
This letter will serve to set forth our mutual understanding and
agreement regarding certain information ("Information") that we may disclose to
each other in the course of our discussions and negotiations with respect to the
Assisted Living Public Offering.
1. For a period of two years from the date hereof, neither party shall
disclose to any other person, firm, corporation or other entity any of the
Information received from the other party, whether such Information is
transmitted to the other party in written, verbal or other form, or use any such
Information in any way materially detrimental to either party, except that such
Information may disclosed by the parties to their respective employees,
attorneys and advisors engaged in discussions regarding the contemplated
business transactions.
2. Each party shall use the same degree of care to avoid disclosure or
use of the Information provided by the other party as it employs with respect to
its own proprietary Information that is considered important to the operation of
its business.
3. The parties hereto agree that the Information shall not be deeemed
proprietary, and neither party shall have any obligation with respect to any
Information, which:
a. is or becomes publicly known through no wrongful act of either
party; or
<PAGE>
Mr. John R. Lanier
March 22, 1996
Page Two
b. is recieved on a non-confidential basis from a third party with-
out a similar restricition and without breach of this Agreement;
or
c. is approved for release by written authorization of the party
providing the confidential Information. Such authorization shall
be signed by a corporate officer of the providing party.
4. All written Information and other physical forms of Information
delivered by either party to the other party shall be and shall remain the
property of the providing party. Upon written request by the providing party,
the receiving party shall promptly follow the providing party's instructions to
either return or destroy such written or other materials and any and all copies
thereof.
5. The receiving party shall have no ownership rights in the Information
and agrees that it shall not print, or copy, or permit to be printed or copied,
in whole or in part, the Information without the prior written permission of the
providing party, except as necessary to discuss the aforesaid business
transactions.
6. Each party acknowledges that unauthorized disclosure or use of the
Information provided by the other party may cause harm and damage to the
business of the providing party which may be difficult to ascertain and which
may not be adquately compensated in damages at law. Therefore, each party agrees
that it may be enjoined from disclosing or using the Information.
7. This Agreement shall be binding upon and inure to the benefit of the
parties' succesors in interest. This Agreement shall not be assignable by either
party hereto without the written consent of the other party hereto and any
purported assignment without such consent shall be void. This Agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof, and shall supersede all previous communications, representations,
understandings, and agreements, either oral or written between the parties or
any officials or representatives thereof. This Agreement may not be changed or
modified save by a written agreement signed by the parties hereto or by their
successors in interest. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland.
<PAGE>
Mr. John Lanier
March 22, 1996
Page Three
Kindly inidicate your agreement with the foregoing by signing and returning
to us a copy of this letter.
Sincerely,
By: /s/ Michael D. Drusano
---------------------------------
Michael D. Drusano
Director Project Finance
ACCEPTED AND AGREED THIS 28th DAY OF March, 1996.
By: /s/ Earl Dedman
-----------------------------
Name: EARL DEDMAN, P.E.
-----------------------------
Title: EXECUTIVE VICE PRESIDENT
-----------------------------
MARCELA ABADI /s/ Marcela Abadi
--------------------------
KEN CROSBY /S/ Ken Crosby
--------------------------
HENRY D'ELENA /s/ Henry D'Elena
--------------------------
VINCE MILLER /s/ Vince Miller
--------------------------
IHS
Integrated Health Services, Inc.
- --------------------------------------------------------------------------------
March 18, 1996
VIA FEDERAL EXPRESS
- -------------------
The Homestead Company, L.C.
151 Whittier, Suite 2000
Wichita, KS 67207
Attention: Mr. Jack West
Dear Mr. West:
This letter of intent will serve to express our mutual understandings with
respect to the proposed development agreement, lease, purchase option and
working capital line of credit (the "Transaction") between a subsidiary of
Integrated Living Communities, Inc., (such subsidiary herinafter called "ILC")
and The Homestead Company, L.C., a Kansas limited liability company (the
"Owner") for the construction and development of assisted living facilities in
the states of Kansas, Missouri, Nebraska, Iowa and other states in the midwest
(the "Facilities"). It is contemplated that a public offering of the stock of
Integrated Living Communities, Inc. (the "Parent") will be completed.
Our intention to consummate the Transaction is subject to the following
terms and conditions:
1. Line of Credit. ILC will make available to Owner a revolving line of
credit (the "Line of Credit") in the maximum principal amount of Eight Hundred
Thousand ($800,000) Dollars, pursuant to a revolving credit and security
agreement (the "Revolving Credit and Security Agreement"). The Line of Credit
shall be evidenced by a revolving note (the "Note") and shall be secured by a
lien on the Owner's properties under development. The lien in favor of ILC shall
extend to all tangible and intangible assets now owned or hereafter acquired by
Owner in connection with the construction and development of the Facilities,
including, but not limited to, land contracts and land purchase options,
architectural plans, licenses and permits.
The Line of Credit shall be subject to the terms and conditions
outlined in the Note and the Revolving Credit and Security Agreement of even
date herewith.
2. Construction of Facilities. Owner shall develop and construct the
Facilities pursuant to architectural and engineering plans submitted to and
approved by ILC so that the Facilities as constructed will be suitable to ILC's
purposes, and subject to all applicable health facility licensure and local
building code requirements.
10065 Red Run Boulevard Owings Mills, Maryland 21117
410-998-8400 Fax: 410-998-8700
Hospital Care Without Hospital Costs
<PAGE>
ILC and Owner will enter into a development agreement (the "Development
Agreement") pursuant to which Owner will guarantee completion of the
construction of the Facilities, agree to submit all sites, architectural and
engineering plans to ILC for its approval, which approval shall not be
unreasonably withheld or delayed, and provide for ILC to have management
involvement in the facility set-up at least sixty (60) days prior to the opening
of each of the Facilities. Owner shall provide a completely furnished "turnkey"
facility containing all fixtures and equipment necessary to operate each of the
Facilities as an assisted living facility, except for furniture, furnishings
(including carpet and wallpaper), telephone equipment, customary supplies,
inventory and consumables, and office and computer equipment.
3. Lease. Upon completion of the construction and the issuance of
certificates of occupancy and licenses from all agencies having jurisdiction
over each Facility, ILC will enter into a lease of such completed Facility
(a"Lease") for an initial lease term of ten (10) years (the "Initial Term").
Each Lease will be renewable at the option of the ILC for three (3) successive
five (5) year terms (each term being hereafter referred to as a "Renewal Term").
Each Lease will commence anytime after the receipt of the above-referenced
items, except tht each Lease shall commence no later than five (5) business days
after the receipt of the above-referenced items (the "Commencement Date"). The
Commencement Date is subject to the satisfaction of all of the conditions
contained in Paragraph 11 of this letter, as well as all customary
representations and warranties.
The annual rent in the first year of the Initial Term shall be $248,500
and shall be payable in equal monthly installments, in advance, on the first day
of each month. The annual rent shall increase each year by the annual increase
in the Consumer Price Index for the applicable statistical area.
In addition to the annual rent as set forth above, each Lease shall
provide that ILC shall be responsible for payment of all expenses of the
Facilities, such as real estate taxes, personal property taxes, insurance,
utilities, maintenance systems, and repairs and expenses of operation, such that
the annual rent shall be net to Owner. ILC shall not, however, be responsible
for any income taxes of Owner, or for any indebtedness incurred by Owner. It
will be the obligation of the Owner to make payments on any outstanding mortgage
on the Facilities; provided, that in the event the mortgagee under such mortgage
requires an escrow for real estate taxes, ILC will reimburse Owner on a monthly
basis any escrowed funds for real estate taxes placed with the mortgagee as the
same are paid to the mortgagee.
The property to be leased shall include each of the Facilities,
including, but not limited to, its premises (including all real property and
improvements) and all furnishings, fixed and moveable equipment and tangible
personal property required to operate each of the Facilities as an assisted
living facility or such other use as mutually agreed by the parties (subject to
the exclusions contained in Paragraph 2 of this letter), including licenses,
permits and other intangible assets associated with the operations of the
Facilities, which shall be assigned to ILC to the extent assignable.
<PAGE>
Mr. Jack West
March 18, 1996
Page 3
At the end of the Initial Term or, if applicable, any Renewal Term
thereof or upon the earlier termination of the Lease, ILC shall surrender the
Facilities and the leased equipment (including additions, replacements and
accessories thereto) and fixtures to Owner.
4. Guarantees.
----------
(a) The annual rent under the Leases shall be guaranteed by Parent
and Integrated Health Services, Inc. ("IHS"); provided, however, that IHS's rent
guarantee shall apply only to the first ten (10) Facilities to be developed by
Owner. In the event that IHS successfully completes a public offering of the
stock of Parent, IHS's guarantee will be released upon the satisfaction of
certain financial covenants to be mutually agreed by the parties.
(b) IHS shall provide a guarantee of the construction financing for
first ten (10) Facilities to be developed by Owner.
5. Facility Purchase Option. Upon the Commencement Date of each Lease,
Owner shall grant to ILC the sole and exclusive option (the "Facility Purchase
Option") to purchase such Facility for a purchase price equal to the fair market
value of the Facility on the exercise date of the Facility Purchase Option as
determined by an MAI appraiser, which purchase price shall be no less than
$2,100,000 (the "Option Price"), less the amount of the Purchase Option Deposit
as defined below. If the parties cannot agree on an appraiser, the Option price
shall be determined by averaging the results of appraisals conducted by three
(3) MAI appraisers chosen according to the following process: ILC shall select
and pay for the first appraiser, Owner shall select and pay for the second
appraiser and the third appraiser shall be selected by the first two appraisers
the cost of which shall be shared by the Owner and ILC. The Facility Purchase
Option shall be exercisable by ILC at any time after the fifth anniversary date
of the Initial Term or any Renewal Term upon one hundred twenty (120) days
notice to Owner. If ILC exercises the Facility Purchase Option, ILC shall not
assume any indebtedness or other liabilities of the Owner or the Facility, all
of which will be satisfied in full by Owner at the closing of the purchase of
such Facility. On the Commencement Date, ILC and Owner will enter into a
facility purchase option agreement (the "Purchase Option Agreement") which will
set forth terms and conditions of the Facility Purchase Option.
6. Purchase Option Deposits. ILC shall pay to Owner a cash purchase
option deposit in the amount of $100,000 (a"Purchase Option Deposit") for each
Facility which ILC leases from Owner upon the Commencement Date of each
applicable Lease.
<PAGE>
Mr. Jack West
March 18, 1996
Page 4
7. Closing. The execution of the Note, the Credit and Security
Agreement and the Development Agreement shall take place on or before April 30,
1996, unless extended by Owner for a period not to exceed 60 calendar days (the
"Execution Date").
8. Indemnification. The Owner and Jack West shall indemnify and hold
harmless ILC, Parent and IHS with respect to losses arising out of any breach of
the Owner's representations and warranties with respect to its properties and
its authority, as well as with respect to all representations or warranties
concerning the business, operations, or financial condition or results of the
Facilities prior to the applicable Commencement Date. ILC shall indemnify and
hold harmless the Owner with respect to losses arising out of any breach of
ILC's representations and warranties contained in the definitive agreements.
9. Public Announcements. Subject to requirements of law, any news
releases or other announcements by Owner or ILC pertaining to this letter, the
Transaction, or the negotiations concerning the Transaction shall be approved in
writing by all parties prior to release. ILC and the Owner shall keep the
existence of this letter and its contents confidential, except as may be
necessary for ILC to comply with applicable law after reasonable notice to the
Owner. Notwithstanding the foregoing, the Owner understands that IHS is a
publicly-traded company and, as such, may be required to disclose this
transaction and the terms thereof by a filing with the Securities and Exchange
Commission or by the issuance of a press release. To the extent possible , ILC
shall give Owner prior notice of, and an opportunity to review and approve, any
such disclosure. The provisions of this Paragraph 9 will expire on the Execution
Date.
10. Conditions to Execution of Definitive Agreements. The execution of
the Development Agreement shall be subject to the fulfillment of the following
conditions:
(a) Due Diligence. The Owner acknowledges that, as of the execution
of this letter of intent, ILC has not had the opportunity to inspect any of the
properties or to conduct any investigation of the Owner's business and financial
conditions. Prior to the Execution Date, the Owner shall permit representatives
of ILC to enter its offices or visit the sites during normal working hours to
observe and evaluate the daily management and operations of the Owner, review
the budgets and projections provided by the Owner and all other procedures that
it deems appropriate in its sole discretion (the "Due Diligence").
(b) Documentation. The negotiation of a definitive Note, Revolving
Credit and Security Agreement and Development Agreement setting forth all terms
and conditions, including all customary provisions, representations, warranties,
non-competition and other convenants.
(c) Consents. ILC and Owner shall have received all required
consents and approvals from its respective lenders and boards of directors.
<PAGE>
Mr. Jack West
March 18, 1996
Page 5
(d) Construction Financing. Owner's receipt of a commitment for
construction financing for the first ten (10) Facilities to be developed by
Owner, as well as ILC's review and approval of the terms and conditions of such
commitment.
11. Conditions to Commencement of Leases. The execution and
commencement of each Lease and Purchase Option Agreement shall be subject to the
fulfillment of the following conditions:
(a) Due Diligence. Further completion of the Due Diligence, as well
as the completion of environmental and engineering studies, survey and title
reports, and any other procedures that ILC deems appropriate in its sole
discretion.
(b) Documentation. The negotiation, execution, and delivery of a
definitive Lease and Purchase Option Agreement setting forth all terms and
conditions, including all customary provisions, representations, warranties,
non-competition and other covenants, and the receipt by the parties of such
ancillary documents, including opinions of counsel and non-disturbance
agreements, as shall be acceptable to ILC and its counsel.
(c) Title. ILC; at its own cost, shall have received and reviewed to
its satisfaction all recorded title documents, mortgages, liens, and other
matters affecting title to the Owner's properties and shall have obtained title
insurance at regular rates, without additional premium.
(d) Regulatory Matters. ILC shall have received and reviewed to its
satisfaction copies of all licenses, permits, licensure surveys, other
regulatory materials, structural and equipment requirements, building permits
and approval requirements pertaining of the Owner's properties. The Owner's
properties shall be in material compliance with all material standards of
licensure and other applicable legal requirements, including, without
limitation, all building, zoning, occupational safety and health, environmental,
and residential care laws, ordinances, and regulations relating to the Owner's
properties.
(e) Non-Disturbance Agreement. Execution of a Non-Disturbance
Agreement by any Facility lender associated with mortgage obligations with
respect to the Facilities in a form acceptable to ILC.
(f) Financing. Owner's receipt of a commitment for permanent
mortgage financing for each Facility, as well as ILC's review and approval of
the terms and conditions of such commitment. ILC shall not be required to
guarantee any long-term or mortgage obligations of Owner.
<PAGE>
Mr. Jack West
March 18, 1996
Page 6
12. Exclusivity. Until June 30, 1996, or such longer period as may be
necessary to obtain any required regulatory approvals (unless, as of any earlier
date, ILC has ended its active efforts to consummate the transactions
contemplated herein), neither the Owner nor any of its affiliates shall
negotiate directly or indirectly with any other party in respect of the lease or
sale of the Owner's properties, the development of assisted living properties
for another party or the sale of a controlling interest in the Owner.
13. Confidentiality. In the course of the discussions and negotiations each
party may disclose to the other certain proprietary, confidential or other
non-public information (collectively, the "Information") relating to its
respective business, the proprietary, confidential and non-public nature of
which Information both parties desire to maintain. Except as herein set forth,
neither party shall (a) reveal or make known to any person, firm, corporation or
entity, other than its own management and advisors, including its attorneys,
accountants and lenders, or (b) utilize in its own business, or (c) make any
other usage of, any Information disclosed to it by the other in connection with
the discussions and negotiations above mentioned. Notwithstanding the foregoing,
(i) each party may disclose any Information received from the other party to any
governmental or regulatory authority in connection with obtaining approval of
the transactions contemplated hereby, and (ii) if required, IHS or ILC may
disclose any Information received fron the Owner to their lender in connection
with obtaining their approval of the transactions contemplated hereby. A party's
obligations with respect to any item of Information disclosed to it shall
terminate if that item of Information becomes disclosed in published literature
or otherwise becomes generally available to the public; provided, however, that
such public disclosure did not result, directly or indirectly, from any act,
omission, or fault of such party with respect to that item of Information.
Further, this Section 13 shall not apply to any item of Information which at the
time of disclosure was already generally available to the public or which at the
time of disclosure was already in the possession of the party intending to
utilize the item of Information and was not acquired by such party, directly or
indirectly, from the disclosing party under a confidentiality agreement. The
parties agree that the information either has received or may receive from the
other has been and will be used by the receiving party solely for the limited
purpose of its investigation and evaluation of the other party in connection
with the transactions contemplated hereby.
As soon as possible after execution and delivery of this letter, the
parties will cooperate in the negotiation and preparation of the definitive
agreements and other necessary documentation and will use all reasonable efforts
to satisfy the conditions set forth in Paragraph 10 hereof which are in their
respective control, each party to bear its own expenses with no liability for
such expenses to the other party, whether or not the proposed Acquisition or any
part thereof shall close.
<PAGE>
Mr. Jack West
March 18, 1996
Page 7
It is understood that this letter merely constitutes a statement of the
mutual intentions of the parties with respect to the proposed transactions, does
not contain all matters upon which agreement must be reached in order for the
proposed transactions to be consummated and, except as respects Paragraphs 9,
12, and 13, above, creates no binding rights in favor of either party. A binding
commitment with respect to the proposed transactions will result only after
execution and delivery of definitive agreements, subject to the terms and
conditions contained therein.
[SIGNATURES ON THE FOLLOWING PAGE]
<PAGE>
Mr. Jack West
March 18, 1996
Page 8
If the foregoing is acceptable to you, please so indicate by signing a copy
of this letter and returning it to the undersigned. This letter will be void
unless it is fully executed and returned to ILC by Owner by 5:00 P.M. on March
22, 1996.
Very truly yours,
INTEGRATED LIVING
COMMUNITIES, INC.
By: /s/ Elizabeth B. Kelly
----------------------
Elizabeth B. Kelly
Senior Vice President
Corporate Development
ACCEPTED AND AGREED TO:
THE HOMESTEAD COMPANY, L.C.
By: /s/ Jack West
----------------------
Jack West,
President
/s/ Jack West
- ----------------------------
Jack West, Individually
Date: 3-19-96
-----------
REVOLVING CREDIT NOTE
$800,000.00 Dated: March 18, 1996
FOR VALUE RECEIVED, the undersigned, THE HOMESTEAD COMPANY, L.C., a Kansas
limited liability company ("Borrower"), hereby unconditionally promises to pay
to the order of INTEGRATED HEALTH SERVICES RETIREMENT MANAGEMENT, INC., a
Delaware corporation ("Lender"), the principal amount of each loan made by the
Lender to the Borrower pursuant to the Revolving Credit and Security Agreement,
the aggregate principal amount of which loans to Borrower at any time
outstanding shall not exceed the sum of EIGHT HUNDRED THOUSAND ($800,000.00)
DOLLARS, provided that the entire principal balance of such loans and all
accrued and unpaid interest thereon shall be fully due and payable one (1) year
after the date hereof.
This Note shall bear interest from its date until maturity on the principal
amount outstanding from time time hereunder (calculated on the basis of a
360-day year of twelve 30-day months) at a rate of eleven and three quarters of
one (11-3/4%) per cent per annum, such interest to accrue on a monthly basis.
Each payment made hereunder shall be applied first to the payment of all accrued
interest and the balance shall be applied to the principal.
Notwithstanding any provision contained herein or in the Revolving Credit
and Security Agreement, the total liability of Borrower for payment of interest
pursuant hereto, including late charges, shall not exceed the maximum amount of
such interest permitted by law to be charged, collected, or received from
Borrower, and if any payments by Borrower include interest in excess of such a
maximum amount, Lender shall apply such excess to the reduction of the unpaid
principal amount due pursuant hereto, or if none is due, such excess shall be
refunded to Borrower.
This Note is the Loan Note referred to in the Revolving Credit and Security
Agreement of even date herewith made by and between the Borrower and the Lender
(the "Revolving Credit and Security Agreement"). This Note is entitled to all of
the benefits under the Revolving Credit and Security Agreement and the other
agreements and documents executed pursuant thereto or in connection therewith
(collectively, the "Loan Documents"). Borrower shall pay all costs of collection
of this Note, including reasonable attorney's fees.
The Lender is authorized but not required to record the date and amount of
each loan made, the date and amount of any principal and interest payment, and
the principal balance hereof on any schedule which may be attached hereto and
made a part hereof, and any such recordation shall, in the absence of manifest
error, constitute prima facie evidence of the accuracy of the information so
recorded; provided however, that the Lender's failure to so record shall not
limit the obligations of the Borrower hereunder and under the Revolving Credit
and Security Agreement to pay the principal of and interest on the loans.
Borrower waives notice of demand, presentment for payment, notice of
protest, and protest of this Note. All rights and remedies given by this Note,
the Revolving Credit and Security Agreement, the other Loan Documents and by law
are cumulative and not exclusive of any thereof or of any other rights or
remedies available to the Lender and no course of dealing between Borrower and
the Lender, or any delay or omission in exercising any right or remedy, shall
operate as a waiver of any right or remedy, and every right and remedy may be
exercised from time to time and as often as shall be deemed appropriate by
Lender.
<PAGE>
Borrower represents and warrants that the loans evidenced hereby are made
for business purposes only and are therefore commercial loans.
The Borrower may repay all or any part of the remaining principal balance
of this Note at any time without penalty or premium.
This Note shall be governed, interpreted, and enforceable in accordance
with the laws of the State of Maryland.
IN WITNESS WHEREOF, the undersigned has executed this Note on the date
first above written.
THE HOMESTEAD COMPANY, L.C.
By: /S/ Jack West
Name: Jack West
Title: CEO
2
<PAGE>
ALLONGE AND AMENDMENT OF REVOLVING CREDIT NOTE
Reference is made to that certain Revolving Credit Note in the original
principal amount of $800,000, dated March 18, 1996 (the "Original Note") made by
THE HOMESTEAD COMPANY, L.C., a Kansas limited liability company ("Borrower"),
and payable to INTEGRATED HEALTH SERVICES RETIREMENT MANAGEMENT, INC., a
Delaware corporation ("Lender"). This Allonge and Amendment (this "Allonge")
shall be and remain attached to and shall constitute an integral part of the
above described Original Note from and after the date hereof (the Original Note
as modified by this Allonge being hereinafter referred to as the "Note"). Terms
capitalized but not otherwise defined herein shall have the meanings given to
them, respectively, in the Original Note.
The Original Note is hereby amended by amending the first Paragraph thereof
in full to read as follows:
"FOR VALUE RECEIVED, the undersigned, THE HOMESTEAD COMPANY, L.C., a Kansas
limited liability company ("Borrower"), hereby unconditionally promises to pay
to the order of INTEGRATED LIVING COMMUNITIES RETIREMENT MANAGEMENT,INC., a
Delaware corporation ("Lender"), the principal amount of each loan made by the
Lender to the Borrower pursuant to the Revolving Credit and Security Agreement,
the aggregate principal amount of which loans to Borrower at any time
outstanding shall not exceed the sum of ONE MILLION ($1,000,000.00) DOLLARS,
provided that the entire principal balance of such loans and all accrued and
unpaid interest thereon shall be fully due and payable one (1) year after the
date hereof."
The Original Note is further amended by increasing the face amount thereof
to $1,000,000.00, and by reflecting the name change of Lender from "Integrated
Health Services Retirement Management, Inc." to "Integrated Living Communities
Retirement Management, Inc."
Except as modified hereby, all the terms and conditions of the Original
Note are hereby ratified and confirmed. This Allonge may be signed in one or
more counterparts each of which taken together shall constitute one and the same
instrument.
[SIGNATURES ON THE FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
undersigned has caused this Allonge to be executed as of the 12th of July, 1996.
THE HOMESTEAD COMPANY, LLC
BY: /s/ Jack West
-----------------------
Name: Jack West
-----------------------
Title: CEO
-----------------------
ACCEPTED BY:
INTEGRATED LIVING COMMUNITIES
RETIREMENT MANAGEMENT, INC.
By: /s/ Edward J. Komp
--------------------------
Name: Edward J. Komp
--------------------------
Title: Executive Vice President
--------------------------
REVOLVING CREDIT AND SECURITY AGREEMENT
AGREEMENT made as of the 18th day of March , 1996, between THE HOMESTEAD
COMPANY, L.C., a Kansas limited liability company (the "Borrower"), and
INTEGRATED HEALTH SERVICES RETIREMENT MANAGEMENT, INC., a Delaware corporation
("Lender").
WHEREAS, Borrower is the holder of four (4) land contracts in Kansas and six
(6) land contracts in Nebraska (the "Sites") and any additional land contracts
entered into by Borrower with the approval of Lender, all as scheduled on
Exhibit A attached hereto (collectively, the "Land Contracts"); and
WHEREAS, Borrower wishes to obtain a loan to finance the development of
assisted living facilities ("Facilities") on the Sites; and
WHEREAS, Lender is willing to make available to Borrower a revolving line of
credit in the maximum amount of $800,000.00, and Borrower wishes to obtain such
revolving line of credit, all upon the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, and for other good and value consideration, the parties hereby agree
that:
1. REVOLVING CREDIT LOAN.
Subject to the terms and conditions hereof and relying upon the
representations and warranties of Borrower herein set forth. Lender shall make a
revolving credit loan ("Loan") to Borrower, provided that the aggregate
principal amount of all Loans at any one time outstanding to the Borrower shall
not exceed the sum of EIGHT HUNDRED THOUSAND ($800,000.00) DOLLARS. Within such
limits of amount and subject to the other provisions of this Agreement, the
Borrower may borrow, repay, and reborrow pursuant to this Section 1. The
proceeds of the Loan shall only be used for the development of the Facilities
pursuant to the Land Contracts. At any time when Borrower wishes to borrow any
amounts under the Loan, Borrower will notify Lender of the amount requested and
proposed use of the proceeds, and, subject to Lender's approval, Lender will use
its best efforts to remit the amount requested to Borrower with five (5)
business days of the request.
2. LOAN NOTE.
The obligation of the Borrower to repay the aggregate unpaid principal amount
of the Loans, together with interest thereon, shall be evidenced by the certain
revolving credit note (the "Loan Note") of Borrower of even date herewith,
payable to the order of Lender in a face amount equal to the maximum loan amount
set forth in Section 1, above, and payable upon the demand of Lender
3. REPAYMENT OF THE LOAN.
(a) Interest on the Loan shall accrue monthly at a rate per annum of eleven
and three quarter of on (11-3/4%) percent.
(b) The entire outstanding principal balance of the Loan Note, and all
accrued and unpaid interest thereon, shall be fully due and payable by the
Borrower one (1) year after the date hereof.
4. GRANT OF SECURITY INTEREST.
(a) Borrower hereby grants to Lender a lien and security interest in all of
the following described property (the "Collateral"):
(i) Borrower's interest in any and all of the documentation, including
architectural plans, of the development and construction of the
Facilities;
(ii) an assignment of the Land Contracts;
(iii) Borrower's interest in any and all licenses, permits and other
governmental approvals for the Facilities; and
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<PAGE>
(iv) any and all proceeds of any of the foregoing.
(b) The lien and security interest granted herein is given to secure
performance and payment of all obligations, fees and indebtedness of Borrower to
Lender or any of its subsidiaries of whatever kind and whenever or however
created or incurred, whether now existing or hereafter arising (hereinafter
called the "Obligations"), including, without limiting the generality of the
foregoing, any such obligations or indebtedness arising under this Agreement.
(c) Borrower will take any and all action requested by Lender to perfect
Lender's security interest in the Collateral granted pursuant to the terms of
this Section 4, including, without limitation, the execution and filing of
financing statements in any jurisdiction which Lender deems appropriate.
(d) Jack West, the Cheif Executive Officer of Borrower, will execute a
Personal Guaranty guaranteeing the payment to Lender of any and all amounts of
principal and accrued and unpaid interest thereon of the Lease; provided, that
the maximum liability of Jack West under the Personal Guaranty will not exceed
$250,000.
5. PRIORITY OF LIEN.
Borrower represents, warrants and agrees that (i) Borrower owns good and
indefeasible title to the Collateral, (ii) no security interest or lien has been
created by Borrower, or is known by Borrower to exist with respect to any
Collateral, (iii) no financing statement or other security instrument is on file
in any jurisdiction covering such Collateral, (iv) Borrower will not create any
other security interest or lien and will ot file or permit to be filed any other
financing statement or other security instrument with respect to the Collateral
other than required pursuant to Section 4 hereof, without the consent of Lender,
(v) Borrower will not incur any additional debt without the prior wirtten
consent of Lender, and (vi) Borrower will not sell, assign, transfer or in any
other way alienate Borrower's rights under the Land Contracts without the prior
written consent of Lender. Borrower will execute, deliver and file such
financing statements, security agreements and other documents as may be
requested by Lender from time to time to confirm, perfect and preserve the
security interest created hereby, and in addition, hereby authorizes Lender to
execute on behalf of Borrower, deliver and file such financing statements,
security agreements and other documents without the signatures of Borrower, all
at the expense of Borrower. The lien herein referred to as security for the
Obligations, in favor of Lender, is and shall be first, prior and superior to
all other liens with respect to the Collateral.
6. ADDITIONAL COVENANTS OF BORROWER.
(a) Until the Obligations are paid in full, and subject to the provisions
of Section 7, below, Borrower agrees that it will;
(i) furnish or cause to be furnished to the Lender any financial or other
information that the Lender may reasonably deem necessary or desirable;
(ii) duly pay and discharge all taxes, assessments and governmental charges
owed by or against Borrower or any of its properties, prior to the date
on which penalty will attach thereto, unless and only to the extent
that any such taxes are contested in good faith by appropriate
proceedings by Borrower;
(iii) take whatever actions are necessary to comply with all statutes and
regulations governing the construction of the Facilities;
(iv) promptly cure any defects in the execution and delivery of this
Agreement and all other instruments executed in connection with this
transaction;
(v) execute and deliver or causes to be executed and delivered any other
instruments or documents which the Lender may reasonably request;
(vi) promptly notify the Lender of any Event or Default discovered by
Borrower;
(vii) provide Lender with monthly development reports regarding the status of
the Sites, including, without limitation, progress updates on any
relevant due diligence dates and deadlines under the Land Contracts;
and
2
<PAGE>
(viii) not incur any pre-development costs for the Sites without the prior
approval of Lender which shall not be unreasonably withheld.
7. REMEDIES.
If all or any part of the Obligations shall become due and payable, Lender
shall have in any jurisdiction where enforcement hereof is sought, in addition
to all other rights and remedies which Lender may have under law or in equity,
the following rights and remedies: to foreclose the liens and security interests
created under this agreement or under any other agreement relating to Collateral
by any available judicial procedure or without judicial process, to enter any
premises where any Collateral may be located for the purpose of taking
possession or removing the same, to sell, assign, lease, or otherwise dispose of
the Collateral or any part thereof, either at public or private sale or at any
broker's board, in lots or in bulk, for cash, on credit or otherwise, with or
without representations or warranties, and upon such terms as shall be
acceptable to Lender, all at Lender's sole option and as Lender in its sole
discretion may deem advisable, and Lender and Borrower may bid or become
purchaser at any such sale if public, free from any right of redemption which is
hereby expressly waived by the Borrower, and Lender shall have the right at its
option to apply or be credited with the amount of all or any part of the
Obligations owing to Lender against the purchase price bid by Lender at any such
sale. The net cash proceeds resulting from the collection, liquidation, sale,
lease, or other disposition of Collateral shall be applied first, to the
expenses (including all attorneys' fees) of retaking, holding, storking,
processing and preparing for sale, selling, collecting liquidating and the like,
and then to the satisfaction of all Obligations, application as to particular
Obligations or against princpal or interest to be in Lender's absolute
discretion. The Borrower shall be liable to Lender and shall pay to Lender on
demand any deficiency which may remain after such sale, disposition, collection
or liquidatgion of Collateral, and Lender in turn agrees to remit to the
Borrower any surplus remaining after all Obligations have been paid in full. The
Borrower will, at Lender's request, assemble all Collateral and make it
available to Lender at places which Lender may select, whehter at premises of
the Borrower or elsewhere, and will make available to Lender all premises and
facilities of the Borrower for the purpose of Lender's taking possession of
Collateral or of removing or putting the Collateral in saleable form.
8. WAIVERS
With respect to both Obligations and Collateral, the Borrower assents to any
extension or prosponement of the time of payment or other indulgence, to any
substitution, exchange or relase of Collateral, to the addition or release of
any party or person primarily or secondarily liable, to the acceptance of
partial payments thereon and the settlement, compromising or adjusting of any
thereof, all in such manner and at such time or times as the Lender may deem
advisable. The Lender may exercise its rights with respect to Collateral without
resorting or regard to other Collateral or sources of reimbursement for
Obligations. The Lender shall not be deemed to have waived any of its rights
upoon or under Obligations or Collateral unless such waiver be in writing and
signed by the Lender. No delay or omisssion on the part of the Lender on
Obligations or Collateral, whether evidenced hereby or by any other instrument
or paper, shall be cumulative and may be exercised spearately or concurrently.
9. TRANSFERS BY LENDER.
Lender may transfer any or all of the Obligations, and upon any such tranfer
Lender may transfer any or all of the Collateral to an affiliate of Lender and
shall be fully discharged thereafter from all liability with respect to the
Collateral so transferred, and the transferee shall be vested with all rights,
powers and remedies of Lender hereunder with respect to Collateral so
transferred; but with respect to any Collateral not so transferred Lender shall
retain all rights, powers and remedies hereby given. Lender may at any time
deliver any or all of the Collateral to Borrower, whose receipt shall be a
complete and full acquittance for the Collateral so delivered, and Lender shall
thereafter be discharged from any liability therefor.
10. DEFINITION OF BORROWER.
The term "Borrower" as used throughout this Agreement shall include (a) the
successors and assigns of Borrower; (b) any individual, association, trust,
partnership, corporation, or other entity to which all or substantially all of
the business or assets of Borrower shall have been transferred or with or
3
<PAGE>
into which the business of Borrower shall have been merged, consolidated,
reorganized or absorbed; and (c) in the case of a partnership or joint venture,
any general or limited partnership or joint venture which shall have been
created by reason of, or continued in existence after, the admission of any new
partner, partners or joint venturers therein or the dissolution of the existing
partnership or joint venture by the death, resignation or other withdrawal of
any partner or joint venturer.
11. CONTINUTING AGREEMENT.
This is a continuing agreement and all the rights, powers and remedies of
Lender hereunder shall continue to exist unless (a) all Obligations shall have
been paid in full, or (b) Lender, upon request of Borrower, has executed a
termination statement. Otherwise this Agreement shall continue irrespective of
the fact that any or all of the Obligations may have become barred by any statue
of limitations or that the liability of Borrower may have ceased, and
notwithstanding the death, incapacity or bankruptcy of Borrower or any other
event or proceeding affecting Borrower. The rights, powers and remedies of
Lender hereunder shall be in addition to all rights, powers and remedies given
by statute or rule of law and, regardless of whether or not the Uniform
Commercial Code is in effect in the jurisdiction where such rights, powers and
remedies are asserted, Lender shall have the rights, powers and remedies of a
Lender under the Uniform Commercial Code, as amended. No forbearance or delay by
Lender in exercising any right, power or remedy shall be deemed a waiver thereof
or preclude any other or further exercise thereof; and no single or partial
exercise of any right, power or remedy shall preclude any other or further
exercise thereof, or the exercise of any right, power or remedy.
12. MAXIMUM INTEREST.
All agreements between Borrower and Lender are hereby expressly limited so
that in no contingency or event whatsoever, whether by reason of deferment in
accordance with this Agreement or advancement of the loan proceeds, acceleration
of maturity of the Obligations, or otherwise, shall the amount paid or agreed to
be paid to Lender for the use, forbearance or detention of the money to be
loaned hereunder exceed the maximum permissible under applicable law. If, from
any circumstance whatsoever, fulfillment of any provision hereof, at the time
performance of such provision shall be due, shall involve transcending the limit
of validity prescribed by law, then ipso facto, the obligation to be fulfilled
shall be reduced to the limit of such validity, and if from any circumstance
Lender should ever receive as interest an amount which would exeed the highest
lawful rate, such amount which would be excessive interest shall be applied to
the reduction of the principal of the Obligations and not to the payment of
interest.
13. BORROWER'S REPRESENTATIONS AND WARRANTIES.
To induce the Lender to enter into the transactions provided for herein,
Borrower represents and warrants to Lender that:
(a) Borrower is duly authorized to execute and deliver this Agreement ant to
perform all of its obligations under this Agreement, including the execution,
delivery and performance of whatever addtional documents are necessary or
required in connection with the transactions contemplated herein;
(b) the execution and delivery by Borrower of this Agreement and the
performance by Borrower of its obligations under this Agreement do not and will
not conflict with any provision of law, or of any other agreement affecting or
binding upon Borrower;
(c) this Agreement, when duly executed and delivered, will be the valid and
binding obligation of Borrower enforceable in accordance with its terms, except
as limited by bankruptcy, insolvency or other laws of general application
relating to the enforcement of creditors' rights and except to the extent that
the availabilty of specific performance thereof may be limited by principles of
equity; and
(d) the proceeds of the Loan will be used for business purposes, and the Loan
constitutes a commercial loan.
4
<PAGE>
14. NOTICES.
Any notice or other communication by either party to the other shall be in
writing and shall be given and be deemed to have been duly given, upon the date
delivered if delivered personally or upon the date received if mailed postage
pre-paid, registered, or certified mail, addressed as follows:
To the Borrower:The Homestead Company, L.C.
155 North Market Street, Suite 910
Wichita, KS 67207
Attention: Jack West
To the Lender:Integrated Helath Services Retirement Management, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Daniel J. Booth
With copies to:Integrated Health Services Retirement Management, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Marshall A. Elkins, Esq.
Blass & Driggs
461 Fifth Avenue, 19th Floor
New York, NY 10017
Attention: Michael S. Blass, Esq.
or to such other address,a nd to the attention of such other person or officer
as either party may designate in writing by notice.
15. APPLICABLE LAW.
The substantive laws of the State of Maryland shall govern the validity,
construction, enforcement and interpretation of this Agreement and all other
documents and instruments referred to herein, unless otherwise specified
therein.
[SIGNATURES ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date
first above written.
BORROWER: LENDER:
THE HOMESTEAD COMPANY, L.C. INTEGRATED HEALTH
SERVICES RETIREMENT
MANAGEMENT, INC.
By: /s/ Jack West By: /s/
------------------------------- -----------------------------
Name: Jack West Name:
------------------------------- ----------------------------
Title: CEO
5
<PAGE>
AMENDMENT NO. 1
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 TO REVOLVING CREDIT AND SECURITY AGREEMENT (the "First
Amendment") is made as of the 12th day of July, 1996, by and between THE
HOMESTEAD COMPANY, L.C., a Kansas limited company (the "Borrower"), and
INTEGRATED LIVING COMMUNITIES RETIREMENT MANAGEMENT, INC., a Delaware
corporation ("Lender").
WHEREAS, Borrower and Lender have entered into that certain revolving credit
and security agreement dated March 18, 1996 (the "Rvolving Credit and Security
Agreement"); and
WHEREAS, pursuant to the Revolving Credit and Security Agreement, Lender made
available to Borrower a revolving line of credit in the maximum amount of
$800,000, pursuant to the terms and conditions set forth therein; and
WHEREAS, Lender was formerly known as "Integrated Health Services Retirement
management, Inc."; and
WHEREAS, the parties wish to amend the Revolving Credit and Security
Agreement to increase the maximum amount of the line of credit to $1,000,000.
NOW THEREFORE, in consideration of the mutual promises hereinafter set forth,
and for other good and valuable consideration, the parties hereby agree as
follows:
Section 1 of the Revolving Credit and Security Agreement shall be amended to
read in its entirety as follows:
"Subject to the terms and conditions hereof and relying upon the
representations and warranties of Borrower herein set forth, Lender shall make a
revolving credit loan ("Loan") to Borrower, provided that the aggregate
principal amount of all Loans at any onte time outstanding to the Borrower shall
not exceed the sum of ONE MILLION ($1,000,000.00) DOLLARS. Within such limits of
amount, and subject to the other provisions of this Agreement, the Borrower may
borrow, repay, and reborrow pursuant to this Section 1. The proceeds of the Loan
shall only be used for the development of the Facilities pursuant to the Land
Contracts. At any time when Borrower wishes to burrow any amounts unde the Loan.
Borrower will notify Lender of the amount requested and the proposed use of the
proceeds, and, subject to Lenders's approval, Lender will use its best efforts
to remit the amount requested to borrower with five (5) business days of the
request."
2. Except as expressly amended hereby, the Revolving Credit and Security
Agreement shall remain unchanged in all respects and shall continue in full
force and effect.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment on the
date first above written.
BORROWER: LENDER:
THE HOMESTEAD COMPANY, L.C. INTEGRATED HEALTH
SERVICES RETIREMENT
MANAGEMENT, INC.
By: /s/ Jack West By: /s/ Edward Komp
------------------------------ ---------------------------
Name: Jack West Name: Edward J. Komp
------------------------------ ---------------------------
Title: CEO Title: Executive Vice President
------------------------------ ---------------------------
6
INDEMNIFICATION AGREEMENT
Indemnification Agreement, dated as of this 15th day of
August, 1996, by and between Integrated Health Services, Inc., a Delaware
corporation ("IHS"), and Integrated Living Communities, Inc., a Delaware
corporation ("ILC").
W I T N E S S E T H :
---------------------
WHEREAS, ILC is a wholly-owned subsidiary of IHS formed in
November 1995 to operate the assisted living and other senior housing facilities
owned, leased and managed by IHS;
WHEREAS, IHS had entered into negotiations and an agreement in
principle to acquire The Standish Care Company ("Standish") (the "Standish
Negotiations");
WHEREAS, IHS had entered into discussions with Oak Care,
L.L.C. ("Oak Care") relating to the possible engagement of Oak Care to develop,
on behalf of IHS and ILC, 15-20 assisted living projects in Arizona, Colorado
and Nevada (the "Oak Care Negotiations");
WHEREAS, IHS subsequently determined not to pursue the
transactions contemplated by the Standish Negotiations and the Oak Care
Negotiations;
WHEREAS, Standish has indicated to IHS that it believes IHS
and/or its affiliates, including ILC, has, any liability to Standish as a result
of the termination of the Standish Negotiations;
WHEREAS, Oak Care has indicated to IHS that it believes IHS
and/or its affiliates, including ILC, has, any liability to Oak Care as a result
of the termination of the Oak Care Negotiations;
WHEREAS, IHS believes that it does not have, and none of its
affiliates, including ILC, has liability to Standish as a result of the Standish
Negotiations or to Oak Care as a result of the Oak Care Negotiations; and
WHEREAS, IHS has agreed, at ILC's request, to indemnify and
hold ILC harmless from and against any and all liabilities arising out of the
Standish Negotiations and the Oak Care Negotiations.
NOW, THEREFORE, in consideration of the premises and mutual
covenants and agreements of the parties as set forth herein and other good and
<PAGE>
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. IHS shall indemnify ILC and hold ILC harmless from and
against any and all actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, amounts paid in settlement,
liabilities, obligations, taxes, liens, losses, expenses and fees, including
court costs and reasonable attorneys' fees and expenses, (collectively
"Liabilities") incurred or suffered by ILC arising out of, based upon or
resulting from the Standish Negotiations or the Oak Care Negotiations.
2. (a) In the event ILC becomes aware of any action by
Standish or Oak Care, or any of their respective successors and assigns (such
action being referred to as a "Third Party Claim"), with respect to any matter
which may give rise to a claim by ILC for indemnification against IHS under this
Agreement, then the ILC shall promptly notify IHS thereof in writing; provided,
however, that no delay on the part of ILC in notifying IHS shall relieve IHS
from any obligation hereunder unless (and then solely to the extent) IHS thereby
is prejudiced.
(b) IHS will have the right to defend ILC against the Third
Party Claim with counsel of its choice reasonably satisfactory to ILC so long as
(i) IHS notifies ILC in writing within fifteen (15) days after ILC has given
notice of the Third Party Claim that IHS will indemnify ILC from and against the
entirety of any Liabilities ILC may suffer resulting from, arising out of,
relating to, in the nature of or caused by the Third Party Claim, (ii) the Third
Party Claim involves only money damages and does not seek an injunction or other
equitable relief, (iii) settlement of, or an adverse judgment with respect to,
the Third Party Claim is not, in the good faith judgment of ILC, likely to
establish a precedential custom or practice adverse to the continuing business
interests of ILC, and (iv) IHS conducts the defense of the Third Party Claim
actively and diligently.
(c) So long as IHS is conducting the defense of the Third
Party Claim in accordance with clause (b) above, (i) ILC may retain separate
co-counsel at its sole cost and expense and participate in the defense of the
Third Party Claim, (ii) ILC will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim without the
prior written consent of IHS (not to be withheld, delayed or conditioned
unreasonably), and (iii) IHS will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim without the
prior written consent of ILC (not to be withheld, delayed or conditioned
unreasonably).
(d) In the event any of the conditions in clause (b) above is
or becomes unsatisfied, however, or in the event the named parties to any Third
Party Claim (including any impleaded parties) include both IHS and ILC and IHS
and ILC shall have been advised by counsel that representation of IHS and ILC by
the same counsel would be inappropriate under applicable standards of
professional conduct due to actual
-2-
<PAGE>
or potential differing interests between them, then (i) ILC may defend against,
and consent to the entry of any judgment or enter into any settlement with
respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and ILC need not consult with, or obtain any consent from, IHS in
connection therewith), (ii) IHS will reimburse ILC promptly and periodically for
the costs of defending against the Third Party Claim (including reasonable
attorneys' fees and expenses), and (iii) IHS will remain responsible for any
Liabilities ILC may suffer resulting from, arising out of, relating to, in the
nature of, or caused by the Third Party Claim to the fullest extent provided in
this Agreement.
3. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto without the prior written consent
of the other parties hereto.
4. This Agreement contains the entire agreement between the
parties hereto with respect to the subject matter hereof, and controls and
supersedes any prior understandings, agreements or representations by or between
the parties, written or oral, which conflicts with, or may have related to, the
subject matter hereof or thereof in any way.
5. All notices or other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally or
sent by telex, telefax or telegraphic communication, by recognized overnight
courier marked for overnight delivery, or by registered or certified mail,
postage prepaid, addressed (a) if to IHS, at 10065 Red Run Boulevard, Owings
Mills, Maryland 21117, Attention: Chief Executive Officer and (b) if to ILC, at
Bernwood Centre, 24850 Old 41 Road, Bonita Springs, Florida 34135, Attention:
Chief Executive Officer; or such other addresses as shall be furnished by like
notice by such party. All such notices and communications shall, when telexed
(provided the correct answerback has been received) or telefaxed (immediately
thereafter confirmed by telephone) or telegraphed, be effective when telexed,
telefaxed or delivered to the telegraph company, respectively, or if sent by
nationally recognized overnight courier service, be effective one business day
after the same has been delivered to such courier service marked for overnight
delivery, or, if mailed, be effective five days after being mailed by registered
or certified mail, return receipt requested, postage prepaid.
6. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware, without reference
to or application of any conflicts of laws principles.
7. Whenever possible, each provision of this Agreement shall
be interpreted in such manner so as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality
-3-
<PAGE>
or unenforceability shall not affect any other provision of this Agreement. If
any provision contained in this Agreement is determined to be invalid, illegal
or unenforceable as written, a court of competent jurisdiction shall, at any
party's request, reform the terms of this Agreement to the extent necessary to
cause such otherwise invalid provisions to be enforceable under applicable law.
8. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day, month and year first written above.
INTEGRATED HEALTH SERVICES, INC.
By:/s/ Marshall A. Elkins
-----------------------------
Name: Marshall A. Elkins
Title: Executive Vice President and General
Counsel
INTEGRATED LIVING COMMUNITIES, INC.
By: /s/ Edward J. Komp
-----------------------------
Name: Edward J. Komp
Title: President
-4-
ANCILLARY SERVICES AGREEMENT
----------------------------
THIS ANCILLARY SERVICES AGREEMENT (this "Agreement") is made and
entered into as of (although not necessarily on) June 3, 1996 by and among
INTEGRATED LIVING COMMUNITIES, INC. a Delaware corporation ("Company"),
INTEGRATED HEALTH SERVICES, INC., a Delaware corporation ("IHS"), and AGUIRRE,
INC., a Texas Corporation ("Developer").
WHEREAS, the parties hereto have entered into that certain Development
Services Agreement of even date herewith; and
WHEREAS, the parties desire to further memorialize agreements regarding
the provision of certain services and the guarantee of payment thereof;
Now, therefore, for good and valuable consideration of the mutual
covenants contained herein and in the Development Services Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Company, IHS and Developer hereby agree as follows:
1. Developer has anticipated costs and expenses to be paid to
Developer pursuant to the Development Services Agreement. These costs
and expenses are ancillary to those contained in Section 6 (A) and
Exhibit B of the Development Services Agreement. The following costs
and expenses are to be paid by Company to Developer contemporaneously
upon execution of this Agreement and the Development Services
Agreement:
A. Prototype Design Fee for $501,000.00
services as more fully described
in section (a) of the Development
Services Agreement; and
B. Fees for Legal Services $160,000.00
TOTAL $661,000.00
2. By signature below, to induce Developer to enter this
Agreement and the Development Services Agreement with the Company, IHS
hereby unconditionally guarantees to Developer the payment of the fees
referenced in Section 1 above.
ANCILLARY SERVICES AGREEMENT - Page 1
<PAGE>
3. As a material inducement for the entry into this Agreement
and the Development Services Agreement, the Company and IHS hereby
represent and warrant to Developer as follows:
a. That the Company and IHS each possess full and
complete authority to enter into this Agreement and when
executed and delivered this Agreement will constitute valid
and binding obligations of each enforceable in accordance with
its terms;
b. That the existence of this Agreement and the terms
contained herein shall, to the extent required by law, be
recorded in all disclosure materials necessary for compliance
with all applicable state and federal securities laws;
c. That the entry by the Company and IHS into this
Agreement is not in violation of any agreement, instrument or
applicable law nor will the entry into this Agreement cause a
default in any Agreement to which either is a party.
COMPANY:
- --------
EXECUTED on June 7, 1996
INTEGRATED LIVING COMMUNITIES, INC.
a Delaware corporation
By: /s/ Edward J. Komp
-------------------------------------
Edward J. Komp,
President and Chief Executive Officer
IHS:
- ----
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Edward J. Komp
-------------------------------------
Edward J. Komp,
Executive Vice President
DEVELOPER:
- ----------
ANCILLARY SERVICES AGREEMENT - Page 2
<PAGE>
EXECUTED on June 7, 1996.
AGUIRRE, INC.,
a Texas corporation
By: /s/ Earl Dedman
------------------------
C. Earl Dedman,
Executive Vice President
EXHIBIT 21
INTEGRATED LIVING COMMUNITIES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Under Which
Company State of Incorporation Subsidiary Does Business
- ------- ---------------------- ------------------------
<S> <C> <C>
Integrated Living Communities Retirement Managment, Inc. ... Delaware *
Integrated Living Communities of Maryland (Denton), Inc. ... Delaware The Homestead
Integrated Management-Carrington Pointe, Inc................ Delaware Carrington Pointe
Integrated Living Communities of Colorado Springs, Inc. .... Delaware *
Integrated Living Communities of Bradenton, Inc. ........... Delaware *
Integrated Living Communities of Sarasota, Inc.............. Florida Waterside Retirement Estates
Integrated Living Communities of West Palm Beach, Inc. ..... Delaware *
Integrated Living Communities of Dallas, Inc................ Delaware *
Integrated Living Communities of Denton (Texas), Inc. ...... Delaware *
Integrated Living Communities at Wichita, Inc............... Delaware *
Integrated Living Communities at Garden City, Inc. ......... Delaware *
Integrated Living Communities at Terrace Gardens, Inc. .... Delaware *
Integrated Living Communities at Cabot Pointe, Inc. ........ Delaware Cabot Pointe
Integrated Living Communities at Beth Avot, Inc............. Delaware
Integrated Living Communities of Kearney, Inc............... Delaware
Integrated Living Communities of Grand Island, Inc.......... Delaware
Integrated Living Communities of Hastings, Inc.............. Delaware
Integrated Living Communities of Norfolk, Inc............... Delaware
Integrated Living Communities of Columbus, Inc.............. Delaware
Integrated Living Communities of Fremont, Inc............... Delaware
Integrated Living Communities of Manhattan, Inc............. Delaware
</TABLE>
* Subsidiary does business under its corporate name
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
August 23, 1996
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 2 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
August 23, 1996
