<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1996
REGISTRATION NO. 333-12259
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
BROOKDALE LIVING COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
8361 36-4103821
DELAWARE (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
(STATE OR OTHER CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
JURISDICTION OF
INCORPORATION OR ---------------
ORGANIZATION)
77 WEST WACKER DRIVE, SUITE 3900
CHICAGO, ILLINOIS 60601
(312) 456-0239
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
---------------
MARK J. SCHULTE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BROOKDALE LIVING COMMUNITIES, INC.
77 WEST WACKER DRIVE, SUITE 3900
CHICAGO, ILLINOIS 60601
(312) 456-0239
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
WAYNE D. BOBERG, ESQ. J. VAUGHAN CURTIS, ESQ.
WINSTON & STRAWN KIMBERLY A. KNIGHT, ESQ.
35 WEST WACKER DRIVE ALSTON & BIRD
CHICAGO, ILLINOIS 60601 1201 WEST PEACHTREE STREET
(312) 558-5600 ATLANTA, GEORGIA 30309
(404) 881-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES 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 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 statement 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 THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 21, 1996
PROSPECTUS
, 1996
5,625,000 SHARES
LOGO
COMMON STOCK
All of the 5,625,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Brookdale
Living Communities, Inc. ("Brookdale" or the "Company"). Upon completion of the
Offering, The Prime Group, Inc. and its affiliates (collectively, "PGI") and
management of the Company will own 44.4% of the Common Stock (41.0% if the
Underwriters' over-allotment option is exercised in full). See "Risk Factors--
Significant Influence by Existing Stockholders and Management."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $15.00 and $17.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "BLCI."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN 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 THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................. $ $ $
Total(3).................. $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933.
(2) Before deducting expenses payable by the Company, estimated at $2,080,000.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days hereof, to purchase up to an aggregate of 843,750 additional shares
of Common Stock at the price to the public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ and $ , respectively. The Underwriters
have agreed to reserve up to 100,000 shares for sale to certain individuals
at the Price to the Public less Underwriting Discounts and Commissions. To
the extent such reserved shares are sold to such individuals, total
Underwriting Discounts and Commissions will be reduced to the extent of
such discounts. 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 prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
<PAGE>
[PHOTOS]
[The inside front cover page will include a fold out page with color
photographs and captions on each side of such fold out page. The inside front
cover page itself will also contain color photographs and captions. The
photographs will consist of an outside view of each of the facilities expected
to be owned or leased by the Company together with a corresponding caption
identifying such facility by name and the city of its location, as well as an
artist's depiction of the Company's prototype facility with a caption
identifying it as such. In addition, each side of the fold out page and the
inside front cover page will contain several photographs of residents in
various settings, in each case without captions.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Except as otherwise indicated, the
information contained in this Prospectus assumes (i) the consummation at the
completion of the Offering of the transactions described herein resulting in
the formation of the Company, including, but not limited to, the contribution
to the Company of the Hallmark facility and the operations relating to the
Original Facilities (as defined herein), the acquisition of the Acquired
Facilities (as defined herein), the net lease by the Company of the Leased
Facilities (as defined herein) and the purchase by the Company of the Preferred
Stock (as defined herein) (collectively, the "Formation") and (ii) the
Underwriters' over-allotment option is not exercised. Unless the context
requires otherwise, all references to the "Company" or "Brookdale" in this
Prospectus mean the Company, its predecessors and those entities owned or
controlled by the Company as though the Formation had occurred. See "Risk
Factors--Conflicts of Interest," "--Lack of Arms Length Negotiations" and""--
Uncertainty of Proposed Acquisitions by NPC," "The Company and the Formation"
and "Certain Transactions."
Brookdale Living Communities, Inc. ("Brookdale" or the "Company") provides
senior and assisted living services to the elderly through its facilities
located in urban and suburban areas of major metropolitan markets. The Company
operates nine senior and assisted living facilities containing a total of 1,968
units which, as of September 30, 1996, were approximately 99% occupied. The
Company owns three of such facilities, leases four facilities under long-term
net operating leases and manages two other facilities pursuant to management
contracts. With facilities that contain an average of 220 units, the Company
believes Brookdale is able to achieve economies of scale within its facilities
and provide senior and assisted living services in a more cost-effective
manner. The Company plans to acquire or lease approximately three to five
facilities per year containing an aggregate of approximately 800 to 1,000
units, and to commence development of at least three new facilities per year
containing approximately 200 units each. The Company had pro forma revenues and
net income for the nine months ended September 30, 1996 of $28.7 million and
$1.4 million, respectively. All of the Company's revenues are derived from
private pay sources.
Brookdale's facilities are designed for middle to upper income residents who
desire an upscale residential environment providing the highest level of
quality, care and value. Brookdale's objective is to allow its residents to age
in place by providing them with a continuum of senior and assisted living
services. By providing residents a range of service options as their needs
change, the Company seeks to achieve a greater continuity of care, thereby
enabling seniors to maintain their residency for a longer time period. The
ability to allow residents to age in place is beneficial to Brookdale's
residents as well as their families who are burdened with care option decisions
for their elderly relatives. In addition to studio, one-bedroom and two-bedroom
units, the Company provides all residents with basic services, such as meal
service, 24-hour emergency response, housekeeping, concierge services,
transportation and recreational activities. For residents who require
additional supplemental care services, the Company provides assistance with
certain activities of daily living. The average age of Brookdale's residents is
approximately 82 years old, and many of these residents require some level of
assistance with activities of daily living. Supplemental care services are
provided either by the Company or by outside services or agencies. It is the
Company's intention to bring "in-house" as many of these services as
practicable.
The Company's operating philosophy is to provide the highest quality of
personalized care for its residents in order to enhance their physical and
mental well-being. A key element of this philosophy is to establish
affiliations between Brookdale's facilities and local hospitals. Each of the
Hallmark facility in Chicago, Illinois, the Heritage facility in Des Plaines,
Illinois and the Devonshire facility in Lisle, Illinois (collectively, the
"Original Facilities"), have affiliations with local hospitals. In addition,
the Company is arranging hospital affiliations for the Acquired Facilities and
the Hawthorn Lakes and Edina Park Plaza facilities and intends to arrange such
affiliations for facilities that it acquires, develops or leases in the future.
Hospital affiliations provide for on-site physician and nursing services, and
facilitate the provision of health care services and wellness programs to the
Company's residents.
3
<PAGE>
The Company believes that the senior and assisted living industry is emerging
as a preferred alternative to meet the growing demand for a cost-effective
residential setting in which to care for the elderly who cannot or choose not
to live independently due to physical or cognitive frailties and who may
require assistance with some of the activities of daily living or the
availability of nursing or other medical care. In general, senior and assisted
living consists of a combination of housing and the availability of 24-hour a
day personal support services and assistance with certain activities of daily
living. The Company believes that factors contributing to the growth of the
senior and assisted living industry include: (i) the aging of the U.S.
population; (ii) consumer preference for greater independence in a residential
setting as compared to institutional settings, such as skilled nursing
facilities; (iii) its cost effectiveness compared to skilled nursing care and
home health care; and (iv) the decreasing ability of relatives to provide care
for the elderly in the home. According to industry analysts, annual revenues in
the senior and assisted living industry are estimated to have been
approximately $10 to $12 billion in 1995 and are expected to grow significantly
over the next several years. The senior and assisted living industry remains
highly fragmented, with only 5% of the industry's units operated by the 20
largest companies in the industry, which provides substantial opportunities for
industry consolidation.
The Company's business and growth strategy is based on the following key
elements: (i) acquiring and leasing senior and assisted living facilities in
major metropolitan markets; (ii) leveraging its development expertise to
construct its prototype facility in major metropolitan markets; (iii) providing
access to a full continuum of senior and assisted living services to residents
of its facilities; (iv) utilizing sophisticated marketing programs to maintain
high occupancy rates; and (v) utilizing its operational expertise to enhance
the services provided and improve the profitability of its existing and future
facilities. As part of its acquisition strategy, the Company expects to enter
into a $50 million secured revolving line of credit (the "Acquisition Line").
Brookdale Living Communities, Inc. was incorporated in Delaware in September
1996 to continue and expand the business and operations of the senior and
assisted living division of The Prime Group, Inc. and its affiliates
(collectively, "PGI"). Since 1981, PGI has been engaged in the ownership,
development, acquisition and operation of over 20 million square feet of income
producing properties and, since 1985, has been active in development,
construction, marketing and operation of senior and assisted living facilities
for the elderly. The Company's principal executive offices are located at 77
West Wacker Drive, Suite 3900, Chicago, Illinois 60601, and its telephone
number is (312) 456-0239.
THE OFFERING
Common Stock offered by the Company..
5,625,000 shares
Common Stock to be outstanding after
the Offering......................... 10,125,000 shares (1)
Use of Proceeds......................
To pay the cash portion of the purchase
price for the Acquired Facilities, to
pay certain amounts to or on behalf of
PGI and to various third parties in
connection with the Formation, to
purchase the Preferred Stock (as defined
herein) from NPC (as defined herein), to
fund the security deposits for the
leases with NPC for the Leased
Facilities, to finance a portion of
future acquisitions and developments and
for working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol........ BLCI
- --------------------
(1) Does not include 383,500 shares of Common Stock subject to options expected
to be granted at the initial public offering price. See "Management--Stock
Incentive Plan."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1995(1) 1995 1996 1996(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (2)(3):
Revenue:
Resident fees.......... $6,637 $ 15,205 $ 21,935 $ 36,910 $16,024 $16,905 $ 28,462
Management services
income ............... -- -- -- 285 -- -- 228
------ -------- -------- -------- ------- ------- --------
Total revenue........ 6,637 15,205 21,935 37,195 16,024 16,905 28,690
Facilities operating
expenses.............. (5,279) (11,270) (13,253) (21,081) (9,956) (9,433) (15,418)
Lease expenses......... -- -- -- (10,600) -- -- (7,950)
General and
administrative (4).... -- -- -- (2,500) -- -- (1,875)
Depreciation and
amortization.......... (1,626) (3,286) (3,721) (1,971) (2,937) (2,387) (1,510)
------ -------- -------- -------- ------- ------- --------
Operating income
(loss)................ (268) 649 4,961 1,043 3,131 5,085 1,937
Dividend income........ -- -- -- 2,688 -- -- 2,016
Interest and financing
fees expense, net..... (1,791) (4,053) (6,385) (3,432) (4,758) (4,075) (2,215)
------ -------- -------- -------- ------- ------- --------
Income (loss) before
minority interest and
extraordinary item.... (2,059) (3,404) (1,424) 299 (1,627) 1,010 1,738
(Income) loss allocated
to minority interest.. 1,266 1,178 802 -- 730 (86) --
------ -------- -------- -------- ------- ------- --------
Income (loss) before
extraordinary item.... (793) (2,226) (622) 299 (897) 924 1,738
Extraordinary item
(gain on
extinguishment of
debt)................. -- -- 3,274 -- -- -- --
------ -------- -------- -------- ------- ------- --------
Net income (loss)...... $ (793) $ (2,226) $ 2,652 $ 299 $ (897) $ 924 $ 1,738
====== ======== ======== ======== ======= ======= ========
UNAUDITED PRO FORMA
DATA:
Income (loss) before
income taxes and
minority interest..... $ (793) $ (2,226) $ (622) $ 299 $ (897) $ 924 $ 1,738
Pro forma benefit
(provision) for income
taxes (5)............. 317 890 249 346 359 (370) (346)
------ -------- -------- -------- ------- ------- --------
Income (loss) before
extraordinary item.... (476) (1,336) (373) 645 (538) 554 1,392
Extraordinary item
(gain on
extinguishment of
debt), net of income
taxes of $1,310 (5)... -- -- 1,964 -- -- -- --
------ -------- -------- -------- ------- ------- --------
Pro forma net income
(loss)................ $ (476) $ (1,336) $ 1,591 $ 645 $ (538) $ 554 $ 1,392
====== ======== ======== ======== ======= ======= ========
Pro forma income (loss)
before extraordinary
item, per share (6)... $ (0.08) $ 0.06 $ 0.12 $ 0.14
======== ======== ======= ========
Pro forma extraordinary
item, net per share
(6)................... $ 0.43 $ -- $ -- $ --
======== ======== ======= ========
Pro forma net income
per share (6)......... $ 0.35 $ 0.06 $ 0.12 $ 0.14
======== ======== ======= ========
Pro forma common shares
outstanding (6)....... 4,500 10,125 4,500 10,125
======== ======== ======= ========
SELECTED OPERATING AND
OTHER DATA:
Total units operated
(7)................... 577 918 918 1,968 918 918 1,968
Occupancy rate (7)..... 79.9% 95.6% 98.1% 97.9% 98.8% 99.3% 99.4%
Average monthly revenue
per unit (8).......... $1,454 $ 1,732 $ 2,015 $ 1,921 $ 1,963 $ 2,060 $ 1,988
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (3):
Cash................................................. $ 1,886 $ 15,184
Total assets......................................... 95,368 123,043
Total long-term debt................................. 99,407 39,771
Stockholders' and partners' equity (deficit)......... (1,396) 77,337
</TABLE>
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(1) A condition to Brookdale's lease of two of the Leased Facilities (the Edina
Park Plaza and Hawthorn Lakes facilities) is the consent of the United
States Department of Housing and Urban Development to the purchase of such
facilities by NPC and lease thereof to the Company. If such consent is not
obtained and such facilities are not acquired by NPC and such facilities
consequently are not leased to the Company, pro forma as adjusted total
revenue, operating income and net income (loss) would be $28,104, $3,068
and $1,394, respectively, for the year ended December 31, 1995 and $21,718,
$3,242 and $1,826, respectively, for the nine months ended September 30,
1996. See "Risk Factors--Uncertainty of Proposed Acquisitions by NPC."
(2) The historical financial and operating data for each of the three years
ended December 31, 1993, 1994 and 1995 and for each of the nine months
ended September 30, 1995 and September 30, 1996 represent combined
historical financial data for the senior and assisted living division of
The Prime Group, Inc., including among other things, a combination of the
businesses of the partnerships which as of September 30, 1996 owned the
Original Facilities. See "The Company and the Formation."
(3) The pro forma statements of operations data for the year ended December 31,
1995 and the nine months ended September 30, 1996 give effect to (a) the
contribution to the Company of the Hallmark facility and the operations
relating to the Original Facilities; (b) the acquisition by the Company of
the Acquired Facilities; (c) the lease by the Company of the Leased
Facilities from NPC; (d) the initial capitalization of the Company; and (e)
the Offering. The pro forma balance sheet as of September 30, 1996 gives
effect to these transactions as if they occurred on such date. See the
Unaudited Pro Forma Combined Condensed Financial Statements.
(4) Historically, general and administrative expenses have not been incurred
with regard to the Original Facilities, however, upon the completion of the
Offering, the Company will incur and report general and administrative
expenses as a separate item. See Pro Forma Combined Condensed Statements of
Operations.
(5) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Company and the Original Facilities as C Corporations.
See Note h to Notes to the Pro Forma Combined Condensed Statements of
Operations of the Company and Note 1 of Notes to the Combined Financial
Statements of the Original Facilities.
(6) Historical amounts reflect the issuance of 4,500,000 shares of Common Stock
in connection with the Formation. Pro forma as adjusted amounts reflect the
issuance of 5,625,000 shares of Common Stock in connection with the
Offering and 4,500,000 shares of Common Stock in connection with the
Formation.
(7) Total units operated represent the total units operated as of the end of
the period for the Original Facilities (the Hallmark facility was not
acquired until June 1994). Occupancy rate is calculated by dividing total
occupied units by total units operated as of the end of the period for the
Original Facilities. Pro forma amounts include the Original Facilities, the
Acquired Facilities, the Leased Facilities and the managed facilities.
(8) Average monthly revenue per unit represents the average of the total
monthly resident fees divided by occupied units at the end of the period
averaged over the respective period presented and for period of time in
operation during the period for the Original Facilities. Pro forma amounts
include the Original Facilities, the Acquired Facilities and the Leased
Facilities.
5
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the factors set forth below,
as well as the other information contained in this Prospectus, in evaluating
an investment in the Common Stock offered hereby.
RECENT ORGANIZATION; RECENT NET LOSSES
The Company was recently organized in September 1996 to own, operate,
acquire and develop senior and assisted living facilities. The Original
Facilities and operations relating thereto were formerly owned and operated by
PGI. Upon completion of the Offering, PGI will contribute the Hallmark
facility and the operations relating to the Original Facilities to the Company
and the Company will acquire from third parties the Springs of East Mesa and
the Gables at Brighton facilities (collectively, the "Acquired Facilities")
and will net lease the Devonshire and the Heritage facilities from National
Property Company, Inc. ("NPC"). As soon as practicable following the
completion of the Offering and upon receipt of the necessary approvals, the
Company intends to lease the Hawthorn Lakes and the Edina Park Plaza
facilities from NPC (the Devonshire, Heritage, Hawthorn Lakes and Edina Park
Plaza facilities are sometimes collectively referred to herein as the "Leased
Facilities"). The Original Facilities incurred a loss before minority interest
and extraordinary items of approximately $1.4 million in 1995, compared to
losses before minority interest of approximately $3.4 million and $2.1 million
in 1994 and 1993, respectively. The Original Facilities had income before
minority interest of approximately $1.0 million for the nine months ended
September 30, 1996, compared to a loss before minority interest of
approximately $1.6 million for the nine months ended September 30, 1995. On a
pro forma basis, after giving effect to the acquisition of the Acquired
Facilities and the Company entering into the net leases for the Leased
Facilities and the management contracts for the managed facilities, the
Company would have had net income before minority interest in 1995 and net
income before minority interest for the nine months ended September 30, 1996
of approximately $0.6 million and $1.4 million (after pro forma income taxes),
respectively. There can be no assurance that the Company's operations will be
profitable in the future. The inability to achieve profitability at a newly
acquired, developed or leased facility on a timely basis could have a material
adverse effect on the Company's business, financial condition and results of
operations and the market price of the Common Stock. See "--Uncertainty of
Proposed Acquisitions by NPC," "The Company and the Formation," "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONFLICTS OF INTEREST
Michael W. Reschke is Chairman of the Board and a director of each of PGI,
the Company and NPC, and also owns a substantial equity interest in PGI. In
addition, PGI, which will beneficially own approximately 38.8% of the
outstanding Common Stock after completion of the Offering (35.8% if the
Underwriters' over-allotment option is exercised in full), will also
beneficially own 100% of NPC's outstanding common stock following the
completion of the Offering. Because of Mr. Reschke's positions with the
Company, NPC and PGI and his ownership interest in PGI, there are inherent
conflicts of interest between the Company and NPC in the leasing of the Leased
Facilities to the Company, in the acquisition of the Preferred Stock by the
Company from NPC and in any future transactions between the Company and NPC.
Accordingly, the interests of the stockholders of the Company may not have
been, and in the future may not be, reflected fully in all decisions made or
actions taken by the officers and directors of the Company. The Board of
Directors of the Company has adopted a policy that all future transactions
between the Company and NPC or between the Company and its officers,
directors, principal stockholders and their affiliates, will be subject to
approval of a majority of the independent and disinterested outside directors.
See "The Company and the Formation," "Management," "Principal Stockholders"
and "Certain Transactions."
The primary business of NPC is the acquisition and ownership of senior and
assisted living facilities and other real estate properties and the net lease
of such properties to qualified users and operators, including the Company. As
a result of the Company's and NPC's business interests and the relationships
described above, there are inherent conflicts of interest between the Company
and NPC with respect to corporate opportunities for future acquisitions or
leases of senior and assisted living facilities. The Company and NPC have
agreed that
6
<PAGE>
the Company shall have the right to acquire or lease any senior and assisted
living facilities that NPC identifies as an acquisition or lease opportunity
unless a third party then owns or has a contract to acquire or lease such
facility and will (i) lease such facility from NPC, or obtain financing from
NPC to acquire such facility, and (ii) manage such facility. Although the
Company has a right to acquire or lease properties identified by NPC, if the
Company elects not to exercise such right or is unable to do so, NPC could
acquire facilities which compete directly with the Company's facilities. See
"Certain Transactions."
LACK OF ARM'S LENGTH NEGOTIATIONS
The terms of the transactions among PGI, the Company and NPC that comprise a
portion of the Formation, including, without limitation, the contribution of
the Hallmark facility and the operations relating to the Original Facilities
to the Company, the Company's lease of the Leased Facilities from NPC and the
purchase by the Company of NPC's Preferred Stock, were not determined by arm's
length negotiations. No independent third-party appraisals of the Original
Facilities or the operations relating to the Original Facilities were obtained
on behalf of the Company. For example, lease payments to NPC for the Leased
Facilities reflect a return on investment based on certain assumed equity
values for PGI's interest in the Devonshire and Heritage facilities.
Accordingly, there can be no assurance that the terms of these arrangements,
including, but not limited to, the number of shares of Common Stock and cash
received by PGI in exchange for its interests in the Hallmark facility and
operations relating to the Original Facilities, the terms of the leases for
the Leased Facilities or the purchase price of the Preferred Stock, are as
favorable to the Company as those the Company would have obtained from
unaffiliated third parties. See "--Conflicts of Interest," "The Company and
the Formation" and "Certain Transactions."
UNCERTAINTY OF PROPOSED ACQUISITIONS BY NPC
The net lease of two of the facilities (the Hawthorn Lakes and Edina Park
Plaza facilities) is subject to the acquisition of such facilities by NPC. The
closings of NPC's purchase of the Hawthorn Lakes and Edina Park Plaza
facilities are subject to certain customary conditions, including conditions
regarding limited partner consents. In addition, the purchase of such
facilities by NPC and the lease thereof to the Company are also subject to
approval by the United States Department of Housing and Urban Development
("HUD"). The approval by HUD with respect to NPC's purchase and subsequent
lease to Brookdale of the Hawthorn Lakes and Edina Park Plaza facilities has
not been received as of the date hereof and may not be received by the closing
of the Offering, if at all. If Brookdale is unable to lease such facilities,
its pro forma as adjusted total revenue, operating income and net loss for the
year ended December 31, 1995 would be $28.1 million, $3.1 million and $1.4
million, respectively and its pro forma as adjusted total revenue, operating
income and net income for the nine months ended September 30, 1996 would be
$21.7 million, $3.2 million and $1.8 million, respectively. Although the
Company expects that NPC's proposed acquisitions of the Hawthorn Lakes and
Edina Park Plaza facilities will be consummated within several weeks after the
completion of the Offering, there can be no assurance that the conditions to
such closings will be satisfied in a timely manner, if at all. Any material
delay or failure by NPC to consummate the purchase of such facilities,
together with the consequential delay or failure to lease such facilities to
the Company, could have an adverse effect on the Company's operating results.
The Hawthorn Lakes and Edina Park Plaza facilities contain approximately 20%
of the total units operated by the Company. See "The Company and the
Formation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
DIFFICULTIES OF INTEGRATION; FUTURE ACQUISITION RISKS
There can be no assurance that the Company will successfully integrate the
operations of the newly acquired or leased facilities with the operations of
the Original Facilities. If the Company is unsuccessful in operating the newly
acquired or leased facilities and integrating them into the Original
Facilities, the Company's business, financial condition and results of
operations could be materially and adversely affected. In addition, the
Company currently plans to acquire or lease three to five additional
facilities per year that are or can be repositioned as senior and assisted
living facilities. While the Company is actively pursuing acquisition
opportunities, except for the agreements for the purchase of the Acquired
Facilities, it has not entered into any agreements for any material
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acquisitions. There can be no assurance that the Company's acquisitions will be
completed at the rate currently expected, 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 opportunities, 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. Any failure by the Company
to achieve its acquisition plans or to integrate or operate acquired facilities
effectively may have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Business and
Growth Strategy."
DEVELOPMENT AND CONSTRUCTION RISKS
In addition to acquisitions, the Company currently plans to commence
development of approximately three new senior and assisted living facilities
per year containing approximately 200 units each in urban and suburban areas in
major metropolitan markets. The Company's ability to achieve its development
plans will depend upon a variety of factors, many of which are beyond the
Company's control. Further, due to the time required for site selection,
governmental approvals, construction and rental, it is expected that a facility
will not achieve a 90% occupancy rate (a stabilized rate) for at least 32
months, if at all, after a final determination is made by the Company to
proceed with any particular development. The successful development of
additional facilities will involve a number of risks, including the possibility
that the Company may be unable to locate suitable sites at acceptable prices or
may be unable to obtain, or may experience delays in obtaining, necessary
zoning, land use, building, occupancy, licensing and other required
governmental permits and authorizations. The Company may also incur
construction costs that exceed original estimates, may not complete
construction projects on schedule and may experience competition in the search
for suitable development sites. There can be no assurance that the Company will
not suffer delays in its development program, which could slow the Company's
growth. The Company relies and will continue to rely on third-party general
contractors to construct its new facilities. There can be no assurance that the
Company will not experience difficulties in working with general contractors
and subcontractors, which could result in increased construction costs and
delays. Further, facility 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. Accordingly, if the Company is unable to
achieve its development plans, its business, financial condition and results of
operations could be materially and adversely affected. See "Business--Business
and Growth Strategy."
NEED FOR ADDITIONAL FINANCING
To achieve its acquisition and development plans and growth objectives, the
Company will need to obtain significant additional financial resources. The
Company estimates the cost to acquire and develop the new facilities targeted
for acquisition or development over the next two years is approximately $95.0
million in the aggregate, which substantially exceeds the net proceeds of the
Offering and the Company's committed debt financing. Accordingly, the Company's
future growth will depend on its ability to obtain significant additional
financing on acceptable terms. The Company currently estimates that the net
proceeds from the Offering, together with anticipated financing commitments,
will be sufficient to fund its acquisition and development plans for
approximately 15 months following completion of the Offering. As its financing
needs require, the Company will from time to time seek additional financing
through a variety of sources, which may include equity financing, debt
financing, such as tax-exempt bonds, conventional mortgage financing and bank
financing, leases with NPC or third parties or other financing methods which,
if equity securities are employed, may result in dilution to the Company's
stockholders. There can be no assurance that future financing will be available
as needed or on terms acceptable to the Company. A lack of funds may require
the Company to delay or eliminate all or some of its development projects and
acquisition plans and could therefore adversely affect the Company's growth
plans. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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ADVERSE CONSEQUENCES OF INDEBTEDNESS; FLOATING RATE DEBT
The Company was subject to mortgage and other indebtedness in an aggregate
principal amount of approximately $39.8 million at September 30, 1996 on a pro
forma basis. The Company intends to finance its senior and assisted living
facilities through tax-exempt bond financing, conventional mortgage financing,
leases with NPC or third parties or other financing methods, including lines
of credit such as the Acquisition Line. The amount of indebtedness and lease
payments is expected to increase substantially as the Company pursues its
growth strategy. As a result, an increasing amount of the Company's cash flow
will be devoted to debt service and related lease payments, and the Company
will continue to be subject to risks normally associated with significant
financing leverage. In addition, indebtedness the Company may incur in the
future may bear interest at floating rates and in such event increases in
prevailing interest rates could increase significantly the Company's interest
payment obligations on such indebtedness. Further, the Company's lease
payments relating to the Heritage and the Devonshire facilities reflect the
adjustable interest rate applicable to the bonds relating to such facilities
and such lease payments will be adjusted to reflect changes in such interest
rate and, consequently, increases in such interest rate could increase
significantly the Company's lease payments with respect to such facilities.
There can be no assurance the Company will generate sufficient cash flow from
operations to cover required interest, principal and lease payments. Any
payment or other default could cause the lender to foreclose upon the
facilities securing such indebtedness or, in the case of a lease, could result
in the termination of the lease, with a consequent loss of income and asset
value to the Company. In addition, it is anticipated that the terms of the
Company's credit facilities will restrict the payment of dividends by the
Company or distributions by its wholly owned limited partnership to the
Company if certain financial ratios are not met. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Notes to Pro Forma Combined Condensed Statements of
Operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996.
The Heritage, Devonshire, Hawthorn Lakes and Edina Park Plaza facilities
have been financed with tax-exempt bonds. In order to maintain the tax-exempt
treatment of the interest paid on these bonds, the lease agreements between
NPC and the Company will require the Company to maintain the facilities in
compliance with certain federal income tax requirements, principally
pertaining to the maximum income level of a specified portion of the
facilities' residents. Failure to satisfy these requirements would constitute
an event of default under such leases. In the event of a default under the
leases that is not cured within any applicable cure periods, the Company could
lose its rights to possession of such facilities which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In certain cases, the Company's ability to increase prices at the
facilities with such bond financing (in response to higher operating costs or
other factors) could be limited if it affects the ability of the Company to
attract and retain residents with qualifying incomes.
DIFFICULTIES OF MANAGING RAPID GROWTH
The Company expects that the number of facilities it owns and operates will
increase substantially as the Company pursues its development and acquisition
strategy. This planned growth will place significant demands on the Company's
management resources. In order to manage its growth effectively, the Company
must continue to expand its operational, financial and management information
systems and continue to attract, train, motivate, manage and retain key
employees. If the Company is unable to manage its growth effectively, its
business, financial condition and results of operations could be materially
and adversely affected. See "Business--Business and Growth Strategy" and
"Management."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends significantly on the continued services of Mark J.
Schulte, its President and Chief Executive Officer. The loss of his services
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also depends on its ability
to continue to attract and retain management personnel who will be responsible
for the day-to-day operations of its senior and assisted living facilities. If
the Company is unable to hire qualified management personnel to operate its
facilities, the Company's business, financial condition and results of
operations could be materially and adversely affected. See "Management."
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BENEFITS TO AFFILIATES
PGI will realize substantial benefits from the Offering. In particular, upon
completion of the Offering, PGI will own 3,928,750 shares of Common Stock with
a market value of approximately $62.9 million (assuming no exercise of the
Underwriters' over-allotment option and an initial public offering price of
$16.00 per share, the midpoint of the filing range). In addition to PGI's
receipt of Common Stock in connection with PGI's contribution of the Hallmark
facility and the operations relating to the Original Facilities to the
Company, the Company will pay $12.0 million to PGI to retire certain
indebtedness secured by a pledge of cash flow from the Hallmark facility and
will pay PGI $4.6 million to be used for the purchase of a third party's
interest in the Devonshire and the Heritage facilities and will reimburse PGI
for costs and earnest money deposits for the Acquired Facilities. Further, PGI
will receive partner distributions simultaneously with the completion of the
Offering to the extent that the unrestricted cash balances of the Original
Facilities exceed $2.0 million. At the Formation, in accordance with the
Formation Agreement, Mark J. Schulte will transfer all of his interests in the
Hallmark facility and the operations relating to the Original Facilities to
the Company in exchange for 571,250 shares of Common Stock from the Company.
In addition, the Company will purchase the Preferred Stock from NPC for $22.4
million. See "--Conflicts of Interest" and "--Lack of Arm's Length
Negotiations," "The Company and the Formation" and "Use of Proceeds."
SIGNIFICANT INFLUENCE BY EXISTING STOCKHOLDERS AND MANAGEMENT
PGI will beneficially own approximately 38.8% of the outstanding Common
Stock after completion of the Offering (35.8% if the Underwriters' over-
allotment option is exercised in full). Executive officers and directors of
the Company as a group will beneficially own approximately 44.4% of the
outstanding Common Stock after the Offering (41.0% if the Underwriters' over-
allotment option is exercised in full). As a result, PGI and the Company's
executive officers and directors will have significant influence over all
matters requiring approval by the Company's stockholders, including business
combinations and the election of directors. See "Principal Stockholders."
COMPETITION
The long-term care industry is highly competitive, and the Company believes
that the senior and assisted living segment, in particular, will become even
more competitive in the future. The Company will be competing with numerous
other companies providing similar services such as home health care agencies,
other senior and assisted living providers, retirement communities and
convalescent centers. In general, regulatory and other barriers to entry in
the senior and assisted living industry are not substantial. In pursuing its
business and growth strategy, the Company expects to face competition in its
efforts to develop, acquire and lease facilities. Some of the Company's
present and potential competitors are significantly larger and have, or may
obtain, greater financial resources than the resources available to the
Company. Consequently, there can be no assurance that the Company will not
encounter increased competition that could limit its ability to attract
residents or expand its business or otherwise have a material adverse effect
on its business, financial condition and results of operations. Moreover, if
the development of new senior and assisted living facilities outpaces demand
for those facilities in certain markets, such markets may become saturated.
Such an oversupply of facilities could cause the Company to experience
decreased occupancy rates, depressed margins and lower operating results. See
"Business--Competition."
GOVERNMENTAL REGULATION
The Company's senior and assisted living facilities are subject to federal,
state and local regulation and licensing by state and local health and social
service agencies and other regulatory authorities, which requirements vary
from state to state. Senior and assisted living facilities in some states are
subject to periodic survey or inspection by governmental authorities. In
Illinois, where the Original Facilities are located, and perhaps in certain
other states in which the Company may operate in the future, the Company may
be unable to provide certain higher levels of assisted living services without
obtaining the appropriate licenses, if applicable.
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In addition, some states have adopted certificate of need or similar laws
applicable to assisted living and nursing facilities which generally require
that the appropriate state agency approve certain acquisitions or capital
expenditures and determine that a need exists for certain new bed additions or
new services. Many states have placed a moratorium on granting certificates of
need or otherwise stated their intent not to grant approval for such
expenditures. To the extent certificates of need or other similar approvals
are required for expansion of Company operations, such expansion could be
adversely affected by the failure or inability to obtain the necessary
approvals or possible delays in obtaining such approvals.
Although the Company currently does not participate in the Medicare or
Medicaid programs, the hospitals with which it has affiliations do participate
in those programs and the Company intends to participate in the Medicare
program at the skilled nursing facility to be constructed at the Devonshire
facility. Also, all of the Company's residents are eligible for Medicare
benefits. Therefore, certain aspects of the Company's business are and will be
subject to federal and state laws and regulations which govern financial and
other arrangements between and among health care providers, suppliers and
vendors. These laws prohibit certain direct and indirect payments and fee-
splitting arrangements designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider or other entity
or person for medical products and services. These laws include, but are not
limited to, the federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients. The
Office of the Inspector General of the Department of Health and Human
Services, the Department of Justice and other federal agencies interpret these
statutes liberally and enforce them aggressively. Members of Congress have
proposed legislation that would significantly expand the federal government's
involvement in curtailing fraud and abuse and increase the monetary penalties
for violation of these provisions. Violation of these laws can result in,
among other things, loss of licensure, civil and criminal penalties for
individuals and entities, and exclusion of health care providers or suppliers
from participation in the Medicare and/or Medicaid programs.
In addition, although the Company is not a Medicare or Medicaid provider or
supplier, it is subject to these laws because (i) the state laws typically
apply regardless of whether Medicare or Medicaid payments are at issue, (ii)
the Company plans to build and operate a skilled nursing facility at its
Devonshire facility and may establish licensed home health agencies which are
intended to participate in Medicare, and (iii) as required under some state
licensure laws, and for the convenience of its residents, some of the
Company's senior and assisted living facilities maintain contracts with
hospitals, who in turn maintain contracts with certain health care providers
and practitioners, including pharmacies, home health agencies and hospices,
through which the health care providers make their health care items or
services (some of which may be covered by Medicare or Medicaid) available to
facility residents. There can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the Company.
The success of the Company will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses as the regulatory environment for senior and assisted living
facilities evolves. There can be no assurance that federal, state or local
laws or regulatory procedures which might adversely affect the Company will
not be imposed or expanded. Any failure by the Company to comply with
applicable regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Governmental Regulation."
ENVIRONMENTAL RISKS
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 cost of removal or remediation of certain hazardous or
toxic substances that could be located on, in or under such property. Such
laws and regulations often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of the hazardous or
toxic substances. In addition, the Company's skilled nursing facility to be
built at the Devonshire facility will be subject to laws relating to the
disposal of biohazardous waste. The costs of any required remediation or
removal
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of these substances could be substantial and the liability of an owner or
operator as to any affected property is generally not limited under such laws
and regulations and could exceed the property's value and the aggregate assets
of the owner or operator. In connection with the ownership or operation of its
facilities, the Company could be liable for these remediation costs or fines.
As a result, the presence, with or without the Company's knowledge, of
hazardous or toxic substances at any property held or operated by the Company,
or acquired or operated by the Company in the future, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
LIABILITY AND INSURANCE
The services provided by the Company subject it to significant liability
risks. In recent years, the senior and assisted living industry has
experienced an increase in the number of lawsuits alleging negligence and
other legal theories, many of which involve significant legal costs and
substantial claims. The Company intends to secure, by completion of the
Offering, insurance policies in amounts and with such coverage as it deems
appropriate for its operations. There can be no assurance, however, that the
Company will be able to continue to obtain sufficient liability insurance
coverage in the future or that such coverage will be available on acceptable
terms. A successful claim in excess of the Company's coverage or not covered
by the Company's insurance could have a material adverse effect on the
Company's business, financial condition and results of operations. Claims
against the Company, regardless of their merit or outcome, may involve
significant legal costs and require management to devote considerable time
which would otherwise be utilized in the operation of the Company. See
"Business--Insurance."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 10,125,000 shares of
Common Stock outstanding (or 10,968,750 shares if the Underwriters' over-
allotment option is exercised in full). Of these shares, the 5,625,000 shares
sold in the Offering (or a maximum of 6,468,750 if the Underwriters' over-
allotment option is exercised in full) 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 in defined in Rule 144 promulgated under the Securities
Act. The remaining 4,500,000 shares are "restricted securities" within the
meaning of Rule 144 and are held by PGI and management of the Company. The
Company, its directors, executive officers and certain key employees and PGI
have agreed with the Underwriters, subject to certain exceptions, not to sell
or otherwise dispose of any shares of Common Stock, any options to purchase
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock for a period of 180 days after the date of this Prospectus (the
"lock-up period") without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"). After expiration of the lock-up
period, PGI will be entitled to certain demand and incidental registration
rights with respect to its shares. If PGI, by exercising its demand
registration rights, causes a large number of shares to be registered and sold
in the public market, such sales could have an adverse effect on the market
price for the Common Stock. Further, promptly following completion of the
Offering, the Company intends to register 750,000 shares of Common Stock which
will be reserved for issuance pursuant to the Company's stock option programs.
Upon completion of the Offering, options to purchase 383,500 shares will be
granted at the initial public offering price to executive officers, certain
key employees and non-employee directors of the Company. Such Options will
vest and become exercisable with regard to 348,500 shares, subject to certain
conditions being met, at the rate of 25% per year commencing on the first
anniversary of their date of grant and, with regard to 35,000 shares, at the
rate of 33.3% per year commencing on the first anniversary of their date of
grant. All restricted shares of Common Stock will be eligible for sale to
certain qualified institutional buyers in accordance with Rule 144A under the
Securities Act. Sales of substantial amounts of shares of Common Stock in the
public market after the 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. See "Management--Stock Incentive Plan," "Description
of Capital Stock--Registration Rights Agreement," "Shares Eligible for Future
Sale" and "Underwriting."
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ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the 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 the Offering. The initial public offering price of the Common
Stock will be determined by negotiation between the Company and the
representatives of the Underwriters and may bear no relationship to the price
at which the Common Stock will trade after completion of the Offering. For
factors that will be considered in determining the initial public offering
price, see "Underwriting." After completion of the 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 industry
or the Company and the adoption of new statutes or regulations (or changes in
the interpretation of existing statutes or regulations) affecting the health
care industry in general or the senior and 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 may
adversely affect the market price of the shares of Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and Amended and Restated
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 rights senior to those of the Common Stock. Other
provisions impose various procedural and other requirements, including advance
notice and super-majority voting provisions, 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 (the "DGCL") which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined therein) for three years following the date such
person became an interested stockholder unless certain conditions are
satisfied. Pursuant to a Board resolution adopted at the time of formation of
the Company, the Section 203 limits do not apply to any "business combination"
between the Company and PGI. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The existing stockholders of the Company acquired their shares of Common
Stock at an average cost substantially below the assumed initial public
offering price set forth on the cover page of this Prospectus. Therefore,
purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net tangible book value per share of approximately
$8.45. See "Dilution."
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THE COMPANY AND THE FORMATION
The Company was incorporated in Delaware on September 4, 1996 and is wholly
owned by an affiliate of The Prime Group, Inc. At the completion of the
Offering, the shares owned by such affiliate will be repurchased by the
Company in accordance with a subscription agreement between the Company and
such affiliate at a nominal price. Pursuant to the Formation Agreement (as
defined herein), in connection with the completion of the Offering, PGI will
contribute its interest in the Hallmark facility and the operations relating
to the Original Facilities (including all of the capital stock of a wholly
owned subsidiary of PGI that holds certain rights relating to the proposed
skilled nursing facility on the campus of the Devonshire facility) to the
Company in exchange for 3,928,750 shares of Common Stock, $12.0 million in
cash from the net proceeds of the Offering to retire certain indebtedness
secured by a pledge of cash flow from the Hallmark facility and the assumption
by the Company of certain indebtedness in the aggregate amount of $34.4
million. The operations relating to the Original Facilities being contributed
to the Company will include all of the assets and liabilities of PGI with
respect to such operations other than those contributed to NPC and leased to
the Company. However, PGI will receive partner distributions simultaneously
with the Offering to the extent that the unrestricted cash balances of the
Original Facilities exceed $2.0 million. In addition, PGI will assign its
rights to purchase the Gables at Brighton and the Springs of East Mesa
facilities to the Company in exchange for reimbursement of its costs relating
to such purchase contracts, including an earnest money deposit of $0.5 million
and will receive $4.6 million from the net proceeds of the Offering for the
purchase of a third party's interest in the Devonshire and Heritage
facilities. At the Formation, in accordance with the Formation Agreement, Mark
J. Schulte, President and Chief Executive Officer of the Company, will
transfer all of his interests in the Hallmark facility and in the operations
relating to the Original Facilities to the Company in exchange for 571,250
shares of Common Stock. The Company, at the completion of the Offering, will
also enter (i) a management agreement with PGI to manage the Island on Lake
Travis facility and (ii) a management agreement (and an option to purchase)
regarding the Kenwood facility with a third party unaffiliated with PGI that
owns the Kenwood facility. See "Use of Proceeds," "Business--Facilities" and
"Certain Transactions."
At the completion of the Offering, PGI will purchase the interest of a third
party in the Heritage and Devonshire facilities and will contribute all of
such interest, as well as its existing interests in such facilities, to NPC in
exchange for 100% of the common stock of NPC. NPC will replace the credit
enhancement securing the $65.0 million of tax-exempt bonds relating to the
Devonshire and the Heritage facilities. PGI has obtained a commitment from
LaSalle National Bank and Bank One, Chicago, NA whereby letters of credit with
a maturity of three years from the completion of the Offering would be
provided as replacement credit enhancement for such tax-exempt bonds. On or
prior to the completion of the Offering, NPC will have executed definitive
agreements with such banks to issue the letters of credit.
At the completion of the Offering, NPC and the Company will enter net
operating lease agreements for the Heritage and Devonshire facilities for
terms of 25 years with five, 10-year renewal options. The net leases will
require an aggregate security deposit of $5.0 million and monthly rental
payments that will adjust based on an adjustable bond interest rate applicable
to the tax-exempt bonds. Based on the current adjustable bond interest rate of
5.25%, the aggregate monthly lease payments for the Heritage and Devonshire
facilities would be approximately $414,000. Although the lease agreements will
contain certain restrictions on NPC's ability to refinance such adjustable
rate bonds, the Company's future lease payments for such facilities will be
adjusted to reflect changes in NPC's debt service payments. The lease
agreement for the Devonshire facility will provide that NPC will, subject to
various conditions, fund up to $5.0 million for the cost of the construction
of the proposed skilled nursing facility. Base rent for such facility shall
increase by an amount equal to 10% per annum of the amounts so funded by NPC.
See "Risk Factors--Conflicts of Interest" and "--Lack of Arm's Length
Negotiations" and "Certain Transactions."
The lease agreements between the Company and NPC will be net operating
leases that will obligate the Company to comply with the terms and conditions
of the underlying bond financing documents for the respective Leased
Facilities. Beginning in 1999, the leases will require the payment of bonus
rent, on a quarterly basis, in
14
<PAGE>
amounts equal to 4% of the increase, if any, in the aggregate gross revenue of
the Leased Facilities for such period over the aggregate gross revenue of the
Leased Facilities for the same period during 1998. The lease agreements will
contain certain restrictions on the ability of NPC to sell, refinance or
encumber the Leased Facilities or the ownership interests of NPC and will
grant to the Company a right of first offer in the event NPC desires to sell
or transfer any of the Leased Facilities.
The Company and NPC will enter an agreement whereby NPC will agree to
purchase the Edina Park Plaza and the Hawthorn Lakes facilities substantially
in accordance with the purchase agreements for such facilities assigned to NPC
from PGI and to net lease such facilities to the Company. Such purchase and
lease is subject to the consent of the United States Department of Housing and
Urban Development ("HUD") which consent may not be received by the closing of
the Offering, if at all. The Company and NPC will agree to use their best
efforts to obtain the HUD consent and any other appropriate approvals to
effect such purchase and lease. The leases shall be on substantially the same
terms and conditions as the leases for the Devonshire and Heritage facilities.
However, the rent for the Edina Park Plaza facility will be based on the 8.0%
fixed interest rate payable on the HUD guaranteed loan relating to such
facility and the rent for Hawthorn Lakes facility will be based on the 8.525%
fixed interest rate payable on the HUD guaranteed loan relating to such
facility. Although NPC intends to refinance the fixed rate bonds to adjustable
rate bonds, until such refinancing, the monthly rental rate for the Edina Park
Plaza facility will be $200,000 and for the Hawthorn Lakes facility will be
$300,000. Following such refinancing, the rent for these facilities will be
adjusted monthly in accordance with the adjustable interest rate of the
underlying bonds. The earliest dates for refinancing are December 1, 2001 and
January 31, 2001, respectively, for the Edina Park Plaza and Hawthorn Lakes
facilities. The security deposits for the leases of the Edina Park Plaza and
Hawthorn Lakes facilities are $2.4 million and $3.2 million, respectively. The
lease agreement for the Hawthorn Lakes facility will provide that NPC will,
subject to various conditions, fund up to $5.0 million for the cost of
construction of the proposed 57-unit addition and other improvements. Base
rent for such facility shall increase by an amount equal to 10% per annum of
the amounts so funded by NPC.
The Company will purchase $22.4 million of non-participating cumulative
preferred stock of NPC (the "Preferred Stock") simultaneously with the
completion of the Offering. Dividends on the Preferred Stock will be
cumulative from the date of issue and will be payable quarterly in arrears at
an annual dividend rate of 12.0% of the amount of the Preferred Stock. The
Preferred Stock will be non-voting unless dividends are not paid in full for
four quarters. In such event, the preferred stockholders of NPC would be
granted voting rights sufficient to elect a majority of the board of directors
of NPC. In addition, the terms of the Preferred Stock will provide that the
affirmative vote of the majority of the holders of the Preferred Stock will be
required to approve the issuance of any additional Preferred Stock and any
amendment to the charter of NPC that would materially and adversely affect any
right, preference or privilege of the Preferred Stock. The Preferred Stock may
be called at any time after three years from the date of issue at par plus any
unpaid dividends through the date of such call. Prior to three years from the
date of issue, the Preferred Stock may be called only with the consent of
Brookdale, which consent will not be unreasonably withheld if the purpose for
such call is the determination by NPC to elect to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
If NPC elects to be taxed as a RElT and does not call the Preferred Stock, the
dividend rate on the Preferred Stock will be increased to an amount sufficient
to provide the Company with the same after-tax return from such dividends
following such election that the Company received prior to such election. See
"Risk Factors--Conflicts of Interest" and "--Lack of Arm's Length
Negotiations" and "Certain Transactions."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,625,000 shares of
Common Stock offered hereby are estimated to be approximately $81.6 million (at
an assumed initial public offering price of $16.00 per share, the midpoint of
the filing range) or approximately $94.2 million if the Underwriters' over-
allotment option is exercised in full, after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company. Simultaneously with the completion of the Offering, the Company
intends to use approximately $19.5 million of the net proceeds to fund the cash
portion of the purchase price for the Acquired Facilities, approximately $22.4
million to purchase the Preferred Stock from NPC, $4.6 million of the net
proceeds to PGI for its purchase of a third party's interests in the Devonshire
and the Heritage facilities and reimbursement of costs, including an earnest
money deposit of $0.5 million, in connection with the Acquired Facilities,
approximately $5.0 million of the net proceeds to fund the security deposits in
connection with the lease of two of the Leased Facilities (the Devonshire and
the Heritage facilities) from NPC and approximately $0.3 million in payment of
a fee to a lender in connection with the transfer of ownership of the Hallmark
facility to the Company. In addition, the Company intends to use approximately
$5.6 million of the net proceeds to fund the balance of the security deposits
in connection with the lease of the other two Leased Facilities (the Hawthorn
Lakes and Edina Park Plaza facilities) upon the execution of such leases. The
Company also intends to use approximately $12.0 million of the net proceeds to
retire certain indebtedness of PGI which is secured by a pledge of PGI's rights
to cash flow from the Hallmark facility. The Company also intends to use
approximately $0.3 million in payment of a commitment fee to the lender under
the Acquisition Line. The balance of the net proceeds, approximately $11.9
million (or approximately $24.5 million if the Underwriters' over-allotment
option is exercised in full), will be used to finance a portion of the future
acquisitions and developments of senior and assisted living facilities and for
working capital and general corporate purposes. The Company is currently
negotiating with owners of several senior and assisted living facilities as
well as several sites for development of senior and assisted living facilities
to acquire such facilities and sites. The Company has not, however, entered
into binding contracts for any such acquisitions nor can there be any assurance
that the Company will complete any such acquisitions.
Pending such uses described above, the Company intends to invest the net
proceeds in short-term, interest-bearing securities or certificates of deposit.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Business--Business and Growth
Strategy" and "Certain Transactions."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common Stock
and currently plans to retain future earnings, if any, to finance the growth of
the Company's business rather than to pay cash dividends. Payments of any cash
dividends in the future will depend on the financial condition, results of
operations and capital requirements of the Company as well as other factors
deemed to be relevant by the Board of Directors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1996 (i) the
capitalization of the Original Facilities and (ii) the pro forma capitalization
of the Company, as adjusted to give effect to the Formation and the receipt and
application of the net proceeds of the Offering (assuming an initial public
offering price of $16.00, the midpoint of the filing range, and after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by the Company) as discussed in "Use of Proceeds." The table should be
read in conjunction with the Unaudited Pro Forma Combined Condensed Financial
Statements of the Company and the Combined Financial Statements of the Original
Facilities, and the related notes to each thereto, contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1996
--------------------
PRO FORMA
ACTUAL AS ADJUSTED
<S> <C> <C>
Unrestricted cash and cash equivalents................... $ 1,886 $ 15,184
======= ========
Total long-term debt(1).................................. $99,407 $ 39,771
Stockholders' and partners' equity (deficit):
Preferred Stock, $0.01 par value, 20,000,000 shares
authorized; none issued or outstanding.................. -- --
Common Stock, $0.01 par value, 75,000,000 shares
authorized; 10,125,000 shares issued and outstanding,
pro forma as adjusted(2)................................ -- 101
Additional paid-in capital............................... -- 77,236
Accumulated deficit...................................... (1,396) --
------- --------
Total stockholders' and partners' equity (deficit)..... (1,396) 77,337
------- --------
Total capitalization................................. $98,011 $117,108
======= ========
</TABLE>
- ---------------------
(1) See Note (g) of Notes to Unaudited Pro Forma Combined Condensed Balance
Sheet of the Company, Note 4 of Notes to Combined Financial Statements of
the Original Facilities and Note 3 of the Notes to the Combined Financial
Statements of the Activelife Facilities (the Springs of East Mesa, Edina
Park Plaza and Hawthorn Lakes facilities) for information regarding the
Company's long-term indebtedness.
(2) Does not include 383,500 shares of Common Stock subject to options expected
to be granted at the initial public offering price. See "Management--Stock
Incentive Plan."
17
<PAGE>
DILUTION
The Company's net deficit in tangible book value as of September 30, 1996
prior to the Offering was approximately $10.2 million, or $2.27 per share. Net
deficit in tangible book value per share as of September 30, 1996 is equal to
the Original Facilities total tangible assets less its total liabilities,
divided by the 4,500,000 shares of Common Stock to be received by PGI and
management of the Company related to the Formation. After giving effect to the
sale of the 5,625,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $16.00 per share, the midpoint of
the filing range, the pro forma net tangible book value of the Common Stock at
September 30, 1996 would have been approximately $76.5 million, or $7.55 per
share. This represents an immediate increase in pro forma net tangible book
value of $9.82 per share to existing stockholders and immediate dilution of
$8.45 per share to purchasers of Common Stock in the Offering. The following
table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $16.00
Net deficit in tangible book value prior to the Offering...... $ (2.27)
Increase attributable to new investors........................ 9.82
-------
Pro forma net tangible book value after the Offering............ 7.55
------
Dilution per share to new investors............................. $ 8.45
======
</TABLE>
The following table summarizes the differences between PGI and the new
investors with respect to the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
(based upon an assumed initial public offering price of $16.00 per share, the
midpoint of the filing range):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
New investors............ 5,625,000 55.6% $90,000,000 125.0% $16.00
PGI and management(1)(2). 4,500,000 44.4 (18,000,000) (25.0) (4.00)
---------- ----- ----------- -----
Total................ 10,125,000 100.0% $72,000,000 100.0% $ 7.11
========== ===== =========== =====
</TABLE>
- ---------------------
(1) Does not include 383,500 shares of Common Stock subject to options expected
to be granted at the initial public offering price.
(2) Total consideration provided by PGI and management for the shares of common
stock includes the Original Facilities partners' deficit at September 30,
1996 of $1.4 million, and distributions to PGI of $16.6 million.
18
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial and operating data for the
Original Facilities and selected pro forma data for the Company. The selected
financial data as of September 30, 1996 and for the nine months then ended and
as of December 31, 1994 and 1995, and for the years ended December 31, 1993,
1994 and 1995, have been derived from the audited combined financial statements
of the Original Facilities included elsewhere in this Prospectus. The selected
financial data as of December 31, 1991, 1992 and 1993 and for the years ended
December 31, 1991 and 1992 have been derived from the combined financial
statements of the Original Facilities not included in this Prospectus. The
selected financial data as of September 30, 1995 and for the nine months then
ended have been derived from the unaudited combined financial statements of the
Original Facilities included elsewhere in this Prospectus. In the opinion of
management, the unaudited combined financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the combined financial position and combined results of
operations for the unaudited periods. The combined results of operations for
the nine months ended September 30, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
--------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Resident fees.................. $ 3,185 $ 5,044 $ 6,637 $ 15,205 $ 21,935 $16,024 $16,905
Facilities operating expenses... (3,245) (3,910) (5,279) (11,270) (13,253) (9,956) (9,433)
General and administrative
expenses (1)................... -- -- -- -- -- -- --
Depreciation and amortization... (1,224) (1,281) (1,626) (3,286) (3,721) (2,937) (2,387)
------- ------- ------- -------- -------- ------- -------
Operating income (loss)......... (1,284) (147) (268) 649 4,961 3,131 5,085
Interest and financing fees
expense........................ (2,050) (1,742) (1,791) (4,053) (6,385) (4,758) (4,075)
------- ------- ------- -------- -------- ------- -------
Income (loss) before minority
interest and extraordinary
item........................... (3,334) (1,889) (2,059) (3,404) (1,424) (1,627) 1,010
(Income) loss allocated to
minority interest.............. 2,499 1,415 1,266 1,178 802 730 (86)
------- ------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item............. (835) (474) (793) (2,226) (622) (897) 924
Extraordinary item (gain on
extinguishment of debt)........ -- -- -- -- 3,274 -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss)............... $ (835) $ (474) $ (793) $ (2,226) $ 2,652 $ (897) $ 924
======= ======= ======= ======== ======== ======= =======
UNAUDITED PRO FORMA DATA:
Income (loss) before income
taxes and extraordinary item... $ (835) $ (474) $ (793) $ (2,226) $ (622) $ (897) $ 924
Pro forma benefit (provision)
for income taxes (2)........... 334 190 317 890 249 359 (370)
------- ------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item............. (501) (284) (476) (1,336) (373) (538) 554
Extraordinary item (gain on
extinguishment of debt), net of
income taxes of $1,310 (2)..... -- -- -- -- 1,964 -- --
------- ------- ------- -------- -------- ------- -------
Pro forma net income (loss)..... $ (501) $ (284) $ (476) $ (1,336) $ 1,591 $ (538) $ 554
======= ======= ======= ======== ======== ======= =======
Pro forma income (loss) before
extraordinary item, per share
(3)............................ $ (0.08) $ 0.12
======== =======
Pro forma extraordinary item,
per share (3).................. $ 0.43 $ --
======== =======
Pro forma net income per share
(3)............................ $ 0.35 $ 0.12
======== =======
Pro forma common shares
outstanding (3)................ 4,500 4,500
======== =======
SELECTED OPERATING AND OTHER
DATA:
Total units operated (4)........ 323 323 577 918 918 918 918
Occupancy rate (4).............. 66.9% 95.4% 79.9% 95.6% 98.1% 98.8% 99.3%
Average monthly revenue per unit
(5)............................ $ 1,229 $ 1,365 $ 1,454 $ 1,732 $ 2,015 $ 1,963 $ 2,060
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........... $66,726 $70,255 $65,149 $102,579 $100,325 $95,368
Total long-term debt... 70,578 70,848 71,510 101,242 99,627 99,407
Partners' capital
(deficit)............. (1,514) (1,987) (2,780) 1,852 3,597 (1,396)
</TABLE>
- ---------------------
(1) Historically, general and administrative expenses have not been incurred
with regard to the Original Facilities, however, upon the completion of the
Offering, the Company will incur and report general and administrative
expenses as a separate item. See Pro Forma Combined Condensed Statements of
Operations.
(2) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Original Facilities as a C Corporation. See Note 1 of
Notes to the Combined Financial Statements of the Original Facilities.
(3) Reflects the issuance of 4,500,000 shares of Common Stock in connection
with the Formation.
(4) Total units operated represent the total units operated as of the end of
the period for the Original Facilities (the Hallmark facility was not
acquired until June 1994). Occupancy rate is calculated by dividing total
occupied units divided by total units operated as of the end of the period
for the Original Facilities.
(5) Average monthly revenue per unit represents the average of total monthly
resident fees divided by occupied units at the end of the period averaged
over the respective period presented and for the period of time in
operation over the period for the Original Facilities.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Combined Financial Statements of the Original
Facilities and Notes thereto, each appearing elsewhere in this Prospectus. Such
historical information includes the operations, assets and liabilities of the
business and facilities relating to the Original Facilities (a portion of
which, consisting of the Hallmark facility and the operations relating to the
Original Facilities, will be contributed to the Company as part of the
Formation, the balance of which, consisting of the Heritage and the Devonshire
facilities, will be acquired by NPC and in turn leased to the Company upon the
completion of the Offering), and forms the basis for "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Except for
"Overview," the discussion of historical results set forth below does not
include financial information relating to the Acquired Facilities (consisting
of the Springs of East Mesa and the Gables at Brighton facilities), two of the
Leased Facilities (consisting of the Hawthorn Lakes and Edina Park Plaza
facilities) or the managed facilities. See "Risk Factors--Uncertainty of
Proposed Acquisitions by NPC" and "The Company and the Formation." Historical
results as set forth herein are not necessarily indicative of future results
from operations.
OVERVIEW
The Company operates nine senior and assisted living facilities containing a
total of 1,968 units. Three of such facilities are owned by the Company, four
facilities are leased by the Company from NPC and two facilities are managed by
Brookdale pursuant to management contracts. The Company's senior and assisted
living facilities offer residents a supportive, "home-like" setting and
assistance with certain activities of daily living. Residents of Brookdale's
facilities are typically unable or choose not to live independently, but do not
require the 24-hour nursing care provided in skilled nursing facilities. By
providing 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. The
ability to allow residents to age in place is beneficial to Brookdale's
residents as well as their families who are burdened with care option decisions
for their elderly relatives.
Upon the completion of the Offering, PGI will contribute its interests in the
Hallmark facility and the operations relating to the Original Facilities
(including all of the capital stock of a wholly owned subsidiary of PGI that
holds certain rights relating to the proposed skilled nursing facility on the
campus of the Devonshire facility) to the Company in exchange for 3,928,750
shares of Common Stock, $12.0 million in cash from the net proceeds of the
Offering and the assumption by the Company of certain indebtedness in the
aggregate amount of $34.4 million. The operations relating to the Original
Facilities being contributed to the Company will contain all of the assets and
liabilities of PGI with respect to such operations other than those contributed
to NPC and leased to the Company. However, PGI will receive partner
distributions simultaneously with the Offering to the extent that the
unrestricted cash balances of the Original Facilities exceed $2.0 million. In
addition, PGI will assign its rights to purchase the Gables at Brighton and the
Springs of East Mesa facilities to the Company in exchange for reimbursement of
its costs relating to such purchase contracts, including an earnest money
deposit of $0.5 million and will receive $4.6 million from the net proceeds of
the Offering for the purchase of a third party's interest in the Devonshire and
the Heritage facilities. At the Formation in accordance with the Formation
Agreement, Mark J. Schulte, President and Chief Executive Officer of the
Company, will transfer all of his interests in the Hallmark facility and the
operations relating to the Original Facilities to the Company in exchange for
571,250 shares of Common Stock. In addition, at the completion of the Offering,
NPC and the Company will enter lease agreements for the Heritage and Devonshire
facilities for terms of 25 years with five, 10-year renewal options. The net
leases will require an aggregate security deposit of $5.0 million and monthly
rental payments in advance based on an adjustable bond interest rate applicable
to the tax-exempt bonds that will be adjusted with changes in such rate. Based
on an adjustable bond interest rate of 5.25%, the aggregate monthly lease
payments for the Heritage and Devonshire facilities would be $414,000. Although
the lease agreements contain certain restrictions on NPC's ability to refinance
such adjustable rate bonds, the Company's future lease payments for such
facilities will be adjusted to reflect changes in NPC's debt service payments.
The lease agreement for the
21
<PAGE>
Devonshire facility will provide that NPC will, subject to various conditions,
fund up to $5.0 million for the cost of the construction of the proposed
skilled nursing facility. Base rent for such facility shall increase by an
amount equal to 10% per annum of the amounts so funded by NPC. In addition,
the Company and NPC will enter an agreement whereby NPC will agree to purchase
the Edina Park Plaza and the Hawthorn Lakes facilities substantially in
accordance with the purchase agreements for such facilities assigned to NPC
from PGI and to net lease such facilities to the Company. The Company will
also purchase the Preferred Stock of NPC for $22.4 million. Dividends on the
Preferred Stock will be cumulative from the date of issue and will be payable
quarterly in arrears at an annual dividend rate of 12.0% of the amount of the
Preferred Stock. Further, at the completion of the Offering, the Company will
enter (i) a management contract with PGI to manage the Island on Lake Travis
facility and (ii) a management agreement (and an option to purchase) regarding
the Kenwood facility with a third party unaffiliated with PGI that owns the
Kenwood facility. See "The Company and the Formation" and "Use of Proceeds."
The Company currently plans to acquire or lease approximately three to five
facilities per year containing an aggregate of approximately 800 to 1,000
units, and to commence development of at least three new facilities per year
containing approximately 200 units each in major urban and suburban areas in
major metropolitan markets. The Company anticipates that it will use a
combination of net proceeds from the Offering, additional equity financing and
debt financing, lease transactions and cash generated from operations to fund
this development activity. In order to achieve its growth plans, the Company
will be required to obtain a substantial amount of additional financing. There
can be no assurance that future financing or lease transactions will be
available as needed or on terms acceptable to the Company. A lack of funds may
require the Company to delay all or some of its acquisition plans and
development projects. See "Risk Factors--Difficulties of Integration; Future
Acquisition Risks," "--Development and Construction Risks" and "--Need for
Additional Financing" and "--Liquidity and Capital Resources."
The Company derives its revenues from resident fees and management fees. On
a pro forma basis after giving effect to the Formation, most of the Company's
operating revenue has come from resident fees, which comprised 99.2%, of total
operating revenues for both the year ended December 31, 1995 and the nine
months ended September 30, 1996. Resident fees typically are paid monthly by
residents, their families or other responsible parties. All of the Company's
revenue has been derived from private pay sources. Management services income,
which on a pro forma basis after giving effect to the Formation, accounted for
the remaining 0.8% of the Company's revenues for both the year ended December
31, 1995 and the nine months ended September 30, 1996, consists of management
fees which typically range from 3.0% to 5.0% of a managed facility's total
gross revenues. Resident fees and management fees are recognized as revenues
when services are provided. After the Offering, the Company will not receive
management fees with regard to its owned and leased facilities; however, it
will receive fees under the management contracts for the Island on Lake Travis
and Kenwood facilities.
The Company classifies its operating expenses into the following categories:
(i) facility operating expenses, which include lease payments, labor, food,
marketing and other direct facility expenses and real estate taxes; (ii)
general and administrative expenses, which primarily include corporate
headquarters and other overhead costs; and (iii) depreciation and
amortization.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain data from the respective combined
statements of operations of the Original Facilities:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Resident fees.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Facility operating expenses...... (79.5) (74.1) (60.4) (62.1) (55.8)
General and administrative
expenses (1).................... -- -- -- -- --
Depreciation and amortization.... (24.5) (21.6) (17.0) (18.3) (14.1)
------ ------ ------ ------ ------
Income (loss) from operations.... (4.0) 4.3 22.6 19.6 30.1
Interest expense................. (27.0) (26.7) (29.1) (29.7) (24.1)
------ ------ ------ ------ ------
Income (loss) before minority
interest and extraordinary item. (31.0) (22.4) (6.5) (10.1) 6.0
(Income) loss allocated to
minority interest............... 19.1 7.7 3.7 4.5 (.5)
------ ------ ------ ------ ------
Income (loss) before
extraordinary item.............. (11.9) (14.7) (2.8) (5.6) 5.5
Extraordinary item............... -- -- 14.9 -- --
------ ------ ------ ------ ------
Net income (loss)................ (11.9)% (14.7)% 12.1% (5.6)% 5.5%
====== ====== ====== ====== ======
Selected Operating and Other
Data:
Total units operated (2)......... 577 918 918 918 918
Occupancy rate (2)............... 79.9% 95.6% 98.1% 98.8% 99.3%
Average monthly revenue per unit
(3)............................. $1,454 $1,732 $2,015 $1,963 $2,060
</TABLE>
- ---------------------
(1) Historically, general and administrative expenses have not been incurred
with regard to the Original Facilities, however, upon the completion of the
Offering, the Company will incur and report general and administrative
expenses as a separate item. See Pro Forma Combined Condensed Statements of
Operations.
(2) Total units operated represents total units operated as of the end of the
period for Original Facilities (the Hallmark facility was not acquired
until June 1994). Occupancy rate is calculated by dividing total occupied
units by total units operated as of the end of the period for the Original
Facilities.
(3) Average monthly revenue per unit represents the average of the total
monthly resident fees divided by occupied units at the end of the period,
averaged over the respective period presented and for the period of time in
operation during the period for the Original Facilities.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue. Resident fees revenue increased approximately $881,000, or 5.5%, to
$16.9 million for the nine months ended September 30, 1996. The increase was
primarily due to a 5% increase in average monthly revenue per unit and a 0.5%
increase in occupancy percentage from the nine months ended September 30, 1995
to the nine months ended September 30, 1996. The occupancy rate for the
Original Facilities during the nine months ended September 30, 1996 was 99.3%
as compared to 98.8% during the nine months ended September 30, 1995. The
average monthly revenue per unit increased by $97 per unit, to $2,060 per unit,
for the nine months ended September 30, 1996 as compared to $1,963 per unit for
the nine months ended September 30, 1995.
Operating Expenses. Facility operating expenses decreased approximately
$523,000, or 5.3%, to $9.4 million for the nine months ended September 30,
1996. The primary reason for the decrease was due to more efficient operations
at the Original Facilities and economies of scale created by the increase in
occupancy and revenue. This was evidenced by the decrease in these expenses as
a percentage of revenue to 55.8%, for the nine months ended September 30, 1996
compared to 62.1% for the nine months ended September 30, 1995. In addition,
property management fees (such management fees, which were paid to PGI, will
not be payable after the Formation) decreased approximately $98,000, or 12.3%,
due primarily to a reduction of the Hallmark's management fees, effective
January 1, 1996, from 5.0% of net operating income to 3.0%.
Depreciation and amortization expense decreased approximately $550,000, or
18.7%, to $2.4 million for the nine months ended September 30, 1996 primarily
due to amortization of deferred marketing fees related to
23
<PAGE>
the Heritage facility that became fully amortized in August 1995. Amortization
expense contributed approximately $591,000 to depreciation and amortization
expense in 1995 and was partially offset by an increase in depreciable assets
at each of the Original Facilities.
Interest and financing fees expense decreased approximately $683,000, or
14.4%, to $4.1 million for the nine months ended September 30, 1996 due
primarily to the refinancing of the Hallmark mortgage payable at the end of
1995. This refinancing resulted in savings of approximately $477,000 as the new
note bears a fixed rate of interest of 7.265% per annum whereas the old note
accrued interest at a rate of LIBOR plus 2.5% per annum. For the nine months
ended September 30, 1995, the interest rate on the old note ranged from 8.75%
to 9.0%. In addition, the Devonshire and the Heritage facilities experienced
lower interest rates on their variable rate bonds for the first nine months of
1996 than for the same period in 1995, which resulted in additional savings of
approximately $238,000. Interest rates on these bonds (exclusive of credit
enhancement and other fees) averaged approximately 3.2% for the nine months
ended September 30, 1996 as compared to an average rate of approximately 3.7%
for the nine months ended September 30, 1995. These decreases in interest
expense were slightly offset by increased financing fees associated with the
Devonshire and the Heritage bonds for the nine month period ended September 30,
1996.
Income (Loss) Before Minority Interest and Net Income (Loss). Income before
minority interest and net income increased approximately $2.6 million and $1.8
million, respectively, to approximately $1.0 million and $924,000,
respectively, for the nine months ended September 30, 1996 compared to a loss
before minority interest and net loss of $1.6 million and $897,000,
respectively, for the nine months ended September 30, 1995 due primarily to an
increase in operating revenue and a decrease in operating expenses, as
described above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Revenue. Resident fees revenue increased approximately $6.7 million, or
44.3%, to $21.9 million in 1995. Of this increase, $4.9 million related to a
full year of operations at the Hallmark facility in 1995 versus seven months in
1994, while the remainder of this increase was due primarily to increases in
average monthly revenue per unit at the Original Facilities and occupancy rates
for 1994 as compared to 1995. The occupancy rate for the Original Facilities
during 1995 increased 2.5% to 98.1% from 95.6% during 1994. The average monthly
revenue per unit increased by $283 per unit, to $2,015 per occupied unit, for
1995 as compared to $1,732 per unit for 1994.
Operating Expenses. Facility operating expenses increased approximately $2.0
million, or 17.6%, to $13.3 million in 1995. The primary reason for the
increase was an increase of $1.9 million in facility operating expenses at the
Hallmark facility due to a full year of operations versus only seven months in
1994. Real estate taxes increased approximately $120,000, or 13.4%, to $1.0
million in 1995 again due to a full year of taxes being expensed for the
Hallmark facility. Real estate taxes at both the Devonshire and Heritage
facilities were consistent from year to year. Property management fees (such
management fees, which were paid to PGI, will not be payable after the
Formation) increased approximately $327,000, or 44.0%, to $1.1 million in 1995
primarily due to a full year of fees assessed at the Hallmark facility and
increased revenues at the Devonshire and Heritage facilities. However, the
Original Facilities were run more efficiently and economies of scale created by
the increase in occupancy and revenue are evidenced by the reduction of these
expenses as a percentage revenue decreasing to 60.4% for the year ended
December 31, 1995 from 74.1% for the year ended December 31, 1994.
Depreciation and amortization expense increased approximately $435,000, or
13.2%, to $3.7 million in 1995. Of this increase, approximately $511,000
related to a full year of depreciation at the Hallmark facility and $121,000
related to an increase of depreciable assets at the Original Facilities. These
increases were partially offset by a decrease of $197,000 in the amortization
of deferred marketing costs at the Heritage facility that became fully
amortized in mid 1995.
Interest and financing fees expense increased 57.5%, or $2.3 million, to $6.4
million. Of this increase, approximately $1.7 million was due to twelve months
of interest expense at the Hallmark facility for 1995 in
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<PAGE>
comparison to only seven months in 1994. In addition, approximately $612,000 of
additional interest expense related to the variable-rate bonds that encumber
both the Devonshire and Heritage facilities was recognized in 1995 due to
increased interest rates. Interest rates on the bonds (exclusive of credit
enhancement and other fees) averaged 3.9% in 1995 versus 2.9% in 1994. The
Devonshire and Heritage facilities also realized an increase in financing fees
in 1995 as a standard fee of 1.35% of the outstanding bond balance was imposed.
This created a $135,000 increase in financing fees from the prior year. The
above mentioned increases were partially offset by a $117,000 reduction to
interest expense related to a note payable to an affiliate that was paid off in
1994.
In December 1995, the owner of the Hallmark facility repaid its original
mortgage note from the proceeds of a new note at a discount of approximately
$3.3 million, which was recognized as an extraordinary gain on the
extinguishment of debt.
Income (Loss) Before Minority Interest and Net Income (Loss). Loss before
minority interest decreased approximately $2.0 million to approximately $1.4
million and net income increased approximately $5.3 million to $1.9 million in
1995 compared to a loss before minority interest and net loss of $3.4 million
and $2.2 million, respectively, in 1994 due primarily to an extraordinary gain
on the extinguishment of the mortgage debt on the Hallmark facility debt and
increased revenues at the Original Facilities, both described above. Partially
offsetting the extraordinary gain and increase in operating revenue was an
increase in operating expenses, as described above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Revenue. Resident fees revenue increased approximately $8.6 million, or
129.1%, to $15.2 million in 1994. The increase was primarily due to the
addition of the Hallmark facility in 1994 that contributed approximately $4.7
million to total revenues. In addition, the Heritage facility experienced a
$3.4 million increase in revenues due to a full year of operations in 1994 (the
Heritage facility opened in September 1993). The balance of the increase was
related to an increase in the average monthly revenue per unit for the
Devonshire and Heritage facilities of $99 to $1,553 for 1994 from $1,454 for
1993 and a 18.7% increase in occupancy rate to 98.6% for 1994 from 79.9% for
1993. Overall average monthly revenue per unit increased $278 and overall
occupancy percentage increased 15.7% from 1993 to 1994 to $1,732 and 95.6%,
respectively.
Operating Expenses. Facility operating expenses increased approximately $6.0
million, or 113.5%, to $11.3 million in 1994, primarily due to the addition of
the Hallmark facility and a full year of operations at the Heritage facility.
Real estate taxes increased approximately $470,000, or 112.9%, to $887,000 due
to the factors mentioned above and a higher assessed real estate valuation for
the Devonshire facility. Property management fees (such management fees, which
were paid to PGI, will not be payable after the Formation) increased
approximately $418,000, or 128.3%, to $744,000 due to increased revenue.
However, the Original Facilities experienced economies of scale created by the
increase in occupancy and revenue as evidenced by the reduction of these
expenses as a percentage of revenue decreasing to 74.1% for 1994 from 79.5% for
1993.
Depreciation and amortization expense increased approximately $1.7 million,
or 102.1%, to $3.3 million. Of this increase, the addition of the Hallmark
facility contributed $700,000 in depreciation and a full year of operations for
the Heritage facility resulted in an additional $966,000 of depreciation and
amortization.
Total interest and financing fees expense increased approximately $2.3
million, or 126.3%, to $4.1 million due primarily to $1.4 million in interest
expense incurred in 1994 on the mortgage note secured by the Hallmark facility.
In addition, interest and related financing fees on the variable rate bonds
related to the Heritage facility increased $942,000 in 1994 as these amounts
were expensed commencing in September 1993. Prior to this time, interest and
financing fees were capitalized as part of the cost of the building. The
balance of the increase was due to increased interest rates on the Devonshire's
variable rate bonds.
Loss Before Minority Interest and Net Loss. Loss before minority interest and
net loss increased approximately $1.3 million and $567,000, respectively, to
$3.4 and $2.2 million, respectively, in 1994 compared
25
<PAGE>
to a net loss of $2.1 million and $793,000, respectively, in 1993 due primarily
to an increase in total expenses as described above. Partially offsetting the
increase in operating expenses was an increase in operating revenue, as
described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided (used) by operations totaled approximately $3.4 million and
$836,000 for the nine months ended September 30, 1996 and 1995, respectively,
and approximately $620,000, $2.2 million and ($1.1) million for each of the
three years ended December 31, 1995, 1994 and 1993, respectively. The variance
in cash flows from operations during the foregoing periods resulted primarily
from the effects of increases in various liabilities in 1994 due to the
acquisition of the Hallmark facility and improved operating results of the
Original Facilities during the nine months ended September 30, 1996. Cash
totaled $1.9 million, $5.5 million, $4.2 million, $4.1 million and $497,000 at
September 30, 1996 and 1995 and December 31, 1995, 1994 and 1993, respectively.
Net cash used in investing activities totaled approximately $276,000 and
$33,000 for the nine months ended September 30, 1996 and 1995, respectively,
and approximately $167,000, $43.8 million and $12.9 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Brookdale's investing
activities included capital expenditures of $42.1 million related to the
acquisition of the Hallmark facility in 1994, $9.9 million for the completion
of the Heritage facility in 1993 and improvements to existing operations
totaling $254,111 and $5,558 for the nine months ended September 30, 1996 and
1995, respectively, and $238,633, $1.1 million and $144,100 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Management believes that its capital expenditure program is adequate to
improve and equip its existing facilities, and expects to finance such
expenditures primarily through cash flows from operations. Excluding the
acquisition and development of new facilities, management believes that capital
expenditures related to the construction of the 82-bed skilled nursing facility
adjacent to the Devonshire facility will approximate $5.0 million and the
expansion of the Hawthorn Lakes facility will approximate $5.0 million. The
funds necessary for such capital expenditures are expected to be provided by
NPC, the owner and lessor of such facilities, and the annual base rent payable
by the Company under the net leases for such facilities will be increased by an
amount equal to 10.0% of any amounts so funded by NPC.
Net cash (used in) provided by financing activities was approximately ($5.4)
million and $574,000 for the nine months ended September 30, 1996 and 1995,
respectively, and approximately ($378,000), $45.2 million and $12.1 million for
the years ended December 31, 1995, 1994 and 1993, respectively. The activity
primarily relates to advances made to the general partner in 1996, the payment
of the principal portion of debt and distributions to partners and additional
financing and partner contributions to fund the acquisition of the Hallmark
facility in 1994 and the completion of the Heritage facility in 1993.
Brookdale plans to retain future earnings, if any, to finance the growth of
its business rather than to pay cash dividends. Payments of any cash dividends
in the future will depend on the financial condition, results of operations and
capital requirements of the Company as well as other factors deemed relevant by
the Board of Directors.
The Company currently plans to acquire or lease approximately three to five
facilities per year containing an aggregate of approximately 800 to 1,000
units, and to commence development of at least three new facilities per year
containing approximately 200 units each in urban and suburban areas in major
metropolitan markets. The Company anticipates that new developments will
require eight to 10 months for pre-construction development, 12 to 14 months
for construction and approximately 12 months after opening to achieve
stabilized occupancy. The development costs for the 175-unit prototype are
estimated to be approximately $20 million, or approximately $115,000 per unit.
The Company anticipates that it will use a combination of net proceeds from the
Offering, additional equity financing and debt financing, lease transactions
and cash generated from operations to fund its acquisition and development
activity. The Company currently estimates that the net proceeds from the
Offering, together with anticipated financing commitments, will be sufficient
to fund its acquisition and development plans for approximately 15 months
following completion of the Offering. Therefore, in order to achieve its growth
plans, the Company will be required to obtain a substantial amount of
additional
26
<PAGE>
financing. The Company presently has no commitment, arrangement or
understanding regarding financing to fund the debt portion of the Company's
development plans. There can be no assurance that the Company will be able to
obtain financing for its development program.
The Company has obtained a non-binding term sheet from a financial
institution for a $50 million revolving line of credit (the "Acquisition Line")
for loans to finance the acquisition of senior and assisted living facilities.
The Company will guarantee repayment of all amounts outstanding under the
Acquisition Line. The Acquisition Line is expected to have a term of three
years and to be secured by cross-collateralized first mortgages on the real
property and improvements financed with funds drawn under the Acquisition Line
and a pledge of receivables relating to such facilities. With respect to each
advance, payments of interest only are expected to be required for the first
year and payments of interest and amortization of principal are expected to be
required thereafter. Advances under the Acquisition Line are expected to bear
interest at a variable rate per annum of 30-day LIBOR plus 2.35% to 2.75%.
The documentation for the Acquisition Line and the Company's other financing
documents will contain terms and conditions and representations and warranties
that are customary for such loans and are expected to contain financial
covenants and other restrictions that (i) require the Company to meet certain
financial tests and maintain certain escrows of funds, (ii) limit, among other
things, the ability of the Company to borrow additional funds, dispose of
assets and engage in mergers or other business combinations, and (iii) restrict
the ability of the Company to operate competing facilities within certain
distances from mortgaged facilities. See "Risk Factors--Adverse Consequences of
Indebtedness; Floating Rate Debt."
The Company has $99.4 million of long-term indebtedness as of September 30,
1996 ($39.8 million pro forma after giving effect to the Formation) of which
$65.0 million is tax-exempt bonds with floating rates. See Unaudited Pro Forma
Combined Condensed Financial Statements contained elsewhere in this Prospectus.
The interest rates (exclusive of credit enhancement and other fees) on such
debt averaged 2.9% in 1994 and 3.9% in 1995. Such tax-exempt bonds contain
covenants requiring the facilities to maintain a minimum number of units for
income qualified residents. The Company may enter into similar bond financing
in the future. See "Risk Factors--Adverse Consequences of Indebtedness;
Floating Rate Debt."
Following the Offering, the Company will be dependent on third-party
financing for its acquisition and development program. Except for the
Acquisition Line, 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 or leases facilities that do
not generate positive cash flow (after financing or lease costs, as
applicable), the Company may be required to seek additional capital for working
capital and liquidity purposes. See "Risk Factors--Need for Additional
Financing."
IMPACT OF INFLATION
Resident fees from senior and assisted living facilities owned or leased by
the Company and management fees from facilities operated by the Company are its
primary sources of revenue. These revenues are affected by monthly fee rates
and facility occupancy rates. The rates charged for the delivery of senior and
assisted living services are highly dependent upon local market conditions and
the competitive environment in which the facilities operate. In addition,
employee compensation expense is a principal cost element of facility
operations. Substantially all of the Company's resident agreements are for
terms of approximately one year and allow, at the time of renewal, for
adjustments in the monthly fees payable thereunder, and thus may enable the
Company to seek increases in monthly fees due to inflation or other factors.
Any such increase would be subject to market and competitive conditions and
could result in a decrease in occupancy at the Company's facilities. The
Company believes, however, that the short-term nature of its resident
agreements generally serves to reduce the risk to the Company of the adverse
effect of inflation. There can be no assurance that resident fees will increase
or that costs will not increase due to inflation or other causes. See "Risk
Factors--Adverse Consequences of Indebtedness; Floating Rate Debt."
27
<PAGE>
BUSINESS
OVERVIEW
Brookdale provides senior and assisted living services to the elderly through
its facilities located in urban and suburban areas of major metropolitan
markets. The Company operates nine senior and assisted living facilities
containing a total of 1,968 units which, as of September 30, 1996, were
approximately 99% occupied. The Company owns three of such facilities, leases
four facilities under long-term net operating leases and manages two other
facilities pursuant to management contracts. With facilities that contain an
average of 220 units, the Company believes Brookdale is able to achieve
economies of scale within its facilities and provide senior and assisted living
services in a more cost-effective manner. The Company plans to acquire or lease
approximately three to five facilities per year containing an aggregate of
approximately 800 to 1,000 units, and to commence development of at least three
new facilities per year containing approximately 200 units each. Brookdale had
pro forma revenues and net income for the nine months ended September 30, 1996
of $28.7 million and $1.4 million, respectively. All of the Company's revenues
are derived from private pay sources. See "Risk Factors--Uncertainty of
Proposed Acquisitions by NPC," "--Difficulties of Integration; Future
Acquisition Risks," "--Development and Construction Risks" and "--Need for
Additional Financing" and "Certain Transactions."
Brookdale's facilities are designed for middle to upper income residents who
desire an upscale residential environment providing the highest level of
quality, care and value. The Company's objective is to allow its residents to
age in place by providing them with a continuum of senior and assisted living
services. By providing residents a range of service options as their needs
change, Brookdale seeks to achieve a greater continuity of care, thereby
enabling seniors to maintain their residency for a longer time period. The
ability to allow residents to age in place is beneficial to Brookdale's
residents as well as their families who are burdened with care option decisions
for their elderly relatives. In addition to studio, one-bedroom and two-bedroom
units, the Company provides all residents with basic services, such as meal
service, 24-hour emergency response, housekeeping, concierge services,
transportation and recreational activities. For residents who require
additional supplemental care services, the Company provides assistance with
certain activities of daily living. The average age of Brookdale's residents is
approximately 82 years old, and many of these residents require some level of
assistance with their activities of daily living. Supplemental care services
are provided either by the Company or by outside services or agencies. It is
the Company's intention to bring "in-house" as many of these services as
practicable.
THE SENIOR AND ASSISTED LIVING INDUSTRY
The senior and assisted living industry is a rapidly growing component of the
non-acute health care system for the elderly. According to industry analysts,
the senior and assisted living industry generated approximately $10 to $12
billion in revenues in 1995 and are expected to grow significantly over the
next several years. The senior living industry serves the needs of the elderly
who require or prefer occasional assistance with the activities of daily living
and who no longer desire, or cannot maintain, an independent lifestyle. It is
estimated that 35% of the people over age 85 require assistance with at least
one activity of daily living, such as bathing, eating, personal hygiene,
grooming and dressing. The senior and assisted living industry remains highly
fragmented, with only 5% of the industry's units operated by the 20 largest
companies in the industry, which provides opportunities for industry
consolidation.
The rapid growth of the senior and assisted living industry is supported by
several significant trends, including the following:
FAVORABLE DEMOGRAPHICS. The primary consumers of senior and assisted living
services are persons over age 65. This group represents one of the fastest
growing segments of the U.S. population. According to U.S. Bureau of the Census
data, the number of people in the U.S. age 65 and older increased by more than
27% from 1981 to 1994, growing from 26.2 million to 33.2 million. The segment
of the population over 85 years of age, which comprises the largest percentage
of residents at senior care facilities, is projected to increase by more than
40% between the years 1990 and 2000. Brookdale believes that these trends,
depicted in the graph below, will contribute to continued strong demand for
senior and assisted living services.
28
<PAGE>
PROJECTED PERCENTAGE CHANGE IN THE ELDERLY POPULATION OF THE U.S.
LOGO
CONSUMER PREFERENCE. The Company believes that senior and assisted living
facilities provide prospective residents and their families with an attractive
alternative to skilled nursing facilities. Senior and assisted living
facilities, which are generally furnished by residents, allow residents to age
in place and preserve their independence in a more residential setting. The
Company believes these factors result in a higher quality of life than that
experienced in the more institutional or clinical settings, such as skilled
nursing facilities.
COST-EFFECTIVE ALTERNATIVE. The annual per resident cost for senior and
assisted living care is significantly less than the annual per resident cost
for skilled nursing care. The Company believes that the cost of senior and
assisted living care (which includes housing and meal preparation) compares
favorably with home health care when the costs associated with housing and meal
preparation are added to the costs of home health care. Pricing pressure is
also forcing skilled nursing facilities to shift their focus toward providing
more intense levels of care enabling them to charge higher fees, thus adding to
the shortage of facilities where less intensive care is available. The rapid
growth of the elderly population coupled with continuing constraints on the
supply and availability of long term care beds is leading to a continued
shortage of long term care beds for the elderly, as the table below
illustrates.
DECLINE IN NURSING BEDS PER THOUSAND
FOR INDIVIDUALS 85 YEARS OR OLDER
LOGO
CHANGING FAMILY DYNAMICS. As a result of the growing number of two-income
families, many children are not able to care for elderly parents in their own
homes. Two-income families are, however, better able to provide financial
support for elderly parents. In addition, other factors, such as the growth in
the divorce rate and single-parent households, as well as the increasing
geographic dispersion of families, have contributed to the growing inability of
children to care for aging parents in the home.
29
<PAGE>
BUSINESS AND GROWTH STRATEGY
The Company's business and growth strategy is based on the following key
elements:
ACQUIRE AND LEASE EXISTING SENIOR AND ASSISTED LIVING FACILITIES. The Company
believes that significant opportunities exist to take advantage of the
fragmented senior and assisted living industry by selectively acquiring or
leasing existing facilities. The Company's acquisition strategy will focus
primarily on facilities that are designed or can be repositioned by the Company
for middle to upper-income private pay residents. Acquisitions will primarily
consist of large facilities, similar to the Company's current facilities that
contain an average of 220 units, located in urban and suburban areas of major
metropolitan markets. The Company believes that its future acquisitions will
offer opportunities to enhance income by bringing supplemental services in-
house and by operating its facilities more efficiently by implementing the
Company's standardized operating procedures. See "Risk Factors--Difficulties of
Integration; Future Acquisition Risks."
DEVELOP THE BROOKDALE PROTOTYPE FACILITY IN TARGETED MARKETS. The Company
intends to leverage its development expertise and construct its prototype
facility in selected sites located in urban and suburban areas of major
metropolitan markets. The Company's prototype facility, which is flexible and
can be adapted to the specific requirements of individual markets and site
requirements, contains 175 units, but can be constructed to accommodate between
150 and 225 units. The prototype offers a mix of studio, one-bedroom and two-
bedroom units and common areas providing premium amenities. The Company intends
to begin development of three facilities in each of the next five years, and
anticipates that each development will require approximately 20 to 24 months
from pre-development to completion of construction. See "Risk Factors--
Development and Construction Risks."
PROVIDE ACCESS TO A FULL CONTINUUM OF SENIOR AND ASSISTED LIVING SERVICES.
The Company's strategy is to provide access to a full continuum of senior and
assisted living services allowing its residents' to age in place. This allows
the Company's residents to obtain a range of care as they become more frail or
as their health care needs become more acute. These services are provided
either by the Company or by outside services or agencies. It is the Company's
strategy to increase the availability of additional services and to capture the
majority of the revenue generated by providing these services through Company
employees. In addition, one of Brookdale's goals is to establish hospital
affiliations for each of its facilities. Hospital affiliations provide for on-
site physician and nursing services and facilitate the provision of health care
services and wellness programs to the Company's residents. In order to offer
residents a complete range of care options, the Company is presently developing
an 82-bed skilled nursing facility on the campus of the Devonshire facility.
The Company may pursue the development of additional skilled nursing facilities
at its other facilities in selected markets. See "Risk Factors--Development and
Construction Risks," "Use of Proceeds" and "--Hospital Affiliations."
UTILIZE SOPHISTICATED MARKETING AND MANAGEMENT PROGRAMS. The Company utilizes
sophisticated marketing and management programs to achieve high occupancy rates
and financial performance, which as of September 30, 1996 was approximately 99%
in the Original Facilities. The Company believes that its programs will improve
the occupancy rates of facilities that the Company acquires or leases in the
future. The Company's marketing programs are designed to create community
awareness of the Company, its facilities and its services, and to cultivate
relationships with referral sources such as health care providers, physicians,
clergy, area agencies for the elderly, home health agencies and social workers.
In addition, hospital affiliations have been successfully implemented by the
Company at the Original Facilities, which provide referrals of prospective
residents. The Company believes that the success of its marketing programs is
demonstrated not only by its high occupancy rates, but also by the Company's
ability to maintain waiting lists at its facilities for prospective residents
who pay a deposit in order to be included on such lists. See "--Company
Operations--Marketing and Sales."
UTILIZE OPERATIONAL EXPERTISE TO ENHANCE PROFITABILITY. The Company has
developed and successfully implemented sophisticated management and operational
procedures at its Original Facilities resulting in strong operating margins and
occupancy rates at these facilities. These procedures include securing national
vendor contracts where feasible to ensure consistent low pricing, implementing
sophisticated budgeting and financial
30
<PAGE>
controls at each facility and establishing standardized training and operations
procedures. The Company believes that the systematic implementation of its
management and operations policies will enable the Company to enhance the
financial performance of its existing and future facilities and continue to
improve the profitability of its stabilized facilities. See "Risk Factors--
Uncertainty of Proposed Acquisitions by NPC," "--Difficulties of Integration;
Future Acquisition Risks" and "--Development and Construction Risks."
EXPAND FACILITIES WHERE ECONOMICALLY ADVANTAGEOUS. The Company has found that
certain senior and assisted living facilities with stabilized occupancies
benefit from additions and expansions offering increased capacity, as well as
additional levels of service for higher acuity residents. Furthermore, the
expansion of existing facilities allows the Company to enhance its economies of
scale by increasing the revenue base while leveraging the existing facility's
infrastructure such as laundry and the kitchen. In addition to the planned 82-
bed skilled nursing facility on the campus of the Devonshire facility, the
Company is currently planning to expand its Hawthorn Lakes facility in Vernon
Hills, Illinois with an additional 57 units. See "Risk Factors--Development and
Construction Risks."
FACILITIES
The following table sets forth certain information regarding the Company's
facilities:
<TABLE>
<CAPTION>
OCCUPANCY
YEAR RATE(1) OWNERSHIP
FACILITY LOCATION UNITS OPENED 1994 1995 1996 STATUS(2)
<S> <C> <C> <C> <C> <C> <C> <C>
The Hallmark(3)......... Chicago, IL 341 1990 91% 99% 100% Owned
The Devonshire(3)(4).... Lisle, IL 323 1990 99% 98% 98% Leased
The Heritage(3)(4)...... Des Plaines, IL 254 1993 99% 100% 100% Leased
The Island on Lake
Travis(5).............. Lago Vista, TX 206 1988 94% 95% 98% Managed
Hawthorn Lakes(4)....... Vernon Hills, IL 202 1987 -- -- 100% Leased
Edina Park Plaza(4)..... Edina, MN 201 1987 -- -- 99% Leased
The Springs of East
Mesa(6)................ Mesa, AZ 185 1986 -- -- 100% Owned
The Kenwood(7).......... Minneapolis, MN 153 1987 -- -- 100% Managed
The Gables at
Brighton(6)............ Brighton, NY 103 1988 -- -- 100% Owned
-----
Total Units......... 1,968(8)
</TABLE>
- ---------------------
(1) The occupancy rate, which is calculated by dividing the number of occupied
units by the number of available units, was determined as of December 31,
1994 for the 1994 occupancy rate indicated, as of December 31, 1995 for the
1995 occupancy rate indicated and as of September 30, 1996 for the 1996
occupancy rate indicated. If the occupancy rate is not indicated, such
occupancy rate was not available because the Company did not operate the
facility during such year.
(2) All facilities indicated as "Owned" are 100% owned by Brookdale.
(3) This facility is one of the Original Facilities.
(4) This facility is one of the Leased Facilities. See "The Company and the
Formation" for a description of the terms of the lease applicable to this
facility. See "Risk Factors--Uncertainty of Proposed Acquisitions by NPC."
(5) The management agreement for this facility is expected to have an initial
term of two years, cancellable by the Company at any time upon 60 days'
prior written notice (and by PGI only for cause as set forth in the
agreement during its initial term), and a management fee of 5.0% of gross
revenues and reimbursement of expenses. See "Certain Transactions."
(6) This facility is one of the Acquired Facilities.
(7) The management agreement for this facility is expected to have a ten-year
term, cancellable upon six months' notice after the 29th month of its term,
and a management fee of 3.0% of gross revenues and reimbursement of
expenses. In addition, the management agreement is expected to provide the
Company with an option to purchase this facility.
(8) Excluding the planned 82-bed skilled nursing facility at the Devonshire
facility and the 57-unit expansion at the Hawthorn Lakes facility.
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SERVICES
The Company's senior and assisted living facilities offer residents personal
support services and assistance with certain activities of daily living in a
supportive, home-like setting. Residents of the Company's facilities are
typically unable or choose not to live independently, but do not require the
24-hour nursing care provided in skilled nursing facilities. The Company's
service options are designed to meet residents' changing needs and to achieve a
continuity of care, enabling seniors to age in place and thereby maintain their
residency for a longer time period.
BASIC CARE PROGRAM
The basic care package, which is received by all residents, includes meal
service, housekeeping services within the resident's unit, social and
recreational activities, scheduled transportation to medical centers and
shopping, security, emergency call response, access to on-site medical services
and medical education and wellness programs.
SUPPLEMENTAL CARE SERVICES
In addition to the basic care services, the Company offers custom tailored
supplemental care services for residents who desire or need such services.
Optional supplemental care services include check-in services and shopping,
escort and companion services. Residents with cognitive or physical frailties
and higher level service needs are either accommodated with supplemental
services in their own units or, in certain facilities, are cared for in a more
structured and supervised environment on a separate wing or floor of the
facility with a dedicated staff and with separate dining rooms and activity
areas.
At present, many residents receive supplemental services from outside third
parties. The Company has also established a program providing various levels
and combinations of supplemental care services called "Personally Yours"SM.
This personal service program provides certain non-licensed services, such as
companion services, assistance with dressing and bathing, medication reminders,
check-in services, shopping and escort services. The Company plans to expand
its supplemental service offerings, where permitted, in order to capture
incremental revenue and enable its residents to remain in its facilities
longer. In addition, where practicable, the Company intends to obtain licensure
to provide licensed home health services to residents.
Certain services, such as physician care, infusion therapy, physical and
speech therapy and other home health care services, are provided to many of
Brookdale's residents who need these services by third parties. The Company
assists residents in locating qualified providers for such health care
services.
COMPANY OPERATIONS
OVERVIEW
The Company continually reviews opportunities to expand the amount of
services it provides to its residents. To date, the Company has been able to
increase its monthly service fees on an annual basis and has experienced
increasing facility operating margins at the Original Facilities through a
combination of the implementation of efficient operating procedures and the
economies of scale associated with its larger than average facilities. The
Company's operating procedures include securing national vendor contracts where
appropriate to obtain consistent low pricing, implementing sophisticated
budgeting and financial controls at each facility and establishing standardized
training and operations procedures. The Company believes that successful senior
and assisted living operators must combine health care, hospitality and real
estate operations expertise.
Brookdale has implemented intensive standards, policies and procedures
systems, including detailed staff manuals, which the Company believes has
contributed to Brookdale's high facility operating margins. The Company has
centralized accounting, finance and other operating functions at its corporate
headquarters so that, consistent with its operating philosophy, facility-based
personnel focus on resident care. Headquarters staff in
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Chicago, Illinois are responsible for: the establishment of Company-wide
policies and procedures relating to, among other things, resident care,
facility design and facility operations; billings and collections; accounts
payable; finance and accounting; development of employee training materials and
programs; marketing activities; the hiring and training of management and other
facility-based personnel; compliance with applicable local and state regulatory
requirements; and implementation of the Company's acquisition, development and
leasing plans.
FACILITY STAFFING AND TRAINING
Each facility has an Executive Director responsible for the day-to-day
operations of the facility, including quality of care, social services and
financial performance. Each Executive Director receives specialized training
from the Company. In addition, a portion of each Executive Director's
compensation is directly tied to the operating performance of the facility and
to the maintenance of high occupancy levels. The Company believes that the
quality and size of its facilities, coupled with its competitive compensation
philosophy, have enabled it to attract high-quality, professional
administrators. Each Executive Director is supported by a Resident Services
Director who is directly responsible for day-to-day care of the residents, and
by a Marketing Director, who oversees marketing and community outreach
programs. Other key positions at each facility include the Food Service
Director, the Activities Director, the Housekeeping Director, the Engineering
Director and the Business Manager. See "Risk Factors--Dependence on Senior
Management and Skilled Personnel."
The Company believes that quality of care and operating efficiency can be
maximized by direct resident and staff contact. Employees involved in resident
care, including the administrative staff, are trained in the support and care
needs of the residents and emergency response techniques. The Company has
adopted formal training and evaluation procedures to help ensure quality care
for its residents. The Company has extensive policy and procedure manuals for
each department, and holds ongoing training sessions for management and staff
at each site. See "Risk Factors--Difficulties of Managing Rapid Growth."
QUALITY ASSURANCE
The Company maintains quality assurance programs at each of its facilities
through its corporate headquarters staff. The Company's quality assurance
program is designed to achieve a high degree of resident and family member
satisfaction with the care and services provided by the Company. The Company's
quality control measures include, among other things, facility inspections
conducted by corporate staff on at least a monthly basis. These inspections
cover: the appearance of the exterior and grounds; the appearance and
cleanliness of the interior; the professionalism and friendliness of staff;
resident care plans; the quality of activities and the dining program;
observance of residents in their daily living activities; and compliance with
government regulations.
The Company's quality control measures also include the survey of residents
and family members on a regular basis to monitor the quality of services
provided to residents. The survey process begins with a visitor's survey sent
one week following a potential resident's visit to a facility to ascertain his
or her opinions and initial impressions. Detailed annual written surveys and
exit surveys are used to appraise and monitor the level of satisfaction of
residents and their families with facility operations and services.
In order to foster a sense of community as well as to respond to residents'
desires, at each facility the Company has initiated the establishment of a
resident council, an advisory committee elected by the residents, that meets
monthly with the Executive Director of the facility. Separate resident
committees also exist for food service, activities, marketing and hospitality.
These committees promote resident involvement and satisfaction and enable
facility management to be more responsive to the residents' needs and desires.
MARKETING AND SALES
The Company's marketing strategy is intended to create awareness of the
Company and its services among potential residents and their family members and
referral sources, such as hospital discharge planners, physicians, clergy, area
agencies for the elderly, skilled nursing facilities, home health agencies and
social workers.
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Brookdale's marketing staff develops overall strategies for promoting the
Company and monitors the success of the Company's marketing efforts. Each
facility has a Director of Marketing who oversees the facility's marketing and
outreach programs and supervises the on-site marketing staff and move-in
coordinators. Besides direct contacts with prospective referral sources, the
Company also relies on print advertising, yellow pages advertising, direct
mail, signage and special events, such as grand openings for new facilities,
health fairs and community receptions. In addition, resident referral programs
have been established and are promoted at each facility. See "Risk Factors--
Competition."
HOSPITAL AFFILIATIONS
Another key element in the Company's strategy is to establish affiliations
between Brookdale's facilities and hospitals. The Hallmark and the Heritage
facilities are affiliated with Saint Joseph Health Centers and Hospital and
Holy Family Hospital, respectively, pursuant to agreements with the respective
hospitals. Both agreements grant the hospitals the right to lease space from
the Company at the respective facilities and provide that the hospitals will
maintain centers in the facilities to make services available to facility
residents. Each hospital pays rent for its leased space and the Company
compensates the hospitals for making the services they render available at the
facilities. The annual amounts paid by the hospitals pursuant to the rental
arrangements at the Hallmark and Heritage facilities are approximately equal to
the annual amounts paid by such facilities to such respective hospitals
pursuant to the applicable compensation arrangements. The agreement regarding
the Heritage facility terminates in 1998 and the agreement regarding the
Hallmark facility terminates in 1999, but will be automatically extended unless
either the hospital or the Company gives notice of termination. Although not
subject to a written agreement, the Devonshire facility has an affiliation with
Good Samaritan Hospital on terms similar to the agreements regarding the
Hallmark and the Heritage facilities. The Company is in the process of
arranging hospital affiliations for the Acquired Facilities (the Gables at
Brighton and the Springs of East Mesa facilities), and the Hawthorn Lakes and
Edina Park Plaza facilities, and will not be assuming any existing health care
or hospital affiliation agreements at such facilities. In addition, the Company
intends to arrange such affiliations for facilities that it acquires, develops
or leases in the future. Hospital affiliations provide for on-site physician
and nursing services and facilitate the provision of health care services and
wellness programs to the Company's residents and provide the Company with a
referral source.
ACQUISITIONS AND DEVELOPMENT
The Company evaluates markets for acquisition and development opportunities
based on demographics and market studies. The Company's acquisition and
development strategy will focus on the urban and suburban areas of major
metropolitan areas.
ACQUISITIONS
The Company currently expects to acquire three to five facilities per year
containing an aggregate of approximately 800 to 1,000 units. The Company may
acquire facilities as a means of entry to new markets and may also seek to
acquire facilities within its existing markets to gain further market share and
leverage its existing market awareness. Acquisitions are expected to primarily
consist of large facilities that are similar to the Company's current
facilities, which average approximately 220 units per facility. In reviewing
acquisition opportunities, the Company considers, among other things,
underlying demographics, facility location within its neighborhood or
community, the current reputation of the facility in the marketplace and the
ability of the Company to improve a facility's operations. Further, the Company
evaluates the opportunity to improve or enhance services and operating results
through the implementation of the Company's standard operating procedures. See
"Risk Factors--Difficulties of Integration; Future Acquisition Risks" and "--
Need for Additional Financing."
The Company acquired the Hallmark, a 341-unit facility in Chicago, Illinois
in June 1994. Simultaneously with the completion of the Offering, the Company
will acquire the Gables at Brighton, a 103-unit facility in Brighton, New York
and the Springs of East Mesa in Mesa, Arizona. In addition, the Company will
enter into a
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management contract to operate a 150-unit facility in Minneapolis, Minnesota
which also provides Brookdale with an option to acquire such facility. The
Company believes that the Acquired Facilities are similar to the Company's
existing facilities and offer opportunities to enhance income through changes
such as bringing supplemental services in-house and implementing the Company's
standardized operating procedures. Management has extensive contacts in the
senior and assisted living and the health care industries, and the Company is
frequently presented with opportunities to acquire, develop, lease or manage
senior and assisted living facilities. The Company is involved in ongoing
discussions with owners of facilities for future acquisition opportunities. The
Company has a full-time staff, including its Director of Acquisitions,
dedicated to seeking, negotiating and closing acquisition transactions. See
"Risk Factors--Difficulties of Integration; Future Acquisition Risks."
DEVELOPMENT
The Company currently intends to commence the development of approximately
three facilities per year. The Company's flexible prototype facility contains
175 units, but can be constructed to accommodate between 150 to 225 units. The
size of a particular facility will depend on site size, zoning and underlying
market characteristics. The Company's 175-unit prototype contains approximately
165,000 square feet in a four-story building and contains a mix of studio, one-
bedroom and two-bedroom units. In addition to the living units, the Company's
prototype contains common areas for residents, including a living room,
library, billiards room, multi-purpose room, arts and crafts room, exercise
room, convenience store, beauty/barber shop, mail room, dining room and private
dining room. The Company anticipates that new developments will require eight
to 10 months for pre-construction development, 12 to 14 months for construction
and approximately 12 months after opening to achieve stabilized occupancy. The
development costs for the 175-unit prototype are estimated to be approximately
$20 million, or approximately $115,000 per unit.
The Company evaluates markets in which to develop its prototype based on a
number of factors, including demographic profiles of both potential residents
and their adult children, existing competitors and lack of new entrants,
estimated market demand and zoning prospects. Site selection is based on
established criteria relating to land cost and conditions, visibility,
accessibility, immediate adjacencies, community perception and zoning
prospects. Full market feasibility studies, which include evaluations of all
potential competitors, extensive interviews with key community sources and
health care providers and demographic studies, are conducted for each site.
The Company is presented with potential sites by independent brokers,
developers, health care organizations and financial institutions and through
internal site identification. 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
selection criteria, the Company will then conduct a more in-depth analysis of
the market to ensure there is a demonstrated need for senior and 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 will be purchased for development. See "Risk Factors--Development
and Construction Risks" and "--Need for Additional Financing."
COMPETITION
The senior and assisted living services and health care industries are highly
competitive and the Company expects that the senior and assisted living
services 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 senior and assisted living services. The Company will
compete with such facilities primarily on the bases of cost, quality of care
and the array of services provided. The Company will also compete with
companies providing home based health care based on those factors as well as
the reputation, geographic location and physical appearance of facilities and
family preferences. Some of the Company's competitors operate on a not-for-
profit basis or as charitable organizations, or have, or may obtain, greater
financial resources than those of the Company.
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Moreover, in the implementation of the Company's business and growth
strategy, the Company expects to face competition for the acquisition and
development of senior and assisted living facilities. 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
Senior and assisted living facilities are subject to varying degrees of
federal, state and local regulation and licensing by local and state health and
social service agencies and other regulatory authorities. 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; physical plant specifications; furnishing of
resident units; food and housekeeping services; emergency evacuation plans; and
resident rights and responsibilities. In most states, senior and assisted
living facilities also are subject to state or local building codes, fire codes
and food service licensure or certification requirements. Assisted living
facilities may be subject to periodic survey or inspection by governmental
authorities. In Illinois, where the Original Facilities are located, and
perhaps in certain other states in which the Company may operate in the future,
the Company may be unable to provide certain higher levels of assisted living
services without obtaining the appropriate licenses, if applicable. The
Company's success will depend in part on its ability to satisfy such
regulations and requirements and to acquire and maintain required licenses. The
Company's operations could also be adversely affected by, among other things,
regulatory developments such as revisions in licensing and certification
standards.
Some states have adopted certificate of need or similar laws applicable to
assisted living and nursing facilities which generally require that the
appropriate state agency approve certain acquisitions or capital expenditures
and determine that a need exists for certain new bed additions or new services.
Many states have placed a moratorium on granting certificates of need or
otherwise stated their intent not to grant approval for such expenditures. To
the extent certificates of need or other similar approvals are required for
expansion of Company operations, such expansion could be adversely affected by
the failure or inability to obtain the necessary approvals, or possible delays
in obtaining such approvals.
Although the Company currently does not participate in the Medicare or
Medicaid programs, the hospitals with which it has affiliations do participate
in those programs and the Company intends to participate in the Medicare
program at the skilled nursing facility to be constructed at the Devonshire
facility. Also, all of the Company's residents are eligible for Medicare
benefits. Therefore, certain aspects of the Company's business are and will be
subject to federal and state laws and regulations which govern financial and
other arrangements between and among healthcare providers, suppliers and
vendors. These laws prohibit certain direct and indirect payments and fee-
splitting arrangements designed to induce or encourage the referral of patients
to, or the recommendation of, a particular provider or other entity or person
for medical products and services. These laws include, but are not limited to,
the federal "anti-kickback law" which prohibits, among other things, the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. The Office of the Inspector General
of the Department of Health and Human Services, the Department of Justice and
other federal agencies interpret these statutes liberally and enforce them
aggressively. Members of Congress have proposed legislation that would
significantly expand the federal government's involvement in curtailing fraud
and abuse and increase the monetary penalties for violation of these
provisions. Violation of these laws can result in, among other things, loss of
licensure, civil and criminal penalties for individuals and entities, and
exclusion of health care providers or suppliers from participation in the
Medicare and/or Medicaid programs.
In addition, although the Company is not a Medicare or Medicaid provider or
supplier, it is subject to these laws because (i) the state laws typically
apply regardless of whether Medicare or Medicaid payments are at issue, (ii)
the Company plans to build and operate a skilled nursing facility at its
Devonshire facility and may establish licensed home health agencies which are
intended to participate in Medicare, and (iii) as required under some
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state licensure laws, and for the convenience of its residents, some of the
Company's senior and assisted living facilities maintain contracts with
hospitals, who in turn maintain contracts with certain health care providers
and practitioners, including pharmacies, home health agencies and hospices,
through which the health care providers make their health care items or
services (some of which may be covered by Medicare or Medicaid) available to
facility residents. There can be no assurance that such laws will be
interpreted in a manner consistent with the practices of 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 facilities 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 facilities at desired locations or
could result in costly delays, which could adversely affect the Company's
business and growth strategy and results of operations. See "Risk Factors--
Development and Construction Risks" and "--Governmental Regulation."
THE COMPANY AND THE FORMATION
The Company was incorporated in Delaware on September 4, 1996 and is wholly
owned by an affiliate of The Prime Group, Inc. At the completion of the
Offering, the shares owned by such affiliate will be repurchased by the
Company in accordance with a subscription agreement between the Company and
such affiliate at a nominal price. Pursuant to the Formation Agreement (as
defined herein), in connection with the completion of the Offering, PGI will
contribute its interest in the Hallmark facility and the operations relating
to the Original Facilities (including all of the capital stock of a wholly
owned subsidiary of PGI that holds certain rights relating to the proposed
skilled nursing facility on the campus of the Devonshire facility) to the
Company in exchange for 3,928,750 shares of Common Stock, $12.0 million in
cash from the net proceeds of the Offering to retire certain indebtedness
secured by a pledge of cash flow from the Hallmark facility and the assumption
by the Company of certain indebtedness in the aggregate amount of $34.4
million. The operations relating to the Original Facilities being contributed
to the Company will include all of the assets and liabilities of PGI with
respect to such operations other than those contributed to NPC and leased to
the Company. However, PGI will receive partner distributions simultaneously
with the Offering to the extent that the unrestricted cash balances of the
Original Facilities exceed $2.0 million. In addition, PGI will assign its
rights to purchase the Gables at Brighton and the Springs of East Mesa
facilities to the Company in exchange for reimbursement of its costs relating
to such purchase contracts, including an earnest money deposit of $0.5 million
and will receive $4.6 million from the net proceeds of the Offering for the
purchase of a third party's interest in the Devonshire and Heritage
facilities. At the Formation, in accordance with the Formation Agreement, Mark
J. Schulte, President and Chief Executive Officer of the Company, will
transfer all of his interests in the Hallmark facility and in the operations
relating to the Original Facilities to the Company in exchange for 571,250
shares of Common Stock. The Company, at the completion of the Offering, will
also enter (i) a management agreement with PGI to manage the Island on Lake
Travis facility and (ii) a management agreement (and an option to purchase)
regarding the Kenwood facility with a third party unaffiliated with PGI that
owns the Kenwood facility. See "Use of Proceeds," "--Facilities" and "Certain
Transactions."
At the completion of the Offering, PGI will purchase the interest of a third
party in the Heritage and Devonshire facilities and will contribute all of
such interest, as well as its existing interests in such facilities, to NPC in
exchange for 100% of the common stock of NPC. NPC will replace the credit
enhancement securing the $65.0 million of tax-exempt bonds relating to the
Devonshire and the Heritage facilities. PGI has obtained a
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commitment from LaSalle National Bank and Bank One, Chicago, NA whereby
letters of credit with a maturity of three years from the completion of the
Offering would be provided as replacement credit enhancement for such tax-
exempt bonds. On or prior to the completion of the Offering, NPC will have
executed definitive agreements with such banks to issue the letters of credit.
At the completion of the Offering, NPC and the Company will enter net
operating lease agreements for the Heritage and Devonshire facilities for
terms of 25 years with five, 10-year renewal options. The net leases will
require an aggregate security deposit of $5.0 million and monthly rental
payments that will adjust based on an adjustable bond interest rate applicable
to the tax-exempt bonds. Based on the current adjustable bond interest rate of
5.25%, the aggregate monthly lease payments for the Heritage and Devonshire
facilities would be approximately $414,000. Although the lease agreements will
contain certain restrictions on NPC's ability to refinance such adjustable
rate bonds, the Company's future lease payments for such facilities will be
adjusted to reflect changes in NPC's debt service payments. The lease
agreement for the Devonshire facility will provide that NPC will, subject to
various conditions, fund up to $5.0 million for the cost of the construction
of the proposed skilled nursing facility. Base rent for such facility shall
increase by an amount equal to 10% per annum of the amounts so funded by NPC.
See "Risk Factors--Conflicts of Interest" and "--Lack of Arm's Length
Negotiations" and "Certain Transactions."
The lease agreements between the Company and NPC will be net operating
leases that will obligate the Company to comply with the terms and conditions
of the underlying bond financing documents for the respective Leased
Facilities. Beginning in 1999, the leases will require the payment of bonus
rent, on a quarterly basis, in amounts equal to 4% of the increase, if any, in
the aggregate gross revenue of the Leased Facilities for such period over the
aggregate gross revenue of the Leased Facilities for the same period during
1998. The lease agreements will contain certain restrictions on the ability of
NPC to sell, refinance or encumber the Leased Facilities or the ownership
interests of NPC and will grant to the Company a right of first offer in the
event NPC desires to sell or transfer any of the Leased Facilities.
The Company and NPC will enter an agreement whereby NPC will agree to
purchase the Edina Park Plaza and the Hawthorn Lakes facilities substantially
in accordance with the purchase agreements for such facilities assigned to NPC
from PGI and to net lease such facilities to the Company. Such purchase and
lease is subject to the consent of HUD which consent may not be received by
the closing of the Offering, if at all. The Company and NPC will agree to use
their best efforts to obtain the HUD consent and any other appropriate
approvals to effect such purchase and lease. The leases shall be on
substantially the same terms and conditions as the leases for the Devonshire
and Heritage facilities. However, the rent for the Edina Park Plaza facility
will be based on the 8.0% fixed interest rate payable on the HUD guaranteed
loan relating to such facility and the rent for Hawthorn Lakes facility will
be based on the 8.525% fixed interest rate payable on the HUD guaranteed loan
relating to such facility. Although NPC intends to refinance the fixed rate
bonds to adjustable rate bonds, until such refinancing, the monthly rental
rate for the Edina Park Plaza facility will be $200,000 and for the Hawthorn
Lakes facility will be $300,000. Following such refinancing, the rent for
these facilities will be adjusted monthly in accordance with the adjustable
interest rate of the underlying bonds. The earliest dates for refinancing are
December 1, 2001 and January 31, 2001, respectively, for the Edina Park Plaza
and Hawthorn Lakes facilities. The security deposits for the leases of the
Edina Park Plaza and Hawthorn Lakes facilities are $2.4 million and $3.2
million, respectively. The lease agreement for the Hawthorn Lakes facility
will provide that NPC will, subject to various conditions, fund up to $5.0
million for the cost of construction of the proposed 57-unit addition and
other improvements. Base rent for such facility shall increase by an amount
equal to 10% per annum of the amounts so funded by NPC.
The Company will purchase the Preferred Stock from NPC simultaneously with
the completion of the Offering. Dividends on the Preferred Stock will be
cumulative from the date of issue and will be payable quarterly in arrears at
an annual dividend rate of 12.0% of the amount of the Preferred Stock. The
Preferred Stock will be non-voting unless dividends are not paid in full for
four quarters. In such event, the preferred stockholders of NPC would be
granted voting rights sufficient to elect a majority of the board of directors
of
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NPC. In addition, the terms of the Preferred Stock will provide that the
affirmative vote of the majority of the holders of the Preferred Stock will be
required to approve the issuance of any additional Preferred Stock and any
amendment to the charter of NPC that would materially and adversely affect any
right, preference or privilege of the Preferred Stock. The Preferred Stock may
be called at any time after three years from the date of issue at par plus any
unpaid dividends through the date of such call. Prior to three years from the
date of issue, the Preferred Stock may be called only with the consent of
Brookdale, which consent will not be unreasonably withheld if the purpose for
such call is the determination by NPC to elect to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
If NPC elects to be taxed as a RElT and does not call the Preferred Stock, the
dividend rate on the Preferred Stock will be increased to an amount sufficient
to provide the Company with the same after-tax return from such dividends
following such election that the Company received prior to such election. See
"Risk Factors--Conflicts of Interest" and "--Lack of Arm's Length Negotiations"
and "Certain Transactions."
EMPLOYEES
The Company has approximately 610 employees, of which 23 are employed at the
Company's headquarters. The Company believes employee relations are good.
INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. Compared to more institutional long term care facilities, senior
and assisted living residences offer residents a greater degree of independence
in their daily lives. This increased level of independence, however, may
subject the resident and the Company to certain risks that would be reduced in
more institutionalized settings. The Company currently maintains liability
insurance intended to cover such claims which it believes is adequate based on
the nature of the risks, its historical experience and industry standards. See
"Risk Factors--Liability and Insurance."
EXECUTIVE OFFICES
The Company's executive office is located in Chicago, Illinois, where the
Company leases approximately 4,500 square feet under an agreement with an
affiliate of PGI. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition and results of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of the
Company's directors, executive officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
<S> <C> <C>
Michael W. Reschke...... 40 Chairman of the Board, Director
Mark J. Schulte......... 43 President and Chief Executive Officer, Director
Craig G. Walczyk........ 37 Vice President--Chief Financial Officer and Secretary
Matthew F. Whitlock..... 32 Vice President--Acquisitions
Mark J. Iuppenlatz...... 37 Vice President--Development
Mary Pat Scoltock....... 34 Vice President--Marketing
Stephan T. Beck......... 40 Vice President--Operations
Sheryl A. Wolf.......... 34 Controller
Margaret B. Shontz...... 37 Vice President--Human Resources
Richard S. Curto........ 45 Director
Eric F. Billings(1)..... 44 Director designee
Darryl W. Hartley-
Leonard(1)............. 51 Director designee
Daniel J. Hennessy(1)... 38 Director designee
</TABLE>
- ---------------------
(1) Prior to or upon the effectiveness of the Registration Statement that
contains this Prospectus, the Company intends to nominate and elect this
person (who is unaffiliated with the Company and PGI) to serve as a
director of the Company, who will be referred to herein as an "Independent
Director." In addition, prior to or upon the effectiveness of the
Registration Statement that contains this Prospectus, the Company intends
to nominate and elect an additional person (who will be unaffiliated with
the Company and PGI) to serve as a director of the Company, who will also
be referred to herein as an "Independent Director."
Michael W. Reschke is Chairman of the Board of Directors of the Company. Mr.
Reschke founded PGI in 1981 and, since that time, has served as PGI's Chairman,
Chief Executive Officer and President. For the last 15 years, Mr. Reschke has
directed and managed the development, finance, construction, leasing,
marketing, acquisition, renovation and property management activities of PGI.
Mr. Reschke is also a member of the Board of Directors of Ambassador
Apartments, Inc., a publicly traded real estate investment trust involved in
multi-family residential projects and the successor in interest to the former
multi-family division of PGI. Mr. Reschke is also Chairman of the Board of
Prime Retail, Inc., a publicly traded real estate investment trust involved in
factory outlet centers and the successor in interest to the former retail
division of PGI. Mr. Reschke is licensed to practice law in the State of
Illinois and is a certified public accountant. Mr. Reschke is a member of the
Chairman's Roundtable and the Executive Committee of the National Realty
Committee, as well as a full member of the Urban Land Institute.
Mark J. Schulte is President and Chief Executive Officer of the Company and
is also a director of the Company. From January 1991 to immediately prior to
the Offering, Mr. Schulte was employed by PGI in its Senior Housing Division,
most recently serving as Executive Vice President, with primary responsibility
for overseeing all aspects of PGI's Senior Housing Division. Prior to joining
PGI, Mr. Schulte had 13 years of experience in development and operation of
multi-family housing, senior housing, senior and assisted living and health
care facilities. Mr. Schulte is licensed to practice law in the State of New
York. Mr. Schulte serves on the Executive Committee of the American Seniors
Housing Association.
Craig G. Walczyk is Vice President--Chief Financial Officer and Secretary of
the Company. From November 1992 to immediately prior to the Offering, Mr.
Walczyk was employed by PGI as Vice President, Director of Corporate
Accounting. Prior to joining PGI, Mr. Walczyk was an Audit Senior Manager with
the accounting firm of Ernst & Young LLP from September 1982 to October 1992.
Mr. Walczyk is a certified public accountant and a member of the American
Institute of Certified Public Accountants and the Illinois CPA Society.
40
<PAGE>
Matthew F. Whitlock is Vice President--Acquisitions of the Company. From
August 1996 to immediately prior to the Offering, Mr. Whitlock was employed by
PGI in its Senior Housing Division as Director of Acquisitions. Prior to
joining PGI, Mr. Whitlock was employed by the Forum Group, previously one of
the largest operators of senior and assisted living facilities, as an
acquisition specialist from August 1995 to July 1996. Mr. Whitlock was a
principal with Concordia Group, a senior and assisted living consulting firm,
from June 1991 to July 1995.
Mark J. Iuppenlatz is Vice President--Development of the Company. From
September 1996 to immediately prior to the Offering, Mr. Iuppenlatz was
employed by PGI in its Senior Housing Division as Director of Development.
Prior to joining PGI's Senior Housing Division, Mr. Iuppenlatz was employed by
Schlotzsky's, Inc., a publicly traded restaurant company, as Vice President--
Real Estate from January 1995 to August 1996. Mr. Iuppenlatz was employed by
PGI as Director of Marketing and Leasing from October 1991 to 1994 and as
Director of Leasing from January 1989 to September 1991.
Mary Pat Scoltock is Vice President--Marketing of the Company. From April
1989 to immediately prior to the Offering, Ms. Scoltock was employed by PGI,
most recently serving as Corporate Director of Marketing of its Senior Housing
Division.
Stephan T. Beck is Vice President--Operations of the Company. From January
1993 to immediately prior to the Offering, Mr. Beck was employed by PGI, most
recently serving as Corporate Director of Operations of its Senior Housing
Division. Prior to joining PGI, Mr. Beck was employed by Classic Residence by
Hyatt as Executive Director of the Hallmark facility, which was then managed by
Classic Residence by Hyatt, from August 1990 to December 1992.
Sheryl A. Wolf is Controller of the Company. From September 1991 to
immediately prior to the Offering, Ms. Wolf was employed by PGI, most recently
serving as Corporate Director of Finance of its Senior Housing Division.
Margaret B. Shontz is Vice President--Human Resources of the Company. From
February 1989 to immediately prior to the Offering, Ms. Shontz was employed by
PGI, most recently serving as Director of Human Resources of its Senior Housing
Division.
Richard S. Curto is Vice Chairman of the Board of Directors of the Company.
Mr. Curto joined PGI in May 1994 and, since that time, has served as Executive
Vice President. Since joining PGI, Mr. Curto has been responsible for the
capital markets transactions and other project related financings of PGI. From
September 1981 to April 1994, Mr. Curto was employed by Kemper Financial
Services, a $65 billion money management firm overseeing the activities of the
lending and equity investment group related to real property, most recently
serving as Senior Vice President in the Fixed Income Department. Mr. Curto is a
member of the Urban Land Institute and the National Realty Committee.
Eric F. Billings has agreed to serve as a director, and will be appointed as
a director, prior to or upon the effectiveness of the Registration Statement
that contains this Prospectus. Mr. Billings co-founded Friedman, Billings,
Ramsey & Co., Inc. ("FBR") in 1989 and, since that time, has served as FBR's
Vice Chairman. See "Underwriting" for a description of certain relationships
between the Company and FBR.
Darryl W. Hartley-Leonard has agreed to serve as a director, and will be
appointed as a director, prior to or upon the effectiveness of the Registration
Statement that contains this Prospectus. Mr. Hartley-Leonard is a founding
partner of H-LK Partners, a hotel development and management partnership,
Chairman of the Board and Chief Executive Officer of DART Inc., a privately-
held technology company, and a founding partner, Chairman of the Board and
Chief Executive Officer of Cobabaco, a cigar distributor. Mr. Hartley-Leonard
retired as Chairman of the Board of Hyatt Hotels Corporation earlier this year
after a 32-year career with Hyatt and its diversified affiliates. Mr. Hartley-
Leonard also serves on the Board of Directors of Royal Caribbean Cruise Line,
the United States Committee for UNICEF and Evanston Hospital.
41
<PAGE>
Daniel J. Hennessy has agreed to serve as a director, and will be appointed
as a director, prior to or upon the effectiveness of the Registration Statement
that contains this Prospectus. Mr. Hennessy co-founded Code, Hennessy &
Simmons, Inc., a Chicago based private equity investment firm, in August 1988
and, since that time, has served as a principal. Mr. Hennessy is also Chairman
of the Board of National Picture and Frame Co., a publicly traded manufacturer
of picture frames, mirrors and framed art products.
The Board of Directors will be divided into three classes, each class
consisting of approximately one-third of the total number of directors. Class I
directors, consisting of Messrs. Reschke, Curto and Billings, will hold office
until the 1997 annual meeting of stockholders; Class II directors, consisting
of Mr. Hartley-Leonard and another director designee to be named, will hold
office until the 1998 annual meeting of stockholders; and Class III directors,
consisting of Messrs. Hennessy and Schulte, will hold office until the 1999
annual meeting of stockholders.
No family relationship exists among any of the directors or executive
officers of the Company. No arrangement or understanding exists between any
director or executive officer or any other person pursuant to which any
director or executive officer was selected as a director or executive officer
of the Company. Executive officers of the Company are elected or appointed by
the Board of Directors and hold office until their successors are elected, or
until the earliest of their death, resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The members of the Audit Committee will consist of certain
of the Independent Directors. The Audit Committee, among other things, makes
recommendations concerning the engagement of independent auditors, reviews the
results and scope of the annual audit and other services provided by the
Company's independent auditors and reviews the adequacy of the Company's
internal accounting controls.
Compensation Committee. The members of the Compensation Committee will
consist of certain of the Independent Directors. The Compensation Committee
makes recommendations to the full Board of Directors concerning salary and
bonus compensation and benefits for executive officers of the Company. In
addition, the Compensation Committee has the power and authority to implement
and administer the Company's Stock Incentive Plan.
COMPENSATION OF DIRECTORS; INDEMNIFICATION AGREEMENTS
The Company intends to pay its directors who are not employees of the Company
a fee for their services as directors. They will receive annual compensation of
$12,000 plus a fee of $1,000 for attendance at each meeting of the Board of
Directors and $500 for attendance at each committee meeting. The members of the
Board will receive reimbursement of all travel and lodging expenses related to
their attendance at both board and committee meetings. The Company anticipates
that it will grant to each non-employee director certain options to purchase
Common Stock. See "--Stock Incentive Plan."
The Company intends to enter into indemnification agreements with each of the
Company's directors. The indemnification agreements will require, among other
things, that the Company indemnify such directors to the fullest extent
permitted by law, and advance to the directors all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company also must indemnify and advance all expenses incurred by
directors seeking to enforce their rights under the indemnification agreements,
and cover directors under the Company's directors' and officers' liability
insurance.
EXECUTIVE COMPENSATION
The Company was organized in September 1996. Accordingly, the Company did not
pay any cash compensation to its executive officers for the year ended December
31, 1995. The following table sets forth the
42
<PAGE>
annual base salary expected to be paid to the Company's Chairman of the Board,
Chief Executive Officer and each of the other five most highly compensated
executive officers during the year ending December 31, 1996. In addition, the
Company's executive officers will be eligible to receive cash bonuses and
additional stock options at the discretion of the Compensation Committee of the
Board of Directors.
<TABLE>
<CAPTION>
NAME PRINCIPAL POSITION(S) 1996 BASE SALARY
<S> <C> <C>
Michael W.
Reschke Chairman of the Board $100,000
Mark J.
Schulte President and Chief Executive Officer 240,000
Craig G.
Walczyk Vice President--Chief Financial Officer and Secretary 125,000
Matthew F.
Whitlock Vice President--Acquisitions 95,000(1)
Mark J.
Iuppenlatz Vice President--Development 135,000(1)
Mary Pat
Scoltock Vice President--Marketing 100,000
Stephan T.
Beck Vice President--Operations 100,000
</TABLE>
- ---------------------
(1) In addition to a base salary, these individuals are expected to receive a
substantial portion of their total compensation from an incentive bonus
program that for Mr. Whitlock is based on facilities acquired and for Mr.
Iuppenlatz is based on facilities developed.
STOCK INCENTIVE PLAN
The Company has established a Stock Incentive Plan (the "Stock Incentive
Plan") for the purpose of attracting and retaining directors, executive
officers and other key employees. Each option granted pursuant to the Stock
Incentive Plan shall be designated at the time of grant as either an "incentive
stock option" or as a "non-qualified stock option."
The Stock Incentive Plan provides for the grants of options ("Options") to
purchase a specified number of shares of Common Stock. Under the Stock
Incentive Plan, 750,000 shares of Common Stock will be available for grants.
Participants in the Stock Incentive Plan, who may be directors, officers or
employees of the Company or its subsidiaries or Company-owned partnerships,
will be selected by the Compensation Committee. See "--Compensation of
Directors; Indemnification Agreements."
The Stock Incentive Plan authorizes the Compensation Committee to grant
incentive stock options at an exercise price to be determined by it, provided
that such price cannot be less than 100% of the fair market value of the Common
Stock on the date on which the Option is granted. If an incentive stock option
is to be granted to an employee who owns over 10% of the total combined voting
power of all classes of the Company's stock, then the exercise price may not be
less than 110% of the fair market value of the Common Stock covered by such
option on the day it is granted. The exercise price of non-qualified stock
options may be any price determined by the Compensation Committee.
Upon completion of the Offering, the Company will grant 348,500 Options (the
"Initial Grants") to the following key officers and employees of the Company:
Michael W. Reschke (75,000); Mark J. Schulte (75,000); Craig G. Walczyk
(30,000); Matthew F. Whitlock (30,000); Mark J. Iuppenlatz (30,000); Mary Pat
Scoltock (30,000); Stephan T. Beck (30,000); Sheryl A. Wolf (15,000); Margaret
B. Shontz (15,000); and certain other employees (18,500).
The Initial Grants will vest, subject to certain conditions being met, at the
rate of 25% per year over the next four years commencing on the first
anniversary of their date of grant and will have a term of 10 years. The
exercise price of the Options issued pursuant to the Initial Grants will be the
initial public offering price of the Common Stock. The exercise price for any
Option is generally payable in cash or, in certain circumstances, by the
surrender, at the fair market value on the date on which the Option is
exercised, of shares of Common Stock.
Any unvested Options held by an optionee will automatically be forfeited if
the optionee leaves employment for any reason. Upon a "change in control" (as
defined in the Stock Incentive Plan), all unvested Options will vest. The
rights of any participants to exercise an Option may not be transferred in any
way other than by will or laws of descent and distribution or pursuant to a
qualified domestic relations order.
43
<PAGE>
The Company also anticipates that it will grant an aggregate of 35,000
Options to its non-employee directors that will vest at the rate of 33.3% per
year over the next three years commencing on the first anniversary of their
date of grant and will have a term of ten years. The exercise price of these
Options will be the initial public offering price of the Common Stock. The
exercise price for any of these Options will generally be payable in cash or,
in certain circumstances, by the surrender, at the fair market value on the
date on which the Option is exercised, of shares of Common Stock.
The Compensation Committee may grant options under the Stock Incentive Plan
in substitution for outstanding options with higher exercise prices. In
addition, in the event of certain extraordinary events, the Compensation
Committee may make adjustments in the aggregate number and kind of shares
reserved for issuance, the number and kind of shares covered by outstanding
awards and the exercise prices specified therein as may be determined to be
appropriate.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with Messrs. Reschke,
Schulte, Whitlock and Iuppenlatz. These agreements provide that the executive
officers shall devote substantially all of their business time to the operation
of the Company, except Mr. Michael W. Reschke who shall only be required to
devote such time as he deems necessary to fulfill his duties and obligations to
the Company as Chairman of the Board. The agreements establish the initial base
salaries set forth in the executive compensation table and provide for an
initial three year term which is automatically extended for an additional year
after expiration of the initial term and any extension period unless the
Company provides the executive officer with at least 30 days' prior written
notice that such term shall not be extended. If any of the agreements are
terminated by the Company "without cause" (as such term is defined in the
agreements), the executive so terminated will be entitled to a lump sum
payment. With respect to Messrs. Whitlock and Iuppenlatz, such lump sum payment
will be an amount equal to six months base salary. With regard to Messrs.
Reschke and Schulte, such executives will receive a lump sum payment of the
greater of 50% of their base salary for the remainder of the term of their
agreements or an amount equal to their base salary for one year. Messrs.
Reschke and Schulte may terminate their respective agreements and be entitled
to approximately two times their annual compensation in the event of a "change
in control" of the Company and a material diminution of their respective duties
and responsibilities or compensation. In the event any of Messrs. Schulte,
Whitlock and Iuppenlatz voluntarily terminates his employment with the Company,
the executive will have a non-compete agreement for a period of two years. Mr.
Reschke is bound by the non-compete agreement between PGI and the Company. See
"Certain Transactions."
44
<PAGE>
CERTAIN TRANSACTIONS
The following agreements will be entered in connection with the Formation and
the Offering:
Formation Agreement. At the Formation and pursuant to a formation agreement
by and among the Company, Mark J. Schulte and PGI (the "Formation Agreement"),
PGI has agreed to transfer to the Company all of its interests in the Hallmark
facility and the operations relating to the Original Facilities. In return for
such contribution, the Company will exchange 3,928,750 shares of its Common
Stock and pay $12.0 million in cash from the net proceeds of the Offering to
retire certain indebtedness secured by a pledge of cash flow from the Hallmark
facility and will assume certain indebtedness in the aggregate amount of $34.4
million. The Company has assumed or agreed to assume all the liabilities of the
Hallmark Facility and the operations relating to the Original Facilities. In
accordance with the Formation Agreement, Mark J. Schulte will transfer all of
his interests in the Hallmark facility and the operations relating to the
Original Facilities to the Company in exchange for 571,250 shares of Common
Stock from the Company. Except as expressly set forth in the Formation
Agreement with regard to title, liens, claims and certain other items and PGI's
representations that the Original Facilities have been operated in the ordinary
course since September 30, 1996, no party is making any representation or
warranty as to the assets, businesses or liabilities transferred or assumed as
part of the Formation, as to any consents or approvals required in connection
therewith, as to the value thereof or as to freedom from counterclaim with
respect to any claim of any party. Except as expressly set forth in the
Formation Agreement, all assets are being transferred on an "as is, where is"
basis. In the Formation Agreement, PGI has agreed that operations relating to
the Original Facilities will have unrestricted cash of $2.0 million at the time
of the Formation. Any amounts of unrestricted cash in excess of $2.0 million
will be distributed to PGI as partner distributions from the Original
Facilities simultaneously with the completion of the Offering. See "Risk
Factors--Conflicts of Interest," "--Lack of Arms Length Negotiations" and "--
Benefits to Affiliates" and "The Company and the Formation."
The Company will indemnify PGI and its affiliates against certain losses,
claims, damages or liabilities including those arising out of: (i) any
inaccurate representation or breach of warranty by the Company under the
Formation Agreement; and (ii) any indebtedness, lease, contract or other
obligation assumed by the Company pursuant to the Formation Agreement. The
Company will also indemnify PGI, as a controlling person, against any loss,
claim, damage or liability arising out of the Offering, except for losses,
claims, damages or liabilities arising from the inaccuracy of information
supplied in writing by PGI for inclusion in this Prospectus. PGI will similarly
indemnify the Company and its subsidiaries with respect to any inaccurate
representation or breach of warranty by PGI under the Formation Agreement.
Investment in and Lease Agreements with NPC. The Company will purchase the
Preferred Stock of NPC for $22.4 million and will enter net lease agreements
with NPC for the Heritage and the Devonshire facilities. In addition, the
Company will enter into an agreement with NPC to net lease the Edina Park Plaza
and the Hawthorn Lakes facilities as soon as NPC acquires such facilities. See
"Risk Factors--Conflicts of Interest," "--Lack of Arms Length Negotiations,"
"--Uncertainty of Proposed Acquisitions by NPC" and "--Benefits to Affiliates",
"The Company and the Formation" and "Use of Proceeds."
Registration Rights Agreement. The Company will grant demand and incidental
registration rights to PGI for the registration of shares of Common Stock owned
by PGI under the Securities Act. See "Description of Capital Stock--
Registration Rights Agreement."
Voting Agreement. PGI will enter a Voting Agreement pursuant to which it will
agree to vote all of its shares of Common Stock at any meeting at which
directors are elected in favor of the election of independent directors so that
after such election, if such persons are elected, there will be at least four
independent directors. The Voting Agreement will continue in effect until the
earlier of three years from the date of the Offering and the date PGI first
owns less than 10% of the outstanding Common Stock.
Non-Compete Agreements. The Company, PGI and Mr. Reschke will enter a Non-
Compete Agreement that will prevent PGI and Mr. Reschke from developing,
acquiring, owning or operating senior and assisting living
45
<PAGE>
facilities and semi-acute care facilities in the United States for a period
expiring on the earlier of (i) four years from the date of the Offering and
(ii) one year from the date of a merger of the Company or the sale of all or
substantially all of the stock or assets of the Company; however, PGI will be
permitted to maintain its ownership interest in the Island on Lake Travis
facility. In addition, to the extent PGI or Mr. Reschke were to acquire a group
of properties that included facilities similar to those operated by the
Company, then the Company would have the right and opportunity to purchase such
similar facilities at a price equal to their fair market value. PGI and Mr.
Reschke will be allowed to provide debt or lease financing for properties that
are similar to the facilities owned or managed by the Company. NPC will be
allowed to own or finance facilities leased to the Company and facilities
managed by third parties that are similar to the facilities owned or managed by
the Company so long as either the Company determines not to acquire or lease
such facilities or such facilities are then owned or under contract with a
third party that will manage such facility. See "Risk Factors--Conflicts of
Interest" and "--Lack of Arm's Length Negotiations."
Management Agreement. The Company and PGI will enter a management agreement
for a term of two years with respect to the Island on Lake Travis facility. The
Company will be paid a monthly fee of 5.0% of the gross revenues of such
facility for each month and reimbursement of expenses. The management agreement
may be terminated by PGI only for cause as set forth in the management
agreement during its initial term and upon 60 days' prior written notice at any
time after the expiration of the initial term. The Company may terminate the
management agreement at any time upon 60 days' advance notice.
Space Sharing Agreement. The Company and an affiliate of PGI will enter a
Space Sharing Agreement for office space located at 77 West Wacker Drive in
Chicago, Illinois to be used as headquarters for the Company. The Agreement
will have an initial term of four months and thereafter may be extended in
increments of two-month terms for up to 12 additional months, at a base rental
rate of approximately $8,800 per month plus pro rata share of real estate taxes
and operating expenses.
In the future, transactions between the Company and its officers, directors,
principal stockholders and their affiliates will require the approval of a
majority of the disinterested members of the Board of Directors.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the Common Stock as of November 20, 1996, and as adjusted to
reflect the sale of the shares offered hereby and to give effect to the
issuance of the shares in connection with the Formation, by (i) each person
known by the Company to be the beneficial owner of 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 of the Company as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OWNERSHIP
SHARES -----------------
BENEFICIALLY BEFORE AFTER
NAME OWNED (1) OFFERING OFFERING
<S> <C> <C> <C>
The Prime Group, Inc.(2)......................... 3,928,750 -- 38.8%
Michael W. Reschke(3)............................ 3,928,750 100.0% 38.8%
Mark J. Schulte.................................. 571,250 -- 5.6%
Richard S. Curto ................................ -- -- --
Eric F. Billings(4).............................. -- -- --
Darryl W. Hartley-Leonard(4)..................... -- -- --
Daniel J. Hennessy(4)............................ -- -- --
Craig G. Walczyk ................................ -- -- --
Matthew F. Whitlock ............................. -- -- --
Mark J. Iuppenlatz .............................. -- -- --
Mary Pat Scoltock ............................... -- -- --
Stephan T. Beck ................................. -- -- --
Executive officers and directors
as a group (11 persons)......................... 4,500,000 100.0% 44.4%
</TABLE>
- ---------------------
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person has beneficial ownership of any securities as to which
such person, directly or indirectly, through any contract, arrangement,
undertaking, relationship or otherwise has or shares voting power and/or
investment power and as to which such person has the right to acquire such
voting and/or investment power within 60 days. Percentage of beneficial
ownership as to any person as of a particular date is calculated by
dividing the number of shares beneficially owned by such person by the sum
of the number of shares outstanding as of such date and the number of
shares as to which such person has the right to acquire voting and/or
investment power within 60 days.
(2) Includes 3,928,750 shares of Common Stock held by The Prime Group, Inc. and
certain of its affiliates. The address of The Prime Group, Inc. is 77 West
Wacker Drive, Chicago, Illinois 60601.
(3) Includes 3,928,750 shares of Common Stock held by The Prime Group, Inc. and
certain of its affiliates. Mr. Reschke is the Chairman, Chief Executive
Officer and President of The Prime Group, Inc.
(4) The Company intends to nominate and elect, prior to or upon the
effectiveness of the Registration Statement that contains this Prospectus,
this person to serve as a director of the Company. In addition, the Company
intends to nominate and elect, prior to or upon the effectiveness of the
Registration Statement that contains this Prospectus, an additional person
to serve as a director of the Company.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Restated Certificate of Incorporation (the "Certificate")
provides that the authorized capital stock of the Company consists of
75,000,000 shares of Common Stock, par value $0.01 per share (the "Common
Stock"), and 20,000,000 shares of Preferred Stock, par value $0.01 per share
(the "Preferred Stock"). Upon completion of the Offering, 10,125,000 shares of
Common Stock will be issued and outstanding (10,968,750 shares if the
Underwriters' over-allotment option is exercised in full), and no shares of
Preferred Stock will be issued or outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share on all
matters submitted to a vote of stockholders. The Certificate does not provide
for cumulative voting, and, accordingly, 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. The Certificate provides that
whenever there is paid, or declared and set aside for payment, to the holders
of the outstanding shares of any class of stock having preference over the
Common Stock as to the payment of dividends, the full amount of dividends and
of sinking fund or retirement fund or other retirement payments, if any, to
which such holders are entitled, then dividends may be paid on the Common Stock
out of any assets legally available therefor, but only when and as declared by
the Board of Directors. The Certificate also provides that in the event of any
liquidation, dissolution or winding up of the Company, after there is paid to
or set aside for the holders of any class of stock having preference over the
Common Stock the full amount to which such holders are entitled and after
payment or provision for payment of all debts and liabilities of the Company,
the holders of the Common Stock shall be entitled to receive the remaining
assets of the Company available for distribution, in cash or in kind. The
holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The rights, preferences and privileges of holders of Common
Stock will be subject to the rights of the holders of any shares of any series
of Preferred Stock that the Company may issue in the future.
PREFERRED STOCK
The Certificate provides that the Board of Directors of the Company is
authorized to issue Preferred Stock in series and to fix and state the voting
powers, and such designations, preferences and relative participating, optional
or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Such action may be taken
by the Board without stockholder approval. Under the Certificate, each share of
each series of Preferred Stock is to have the same relative rights as, and be
identical in all respects with, all other shares of the same series. While
providing flexibility in connection with possible financings, acquisitions and
other corporate purposes, the issuance of Preferred Stock, among other things,
could adversely affect the voting power of the holders of Common Stock and,
under certain circumstances, be used as a means of discouraging, delaying or
preventing a change in control of the Company. There will be no shares of
Preferred Stock outstanding upon completion of the Offering, and the Company
has no present plan to issue shares of its Preferred Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law ("DGCL") authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Although
Section 102(b)(7) does not change directors' duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Certificate limits the liability of directors to the Company
or its stockholders to the full extent permitted by Section 102(b)(7).
Specifically, directors of the Company are not personally liable for monetary
damages to the Company or its stockholders for breach of the director's
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 that involve intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL; or (iv) for
any transaction from which the director derived an improper personal benefit.
48
<PAGE>
Indemnification. To the maximum extent permitted by law, the By-laws provide
for mandatory indemnification of directors and officers of the Company against
any expense, liability and loss to which they may become subject, or which they
may incur as a result of being or having been a director or officer of the
Company. In addition, the Company must advance or reimburse directors and
officers for expenses incurred by them in connection with indemnifiable claims.
The Company also maintains directors' and officers' liability insurance.
CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, the Certificate and the By-laws will
contain, among other things, certain provisions described below that may reduce
the likelihood of a change in the Board of Directors or voting control of the
Company without the consent of the Board of Directors. These provisions could
have the effect of discouraging, delaying or preventing tender offers or
takeover attempts that some or a majority of the stockholders might consider to
be in the stockholders' best interest, including offers or attempts that might
result in payment of a premium over the market price for the Common Stock.
Classification of Board of Directors. The Certificate and the 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, only one-
third of the directors stand for re-election each year, requiring at least two
stockholders' meetings at which directors are elected to replace a majority of
the Board.
Filling of Board Vacancies; Removal. Any vacancy occurring in the Board of
Directors, including any vacancy created by an increase in the number of
directors, shall be filled for the unexpired term by the concurring vote of a
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for the remainder of the full term of the
class in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified.
Directors may only be removed with cause by the affirmative vote of the holders
of at least a majority of the outstanding shares of capital stock then entitled
to vote at an election of directors.
Stockholder Action by Unanimous Written Consent. Any action required or
permitted to be taken by the stockholders must be effected at a duly called
annual or special meeting of such holders and may not be effected by any
consent in writing by such holders, unless such consent is unanimous.
Call of Special Meetings. Special meetings of stockholders may be called at
any time but only by the Board of Directors, the Chairman of the Board, the
Chief Executive Officer, the President or stockholders possessing at least 25%
of the voting power of the issued and outstanding voting stock entitled to vote
generally in the election of directors.
By-laws Amendments. The stockholders may amend the By-laws by the affirmative
vote of the holders of at least two-thirds of the outstanding shares of stock
of the Company entitled to vote thereon. Directors may also amend the By-laws
by a two-thirds vote of the directors then in office.
Certificate Amendments. Except as set forth in the Certificate or as
otherwise specifically required by law, no amendment of any provision of the
Certificate shall be made unless such amendment has been first proposed by the
Board of Directors upon the affirmative vote of at least two-thirds of the
directors then in office and thereafter approved by the affirmative vote of the
holders of at least a majority of the outstanding shares of stock of the
Company entitled to vote thereon; provided, however, if such amendment is to
the provisions described
49
<PAGE>
above or the provisions in the Certificate relating to the decrease in the
authorized number of shares of Preferred Stock, Board authority to issue
Preferred Stock, the removal or decreasing of the limitation on directors'
liability or the amendment of the By-laws or stockholder meeting matters, such
amendment must be approved by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of stock entitled to vote thereon.
Stockholder Nominations and Proposals. With certain exceptions, the By-laws
require that stockholders intending to present nominations for directors or
other business for consideration at a meeting of stockholders notify the
Company's Secretary by the later of 60 days before the date of the meeting and
15 days after the date notice of the meeting is mailed or public notice of the
meeting is given.
Certain Statutory Provisions. Section 203 of the DGCL provides, in general,
that a stockholder acquiring more than 15% of the outstanding voting shares of
a corporation subject to the statute (an "Interested Stockholder"), but less
than 85% of such shares, may not engage in certain "Business Combinations" with
the corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) before such person
became an Interested Stockholder, the corporation's board of directors approved
either the Business Combination or the transaction in which the stockholder
became in Interested Stockholder or (ii) the Business Combination is approved
by the corporation's board of directors and authorized by a vote of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which
the Interested Stockholder receives or could receive a benefit on other than a
pro rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder or a transaction in which the Interested Stockholder
receives certain other benefits.
Pursuant to a Board resolution adopted at the time of formation of the
Company, the Section 203 limits do not apply to any "Business Combination"
between the Company and PGI.
REGISTRATION RIGHTS AGREEMENT
The Company has granted demand and incidental registration rights to PGI for
the registration of shares of Common Stock owned by PGI under the Securities
Act. Three demand registrations are permitted during the first five years
following the initial public offering of the Common Stock and one registration
per year each year thereafter until PGI owns less than 10% of the outstanding
Common Stock. The Company will pay the fees and expenses of the demand
registrations and the incidental registrations, while PGI will pay all
underwriting discounts and commissions. These registration rights are subject
to certain conditions and limitations, including the right of underwriters to
limit the number of shares owned by PGI included in such registration.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is LaSalle National
Trust, N.A.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock,
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 the Offering, the Company will have 10,125,000 shares of
Common Stock outstanding, (10,968,750 shares if the Underwriters' over-
allotment option is exercised in full). Of those shares, the 5,625,000 shares
sold in the Offering (6,468,750 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 4,500,000 shares of Common Stock outstanding will
be restricted securities ("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 for at least two years, and including the holding period
of any prior owner unless such prior owner is an affiliate, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock on the Nasdaq National Market 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 PGI to sell its shares of
Common Stock 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, executive officers and certain key employees and
PGI 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 DLJ, (ii) in the case of the Company, the grant of options to
purchase shares of Common Stock under the Company's Stock Incentive Plan, and
(iii) for the sale of shares in the Offering. PGI may sell all 3,928,750 of its
shares of Common Stock subject to the volume and other limitations of Rule 144
after the expiration of the two-year holding period of Rule 144. The Commission
has proposed an amendment to Rule 144 under the Securities Act which, if
adopted as currently proposed, would reduce the holding periods set forth in
Rule 144 by one year.
PGI has the right to include its shares in any future registration of
securities effected by the Company under the Securities Act, subject to the
right of any underwriter in such offering requiring PGI to reduce the number of
shares PGI otherwise has the right to have included in such registration. If
the Company is required to register
51
<PAGE>
shares held by PGI pursuant to the exercise of its registration rights, such
sales may have an adverse effect on the Company's stock price and its ability
to raise needed capital. See "Risk Factors--Shares Eligible for Future Sale,"
"Principal Stockholders" and "Description of Capital Stock--Registration Rights
Agreement."
The Company intends to file a registration statement under the Securities Act
registering the shares of Common Stock reserved for issuance upon the exercise
of options granted under the Stock Incentive Plan. See "Management--Stock
Incentive Plan." This registration statement is expected to be filed soon after
the date of this Prospectus and will become effective automatically upon
filing. Accordingly, shares registered under such registration statement will
be available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company and except to the extent that the holders
of such options are subject to the 180-day lock-up agreements described above.
52
<PAGE>
UNDERWRITING
Subject to the terms and certain conditions contained in the Underwriting
Agreement, the underwriters named below (the "Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Friedman,
Billings, Ramsey & Co., Inc. are acting as representatives (collectively, the
"Representatives"), have severally agreed to purchase from the Company an
aggregate of 5,625,000 shares of Common Stock. The number of shares of Common
Stock that each Underwriter has agreed to purchase is set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
Friedman, Billings, Ramsey & Co., Inc...........................
---------
Total....................................................... 5,625,000
=========
</TABLE>
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 counsel and
to certain other conditions. The Underwriters are obligated to take and pay
for all the shares of Common Stock offered hereby (other than the shares of
the Common Stock covered by the over-allotment option described below) if any
are taken.
Prior to the Offering, there has been no established trading market for the
shares of Common Stock. The initial price to the public for the shares of
Common Stock offered hereby has been determined by negotiation between the
Company and the Representatives. The factors considered in determining the
initial price to the public include the history of and the prospects for the
industry in which the Company competes, the past and present operations of the
Company, the historical results of operations of the Company, the prospects
for future earnings of the Company, the recent market prices of securities of
generally comparable companies and the general condition of the securities
markets at the time of the Offering.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain liabilities, including
liabilities under the Securities Act.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public initially at the price to the public set
forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not to exceed $
per share. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of $ per share to any other Underwriter and certain other
dealers.
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
843,750 additional shares of Common Stock at the initial public offering price
less underwriting discounts and commissions, solely to cover over-allotments.
To the extent that the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such Underwriter's name in the preceding table bears
to the total number of shares offered.
The Underwriters do not intend to confirm sales of shares of Common Stock to
any accounts over which they exercise discretionary authority.
Subject to certain exceptions, the Company, its directors, executive
officers and certain key employees and PGI have agreed not to offer, sell,
contract to sell, or otherwise dispose of any shares of Common Stock or any
securities convertible or exchangeable into any shares of Common Stock prior
to the expiration of 180 days from the date of this Prospectus, without the
prior written consent of DLJ. See "Shares Eligible for Future Sale."
53
<PAGE>
At the request of the Company, up to 100,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including directors
and employees of the Company and PGI and members of their families. The price
of such shares to such persons will be the initial public offering price set
forth on the cover page hereof less underwriting discounts and commissions. The
number of shares available to the general public will be reduced to the extent
those persons purchase reserved shares. Any shares not so purchased will be
offered hereby at the public offering price set forth on the cover of this
Prospectus.
In connection with structuring certain proposed credit facilities to be
entered into by the Company, DLJ will receive a structuring fee of $150,000.
Eric F. Billings, a proposed director of the Company, is a principal of
Friedman, Billings, Ramsey & Co., Inc., one of the managing underwriters of the
Offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Winston & Strawn, Chicago, Illinois. Alston & Bird, Atlanta,
Georgia, is acting as counsel for the Underwriters in connection with certain
legal matters relating to the sale of Common Stock offered hereby.
EXPERTS
The balance sheet of Brookdale Living Communities, Inc. as of September 30,
1996, the combined financial statements of the Original Facilities as of
December 31, 1994 and 1995 and September 30, 1996, and for each of the three
years in the period ended December 31, 1995 and for the nine months ended
September 30, 1996, the combined financial statements of the Activelife
Facilities as of December 31, 1994 and 1995 and September 30, 1996, and for the
respective periods then ended, and the financial statements of the Gables at
Brighton as of December 31, 1995 and September 30, 1996, and for the respective
periods then ended, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included in reliance
upon such reports given upon the authority of the firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
such contract or other document filed with the Commission as an exhibit to the
Registration Statement, each such statement being qualified by and subject to
such reference in all respects.
As a result of the Offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith will file reports and other information with the
Commission. Reports, registration statements, proxy statements and other
information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's Regional Offices, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World
54
<PAGE>
Trade Center, New York, New York 10048. Copies of such materials can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In
addition, registration statements and certain other documents filed with the
Commission through its Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov. The Registration
Statement, including all exhibits thereto and amendments thereof, has been
filed with the Commission through EDGAR.
The Company intends to furnish holders of the Common Stock with annual
reports containing among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Pro Forma Combined Condensed Balance Sheet as of September 30, 1996..... F-3
Pro Forma Combined Condensed Statement of Operations for the year ended
December 31, 1995...................................................... F-4
Pro Forma Combined Condensed Statement of Operations for the nine months
ended September 30, 1996............................................... F-5
Notes to Pro Forma Combined Condensed Balance Sheet..................... F-6
Notes to Pro Forma Combined Condensed Statements of Operations for the
year ended December 31, 1995 and for the nine months ended
September 30, 1996..................................................... F-10
AUDITED BALANCE SHEET
Report of Independent Auditors.......................................... F-13
Balance Sheet as of September 30, 1996.................................. F-14
Notes to Balance Sheet.................................................. F-15
ORIGINAL FACILITIES
Report of Independent Auditors.......................................... F-16
Combined Balance Sheets as of December 31, 1994 and 1995 and as of
September 30, 1996..................................................... F-17
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and for the nine months ended September 30, 1995
(unaudited) and 1996................................................... F-18
Combined Statements of Changes in Partners' Capital (Deficit) for the
years ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1996..................................................... F-19
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and for the nine months ended September 30, 1995
(unaudited) and 1996................................................... F-20
Notes to Combined Financial Statements.................................. F-21
ACTIVELIFE FACILITIES (SPRINGS OF EAST MESA, EDINA PARK PLAZA AND HAWTHORN
LAKES FACILITIES)
Report of Independent Auditors.......................................... F-27
Combined Balance Sheets as of December 31, 1994 and 1995 and as of
September 30, 1996..................................................... F-28
Combined Statements of Operations for the years ended December 31, 1994
and 1995 and for the nine months ended September 30, 1995 (unaudited)
and 1996............................................................... F-29
Combined Statements of Changes in Partners' Deficit for the years ended
December 31, 1994 and 1995 and the nine months ended September 30,
1996................................................................... F-30
Combined Statements of Cash Flows for the years ended December 31, 1994
and 1995 and for the nine months ended September 30, 1995 (unaudited)
and 1996............................................................... F-31
Notes to Combined Financial Statements.................................. F-32
GABLES AT BRIGHTON ASSOCIATES
Report of Independent Auditors.......................................... F-35
Balance Sheets as of December 31, 1995 and September 30, 1996........... F-36
Statements of Income for the year ended December 31, 1995 and for the
nine months ended September 30, 1995 (unaudited) and 1996.............. F-37
Statements of Changes in Partners' Capital for the year ended December
31, 1995 and for the nine months ended September 30, 1996.............. F-38
Statements of Cash Flows for the year ended December 31, 1995 and for
the nine months ended September 30, 1995 (unaudited) and 1996.......... F-39
Notes to Financial Statements........................................... F-40
NATIONAL PROPERTY COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Pro Forma Condensed Balance Sheet as of September 30, 1996.............. F-41
Pro Forma Condensed Statement of Operations for the year ended December
31, 1995 and for the nine months ended September 30, 1996.............. F-42
Notes to Pro Forma Condensed Balance Sheet.............................. F-43
Notes to Pro Forma Condensed Statements of Operations for the year ended
December 31, 1995 and for the nine months ended September 30, 1996..... F-46
</TABLE>
F-1
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited Pro Forma Combined Condensed Balance Sheet of the Company is
presented as if, at September 30, 1996, the Company had sold 5,625,000 shares
of its common stock at a sale price of $16 per share, issued 4,500,000 shares
of its common stock to PGI and management, acquired owned or leased interests
in the Original Facilities, the Activelife Facilities and the Gables at
Brighton facility and had invested in the preferred stock of National Property
Company, Inc. (NPC) as described under "Use of Proceeds". The unaudited Pro
Forma Combined Condensed Statements of Operations for the year ended December
31, 1995 and for the nine months ended September 30, 1996 are presented as if
the above transactions occurred as of January 1, 1995. The unaudited Pro Forma
Combined Condensed financial statements of the Company should be read in
conjunction with all of the financial statements contained elsewhere in the
Prospectus. In management's opinion, all adjustments necessary to reflect the
effects of the Formation and Offering have been made.
The unaudited Pro Forma Combined Condensed Balance Sheet and Statements of
Operations of the Company are not necessarily indicative of what the actual
financial position or results of operations would have been assuming the
Formation and Offering had occurred at the dates indicated above, nor do they
purport to represent the future financial position or results of operations of
the Company.
The unaudited Pro Forma Condensed Financial Statements of NPC have been
presented as if NPC existed as of January 1, 1995, the Leased Facilities had
been contributed or acquired by NPC and leased to the Company under operating
leases and the Company had acquired shares of NPC's preferred stock as
described under "The Company and the Formation." The unaudited Pro Forma
Condensed Balance Sheet as of September 30, 1996 and Condensed Statements of
Operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 of NPC are not necessarily indicative of what the actual
financial position and results of operations would have been assuming the
above transactions had occurred at the date indicated above, nor do they
purport to represent the future financial position or results of operations of
NPC.
F-2
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
ORIGINAL ACTIVELIFE GABLES AT PRO FORMA PRO FORMA
COMPANY FACILITIES FACILITIES BRIGHTON SUBTOTAL ADJUSTMENTS AS ADJUSTED
------- ---------- ---------- --------- --------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ $ 1 $ 1,886 $ 1,940 $ 529 $ 4,356 (b) $ 10,828 $ 15,184
Cash-restricted......... -- 2,108 924 -- 3,032 (c) (924) 2,108
Accounts receivable..... -- 170 77 -- 247 (d) (77) 170
---- ------- -------- ------- --------- -------- --------
Total current assets.... 1 4,164 2,941 529 7,635 9,827 17,462
Real estate, net........ -- 89,004 28,886 5,617 123,507 (a) (58,703) 64,804
Cash-restricted......... -- -- -- -- -- (c) 10,600 10,600
Investment-preferred
stock.................. -- -- -- -- (e) 22,400 22,400
Deferred costs, net..... -- 1,882 874 -- 2,756 (f) (1,897) 859
Other................... 789 318 177 156 1,440 (g) 5,478 6,918
---- ------- -------- ------- --------- -------- --------
Total assets............ $790 $95,368 $ 32,878 $ 6,302 $ 135,338 $(12,295) $123,043
==== ======= ======== ======= ========= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
AND PARTNERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C>
Current liabilities:
Debt, current........... $-- $ 353 $ 344 $ -- $ 697 (h) $ (258) $ 439
Accrued interest
payable................ -- 379 233 -- 612 (i) (319) 293
Accrued real estate
taxes.................. -- 747 702 -- 1,449 -- 1,449
Accounts payable........ -- 323 498 51 872 (j) (549) 323
Tenant security
deposits............... -- 2,286 815 228 3,329 -- 3,329
Due to affiliates and
other.................. 789 541 1,977 43 3,350 (k) (2,809) 541
---- ------- -------- ------- --------- -------- --------
Total current
liabilities............ 789 4,629 4,569 322 10,309 (3,935) 6,374
Debt, long-term......... -- 99,054 36,033 -- 135,087 (h) (95,755) 39,332
---- ------- -------- ------- --------- -------- --------
Total liabilities....... 789 103,683 40,602 322 145,396 (99,690) 45,706
Commitments (p)......... -- -- -- -- -- -- --
Minority interest....... -- (6,919) -- -- (6,919) (l) 6,919 --
Stockholders' and
partners' equity
(deficit):
Preferred stock, $0.01
par value, 20,000
shares authorized, no
shares issued or
outstanding............ -- -- -- -- -- -- --
Common stock, $0.01 par
value, 75,000 shares
authorized, 10,125
shares issued and
outstanding............ -- -- -- -- -- (m) 101 101
Paid in capital......... 1 -- -- -- 1 (n) 77,235 77,236
Partners' equity
(deficit).............. -- (1,396) (7,724) 5,980 (3,140)(o) 3,140 --
---- ------- -------- ------- --------- -------- --------
Total stockholders' and
partners' equity
(deficit).............. 1 (1,396) (7,724) 5,980 (3,139) 80,476 77,337
---- ------- -------- ------- --------- -------- --------
Total liabilities and
stockholders' and
partners' equity
(deficit).............. $790 $95,368 $ 32,878 $ 6,302 $ 135,338 $(12,295) $123,043
==== ======= ======== ======= ========= ======== ========
</TABLE>
See accompanying notes to the Pro Forma Combined Condensed Balance Sheet.
F-3
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ORIGINAL ACTIVELIFE GABLES AT PRO FORMA PRO FORMA
FACILITIES FACILITIES BRIGHTON SUBTOTAL ADJUSTMENTS AS ADJUSTED(K)
---------- ---------- --------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Resident fees........... $21,935 $12,337 $ 2,638 $36,910 $ -- $36,910
Management services
income................. -- -- -- -- (a) 285 285
------- ------- ------- ------- ------- -------
Total revenue........... 21,935 12,337 2,638 36,910 285 37,195
Facility operating
expenses............... (13,253) (8,312) (1,822) (23,387)(b) 2,306 (21,081)
Lease expenses.......... -- -- -- -- (c) (10,600) (10,600)
General and
administrative
expenses............... -- -- -- -- (d) (2,500) (2,500)
Depreciation and
amortization........... (3,721) (1,010) (292) (5,023)(e) 3,052 (1,971)
------- ------- ------- ------- ------- -------
Income from operations.. 4,961 3,015 524 8,500 (7,457) 1,043
Dividend income......... -- -- -- -- (f) 2,688 2,688
Interest expense........ (6,385) (2,996) -- (9,381)(g) 5,949 (3,432)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes (i)....... (1,424) 19 524 (881) 1,180 299
Pro forma benefit for
income taxes........... 570 -- -- 570 (h) (224) 346
------- ------- ------- ------- ------- -------
Pro forma net income
(loss)................. $ (854) $ 19 $ 524 $ (311) $ 956 $ 645
======= ======= ======= ======= ======= =======
Pro forma net income
(loss) per share....... $ (0.19) $ 0.06
======= =======
Pro forma common shares
outstanding (j)........ 4,500 10,125
======= =======
</TABLE>
See accompanying notes to the Pro Forma Combined Condensed Statement of
Operations.
F-4
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ORIGINAL ACTIVELIFE GABLES AT PRO FORMA PRO FORMA
FACILITIES FACILITIES BRIGHTON SUBTOTAL ADJUSTMENTS AS ADJUSTED(K)
---------- ---------- --------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Resident fees........... $16,905 $9,494 $2,063 $28,462 $ -- $28,462
Management services
income................. -- -- -- -- (a) 228 228
------- ------ ------ ------- ------ -------
Total revenue........... 16,905 9,494 2,063 28,462 228 28,690
Facility operating
expenses............... (9,433) (6,279) (1,354) (17,066)(b) 1,648 (15,418)
Lease expenses.......... -- -- -- -- (c) (7,950) (7,950)
General and
administrative
expenses............... -- -- -- -- (d) (1,875) (1,875)
Depreciation and
amortization........... (2,388) (769) (223) (3,380)(e) 1,870 (1,510)
------- ------ ------ ------- ------ -------
Income from operations.. 5,084 2,446 486 8,016 (6,079) 1,937
Dividend income......... -- -- -- -- (f) 2,016 2,016
Interest expense........ (4,074) (2,244) -- (6,318)(g) 4,103 (2,215)
------- ------ ------ ------- ------ -------
Income before income
taxes (i).............. 1,010 202 486 1,698 40 1,738
Pro forma provision for
income taxes........... (404) -- -- (404)(h) 58 (346)
------- ------ ------ ------- ------ -------
Pro forma net income.... $ 606 $ 202 $ 486 $ 1,294 $ 98 $ 1,392
======= ====== ====== ======= ====== =======
Pro forma net income per
share.................. $ 0.13 $ 0.14
======= =======
Pro forma common shares
outstanding (j)........ 4,500 10,125
======= =======
</TABLE>
See accompanying notes to the Pro Forma Combined Condensed Statement of
Operations.
F-5
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
BASIS OF PRESENTATION
The pro forma combined condensed balance sheet of the Company includes the
historical balance sheets of the Original Facilities, the Activelife
Facilities and the Gables at Brighton facility, each of which consists of the
following properties:
<TABLE>
<CAPTION>
ORIGINAL
FACILITIES ACTIVELIFE FACILITIES GABLES AT BRIGHTON FACILITY
---------- --------------------- ---------------------------
<S> <C> <C>
The Devonshire (1) Springs of East Mesa (3) Gables at Brighton (3)
The Heritage (1) Edina Park Plaza (4)
The Hallmark (2) Hawthorn Lakes (4)
</TABLE>
- ---------------------
(1) These properties will be contributed by PGI to National Property Company
Inc. ("NPC") , and leased to the Company. The Company will also own the
preferred stock of NPC (see Note e).
(2) This property will be contributed to the Company by PGI and management.
(3) These properties will be purchased by the Company from proceeds of the
Offering.
(4) These properties will be purchased by NPC and leased to the Company.
Collectively (1) and (4) properties are referred to as the Leased Facilities
and (3) properties are referred to as the Acquired Facilities.
The Company will retain all assets and liabilities of the Leased Facilities
included in the Original Facilities except for real estate, deferred costs,
debt and accrued interest payable. Accrued real estate taxes and tenant
security deposits of the Leased Facilities included in the Activelife
Facilities will be assumed by the Company. NPC will purchase the real estate
and assume the debt and accrued interest payable of the Leased Facilities
included in the Activelife Facilities. All other assets and liabilities of the
Leased Facilities included in the Activelife Facilities have been eliminated
as they are not being acquired or assumed by the Company. The Company will
purchase the real estate, repay the debt from the proceeds of the Offerings
and receive credits at closings for assuming accrued real estate taxes and
tenant security deposits related to the Acquired Facilities. The Company is
not purchasing any other assets or assuming any other liabilities of the
Acquired Facilities. The following pro forma adjustments reflect the above
activity.
<TABLE>
<C> <S> <C>
(a) Real estate, net:
The Company will purchase the Acquired Facilities for the
purchase prices indicated below and will assume certain
liabilities as follows:
</TABLE>
<TABLE>
<CAPTION>
SPRINGS
OF EAST GABLES AT
MESA BRIGHTON
------- ---------
<S> <C> <C>
Purchase price.......................................... $14,550 $10,700
Less: liabilities being assumed.........................
Mortgage note payable.................................. 5,364 --
Accrued interest....................................... 37 --
Accrued real estate taxes.............................. 52 --
Tenant security deposits............................... 73 228
------- -------
Cash payments made for acquisitions (see Note b)........ $ 9,024 $10,472
======= =======
</TABLE>
<TABLE>
<C> <S> <C>
The Company is acquiring the real estate assets of the above
entities and the liabilities being assumed, in management's
opinion, are stated at their estimated fair market values. The
adjustments to reflect the purchases are reflected below.
</TABLE>
F-6
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET--(CONTINUED)
<TABLE>
<C> <S> <C>
Adjustments to the historical cost bases of the Springs of
East Mesa facility ($8,366) and the Gables at Brighton
facility ($5,083) to reflect their fair values............... $ 13,449
Elimination of the net real estate value of the Leased
Facilities ($49,450 historical cost) included in the Original
Facilities, and ($22,702 historical cost) included in the
Activelife Facilities........................................ (72,152)
--------
$(58,703)
========
(b) Cash:
Gross proceeds from Offering.................................. $ 90,000
Estimated cost of the Offering ($2,080) and underwriters
discount ($6,300)............................................ (8,380)
Payments to be made to PGI from the proceeds of the Offering
for the contribution of its interest in the Hallmark (PGI
will use the payment for (i) the reduction of a debt
obligation of PGI that is collateralized by PGI's ownership
interest in The Hallmark ($12,000) and (ii) consideration to
be paid to Third Party for its ownership interests in the
Leased Facilities included in the Original Facilities
($4,600)). At the close of the Offering, unrestricted cash of
the Original Facilities in excess of $2,000 will be
distributed to PGI (No adjustment is required as of September
30, 1996).................................................... (16,600)
Payment made for the acquisition of the Gables at Brighton
Facility and the Springs of East Mesa facility............... (19,496)
Elimination of historical unrestricted cash and cash
equivalents accounts of the Activelife Facilities ($1,940)
and the Gables at Brighton facility ($529) not being acquired
by the Company............................................... (2,469)
Cash to be used as non-interest bearing security deposit on
the Leased Facilities........................................ (10,600)
Cash used to purchase investment in preferred stock of NPC.... (22,400)
Cash received from NPC for credits received by NPC for
acquisition of Leased Facilities included in Activelife
Facilities................................................... 1,392
Payment of fees for new acquisition line of credit............ (275)
Payment of loan transfer costs on the mortgage note payable
related to The Hallmark...................................... (344)
--------
$ 10,828
========
(c) Short-term cash-restricted:
Elimination of historical short-term cash-restricted accounts
of the Activelife Facilities not being acquired by the
Company....................................................... $ (924)
========
Long-term cash-restricted:
Cash to be used as non-interest bearing security deposit on
the Leased Facilities........................................ $ 10,600
========
(d) Accounts receivable
Elimination of historical accounts receivable accounts of the
Activelife Facilities not being acquired by the Company....... $ (77)
========
(e) Investment--preferred stock
Purchase of non-participating 12% cumulative preferred stock
of NPC (See "The Company and the Formation" for further
information regarding the preferred stock).................... $ 22,400
========
</TABLE>
F-7
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET--(CONTINUED)
<TABLE>
<C> <S> <C>
(f) Deferred costs, net:
Payment of fees for new acquisition line of credit (3 year
term)........................................................ $ 275
Elimination of historical cost deferred costs accounts of the
Leased Facilities included in the Original Facilities
($1,298) and the Activelife Facilities ($874) not being
acquired by the Company...................................... (2,172)
--------
$ (1,897)
========
(g) Other assets:
Reclassification of deferred offering costs, incurred by an
affiliate, to paid in capital................................ $ (789)
Elimination of historical other asset accounts of the
Activelife Facilities ($177) and the Gables at Brighton
facility ($156) not being acquired by the Company............ (333)
Deferred income taxes at a 40% effective rate (includes
federal and state effective income tax rates) related to the
Company assuming ownership of the Original Facilities. The
asset relates to differences in basis of real estate assets
for book purposes and federal income tax purposes that will
be recognized through future depreciation of the basis
difference. The realization of the deferred tax asset is
contingent upon the Company generating future taxable income
to recognize the benefit of the future depreciation of the
basis difference. Management estimates that the Company will
generate sufficient future taxable income to recognize the
tax benefit of the future depreciation. Management's estimate
of future income is based upon the improved operations of the
Original Facilities and additional income generated by the
Company's expansion of operations described in the
Registration Statement. The recognition of the future
depreciation will be a deferred component of the Company's
(provision) benefit for income taxes and will have no impact
on the effective tax rate of the Company..................... 6,600
--------
$ 5,478
========
(h) Debt, current:
Elimination of historical current portion debt accounts of the
fixed rate mortgage notes of the Leased Facilities included
in the Activelife Facilities................................. $ (258)
========
Debt, long-term:
Elimination of historical bonds payable accounts ($65,000) of
the Leased Facilities included in the Original Facilities,
fixed rate mortgage notes facilities ($28,235), and the
interest reduction loan related to ($2,520) of the Leased
Facilities included in the Activelife Facilities not being
assumed by the Company....................................... $(95,755)
========
</TABLE>
After giving effect to the formation, the Company will have principal
payments relating to mortgage notes payable as of September 30, 1996 as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1996............................ $ 135
1997............................ 447
1998............................ 481
1999............................ 518
2000............................ 559
2001............................ 37,631
</TABLE>
<TABLE>
<C> <S> <C>
(i) Accrued interest payable:
Elimination of historical accrued interest accounts of the
Leased Facilities included in the Original Facilities ($86)
and Activelife Facilities ($233) not being assumed by the
Company..................................................... $ (319)
========
(j) Accounts payable:
Elimination of historical accounts payable accounts of the
Activelife Facilities ($498) and the Gables at Brighton
facility ($51) not being assumed by the Company............. $ (549)
========
</TABLE>
F-8
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET--(CONTINUED)
<TABLE>
<C> <S> <C>
(k) Due to affiliates and Other:
Repayment of deferred offering costs of the Company incurred
by an affiliate.............................................. $ (789)
Elimination of historical due to affiliates and other
liabilities accounts of the Activelife Facilities ($1,977)
and the Gables at Brighton facility ($43) not being assumed
by the Company............................................... (2,020)
--------
$ (2,809)
========
(l) Minority interest:
Elimination of Third Party's minority interest balance in the
Original Facilities.......................................... $ 6,919
========
(m) Common stock:
Issuance of 5,625 shares of common stock, $.01 par value,
pursuant to the initial public offering...................... $ 56
Issuance of 4,500 shares of common stock, $.01 par value, to
PGI in consideration for its contribution of its interests in
the Original Facilities...................................... 45
--------
$ 101
========
(n) Paid in capital:
Issuance of 5,625 shares of common stock, $.01 par value,
pursuant to the initial public offering at an assumed
offering price of $16 per share.............................. $ 89,944
Issuance of 4,500 shares of common stock, $.01 par value, to
PGI and management in consideration for its contribution of
its interests in the Original Facilities..................... (45)
Estimated costs of the Offering ($2,080) and underwriters
discount ($6,300)............................................ (8,380)
Payments to be made to PGI from the proceeds of the Offering
for the contribution of its interest in the Hallmark (PGI
will use the payment (i) for the reduction of a debt
obligation of PGI that is collateralized by a portion of
PGI's ownership interest in The Hallmark(+) and (ii)
consideration to be paid to Third Party for its ownership
interests in the Leased Facilities included in the Original
Facilities ($4,600))......................................... (16,600)
Elimination of carry over historical cost basis of the net
liabilities of the Leased Facilities included in the Original
Facilities and Activelife Facilities......................... 9,200
Reclassification of historical partners equity (deficit) (3,140)
Payment of loan transfer costs related to the Hallmark loan... (344)
Provision to reflected deferred income taxes at a 40%
effective rate (includes federal and state effective income
tax rates) related to the Company assuming ownership of the
Original Facilities. The asset primarily relates to
differences in basis of real estate assets (see
Note g)...................................................... 6,600
--------
$ 77,235
========
(+) In June 1996, an affiliate of PGI entered into a loan
agreement with a balance of $34.7 million at September 30,
1996 that is due on June 13, 1997 with a one year extension
period. The loan agreement requires PGI to pledge a portion
of its ownership interest in The Hallmark as collateral.
Upon the distribution of the $12,000 to PGI, its ownership
interest in The Hallmark will be released from the
collateral encumbrance.
(o) Partners' deficit:
Reclassification of historical partners' equity (deficit)..... $ 3,140
========
(p) Commitments
Upon the completion of the Formation and the Offering the
Company will (i) enter into net operating lease agreements
for the Leased Facilities (See "The Company and the
Formation") (ii) provide a stock incentive plan for
directors, executive officers and other key employees (See
"Business--Stock Incentive Plan"), (iii) enter into a space
sharing agreement with PGI (See "Certain Transactions--Space
Sharing Agreement") and (iv) continue a 401(k) plan initiated
by PGI for the Original Facilities (See "Employee Benefit
Plan" in footnote 6 to the combined financial statements of
the Original Facilities).
</TABLE>
F-9
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
<C> <S> <C> <C>
(a) Management services income:
Management services income for management
services performed by the Company for The
Island on Lake Travis and The Kenwood....... $ 285 $ 228
======== =======
(b) Facility operating expenses:
Elimination of historical management fees
paid by the Original Facilities ($1,071 in
1995 and $695 in 1996), the Activelife
Facilities ($755 in 1995 and $587 in 1996),
and the Gables at Brighton facility ($108 in
1995 and $87 in 1996) and administrative
fees paid by the Original Facilities ($372
in 1995 and $279 in 1996) which will not be
incurred by the Company..................... $ 2,306 $ 1,648
======== =======
(c) Lease expenses:
Lease payments related to the Leased
Facilities (See "The Company and the
Formation" for further information on the
Leases)..................................... $(10,600) $(7,950)
======== =======
(d) General and administrative expenses:
Estimated increase in salaries and related
benefits associated with former employees of
PGI who will become the senior officers and
managers of the Company and additional
administrative and financial reporting
expenses which would have been incurred by
the Company had it been operating as a
public company during the year:
Salaries and wages........................... $ (1,600) $(1,200)
Directors' and officers' insurance and fees.. (75) (57)
Legal and accounting......................... (210) (158)
Other........................................ (615) (460)
-------- -------
$ (2,500) $(1,875)
======== =======
The Company anticipates hiring new employees
and incur other administrative costs based
upon its future expansion plans. The Company
estimates these costs to be $1,100 on an
annual basis. These costs have not been
reflected in the pro forma adjustments.
</TABLE>
F-10
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS--
(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
<C> <S> <C> <C>
(e) Depreciation and amortization:
Adjustments to historical depreciation
expense associated with (*):
Decrease in depreciation expense associated
with the change in depreciable lives of the
Hallmark facility........................... $ 117 $ 88
Additional net depreciation expense
associated with the increase in the basis
from the purchase and the increase in
depreciable lives
Springs of East Mesa......................... (251) (183)
Gables at Brighton........................... (17) (9)
Elimination of historical depreciation and
amortization expense of the Leased
Facilities (Original Facilities $2,510 in
1995 and $1,449 in 1996; Activelife
Facilities $785 in 1995 and $594 in 1996)... 3,295 2,043
Additional amortization expense associated
with the fees paid for the new acquisition
line of credit ($275 over 3 years).......... (92) (69)
------ ------
$3,052 $1,870
====== ======
*The Company has determined that the estimated useful lives of buildings to
be 45 years and furniture and equipment to be 5 years, as compared to 40
years and 3-12 years, respectively used by the Original Facilities. This
change was made to better reflect the estimated periods during which such
assets will remain in service. For financial statement reporting purposes,
the above will be recorded prospectively as a change in estimate for the
Original Facilities. Depreciation expense included in the "Pro Forma As
Adjusted" column was based upon the Company's new estimated useful lives.
(f) Dividend income:
Dividend income received from non-
participating 12% cumulative preferred stock
of NPC (See "The Company and the Formation"
for further information on preferred stock
investment)................................. $2,688 $2,016
====== ======
(g) Interest expense:
Elimination of interest expense incurred
related to the debt of the Leased Facilities
(Original Facilities $3,404 in 1995 and
$2,193 in 1996; Activelife Facilities $2,545
in 1995 and $1,910 in 1996)................. $5,949 $4,103
====== ======
</TABLE>
F-11
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS--
(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
<C> <S> <C> <C> <C> <C>
(h) (Provision)
benefit for
income
taxes:
The Original
Facilities
and the
entities
that
operated the
Activelife
Facilities
and the
Gables at
Brighton
facility
prior to the
acquisition
were not
taxable
entities.
The Company
anticipates
receiving a
70%
deduction
for
dividends
received
related to
the dividend
income from
its
preferred
stock
investment
in NPC. The
deduction
has the
following
impact of
Company's
benefit
(provision)
for income
tax at a 40%
effective
income tax
rate
(includes
federal and
state
statutory
income tax
rates):
</TABLE>
<TABLE>
<CAPTION>
1995 1996
<C> <S> <C> <C> <C> <C>
Provision on income before income taxes............ $(120) $(695)
Benefit on deduction for dividends received........ 466 349
----- -----
Benefit (provision) for income taxes............... $ 346 $(346)
===== =====
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C>
This adjustment provides pro forma (provision) benefit for
income taxes at a 40% effective income tax rate............. $(224) $58
===== ===
(i) Income (loss) before income taxes:
The income (loss) before income taxes presented in the
historical statements of operations of the Original
Facilities is before minority interest (1995 and 1996) and
the extraordinary item relating to the gain on
extinguishment of debt (1995) and represents income (loss)
from continuing operations. The
minority interest is not included due to the interest being
acquired in conjunction with the Formation and Offering and
the extraordinary item is not included due to the non-
recurring nature of the transaction.
(j) Pro forma net loss per share is based upon the number of
common shares issued consisting of the 4,500 shares issued
to PGI and management in exchange for their interest in the
Original Facilities plus the issuance of all 5,625 shares in
the initial offering
</TABLE>
<TABLE>
<C> <S> <C> <C>
Original Facilities......................... 4,500 shares 4,500 shares
============= =============
The Company................................. 10,125 shares 10,125 shares
============= =============
(k) In order for NPC to consummate the
acquisition of two of the Leased Facilities
(Hawthorn Lakes and Edina Park Plaza), NPC
must obtain the consent of the United
States Department of Housing and Urban
Development to such transfer. If such
consent is not obtained and such two
facilities are not acquired NPC and leased
to the Company, the Company's pro forma as
adjusted total revenue, operating income,
and net loss would be $28,104, $3,068, and
$1,394 for the year ended December 31, 1995
and pro forma as adjusted total revenue
operating income and net loss would be
$21,718, $3,242 and $1,826 for the nine
months ended September 30, 1996.
</TABLE>
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Brookdale Living Communities, Inc.
We have audited the accompanying balance sheet of Brookdale Living
Communities, Inc., a Delaware corporation, as of September 30, 1996. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet 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 balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Brookdale Living Communities,
Inc. as of September 30, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 15, 1996
F-13
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash.................................................................. $ 1,000
Deferred offering costs............................................... 789,000
--------
Total assets.......................................................... $790,000
========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'S EQUITY
<S> <C>
Due to affiliate...................................................... $789,000
--------
Total liabilities..................................................... 789,000
Stockholder's equity:
Common Stock, $.01 par value, 100 shares authorized, issued and
outstanding.......................................................... 1
Additional paid-in capital............................................ 999
--------
Total stockholder's equity............................................ 1,000
--------
Total liabilities and stockholder's equity............................ $790,000
========
</TABLE>
See notes to balance sheet.
F-14
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO BALANCE SHEET
SEPTEMBER 30, 1996
1. ORGANIZATION
Brookdale Living Communities, Inc. (the "Company") was incorporated in
Delaware under the Delaware General Corporation Law on September 4, 1996. The
Company was formed in order to consolidate and expand the Original Facilities
owned by The Prime Group, Inc. and its affiliates ("PGI"). In connection with
a proposed public offering (the "Offering") more fully described elsewhere in
this Registration Statement and Prospectus, the Company will sell shares of
its common stock to the public and PGI will contribute its interests in The
Hallmark Limited Partnership in exchange for 3,928,750 shares of common stock
of the Company.
2. DEFERRED COSTS
As of September 30, 1996, PGI has incurred approximately $789,000 of legal,
accounting and related costs on behalf of the Company in connection with the
Offering which have been presented as deferred offering costs on the balance
sheet. These costs, in addition to offering costs incurred after September 30,
1996 through the date the Offering, will be deducted from the gross proceeds
of the Offering.
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Brookdale Living Communities, Inc.
We have audited the accompanying combined balance sheets of the Original
Facilities as of December 31, 1994 and 1995 and September 30, 1996 and the
related combined statements of operations, changes in partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995 and for the nine months ended September 30, 1996. These
financial statements are the responsibility of the Original Facilities'
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 combined financial position of the Original
Facilities at December 31, 1994 and 1995 and September 30, 1996, and the
combined results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 and for the nine months ended
September 30, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 15, 1996
F-16
<PAGE>
ORIGINAL FACILITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER
1994 1995 30, 1996
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................. $ 4,126,904 $ 4,201,277 $ 1,885,672
Cash--restricted..................... 2,046,858 2,618,005 2,108,197
Accounts receivable.................. 120,952 160,580 170,412
Due from affiliates.................. 25,484 93,500 115,585
------------ ------------ ------------
Total current assets................. 6,320,198 7,073,362 4,279,866
Real estate, at cost:
Land................................. 8,336,937 8,336,937 8,336,937
Buildings and improvements........... 88,420,115 88,382,978 88,553,025
Furniture and equipment.............. 3,658,545 3,794,756 3,878,820
------------ ------------ ------------
100,415,597 100,514,671 100,768,782
Accumulated depreciation............. (6,400,363) (9,476,602) (11,764,448)
------------ ------------ ------------
94,015,234 91,038,069 89,004,334
Deferred costs, net.................. 1,999,981 1,982,270 1,882,305
Other................................ 243,773 231,521 201,680
------------ ------------ ------------
Total assets......................... $102,579,186 $100,325,222 $ 95,368,185
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
(DEFICIT)
Current liabilities:
Mortgage note payable................ $ 302,506 $ 334,165 $ 352,819
Accrued interest payable............. 884,171 204,063 379,395
Accrued real estate taxes............ 1,127,500 992,570 746,658
Accounts payable..................... 1,052,049 199,602 322,627
Tenant security deposits............. 2,148,232 2,259,846 2,286,275
Due to affiliates.................... 205,679 272,578 482,542
Other................................ 270,833 177,614 58,668
------------ ------------ ------------
Total current liabilities............ 5,990,970 4,440,438 4,628,984
Mortgage note payable................ 35,939,119 34,292,835 34,054,104
Bonds payable........................ 65,000,000 65,000,000 65,000,000
------------ ------------ ------------
Total liabilities.................... 106,930,089 103,733,273 103,683,088
Minority interest.................... (6,202,568) (7,005,255) (6,919,002)
Partners' capital (deficit).......... 1,851,665 3,597,204 (1,395,901)
------------ ------------ ------------
Total liabilities and partners'
capital (deficit)................... $102,579,186 $100,325,222 $ 95,368,185
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-17
<PAGE>
ORIGINAL FACILITIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Resident fees........... $6,636,864 $15,204,692 $21,934,680 $16,023,738 $16,904,801
EXPENSES
Facility operating...... 4,537,630 8,848,494 10,804,692 8,127,299 7,712,236
Real estate taxes....... 416,478 886,533 1,005,620 757,477 747,078
Depreciation and
amortization........... 1,625,596 3,285,812 3,720,612 2,937,173 2,387,811
Interest................ 1,337,315 3,310,052 5,507,289 4,163,841 3,449,365
Financing fees.......... 452,654 743,002 877,500 593,850 624,831
Property management and
other fees--affiliate.. 325,898 1,535,224 1,443,195 1,071,304 973,511
---------- ----------- ----------- ----------- -----------
Total expenses.......... 8,695,571 18,609,117 23,358,908 17,650,944 15,894,832
---------- ----------- ----------- ----------- -----------
Income (loss) before
minority interest and
extraordinary item..... (2,058,707) (3,404,425) (1,424,228) (1,627,206) 1,009,969
(Income) loss allocated
to minority interest... 1,265,864 1,178,257 802,687 730,078 (86,253)
---------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item..... (792,843) (2,226,168) (621,541) (897,128) 923,716
Extraordinary item--gain
on extinguishment of
debt................... -- -- 3,274,207 -- --
---------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (792,843) $(2,226,168) $ 2,652,666 $ (897,128) $ 923,716
========== =========== =========== =========== ===========
UNAUDITED PRO FORMA
DATA:
Income (loss) before
income taxes and
extraordinary item..... $ (792,843) $(2,226,168) $ (621,541) $ (897,128) $ 923,716
Pro forma benefit
(provision) for income
taxes.................. 317,137 890,467 248,616 358,851 (369,486)
---------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item..... (475,706) (1,335,701) (372,925) (538,277) 554,230
Extraordinary item, net
of income taxes of
$1,309,683............. -- -- 1,964,524 -- --
---------- ----------- ----------- ----------- -----------
Pro forma net income
(loss)................. $ (475,706) $(1,335,701) $ 1,591,599 $ (538,277) $ 554,230
========== =========== =========== =========== ===========
Pro forma income (loss)
before extraordinary
item per share......... $ (0.08) $ 0.12
=========== ===========
Pro forma extraordinary
item, net per share.... $ 0.43 $ --
=========== ===========
Pro forma net income per
share.................. $ 0.35 $ 0.12
=========== ===========
Pro forma common shares
outstanding............ 4,500,000 4,500,000
=========== ===========
</TABLE>
See notes to combined financial statements.
F-18
<PAGE>
ORIGINAL FACILITIES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
THE
DEVONSHIRE THE HERITAGE THE HALLMARK
----------- ------------ ------------------- TOTAL TOTAL
GENERAL GENERAL GENERAL LIMITED GENERAL LIMITED
PARTNER PARTNER PARTNER PARTNER PARTNERS PARTNER TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Partners' deficit at
January 1, 1993 $(1,983,125) $ (4,062) $ -- $ -- $(1,987,187) $ -- $(1,987,187)
Net loss.............. (236,510) (556,333) -- -- (792,843) -- (792,843)
----------- ----------- ------- ---------- ----------- ---------- -----------
Partners' deficit at
December 31, 1993 (2,219,635) (560,395) -- -- (2,780,030) -- (2,780,030)
Contributions......... 556,863 600,000 10 5,700,990 1,156,873 5,700,990 6,857,863
Net loss.............. (109,105) (850,942) (12,661) (1,253,460) (972,708) (1,253,460) (2,226,168)
----------- ----------- ------- ---------- ----------- ---------- -----------
Partners' capital
(deficit) at December
31, 1994 (1,771,877) (811,337) (12,651) 4,447,530 (2,595,865) 4,447,530 1,851,665
Contributions......... 54,875 -- -- -- 54,875 -- 54,875
Distributions......... -- -- -- (962,002) -- (962,002) (962,002)
Net income (loss)..... (159,044) (325,557) 31,373 3,105,894 (453,228) 3,105,894 2,652,666
----------- ----------- ------- ---------- ----------- ---------- -----------
Partners' capital
(deficit) at December
31, 1995 (1,876,046) (1,136,894) 18,722 6,591,422 (2,994,218) 6,591,422 3,597,204
Contributions......... 37,961 -- -- -- 37,961 -- 37,961
Distributions......... -- -- -- (1,895,823) -- (1,895,823) (1,895,823)
Advances made to
general partners .... (1,358,544) (2,700,415) -- -- (4,058,959) -- (4,058,959)
Net income............ 8,439 60,934 8,543 845,800 77,916 845,800 923,716
----------- ----------- ------- ---------- ----------- ---------- -----------
Partners' capital
(deficit) at September
30, 1996............... $(3,188,190) $(3,776,375) $27,265 $5,541,399 $(6,937,300) $5,541,399 $(1,395,901)
=========== =========== ======= ========== =========== ========== ===========
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
ORIGINAL FACILITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ (792,843) $(2,226,168) $ 2,652,666 $ (897,128) $ 923,716
Adjustments to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities
Extraordinary item..... -- -- (3,274,207) -- --
Depreciation and
amortization.......... 1,625,596 3,285,812 3,720,612 2,937,173 2,387,811
Minority interest...... (1,265,864) (1,178,257) (822,687) (730,078) 86,253
Changes in operating
assets and
liabilities:
Decrease (increase)
in accounts
receivable.......... 33,783 (103,585) (39,628) (60,882) (9,832)
Decrease (increase)
in other assets..... (82,640) (99,646) 12,252 70,055 29,841
Increase (decrease)
in accrued interest
payable............. (100,350) 714,707 (680,108) 51,735 175,332
Increase (decrease)
in accrued real
estate taxes........ 165,022 600,016 (134,930) 261,534 (245,912)
(Decrease) increase
in accounts payable. 58,759 74,473 (46,029) (49,100) 123,025
Increase in tenant
security deposits... 313,457 1,026,802 111,614 107,839 26,429
(Decrease) increase
in arbitrage rebate
payable............. 1,215 (73,678) (806,418) (806,418) --
(Decrease) increase
in other
liabilities......... (1,028,177) 187,963 (93,219) (48,679) (118,946)
----------- ----------- ----------- ---------- -----------
Net cash (used in)
provided by operating
activities............. (1,072,042) 2,208,439 619,918 836,051 3,377,717
INVESTING ACTIVITIES
Additions to real
estate................ (10,071,182) (43,224,823) (238,633) (5,558) (254,111)
Decrease in
construction costs
payable............... (2,888,133) (606,781) -- -- --
Reimbursement of
building improvements
from tenants.......... -- -- 139,559 -- --
(Increase) decrease in
due from affiliate.... 36,944 41,800 (68,016) (27,131) (22,085)
Decrease (increase) in
cash -- restricted.... 12,489,056 6,938,354 (29,134) (24,193) (21,424)
----------- ----------- ----------- ---------- -----------
Net cash used in
investing activities... (433,315) (36,851,450) (196,224) (56,882) (297,620)
FINANCING ACTIVITIES
Repayment of mortgage
note payable.......... -- -- (32,967,418) (460,792) (220,077)
Repayment of bonds
payable............... -- (4,000,000) -- -- --
Repayment of note
payable -- affiliate.. -- (2,510,081) -- -- --
Proceeds from mortgage
note payable.......... 401,000 36,241,625 34,627,000 -- --
Proceeds from notes
payable -- affiliate.. 261,464 -- -- -- --
Decrease (increase) in
cash -- restricted.... (159,781) (527,778) (542,013) 1,190,811 531,232
Increase in deferred
financing costs....... (614,511) (110,126) (626,662) -- --
Increase (decrease) in
due to affiliate...... (230,930) 126,609 66,899 (172,768) 209,964
Advances to general
partner............... -- -- -- -- (4,058,959)
Contributions from
partners.............. -- 6,857,863 54,875 41,386 37,961
Contributions from
minority interest..... -- 2,194,993 -- -- --
Distributions to
partners.............. -- -- (962,002) -- (1,895,823)
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities............. (342,758) 38,273,105 (349,321) 598,637 (5,395,702)
----------- ----------- ----------- ---------- -----------
Net (decrease) increase
in cash................ (1,848,115) 3,630,094 74,373 1,377,806 (2,315,605)
Cash at beginning of
period................. 2,344,925 496,810 4,126,904 4,126,904 4,201,277
----------- ----------- ----------- ---------- -----------
Cash at end of period... $ 496,810 $ 4,126,904 $ 4,201,277 $5,504,710 $ 1,885,672
=========== =========== =========== ========== ===========
</TABLE>
See notes to combined financial statements.
F-20
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Original Facilities represent a combination of three partnerships
described below ("Partnerships") that own, operate, and manage assisted living
facilities ("Properties") in the greater Chicagoland area. The Properties are
under common management and ownership of The Prime Group, Inc. and its
affiliates ("PGI") as either the managing general partner (responsible for the
operations of the Properties) or 100% owner. Two of the Properties have a
third party owner ("Third Party"), whose ownership interests have been
reflected as a minority interest in the combined financial statements.
Pursuant to the formation transactions more fully described elsewhere in this
Registration Statement and Prospectus, the Original Facilities will be
operated (owned or leased) by a newly formed corporation, Brookdale Living
Communities, Inc. (the "Company"), whose shares are being registered pursuant
to this Registration Statement.
The Partnerships and Properties owned and operated by the Original
Facilities are as follows:
<TABLE>
<CAPTION>
PARTNERSHIP PROPERTY
<S> <C>
The Ponds of Pembroke Limited Partnership The Devonshire
River Oaks Partners The Heritage
Hallmark Partners, L.P. The Hallmark
</TABLE>
Included in the combined financial statements are the operations of The
Devonshire (Partnership ownership-PGI: 25% managing general partner interest,
Third Party: 50% general partner interest and 25% limited partner interest)
and The Heritage (Partnership ownership-PGI: 50% managing general partner
interest and Third Party: 50% general partner interest) from January 1, 1993,
(The Heritage was constructed by PGI and began operations in September 1993)
and the operations of the Hallmark from June 1, 1994 (The Hallmark facility
was purchased by Hallmark Partners, L.P., a newly formed partnership 100%
owned by PGI, on June 1, 1994 for $41.6 million. On an unaudited pro-forma
basis for the years ended December 31, 1993 and 1994 combined revenue would
have increased by approximately $5.0 million and $2.6 million, respectively
and combined net loss would have increased by approximately $3.8 million and
$1.0 million, respectively, in the combined statements of operations had the
Hallmark been owned by PGI since January 1, 1993).
All significant intercompany accounts and transactions have been eliminated
in combination.
RESIDENT FEE REVENUE
Resident fee revenue is recorded when services are rendered and consist of
fees for basic housing, support services and fees associated with additional
services such as personalized health and assisted living care.
REAL ESTATE
At December 31, 1994, the Properties were carried at cost which was not in
excess of net realizable value as determined by management. In March 1995, the
Financial Accounting Standards Board issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
under which the Partnerships would be required to recognize impairment losses
for the Properties when indicators of impairment are present and the
Properties' expected undiscounted cash flows are not sufficient to recover the
Properties' carrying value. The Partnerships adopted Statement No. 121
effective January 1, 1995 with no impact on the accompanying combined
financial statements.
Expenditures for ordinary maintenance and repairs are expensed to operations
as incurred. Significant renovations and improvements which improve and/or
extend the useful life of the asset are capitalized and depreciated over their
estimated useful life. Interest and other direct costs incurred during
construction periods are capitalized as a component of the building cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of assets, which are as follows:
<TABLE>
<S> <C>
Buildings..................... 40 years
Building improvements and
furniture fixtures........... 3-12 years
</TABLE>
F-21
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED COSTS
Deferred financing costs are amortized using the straight-line method over
the term of the mortgage notes and bonds. Deferred marketing costs, consisting
primarily of the costs of the marketing facilities, were amortized using the
straight-line method over the estimated lease up period of 22 months through
June 1995 when they were fully amortized.
INCOME TAXES
The Partnerships pay no income taxes and the income or loss from the
Partnerships is includable on the respective federal income tax returns of the
partners.
The Partnerships net basis of real estate assets as reported in the
financial statements exceeds the basis used for federal income tax purposes by
approximately $2.4 million due to the use of accelerated depreciation methods
for federal income tax purposes.
USE OF ESTIMATES
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
INTERIM FINANCIAL DATA (UNAUDITED)
The interim financial data for the nine months ended September 30, 1995 is
unaudited; however, in the opinion of management, such interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the combined results of operations and cash flows
for the period.
PRO FORMA PRESENTATION (UNAUDITED)
The pro forma net income per share for the year ended December 31, 1995 and
the nine months ended September 30, 1996 were determined based upon 3.875
million shares of common stock issued by the Company to PGI in exchange for
its ownership in the Original Facilities.
The pro forma (provision) benefit for income taxes for the Original
Facilities is based on the historical combined financial data of the Original
Facilities as if the entities comprising the Original Facilities had operated
as taxable corporations for all periods presented and is recorded at the
federal and state statutory rates in effect during the period (40%).
2. CASH--RESTRICTED
The Heritage and The Hallmark have Life Care Escrow deposits required under
the Illinois Life Care Facility Act Section 7(b) equal to six months of debt
service payments. The Life Care Escrow will be funded from time to time in
accordance with a schedule provided by the Illinois Department of Public
Health. The amount on deposit at December 31, 1994 and 1995 was $384,393 and
$652,503 respectively and at September 30, 1996 was $877,351.
In accordance with the new mortgage note payable described in Note 5, The
Hallmark is required to maintain escrow deposits for real estate taxes,
repairs, and other operating activities. The total of all escrow accounts at
December 31, 1995 was $1,080,351 and at September 30, 1996 was $324,241.
Included in restricted cash at December 31, 1994 and 1995 and September 30,
1996 is $856,047, $885,151, and $906,605, respectively of restricted bond
proceeds. Pursuant to Internal Revenue Code Section 148(f), The
F-22
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Heritage was required to rebate to the United States government any interest
earnings in excess of the interest cost of the Bond proceeds not yet used for
Project costs. During 1995, the Partnership paid $806,418 (included in cash-
restricted and accounts payable at December 31, 1994) to the United States
government as a final settlement of its arbitrage rebate payable. No amounts
were paid in 1993 or 1994.
3. DEFERRED COSTS
Deferred costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
<S> <C> <C> <C>
Financing costs.................... $2,029,891 $2,656,553 $2,656,553
Marketing costs.................... 1,181,623 -- --
---------- ---------- ----------
3,211,514 2,656,553 2,656,553
Less: Accumulated amortization..... (1,211,533) (674,283) (774,248)
---------- ---------- ----------
$1,999,981 $1,982,270 $1,882,305
========== ========== ==========
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
----------------------- 30,
1994 1995 1996
<S> <C> <C> <C>
MORTGAGE NOTES PAYABLE
Mortgage note payable, financial
institution, interest at 7.265% per annum
with monthly principal and interest
assuming a 30 year amortization period,
through maturity in January 2006. (A)...... $34,627,000 $34,406,923
Mortgage note payable, financial
institution, interest at LIBOR plus 2 1/2%
per annum, with quarterly principal and
interest payments as defined through
maturity. (B).............................. $36,241,625
BONDS PAYABLE
Variable rate tax-exempt bonds issued by
state and local governmental authorities.
(C)........................................ $65,000,000 $65,000,000 $65,000,000
</TABLE>
- ---------------------
(A) The mortgage note payable is collateralized by The Hallmark's real estate.
(B) The Hallmark repaid $32,967,418 of this note as a final settlement on
December 18, 1995 from proceeds of the above mentioned mortgage note
payable which resulted in an extraordinary gain of $3,274,207.
(C) Permanent financing for the development for The Devonshire and The
Heritage has been provided by $65,000,000 (The Devonshire--$33,000,000;
The Heritage--$32,000,000) of tax-exempt Qualified Residential Rental
Bonds (the "Bonds"). The Bonds mature on December 15, 2019 and December
15, 2025.
Under the terms of the bond loan agreement, The Devonshire and The Heritage
are to make interest-only payments monthly, calculated using a floating
rate determined by the Remarketing Agent of the Bonds. The rates ranged
from 1.90% to 5.25% during 1993, 1.65% to 5.50% during 1994, 2.55% to 5.20%
during 1995 and 2.30% to 4.40% during the nine months ended September 30,
1996. The rates at December 31, 1994 were 4.95% and 5.10%, December 31,
1995 were 5.05% and 5.20%, and September 30, 1996 were 3.80% and 3.90%.
The maximum annual interest rate on the Bonds is 15%. Under certain
conditions, the interest rate on the Bonds may be converted to a fixed rate
at the request of the respective Partnership.
F-23
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Bonds are collateralized by irrevocable letters of credit issued by
various banks in the aggregate amount of $66,714,699 (the "Letters of
Credit") that expire December, 1996 and March, 1997. A Letter of Credit fee
of .5% per annum of the stated amount of the Letters of Credit is due
quarterly in advance. The Letters of Credit with the various banks are
collateralized by separate Standby Purchase Agreements entered into with
the Third Party to reimburse the banks for any funds drawn on the Letters
of Credit. The Letters of Credit and Standby Purchase Agreements are
collateralized by mortgages on The Devonshire and The Heritage. The due
dates of the bonds would be accelerated upon the expiration of the Letters
of Credit and Standby Purchase Agreements unless they are extended or
replaced. However, The Devonshire and The Heritage have entered into
separate Standby Bond Purchase and Indemnity Agreements (the "Agreements")
with the Third Party pursuant to which the Third Party agrees to provide
standby credit enhancement to issuers of replacement Letters of Credit or,
if replacement Letters of Credit are not obtained, to buy the bonds. The
Agreements expire on March 22, 1998. If the Third Party buys the bonds
pursuant to the Agreements, The Devonshire and The Heritage would be
required to buy the bonds from the Third Party on March 22, 1998. PGI has
provided the Third Party with certain collateral totaling $2,220,000 to
secure the obligations of The Devonshire under the Agreements with the
Third Party. Beginning in 1995, the Partnerships are subject to annual base
fees related to the Letters of Credit and Standby Purchase Agreements equal
approximately 1.35% of the base value. The Partnerships incurred fees of
$452,654, $743,002 and $877,500 during the years ended December 31, 1993,
1994 and 1995 respectively, and $792,304 (unaudited) and $694,511 during
the nine months ended September 30, 1995 and 1996, respectively.
Each bondholder may tender bonds on any business day and receive a price
equal to the principal amount thereof, plus accrued interest through the
tender date. Upon tender, the Remarketing Agent shall immediately remarket
the Bonds on a best-efforts basis. In the event the Remarketing Agent fails
to remarket any bonds, the partnerships are obligated to purchase those
bonds, for which they may draw on the Letters of Credit.
Included in interest expense for the years ended December 31, 1993 and 1994
is $205,243 and $117,318, respectively, of interest expense related to a
$2,510,081 note payable to an affiliate that was repaid in 1994. The note
payable bore interest at 10% per annum.
Interest expense is stated net of interest income of $56,974, $155,608 and
$118,642 for the years ended December 31, 1993, 1994 and 1995, respectively
and $71,259 (unaudited) and $90,144 for the nine months ended September 30,
1995 and 1996, respectively.
The aggregate amount of all principal payments for the mortgage note payable
and bonds payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1996......................... $ 334,165
1997......................... 359,267
1998......................... 65,386,255
1999......................... 415,269
2000......................... 446,465
Thereafter................... 32,685,579
-----------
$99,627,000
===========
</TABLE>
Total interest paid on the mortgage note payable and bonds payable was
$1,289,396, $2,633,635, and $6,306,039 for the years ended December 31, 1993,
1994, and 1995, respectively and $4,183,365 (unaudited) and $3,364,177 for the
nine months ended September 30, 1995 and 1996, respectively. During 1993,
$588,919 of interest was capitalized related to the construction of The
Heritage.
F-24
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. TAX INCREMENTAL FINANCING
The Heritage is located in a redevelopment area designated by a local
municipality as a tax incremental financing district ("TIF"). Under the terms
of the redevelopment agreement, The Heritage is eligible to receive up to
$1,136,889 for all eligible development costs, as defined through a Tax
Incremental Financing Bond ("Bond"). The Bond matures on December 1, 2007 and
bears interest at 10%, with principal and interest payable annually on each
December 1. The Bond is subject to optional redemption in whole, or in part,
at any time, at a redemption price equal to the principal outstanding at the
date redeemed. The Bond is subject to mandatory redemption, in part, by the
application of annual sinking fund installments by the municipality on each
December 1 thereafter, at a redemption price equal to the principal
outstanding at the date redeemed. The Bond is payable solely from real estate
tax incremental revenues and certain sales tax receipts generated in the TIF.
Payments are to be made to the extent of available TIF revenues. The
insufficiency of TIF revenues generated in the redevelopment area for any
given year shall not be considered a default in payment, but all past due
amounts shall be a continuing obligation payable from future TIF revenues. Any
unpaid amounts including interest, at maturity, will be forgiven. As the
collectibility of the bond principal and interest is dependent upon sufficient
revenues being generated in the redevelopment area, revenue is recognized by
The Heritage when principal and interest are received. For the years ended
December 31, 1993, 1994, and 1995, The Heritage received principal and
interest payments totaling $77,906, $144,389 and $144,089, respectively. No
payments were received during the nine months ended September 30, 1995 and
1996.
6. EMPLOYEE BENEFIT PLAN
In August 1994, PGI established 401(k) plans for all employees that meet
minimum employment criteria. The plans provide that the participants may defer
up to 15% of their eligible compensation on a pre-tax basis subject to certain
maximum amounts. The Partnerships will contribute an additional 25% of the
employee's contribution to the plan, up to $500 per employee per annum.
Employees are always 100% vested in their own contributions and vested in
Partnerships contributions over five years. The Partnership made contributions
in the amount of $33,456 and $16,480 for the years ended December 31, 1994 and
1995 respectively and $29,943 (unaudited) and $27,100 for the nine months
ended September 30, 1995 and 1996, respectively. Such amounts are included in
facility operating expense in the combined statements of operations.
7. RELATED PARTY TRANSACTIONS
In connection with the organization of the Partnerships and the development
and financing of the Properties, PGI and an affiliate are entitled to payments
and fees for various services provided. Such amounts incurred for the years
ended December 31, 1993, 1994, and 1995 and the nine months ended September
30, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- --------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Property management fee (a)... $325,898 $743,977 $1,071,195 $792,304 $694,511
Administration fee (b)........ -- 291,247 372,000 279,000 279,000
Incentive leasing fee (c)..... -- 500,000 -- -- --
</TABLE>
- ---------------------
(a) PGI is entitled to a property management fee equal to 5% of total
operating income (3% for The Hallmark effective January 1, 1996).
(b) PGI is entitled to an annual administration fee of $186,000 for providing
administrative services to The Devonshire and The Heritage. The fee is
included in property management and other fees-affiliate expense in the
combined statements of operations.
F-25
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(c) PGI was entitled to an incentive leasing fee from The Hallmark based upon
achieving certain leasing levels, as defined. The fee is included in
property management and other fees-affiliate expense in the combined
statements of operation.
Amounts due to affiliates are for amounts due for advances made by
affiliates. Amounts due from affiliates are for advances made by the
Partnerships to affiliates. Amounts due from and due to affiliates are non-
interest bearing and payable upon demand.
Average balances of amounts due from and due to affiliates for the years
ended December 31, 1993, 1994 and 1995 and for the nine months ended September
30, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- --------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Due from affiliates............. $ 86,750 $ 46,300 $ 59,500 $39,000 $104,500
Due to affiliates............... 194,500 142,400 239,100 119,300 377,500
</TABLE>
In September 1996, The Devonshire and The Heritage made advances to PGI in
the amount of $4,058,959 which PGI used as an escrow deposit to acquire The
Third Party's interest in the two partnerships pursuant to the formation
transactions more fully described elsewhere in this Registration Statement and
Prospectus. The advances are non-interest bearing and have been reflected as a
reduction of partners' deficit in the combined financial statements.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash, cash-restricted and variable rate and fixed rate mortgage notes
payable are reflected in the accompanying combined balance sheets at amounts
considered by management to reasonably approximate fair value. Management
estimates the fair value of its long-term fixed rate notes payable generally
using discounted cash flow analysis based upon the Original Facilities'
current borrowing rate for debt with similar maturities.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Brookdale Living Communities, Inc.
We have audited the accompanying combined balance sheets of the Activelife
Facilities as of December 31, 1994 and 1995 and September 30, 1996 and the
related combined statements of operations, changes in partners' deficit and
cash flows for each of the two years in the period ended December 31, 1995 and
for the nine months ended September 30, 1996. These financial statements are
the responsibility of the Activelife Facilities' 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 combined financial position of the Activelife
Facilities at December 31, 1994 and 1995 and September 30, 1996, and the
combined results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995 and for the nine months ended
September 30, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 15, 1996
F-27
<PAGE>
ACTIVELIFE FACILITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER
1994 1995 30, 1996
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 1,618,778 $ 2,055,227 $ 1,939,712
Cash--restricted........................ 785,066 792,223 923,707
Accounts receivable..................... 123,405 82,208 77,320
----------- ----------- -----------
Total current assets.................... 2,527,249 2,929,658 2,940,739
Real estate, at cost:
Land.................................... 1,731,721 1,731,721 1,731,721
Buildings and improvements.............. 33,082,584 33,169,840 33,273,583
Furniture and equipment................. 1,108,073 1,190,196 1,389,200
----------- ----------- -----------
35,922,378 36,091,757 36,394,504
Accumulated depreciation................ (5,809,951) (6,773,607) (7,508,158)
----------- ----------- -----------
30,112,427 29,318,150 28,886,346
Deferred financing fees, net of
accumulated amortization of $442,302
and $488,898 at December 31, 1994 and
1995, respectively and $523,801 at
September 30, 1996..................... 955,459 908,863 873,960
Other................................... 216,660 185,457 177,001
----------- ----------- -----------
Total assets............................ $33,811,795 $33,342,128 $32,878,046
=========== =========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Mortgage notes payable.................. $ 297,959 $ 323,283 $ 343,758
Accrued interest payable................ 236,343 234,307 232,668
Accrued real estate taxes............... 636,793 655,859 701,589
Accounts payable and accrued expenses... 483,062 439,333 497,996
Tenant security deposits................ 796,956 780,676 815,206
Due to affiliates....................... 1,576,992 1,852,587 1,951,844
Other................................... 61,970 39,074 25,648
----------- ----------- -----------
Total current liabilities............... 4,090,075 4,325,119 4,568,709
Mortgage notes payable.................. 36,003,130 36,022,624 36,032,954
----------- ----------- -----------
Total liabilities....................... 40,093,205 40,347,743 40,601,663
Partners' deficit....................... (6,281,410) (7,005,615) (7,723,617)
----------- ----------- -----------
Total liabilities and partners' deficit. $33,811,795 $33,342,128 $32,878,046
=========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-28
<PAGE>
ACTIVELIFE FACILITIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------------
1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Resident fees.................. $11,495,016 $12,336,745 $9,223,028 $9,494,348
EXPENSES
Facility operating............. 6,505,485 6,867,193 5,112,937 5,117,142
Real estate taxes.............. 654,188 689,255 508,160 574,085
Depreciation and amortization.. 994,336 1,010,252 756,339 769,454
Interest....................... 2,994,039 2,995,823 2,247,189 2,243,947
Property management fee--
affiliate..................... 701,054 755,130 575,192 587,222
----------- ----------- ---------- ----------
Total expenses................. 11,849,102 12,317,653 9,199,817 9,291,850
----------- ----------- ---------- ----------
Income (loss) before
extraordinary item............ (354,086) 19,092 23,211 202,498
Extraordinary item--loss on
extinguishment of debt........ (304,407) -- -- --
----------- ----------- ---------- ----------
Net income (loss).............. $ (658,493) $ 19,092 $ 23,211 $ 202,498
=========== =========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
ACTIVELIFE FACILITIES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
<TABLE>
<CAPTION>
SPRINGS OF EAST
MESA EDINA PARK PLAZA HAWTHORN LAKES
-------------------- ---------------------- ---------------------
TOTAL TOTAL
GENERAL LIMITED GENERAL LIMITED GENERAL LIMITED GENERAL LIMITED
PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Partners' capital
(deficit) at
January 1, 1994.. $ 873 $1,198,912 $ (91,186) $(4,934,450) $(69,314) $(1,461,561) $(159,627) $(5,197,099) $(5,356,726)
Contributions... -- 500,000 -- -- -- -- -- 500,000 500,000
Distributions... (16,414) (543,297) -- -- (2,064) (204,416) (18,478) (747,713) (766,191)
Net income
(loss)......... (412) (40,771) (6,270) (620,688) 96 9,552 (6,586) (651,907) (658,493)
-------- ---------- --------- ----------- -------- ----------- --------- ----------- -----------
Partners' capital
(deficit) at
December 31,
1994............. (15,953) 1,114,844 (97,456) (5,555,138) (71,282) (1,656,425) (184,691) (6,096,719) (6,281,410)
Distributions... (56,572) (312,000) -- -- (3,748) (370,977) (60,320) (682,977) (743,297)
Net income
(loss)......... 2,997 296,724 (4,974) (492,340) 2,164 214,521 187 18,905 19,092
-------- ---------- --------- ----------- -------- ----------- --------- ----------- -----------
Partners' capital
(deficit) at
December 31,
1995............. (69,528) 1,099,568 (102,430) (6,047,478) (72,866) (1,812,881) (244,824) (6,760,791) (7,005,615)
Distributions... (28,650) (201,850) -- -- (6,900) (683,100) (35,550) (884,950) (920,500)
Net income
(loss)......... 2,318 229,465 (3,295) (326,206) 3,002 297,214 2,025 200,473 202,498
-------- ---------- --------- ----------- -------- ----------- --------- ----------- -----------
Partners' deficit
at September 30,
1996............. $(95,860) $1,127,183 $(105,725) $(6,373,684) $(76,764) $(2,198,767) $(278,349) $(7,445,268) $(7,723,617)
======== ========== ========= =========== ======== =========== ========= =========== ===========
</TABLE>
See notes to combined financial statements.
F-30
<PAGE>
ACTIVELIFE FACILITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
---------------------- -----------------------
1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............ $ (658,493) $ 19,092 $ 23,211 $ 202,498
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization.............. 994,336 1,010,252 756,339 769,454
Interest expense added to
mortgage note payable
principal................. 151,524 172,774 127,589 143,305
Extraordinary item......... 304,407 -- -- --
Changes in operating assets
and liabilities:
Increase in cash-
restricted.............. (64,613) (7,157) (81,113) (131,484)
(Increase) decrease in
accounts receivable..... (73,962) 41,197 77,511 4,888
(Increase) decrease in
other assets............ (7,177) 31,203 36,193 8,456
Increase (decrease) in
accrued interest
payable................. 794 (2,036) (1,511) (1,639)
Increase in accrued real
estate taxes............ 2,459 19,066 23,912 45,730
(Decrease) increase in
accounts payable........ (117,733) (43,729) (219,648) 58,663
Increase (decrease) in
tenant security
deposits................ 32,423 (16,280) (36,613) 34,530
Increase in due to
affiliate............... 124,320 275,595 169,069 99,257
Decrease in other
liabilities............. (36,317) (22,896) (16,926) (13,426)
---------- ---------- ---------- ----------
Net cash provided by
operating activities........ 651,968 1,477,081 858,013 1,220,232
INVESTING ACTIVITIES
Additions to real estate..... (176,055) (169,379) (37,993) (302,747)
---------- ---------- ---------- ----------
Cash used in investing
activities.................. (176,055) (169,379) (37,993) (302,747)
FINANCING ACTIVITIES
Repayment of mortgage notes
payable..................... (5,514,747) (297,956) (221,168) (240,000)
Mortgage note payable
prepayment fee.............. (200,000) -- -- --
Proceeds from mortgage note
payable..................... 5,670,000 170,000 127,500 127,500
Increase in deferred
financing costs............. (203,332) -- -- --
Contributions from partners.. 500,000 -- -- --
Distributions to partners.... (766,191) (743,297) (636,774) (920,500)
---------- ---------- ---------- ----------
Net cash used in financing
activities.................. (514,270) (871,253) (730,442) (1,033,000)
---------- ---------- ---------- ----------
Net (decrease) increase in
cash........................ (38,357) 436,449 89,578 (115,515)
Cash and cash equivalents at
beginning of period......... 1,657,135 1,618,778 1,618,778 2,055,227
---------- ---------- ---------- ----------
Cash and cash equivalents at
end of period............... $1,618,778 $2,055,227 $1,708,356 $1,939,712
========== ========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
ACTIVELIFE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Activelife Facilities ("Activelife") represents a combination of three
partnerships described below ("Partnerships") that own, operate, and manage
assisted living facilities ("Properties"). The Properties are under the common
management of Activelife Management Corporation ("AMC"). Certain principals of
AMC also have ownership interests in the Partnerships. Pursuant to the
formation transactions more fully described elsewhere in this Registration
Statement and Prospectus, the Activelife Facilities will be operated (owned or
leased) by a newly formed corporation Brookdale Living Communities, Inc. (the
"Company"), whose shares are being registered pursuant to this Registration
Statement.
The Partnerships and Properties owned and operated by AMC are as follows:
<TABLE>
<CAPTION>
PARTNERSHIP PROPERTY LOCATION
<S> <C> <C>
East Mesa Senior Living Limited Part-
nership Springs of East Mesa Mesa, Arizona
Edina Park Place Associates Limited
Partnership Edina Park Plaza Edina, Minnesota
Hawthorn Lakes Associates Limited Part-
nership Hawthorn Lakes Vernon Hills, Illinois
</TABLE>
The Partnerships maintain their books and records on the basis of accounting
used for federal income tax purposes. The differences between federal income
tax basis and generally accepted accounting principles affecting the
Partnerships relate to differences in the basis of real estate assets and the
use of accelerated depreciation methods with shorter depreciable lives used
for federal income tax basis, resulting in the net book value of real estate
assets being approximately $15.3 million lower for federal income tax basis.
All significant intercompany accounts and transactions have been eliminated
in combination.
RESIDENT FEES REVENUE
Resident fees revenue is recorded when services are rendered and consist of
fees for basic housing, support services and fees associated with additional
services such as personalized health and assisted living care.
REAL ESTATE
At December 31, 1994 and 1995, the Properties were carried at cost which was
not in excess of net realizable value as determined by management. In March
1995, the Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of," under which the Partnerships would be required to recognize
impairment losses for the Properties when indicators of impairment are present
and the Properties' expected undiscounted cash flows are not sufficient to
recover the Properties' carrying value. The Partnerships adopted Statement No.
121 effective January 1, 1996 with no impact on the accompanying combined
financial statements.
Expenditures for ordinary maintenance and repairs are expensed to operations
as incurred. Significant renovations and improvements which improve and/or
extend the useful life of the asset are capitalized and depreciated over their
estimated useful life.
Depreciation is calculated using the straight-line method over the estimated
useful lives of assets, which are as follows:
<TABLE>
<S> <C>
Buildings...................................................... 40 years
Building improvements and furniture and equipment.............. 5-10 years
</TABLE>
F-32
<PAGE>
ACTIVELIFE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND CASH EQUIVALENTS
The Partnerships consider all cash accounts and money market funds and
certificates of deposit with an original maturity of three months or less when
purchased to be cash and cash equivalents.
DEFERRED FINANCING FEES
Deferred financing fees are amortized using the straight-line method over
the term of the mortgage notes payable.
INCOME TAXES
The Partnerships pay no income taxes and the income or loss from the
Partnerships is includable on the respective federal income tax returns of the
partners.
USE OF ESTIMATES
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
INTERIM FINANCIAL DATA (UNAUDITED)
The interim financial data for the nine months ended September 30, 1995 is
unaudited; however, in the opinion of management, such interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the combined results of operations and cash flows
for the period.
2. CASH--RESTRICTED
In accordance with mortgage note payable agreements described in Note 3, the
Partnerships are required to maintain escrow deposits for real estate taxes,
repairs, and other operating activities.
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
----------------------- 30,
1994 1995 1996
<S> <C> <C> <C>
MORTGAGE NOTES PAYABLE
Fixed rate mortgage notes payable issued by
local municipalities (A) (B).............. $28,896,474 $28,672,794 $28,492,648
Mortgage note payable, financial
institution, interest at 8.25% per annum
with monthly principal and interest
assuming a 25 year amortization period,
with a lump-sum payment at maturity in
March 2004. (A) (C)....................... 5,498,166 5,423,890 5,364,036
Interest reduction loan provided by Housing
and Redevelopment Authority of Edina,
Minnesota (HRA) (A) (D)................... 1,906,449 2,249,223 2,520,028
----------- ----------- -----------
$36,301,089 $36,345,907 $36,376,712
=========== =========== ===========
</TABLE>
- ---------------------
(A) Mortgage notes payable are collateralized by the Partnerships' real estate
assets.
(B) The notes bear interest at 8% ($15,411,080 and $15,264,543 at December 31,
1994 and 1995, respectively and $15,146,711 at September 30, 1996) and
8.525% ($13,485,394 and $13,408,251 at December 31, 1994 and 1995,
respectively and $13,345,937 at September 30, 1996), with monthly
principal and interest payments through maturity in 2027.
F-33
<PAGE>
ACTIVELIFE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(C) In February 1994, the mortgage note payable was refinanced resulting in an
extraordinary loss on extinguishment of debt of $304,407.
(D) The Elderly Housing Interest Reduction Agreement (arising out of tax
increment financing) between the HRA and the Partnership provides that the
HRA will make loans upon request of the Partnership in monthly
installments to the Partnership totaling $170,000 each year for a period
of 20 years, commencing in 1987, for the payment of interest on the
mortgage note payable issued by HRA. The loan bears interest at the
greater of 12-1/2% simple interest per annum or the statutory minimum, as
defined, and shall be payable with interest at maturity. Included in the
balance is accrued interest of $616,338 and $789,112 at December 31, 1994
and 1995, respectively and $932,417 at September 30, 1996. Advances plus
all unpaid interest are payable in one installment due 20 years after the
anniversary date of the last payment request on the loan.
The aggregate amount of all principal payments for the mortgage notes payable
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1996......................... $ 323,283
1997......................... 350,928
1998......................... 380,734
1999......................... 413,159
2000......................... 448,211
Thereafter................... 34,429,592
-----------
$36,345,907
===========
</TABLE>
Total interest paid on the mortgage notes payable was $2,841,721 and
$2,825,085 for the years ended December 31, 1994, and 1995, respectively and
$2,121,111 (unaudited) and $2,102,281 for the nine months ended September 30,
1995 and 1996, respectively.
4. RELATED PARTY TRANSACTIONS
In connection with the organization of the Partnerships and the development
and financing of the Properties, AMC is entitled to payments and fees for
various services provided. Such amounts incurred for the years ended December
31, 1994, and 1995 and the nine months ended September 30, 1995 (unaudited)
and 1996 and are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
----------------------- --------------------
1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Property management fees
(a)....................... $ 701,054 $ 755,130 $575,192 $587,222
Development fees (b)....... 175,405 224,142 155,300 129,602
</TABLE>
- ---------------------
(a) AMC is entitled to the following management fees:
.Base fees range from 3% to 4% of gross revenue or the greater of 5% of
monthly gross revenue or $5000.
. Incentive fees range from 1% to 3% of gross revenue and 29% of cash flow
from operations, as defined. The payment of incentive fees is subject to
available cash and distributions to partners equal to certain levels of
return on capital, as defined.
(b) AMC and affiliated entities are entitled to fees for services rendered in
connection with the identification, financings, computer usage and leasing
of the Properties.
Amounts due to affiliates are for amounts due for the above fees and
advances made by affiliates and are non-interest bearing and payable upon
demand from available cash.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, cash-restricted and fixed rate mortgage notes
payable are reflected in the accompanying combined balance sheets at amounts
considered by management to reasonably approximate fair value. Management
estimates the fair value of its long-term fixed rate notes payable generally
using discounted cash flow analysis based upon AMC's current borrowing rate
for debt with similar maturities.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Brookdale Living Communities, Inc.
We have audited the accompanying balance sheets of the Gables at Brighton
Associates (the "Partnership") as of December 31, 1995 and September 30, 1996
and the related statements of income, changes in partners' capital and cash
flows for the year ended December 31, 1995 and for the nine months ended
September 30, 1996. 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 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 the Gables at Brighton
Associates at December 31, 1995 and September 30, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1995 and for the
nine months ended September 30, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 15, 1996
F-35
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 562,453 $ 529,120
Other.............................................. 99,692 156,094
----------- -----------
Total current assets............................... 662,145 685,214
Real estate, at cost:
Land............................................... 702,666 702,666
Building and improvements.......................... 6,873,764 6,887,256
Furniture and equipment............................ 399,591 438,632
----------- -----------
7,976,021 8,028,554
Accumulated depreciation........................... (2,188,848) (2,411,854)
----------- -----------
5,787,173 5,616,700
----------- -----------
Total assets....................................... $ 6,449,318 $ 6,301,914
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses.............. $ 44,840 $ 51,271
Tenant security deposits........................... 226,254 227,649
Due to affiliate................................... 8,165 10,474
Other.............................................. 123,518 32,645
----------- -----------
Total current liabilities.......................... 402,777 322,039
Partners' capital.................................. 6,046,541 5,979,875
----------- -----------
Total liabilities and partners' capital............ $ 6,449,318 $ 6,301,914
=========== ===========
</TABLE>
See notes to financial statements.
F-36
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ----------------------
DECEMBER 31, 1995 1995 1996
<S> <C> <C> <C>
(UNAUDITED)
REVENUE
Resident fees.......................... $2,638,072 $ 1,967,817 $2,062,655
EXPENSES
Facility operating..................... 1,485,766 1,042,914 1,097,980
Real estate taxes...................... 227,562 170,202 168,916
Depreciation........................... 292,334 220,183 223,006
Property management fee--affiliate..... 107,975 82,791 87,004
---------- ----------- ----------
Total expenses......................... 2,113,637 1,516,090 1,576,906
---------- ----------- ----------
Net income............................. $ 524,435 $ 451,727 $ 485,749
========== =========== ==========
</TABLE>
See notes to financial statements.
F-37
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<S> <C>
Partners' capital at January 1, 1995 .............................. $ 6,247,080
Distributions.................................................... (724,974)
Net income....................................................... 524,435
-----------
Partners' capital at December 31, 1995 ............................ 6,046,541
Distributions.................................................... (552,415)
Net income....................................................... 485,749
-----------
Partners' capital at September 30, 1996............................ $ 5,979,875
===========
</TABLE>
See notes to financial statements.
F-38
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ---------------------
DECEMBER 31, 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $ 524,435 $ 451,727 $ 485,749
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................... 292,334 220,183 223,006
Changes in operating assets and
liabilities:
Decrease (increase) in other
assets.......................... 486 (44,738) (56,402)
(Decrease) increase in accounts
payable and accrued expenses.... (9,979) (9,164) 6,431
Increase in tenant security
deposits........................ 12,175 4,047 1,395
(Decrease) increase in due to
affiliate....................... (1,748) (1,661) 2,309
Increase (decrease) in other
liabilities..................... 83,111 (6,267) (90,873)
--------- --------- ---------
Net cash provided by operating
activities.......................... 900,814 614,127 571,615
INVESTING ACTIVITIES
Additions to real estate............. (54,059) (39,402) (52,533)
--------- --------- ---------
Cash used in investing activities.... (54,059) (39,402) (52,533)
--------- --------- ---------
FINANCING ACTIVITIES
Distributions to partners............ (724,974) (592,731) (552,415)
--------- --------- ---------
Cash used in financing activities.... (724,974) (592,731) (552,415)
--------- --------- ---------
Net increase (decrease) in cash...... 121,781 (18,006) (33,333)
Cash at beginning of period.......... 440,672 440,672 562,453
--------- --------- ---------
Cash at end of period................ $ 562,453 $ 422,666 $ 529,120
========= ========= =========
</TABLE>
See notes to financial statements.
F-39
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Gables at Brighton Associates (the "Partnership") is a general partnership
that owns, operates, and manages an assisted living facility known as The
Gables at Brighton ("Property") located in Rochester, New York. Pursuant to
the formation transactions more fully described elsewhere in this Registration
Statement and Prospectus, the Property will be acquired by a newly formed
corporation, Brookdale Living Communities, Inc., whose shares are being
registered pursuant to this Registration Statement.
RESIDENT FEE REVENUE
Resident fee revenue is recorded when services are rendered and consist of
fees for basic housing, support services and fees associated with additional
services such as personalized health and assisted living care.
REAL ESTATE
At December 31, 1995, the Property was carried at cost which was not in
excess of net realizable value as determined by management. In March 1995, the
Financial Accounting Standards Board issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
under which the Partnership would be required to recognize impairment losses
for the Property when indicators of impairment are present and the Property's
expected undiscounted cash flows are not sufficient to recover the Property's
carrying value. The Partnership adopted Statement No. 121 effective January 1,
1996 with no impact on the accompanying financial statements.
Expenditures for ordinary maintenance and repairs are expensed to operations
as incurred. Significant renovations and improvements which improve and/or
extend the useful life of the asset are capitalized and depreciated over their
estimated useful life. Interest incurred during construction periods is
capitalized as a component of the building cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of assets, which are as follows:
<TABLE>
<S> <C>
Building and improvements.. 20-27.5 years
Furniture and equipment.... 5-7 years
</TABLE>
INCOME TAXES
The Partnership pays no income taxes and the income or loss from the
Partnership is includable on the respective federal income tax returns of the
partners.
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL DATA (UNAUDITED)
The interim financial data for the nine months ended September 30, 1995 is
unaudited; however, in the opinion of management, such interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results of operations and cash flows for the
period.
2. RELATED PARTY TRANSACTIONS
In connection with the operation of the Property, an affiliate of one of the
partners is entitled to management fees equal to 2.5% of resident fees and 5%
of cash flows, as defined. Amounts due to affiliate are for amounts due for
the above fees and are non-interest bearing and payable upon demand.
F-40
<PAGE>
NATIONAL PROPERTY COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................. (b) $ 1,008
--------
Total current assets....................................... 1,008
Real estate, net........................................... (a) 114,749
Cash-restricted............................................ (c) 11,000
Deferred costs, net........................................ (d) 1,798
--------
Total assets............................................... $128,555
========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Debt, current.............................................. (e) $ 258
Accrued interest payable................................... (f) 281
--------
Total current liabilities.................................. 539
Debt, long-term............................................ (e) 93,235
Tenant security deposit.................................... (g) 10,600
--------
Total liabilities.......................................... 104,374
Stockholders' equity:
Preferred stock, $10.00 par value, 20,000 shares
authorized, 2,240 shares issued or outstanding............ (h) 22,400
Common stock, $0.01 par value, 75,000 shares authorized,
2,000 shares issued and outstanding....................... (i) 20
Additional paid in capital................................. (j) 1,761
--------
Total stockholders' equity ................................ 24,181
--------
Total liabilities and stockholders' equity................. $128,555
========
</TABLE>
See accompanying notes to the Pro Forma Condensed Balance Sheet.
F-41
<PAGE>
NATIONAL PROPERTY COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995(H) 1996(H)
<S> <C> <C> <C>
Revenue
Rental.......................................... (a) $10,600 $ 7,950
General and administrative expenses............. (b) (300) (225)
Depreciation and amortization................... (c) (3,435) (2,577)
------- -------
Income from operations.......................... 6,865 5,148
Interest expense................................ (d) (5,949) (4,103)
------- -------
Income before preferred stock distribution and
income taxes................................... 916 1,045
Preferred stock distribution.................... (e) (2,688) (2,016)
------- -------
Loss before income taxes........................ (1,772) (971)
Benefit for income taxes........................ 709 388
------- -------
Net loss........................................ (f) $(1,063) $ (583)
======= =======
Net loss per share.............................. $ (0.53) $ (0.29)
======= =======
Common shares outstanding....................... (g) 2,000 2,000
======= =======
</TABLE>
See accompanying notes to the Pro Forma Condensed Statements of Operations
F-42
<PAGE>
NATIONAL PROPERTY COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
BASIS OF PRESENTATION
The pro forma condensed balance sheet of the Company includes adjustments to
reflect the historical balances for real estate, deferred costs, debt and
accrued interest payable of the Original Facilities, described below, and the
purchase and assumption of debt of the Activelife Facilities, described below:
<TABLE>
<CAPTION>
ORIGINAL ACTIVELIFE
FACILITIES FACILITIES
<S> <C>
The Devonshire (1) Edina Park Plaza (2)
The Heritage (1) Hawthorn Lakes (2)
</TABLE>
- ---------------------
(1) These properties will be contributed by PGI to the Company along with
$4,600 in exchange for 2,000 shares of the Company's common stock and
leased to the Brookdale Living Communities Inc. ("Brookdale"). Brookdale
will also own the preferred stock of the Company (see Note h).
(2) These properties will be purchased by the Company and leased to Brookdale.
Collectively these properties are referred to as the Leased Facilities.
Brookdale will retain all other assets and liabilities of the Original
Facilities and will assume accrued real estate taxes and tenant security
deposits of the Activelife Facilities. All other assets and liabilities of the
Activelife Facilities have been eliminated. The Company will purchase the real
estate, with proceeds from the sale of $22,400 of the Company's preferred
stock, the receipt of a $10,600 security deposit from Brookdale for the leases
on the Leased Facilities, $4,600 of cash provided by PGI and receive credits
at closings for assuming accrued real estate taxes and tenant security
deposits related to the Acquired Facilities. The Company is not purchasing any
other assets or assuming any other liabilities of the Activelife Facilities.
The following pro forma adjustments reflect the above activity.
<TABLE>
<C> <S> <C>
(a) Real estate, net:
The Company intends to purchase the Activelife Facilities for
the purchase prices indicated below and the assumption of
certain liabilities at their historical costs:
</TABLE>
<TABLE>
<CAPTION>
EDINA
PARK HAWTHORN
PLAZA LAKES
<S> <C> <C>
Purchase price........................................... $23,980 $29,800
Less: liabilities being assumed..........................
Mortgage note payable.................................... 15,147 13,346
Accrued interest......................................... 101 94
Accrued real estate taxes................................ 397 253
Tenant security deposits................................. 301 441
------- -------
Cash payments made for acquisitions...................... $ 8,034 $15,666
======= =======
</TABLE>
<TABLE>
<C> <S> <C>
The Company is acquiring the real estate assets of the above
entities and the liabilities being assumed, in management's
opinion, are stated at their estimated fair market values. The
adjustments to reflect the purchases are reflected below.
Net assets the Original Facilities contributed by PGI
(Historical cost of $49,450, increase in basis resulting from
the elimination of the net deficit balance of the minority
interest in the Original Facilities of $6,919 and purchase for
cash of $4,600 of the minority interest's ownership interests in
the Original Facilities)........................................ $60,969
</TABLE>
F-43
<PAGE>
NATIONAL PROPERTY COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET--CONTINUED)
<TABLE>
<C> <S> <C>
Adjustments to reflect the acquisition purchase price of
Activelife Facilities .................................. $ 53,780
--------
$114,749
========
(b) Cash:
Proceeds from the sale of 2,240 shares of preferred stock
to Brookdale............................................ $ 22,400
Proceeds from security deposit on the Leased Facilities.. 10,600
Contribution of PGI's interests in the Original
Facilities and cash ($4,600) in exchange for 2,000
shares of the Company's common stock.................... 4,600
Payments made for the acquisition of the Activelife
Facilities.............................................. (23,700)
Cash restricted to collateralize letters of credit on the
Original Facilities bonds payable ...................... (11,000)
Payment to Brookdale of credits received by the Company
for liabilities assumed by Brookdale related to the
Activelife Facilities acquired by the Company........... (1,392)
Payment of letter of credit fees......................... (400)
Payment of organization costs............................ (100)
--------
$ 1,008
========
(c) Long-term cash-restricted:
Cash to be used to collateralize letters of credit on the
Original Facilities bonds payable....................... $ 11,000
========
(d) Deferred costs, net:
Deferred bond costs of the Original Facilities
contributed by PGI...................................... $ 1,298
Payment of deferred costs related organization costs
($100) and letter of credit fees ($400)................. 500
--------
$ 1,798
========
(e) Debt, current:
Current portion of mortgage notes payable--Activelife
Facilities assumed by the Company....................... $ 258
========
Debt, long-term:
Bonds payable--Original Facilities assumed by the
Company................................................. $ 65,000
Mortgage notes payable--Activelife Facilities assumed by
the Company............................................. 28,235
--------
$ 93,235
========
After giving effect to the formation, the Company will
have principal payments for the bonds and mortgage notes
payable as of September 30, 1996 as follows:
</TABLE>
YEAR ENDED DECEMBER 31,
1996................ $ 63
1997................ 263
1998................ 65,286
1999................ 310
2000................ 336
Thereafter.......... 27,235
F-44
<PAGE>
NATIONAL PROPERTY COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET--CONTINUED)
<TABLE>
<C> <S> <C>
(f) Accrued interest payable:
Assumption of historical cost accrued interest payable
accounts of the Original Facilities ($86) and Activelife
Facilities ($195)......................................... $ 281
=======
(g) Tenant security deposits:
Tenants security deposit received from Brookdale related to
the Leased Facilities..................................... $10,600
=======
</TABLE>
<TABLE>
<C> <S> <C>
(h) Preferred Stock
Sale of 2,240 shares of $10 par value preferred stock to
Brookdale (see "The Company and the Formation" for
further information on the preferred stock).............. $22,400
=======
(i) Common Stock:
Issuance of 2,000 shares of common stock, $.01 par value,
to PGI in consideration for its contribution of its
interests in the Original Facilities and $4,600.......... $ 20
=======
(j) Additional paid-in capital:
Issuance of 2,000 shares of common stock, $.01 par value,
to PGI in consideration for its contribution of its
interests in the Original Facilities and $4,600.......... $ 4,580
Net deficit of Original Facilities contributed by PGI..... (2,819)
-------
$ 1,761
=======
</TABLE>
F-45
<PAGE>
NATIONAL PROPERTY COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
<C> <S> <C> <C>
(a) Rental revenue
Base rental payments from leasing the Leased
Facilities to Brookdale (See "The Company
and the Formation" for further information
on the net operating lease agreement) ...... $ 10,600 $ 7,950
========= =======
(b) General and administrative expenses
Estimated management fees and other
administrative costs to be incurred in
operating the Company....................... $ (300) $ (225)
========= =======
(c) Depreciation and amortization
Depreciation expense associated with (*):
Original Facilities.......................... $ (1,669) $(1,252)
Activelife Facilities........................ (1,554) (1,166)
Amortization expense associated with(+):
Deferred financings costs.................... (59) (44)
Organization costs........................... (20) (15)
Deferred letter of credit fees............... (133) (100)
--------- -------
$ (3,435) $(2,577)
========= =======
*The Company has determined that the
estimated useful lives of buildings to
be 45 years and furniture and equipment
to be 5 years, as compared to 40 years
and 3-12 years, respectively used by the
Original Facilities. This change was
made to better reflect the estimated
periods during which such assets will
remain in service. For financial
statement reporting purposes, the above
will be recorded prospectively as a
change in estimate for the Original
Facilities. The Activelife Facilities
will be depreciated using these lives.
Depreciation expense included in the
"Pro Forma As Adjusted" column was based
upon the Company's new estimated useful
lives.
+Deferred costs are amortized using the
straight-line over their estimated
useful lives as follows:
</TABLE>
<TABLE>
<CAPTION>
TYPE PERIOD
---- ------
<S> <C>
Deferred financing costs Term of
bonds payable
Organization costs 5 years
Deferred letter of credit fees 3 years
The adjustments for amortization expense
excludes $394 of amortization related to
deferred marketing costs of the Original
Facilities for 1995.
</TABLE>
<TABLE>
<C> <S> <C> <C>
(d) Interest expense
Interest expense associated with
<CAPTION>
<C> <S> <C> <C>
Bonds payable of the Original Facilities(++)......... $ (3,404) $(2,193)
Mortgage note payable of the Activelife Facilities... (2,545) (1,910)
--------- -------
$ (5,949) $(4,103)
========= =======
</TABLE>
++Amount includes financing fees of the Original Facilities
F-46
<PAGE>
NATIONAL PROPERTY COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
<C> <S> <C> <C>
(e) Preferred stock distribution
Preferred stock distribution at 12% on
$22,400 of preferred stock.................. $ (2,688) $ (2,016)
============ ============
(f) Benefit for income taxes
This adjustment provides pro forma benefit
for income taxes at a 40% effective rate
(includes federal and state effective income
tax rates).................................. $ 709 $ 388
============ ============
(g) Net loss per share
Net loss per shares is based upon the number
of common shares issued to PGI in exchange
for its interest in the Original Facilities. 2,000 shares 2,000 shares
============ ============
(h) In order to consummate the acquisition of
two of the Activelife Facilities (Hawthorn
Lakes and Edina Park Plaza), the Company
must obtain the consent of the United States
Department of Housing and Urban Development
to such transfer. If such consent is not
obtained and such two facilities are not
acquired, pro forma as adjusted total
revenue, operating income, and net loss
would be $4,973, $2,792, and $(1,981) for
the year ended December 31, 1995 and pro
forma as adjusted total revenue operating
income and net loss would be $3,729, $2,093
and $(1,270) for the nine months ended
September 30, 1996.
</TABLE>
F-47
<PAGE>
[PHOTOS]
[The inside back cover page will contain color photographs and captions. The
photographs will consist of an outside view of each of the facilities expected
to be managed by the Company together with a corresponding caption identifying
such facility by name and the city of its location. In addition, the inside
back cover page will contain several photographs of residents in various
settings, in each case without captions.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY 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 OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES 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 ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OF-
FERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company and the Formation............................................. 14
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 28
Management................................................................ 44
Certain Transactions...................................................... 45
Principal Stockholders.................................................... 47
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 51
Underwriting.............................................................. 53
Legal Matters............................................................. 54
Experts................................................................... 54
Additional Information.................................................... 54
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,625,000 SHARES
LOGO
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various costs and expenses in connection
with the issuance and distribution of the securities being registered hereby,
other than underwriting discounts and commissions. The Company will bear all
of such expenses. All amounts are estimated except for the Securities and
Exchange Commission ("SEC") registration fee, the National Association of
Securities Dealers, Inc. ("NASD") filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 42,134
NASD filing fee............................................... 12,719
Nasdaq National Market listing fee............................ *
Blue sky fees and expenses (including attorneys' fees and
expenses).................................................... 30,000
Accounting fees and expenses.................................. *
Legal fees and expenses....................................... *
Printing and engraving expenses............................... *
Transfer agent and registrar's fees........................... *
----------
Total..................................................... $2,080,000
==========
</TABLE>
- ---------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the General Corporation Law of the State of Delaware
("Section 145"), a corporation may indemnify its directors, officers,
employees and agents and its former directors, officers, employees and agents
and those who serve, at the corporation's request, in such capacities with
another enterprise, against expenses (including attorneys' fees), as well as
judgments, fines and settlements in non-derivative lawsuits, actually and
reasonably incurred in connection with the defense of any action, suit or
proceeding in which they or any of them were or are made parties or are
threatened to be made parties by reason of their serving or having served in
such capacity. Section 145 provides, however, that such person must have acted
in good faith and in a manner he or she reasonably believed to be in (or not
opposed to) the best interests of the corporation, and, in the case of a
criminal action, such person must have had no reasonable cause to believe his
or her conduct was unlawful. In addition, Section 145 does not permit
indemnification in an action or suit by or in the right of the corporation,
where such person has been adjudged liable to the corporation, unless, and
only to the extent that, a court determines that such person fairly and
reasonably is entitled to indemnity for expenses the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Company's Amended and Restated By-laws (the "By-laws") provide for
mandatory indemnification of directors and officers generally to the same
extent authorized by Section 145. Under the By-laws, the Company shall advance
expenses incurred by an officer or director in defending any such action if
the director or officer undertakes to repay such amount if it is determined
that he or she is not entitled to indemnification.
The Company maintains directors' and officers' liability insurance.
The Company also intends to enter into indemnification agreements with each
of the Company's directors and certain of its officers. The indemnification
agreements will require, among other things, that the Company indemnify such
directors and officers to the fullest extent permitted by law, and advance to
such directors and officers all related expenses, subject to reimbursement if
it is subsequently determined that indemnification is not permitted. The
Company also must indemnify and advance all expenses incurred by such
directors and officers seeking to enforce their rights under the
indemnification agreements, and cover such directors and officers under the
Company's directors' and officers' liability insurance.
II-1
<PAGE>
The Company's Restated Certificate of Incorporation provides that the
Company's directors will not be personally liable to the Company or its
stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors, except (a) for any breach of the directors' duty of loyalty
to the Company or its stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(c) under Section 174 of the General Corporation Law of the State of Delaware,
which makes directors liable for unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (d) for transactions from which directors
derive improper personal benefit.
The Underwriting Agreement provides for indemnification by the Underwriters
of the directors, officers and controlling persons of the Company against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"), under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information as to all securities sold by
the Company within the last three years that were not registered under the
Securities Act. As to all such transactions, an exemption is claimed under
Section 4(2) of the Securities Act.
On September 4, 1996, the Company issued 100 shares of Common Stock to
Michael W. Reschke for $10.00 per share, or an aggregate purchase price of
$1,000. This Common Stock was purchased solely for investment purposes to
facilitate the organization of the Company. Upon completion of the Offering,
all of the shares so acquired by Mr. Reschke will be redeemed by the Company
for an aggregate redemption price of $1,000.
Simultaneously with the completion of the Offering, the Company also will
issue 3,928,750 shares of Common Stock to PGI in exchange for its interests in
the Hallmark facility and the operations relating to the Original Facilities
and 571,250 shares of Common Stock to Mark J. Schulte in exchange for his
interests in the Hallmark facility and the operations relating to the Original
Facilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Form of Restated Certificate of Incorporation of the Company
3.2* Form of Amended and Restated By-laws of the Company
4.1* Form of certificate representing Common Stock of the Company
5.1* Opinion of Winston & Strawn regarding legality of shares being reg-
istered
10.1* Form of Formation Agreement by and among the Company, PGI and Mark
J. Schulte
10.2* Form of Space Sharing Agreement by and between the Company and PGI
10.3* Form of Registration Rights Agreement by and between the Company and
PGI
10.4* Form of Voting Agreement by and between the Company and PGI
10.5* Form of Non-Compete Agreement by and among the Company, PGI and
Michael W. Reschke
10.6+ Subscription Agreement dated September 4, 1996 by and between the
Company and Michael W. Reschke
10.7* Form of Employment Agreement by and between the Company and Michael
W. Reschke
10.8* Form of Employment Agreement by and between the Company and Mark J.
Schulte
10.9* Form of Employment Agreement by and between the Company and Matthew
F. Whitlock
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
EXHIBIT DESCRIPTION
NUMBER -----------
-------
10.10* Form of Employment Agreement by and between the Company and Mark J.
Iuppenlatz
10.11* Form of Management Agreement by and between Brookdale Living Commu-
nities of Texas, Inc. and The Island on Lake Travis, Ltd.
10.12* Form of Management Agreement by and between Brookdale Living Commu-
nities of Minnesota, Inc. and Kenwood Associates Limited Partnership
10.13* Form of Stock Incentive Plan
10.14* Form of Indemnification Agreement
10.15* Form of Amended and Restated Agreement of Limited Partnership of
Hallmark Partners, L.P.
10.16* Form of Amended and Restated Partnership Agreement of River Oaks
Partners
10.17* Form of Amended and Restated Agreement of Limited Partnership of The
Ponds of Pembroke Limited Partnership
10.18+ Real Estate Purchase Agreement dated September 16, 1996 by and be-
tween PGI and Gables at Brighton Associates
10.19+ Real Estate Purchase Agreement dated September 16, 1996 by and be-
tween PGI and Edina Park Plaza Associates Limited Partnership
10.20+ Real Estate Purchase Agreement dated September 16, 1996 by and be-
tween PGI and East Mesa Senior Living Limited Partnership
10.21+ Real Estate Purchase Agreement dated September 16, 1996 by and be-
tween PGI and Hawthorn Lakes Associates
10.22+ Letter Agreement dated September 17, 1996 by and among PGI, KILICO
Realty Corporation and Kemper Investors Life Insurance Company
10.23* Form of Lease Agreement by and between NPC and Brookdale Living Com-
munities of Minnesota, Inc. regarding the lease of the Edina Park
Plaza facility
10.24* Form of Lease Agreement by and between NPC and Brookdale Living Com-
munities of Illinois, Inc. regarding the lease of the Hawthorn Lakes
facility
10.25* Form of Lease Agreement by and between NPC and Brookdale Living Com-
munities of Illinois, Inc. regarding the lease of the Devonshire fa-
cility
10.26* Form of Lease Agreement by and between NPC and Brookdale Living Com-
munities of Illinois, Inc. regarding the lease of the Heritage fa-
cility
21.1* Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2* Consent of Winston & Strawn (to be included in opinion filed as Ex-
hibit 5.1)
23.3.1+ Consent of Eric F. Billings
23.3.2+ Consent of Darryl W. Hartley-Leonard
23.3.3+ Consent of Daniel J. Hennessy
24.1+ Powers of attorney (included on signature page included in Part II
of the initial filing)
27.1+ Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
Financial Statement Schedules have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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 Company 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 Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Company hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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 Company 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, 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-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY 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 CHICAGO,
STATE OF ILLINOIS, ON THE 21ST DAY OF NOVEMBER, 1996.
Brookdale Living Communities, Inc.
/s/ Mark J. Schulte
By___________________________________
Mark J. Schulte
President and Chief Executive
Officer
----------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON NOVEMBER 21, 1996 BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Michael W. Reschke* Chairman of the Board, Director
___________________________________________
Michael W. Reschke
/s/ Mark J. Schulte President and Chief Executive Officer
___________________________________________ (principal executive officer), Director
Mark J. Schulte
Craig G. Walczyk* Vice President--Chief Financial Officer and
___________________________________________ Secretary (principal financial officer)
Craig G. Walczyk
Sheryl A. Wolf* Controller (principal accounting officer)
___________________________________________
Sheryl A. Wolf
Richard S. Curto* Director
___________________________________________
</TABLE> Richard S. Curto
/s/ Mark J. Schulte
*By__________________________________
Mark J. Schulte, Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
1.1* Form of Underwriting Agreement..............................
3.1* Form of Restated Certificate of Incorporation of the Compa-
ny..........................................................
3.2* Form of Amended and Restated By-laws of the Company.........
4.1* Form of certificate representing Common Stock of the Compa-
ny..........................................................
5.1* Opinion of Winston & Strawn regarding legality of shares be-
ing registered..............................................
10.1* Form of Formation Agreement by and among the Company, PGI
and Mark J. Schulte.........................................
10.2* Form of Space Sharing Agreement by and between the Company
and PGI.....................................................
10.3* Form of Registration Rights Agreement by and between the
Company and PGI.............................................
10.4* Form of Voting Agreement by and between the Company and PGI.
10.5* Form of Non-Compete Agreement by and among the Company, PGI
and Michael W. Reschke......................................
10.6+ Subscription Agreement dated September 4, 1996 by and be-
tween the Company and Michael W. Reschke....................
10.7* Form of Employment Agreement by and between the Company and
Michael W. Reschke..........................................
10.8* Form of Employment Agreement by and between the Company and
Mark J. Schulte.............................................
10.9* Form of Employment Agreement by and between the Company and
Matthew F. Whitlock.........................................
10.10* Form of Employment Agreement by and between the Company and
Mark J. Iuppenlatz..........................................
10.11* Form of Management Agreement by and between Brookdale Living
Communities of Texas, Inc. and The Island on Lake Travis,
Ltd.........................................................
10.12* Form of Management Agreement by and between Brookdale Living
Communities of Minnesota, Inc. and Kenwood Associates Lim-
ited Partnership............................................
10.13* Form of Stock Incentive Plan................................
10.14* Form of Indemnification Agreement...........................
10.15* Form of Amended and Restated Agreement of Limited Partner-
ship of Hallmark Partners, L.P..............................
10.16* Form of Amended and Restated Partnership Agreement of River
Oaks Partners...............................................
10.17* Form of Amended and Restated Agreement of Limited Partner-
ship of The Ponds of Pembroke Limited Partnership...........
10.18+ Real Estate Purchase Agreement dated September 16, 1996 by
and between PGI and Gables at Brighton Associates...........
10.19+ Real Estate Purchase Agreement dated September 16, 1996 by
and between PGI and Edina Park Plaza Associates Limited
Partnership.................................................
10.20+ Real Estate Purchase Agreement dated September 16, 1996 by
and between PGI and East Mesa Senior Living Limited Partner-
ship........................................................
10.21+ Real Estate Purchase Agreement dated September 16, 1996 by
and between PGI and Hawthorn Lakes Associates...............
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
10.22+ Letter Agreement dated September 17, 1996 by and among PGI,
KILICO Realty Corporation and Kemper Investors Life Insur-
ance Company ..............................................
10.23* Form of Lease Agreement by and between NPC and Brookdale
Living Communities of Minnesota, Inc. regarding the lease
of the Edina Park Plaza facility...........................
10.24* Form of Lease Agreement by and between NPC and Brookdale
Living Communities of Illinois, Inc. regarding the lease of
the Hawthorn Lakes facility................................
10.25* Form of Lease Agreement by and between NPC and Brookdale
Living Communities of Illinois, Inc. regarding the lease of
the Devonshire facility....................................
10.26* Form of Lease Agreement by and between NPC and Brookdale
Living Communities of Illinois, Inc. regarding the lease of
the Heritage facility......................................
21.1* Subsidiaries of the Company................................
23.1 Consent of Ernst & Young LLP...............................
23.2* Consent of Winston & Strawn (to be included in opinion
filed as Exhibit 5.1)......................................
23.3.1+ Consent of Eric F. Billings................................
23.3.2+ Consent of Darryl W. Hartley-Leonard.......................
23.3.3+ Consent of Daniel J. Hennessy..............................
24.1+ Powers of attorney (included on signature page included in
Part II of the initial filing).............................
27.1+ Financial Data Schedule....................................
</TABLE>
- ---------------------
*To be filed by amendment.
+Previously filed.
II-7
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated October 15, 1996 with respect to the balance
sheet of Brookdale Living Communities, Inc., the combined financial statements
of Original Facilities, the combined financial statements of Activelife
Facilities, and the financial statements of Gables at Brighton Associates, in
Amendment No. 2 to the Registration Statement (Form S-1) and related
Prospectus of Brookdale Living Communities, Inc. for the registration of
6,468,750 shares of its common stock.
ERNST & YOUNG LLP
Chicago, Illinois
November 20, 1996
