<PAGE>
PROSPECTUS FILED PURSUANT TO RULE NO. 424(b)(3)
MAY 1, 1997 REGISTRATION NO. 333-12259
4,500,000 SHARES
[LOGO OF Brookdale Living Communities, Inc.]
COMMON STOCK
All of the 4,500,000 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"). The Prime Group, Inc.
and certain of its affiliates (collectively, "PGI") have agreed to purchase
2,500,000 of the 4,500,000 shares of Common Stock offered hereby. Upon
completion of the Offering, and after giving effect to PGI's purchase of
2,500,000 shares of the Common Stock offered hereby, PGI and management of the
Company will own 69.7% of the Common Stock (63.1% if the Underwriters' over-
allotment option is exercised in full). See "Risk Factors--Control by Existing
Stockholders and Management" and "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting" for a discussion of the factors 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>
- -------------------------------------------------------------------------------
<CAPTION>
PRICE PRICE UNDERWRITING PROCEEDS
TO THE TO DISCOUNTS AND TO THE
PUBLIC PGI COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Purchased by the
Public..................... $11.50 -- $0.805 $10.695
Per Share Purchased by
PGI(3)..................... -- $10.695 -- $10.695
Total(4).................... $23,000,000 $26,737,500 $1,610,000 $48,127,500
- -------------------------------------------------------------------------------
</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 $4,000,000.
(3) PGI has agreed to purchase 2,500,000 of the 4,500,000 shares of Common
Stock offered hereby at the Price to the Public less Underwriting
Discounts and Commissions.
(4) The Company has granted to the Underwriters an option, exercisable within
30 days hereof, to purchase up to an aggregate of 675,000 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 (not including the 2,500,000 shares purchased by PGI),
Underwriting Discounts and Commissions and Proceeds to the Company
(including the proceeds from the 2,500,000 shares purchased by PGI) will
be $30,762,500, $2,153,375 and $55,346,625, 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 Washington, D.C., on or about May 7, 1997.
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.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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 capital stock of BLC Property, Inc., certain interests in
the Heritage and the Devonshire facilities and the operations relating to the
senior and assisted living division of The Prime Group, Inc. and certain of its
affiliates (collectively, "PGI"), the acquisition of the Acquired Facilities
(as defined herein) and the Company has entered the management contracts for
its two managed facilities (collectively, the "Formation"), (ii) the purchase
by PGI of 2,500,000 of the 4,500,000 shares of Common Stock offered hereby and
(iii) 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--Lack of Arm's Length Negotiations" and "--Uncertainty of Proposed
Leasehold Acquisition," "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 December 31, 1996, were approximately 99% occupied. The
Company owns four of such facilities, leases three facilities under a long-term
net operating lease and manages two other facilities pursuant to management
contracts. In addition, the Company has entered an agreement to acquire a
facility containing 200 units, which is expected to be purchased by a third
party, and in turn net leased to the Company, within 60 days following the
completion of the Offering. With facilities that contain an average of 220
units, the Company believes it is able to achieve economies of scale within its
facilities and provide senior and assisted living services in a cost-effective
manner. The Company plans to acquire or lease approximately three to five
facilities per year containing an aggregate of approximately 600 to 1,000
units, and to commence development of at least two new facilities per year
containing approximately 200 units each. The Company has entered agreements to
acquire development sites located in Glen Ellyn, Illinois, Southfield, Michigan
and Austin, Texas, the closings of which are expected to occur within 12 months
following the completion of the Offering. The Company had pro forma revenues
and a net loss for the year ended December 31, 1996 of approximately $41.5
million and $1.3 million, respectively. The Company estimates that
approximately 99.9% of the Company's pro forma 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. The Company
intends to bring "in-house" as many of these services as practicable and has
established a program providing various levels and combinations of these
services called "Personally Yours"SM.
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
3
<PAGE>
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 currently pursuing hospital affiliations for the Gables at
Brighton, Springs of East Mesa, 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.
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. 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)
utilizing, when available, long-term, tax-exempt bonds to finance the
acquisition and renovation of existing facilities and the development of new
facilities; (iv) providing access to a full continuum of senior and assisted
living services to residents of its facilities; (v) utilizing sophisticated
marketing programs to maintain high occupancy rates; and (vi) utilizing its
operational expertise to enhance the profitability of its existing and future
facilities.
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 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 the
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.. 4,500,000 shares
Common Stock to be outstanding after 6,500,000 shares (1)
the Offering.........................
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
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 695,000 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>
YEARS ENDED DECEMBER 31,
----------------------------------------
PRO FORMA
AS ADJUSTED
1994 1995 1996 1996(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA
AND OPERATING DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (2)(3):
Revenue:
Resident fees........................ $ 15,205 $ 21,935 $23,437 $ 41,183
Management services income .......... -- -- -- 280
-------- -------- ------- --------
Total revenue...................... 15,205 21,935 23,437 41,463
Facilities operating expenses........ (11,270) (13,253) (12,806) (22,459)
Lease expenses (4)................... -- -- -- (10,270)
General and administrative expenses
(5)................................. -- -- -- (2,837)
Depreciation and amortization........ (3,286) (3,721) (2,946) (3,455)
-------- -------- ------- --------
Operating income..................... 649 4,961 7,685 2,442
Interest and financing fees expense,
net................................. (4,053) (6,385) (5,320) (5,168)
-------- -------- ------- --------
Income (loss) before minority
interest and extraordinary item..... (3,404) (1,424) 2,365 (2,726)
(Income) loss allocated to minority
interest............................ 1,178 802 (756) --
-------- -------- ------- --------
Income (loss) before extraordinary
item................................ (2,226) (622) 1,609 (2,726)
Extraordinary item (gain on
extinguishment of debt)............. -- 3,274 -- --
-------- -------- ------- --------
Net income (loss).................... $ (2,226) $ 2,652 $ 1,609 $ (2,726)
======== ======== ======= ========
UNAUDITED PRO FORMA DATA:
Income (loss) before income taxes and
extraordinary item.................. $ (2,226) $ (622) $ 1,609 $ (2,726)
Pro forma benefit (provision) for
income taxes (6).................... 890 249 (643) 1,413
-------- -------- ------- --------
Income (loss) before extraordinary
item................................ (1,336) (373) 966 (1,313)
Extraordinary item (gain on
extinguishment of debt), net of
income taxes of $1,310 (6).......... -- 1,964 -- --
-------- -------- ------- --------
Pro forma net income (loss).......... $ (1,336) $ 1,591 $ 966 $ (1,313)
======== ======== ======= ========
Pro forma net income per share (7)... $ 0.48 $ (0.20)
======= ========
Pro forma shares of common stock
outstanding (7)..................... 2,000 6,500
======= ========
SELECTED OPERATING AND OTHER DATA:
Total units operated (8)............. 918 918 918 2,168
Occupancy rate (8)................... 95.6% 98.1% 99.2% 98.6%
Average monthly revenue per unit (9). $ 1,732 $ 2,015 $ 2,144 $ 1,928
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (3):
Cash........................................... $ 4,044 $ 5,841
Cash-restricted (10)........................... 1,089 3,363
Letter of credit deposit (10).................. -- 11,000
Total assets................................... 56,731 139,288
Total long-term debt........................... 65,000 96,430
Stockholders' and partners' equity (deficit)... (25,428) 17,827
</TABLE>
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(1) The Company has entered a definitive purchase agreement to acquire the Park
Place facility located in Spokane, Washington for approximately $14.4
million. Although the Company expects to assign its rights to purchase the
Park Place facility to a third party, and that such third party will
purchase and in turn net lease such facility to the Company, within 60 days
following the completion of the Offering, there can be no assurance that
the conditions to closing such transaction will be satisfied in a timely
manner, if at all. If such facility is not acquired by such third party and
in turn net leased to the Company, pro forma as adjusted total revenue,
operating income and net loss would be approximately $39.3 million, $3.4
million and $758,000, respectively, for the year ended December 31, 1996.
See "Risk Factors--Uncertainty of Proposed Leasehold Acquisition."
(2) The historical financial and operating data for each of the three years
ended December 31, 1994, 1995 and 1996 represent combined historical
financial data for the senior and assisted living division of PGI,
including among other things, a combination of the businesses of the
Original Facilities. See "The Company and the Formation."
(3) The pro forma statements of operations data for the year ended December 31,
1996 give effect to (a) the Formation; (b) the net lease by the Company of
the Park Place facility; (c) the initial capitalization of the Company; and
(d) the Offering. The pro forma balance sheet as of December 31, 1996 gives
effect to these transactions as if they occurred on such date. See
Unaudited Pro Forma Combined Condensed Financial Statements of the Company.
(4) Pro forma lease expenses for the year ended December 31, 1996 are recorded
net of $806,000 relating to the amortization of a deferred gain on the sale
and leaseback of the Hallmark facility which occurred on December 27, 1996.
See Note (c) to Notes to the Pro Forma Combined Condensed Statement of
Operations and Note 7 to Combined Financial Statements of the Original
Facilities.
(5) Historically, the Original Facilities have incurred property management
fees in lieu of general and administrative expenses. However, upon the
completion of the Offering, the Company will no longer incur property
management fees and report general and administrative expenses as a
separate item. See Pro Forma Combined Condensed Statements of Operations of
the Company.
(6) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Original Facilities as C Corporations. See Note (g) of
Notes to Pro Forma Combined Condensed Statement of Operations of the
Company and Note 1 of Notes to Combined Financial Statements of the
Original Facilities.
(7) Historical amounts reflect the issuance of 2,000,000 shares of Common Stock
in connection with the Formation. Pro forma as adjusted amounts reflect the
issuance of 4,500,000 shares of Common Stock in connection with the
Offering and 2,000,000 shares of Common Stock in connection with the
Formation.
(8) Total units operated represents the total units operated as of the end of
the period for the Original Facilities (the Hallmark facility was not
acquired by PGI until June 1994 and was sold to a third party and leased
back to BLC Property, Inc. on December 27, 1996). 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 Park Place
facility, the Leased Facilities and the managed facilities. PGI owned and
operated the 206-unit Island on Lake Travis facility, which is not included
in the Original Facilities, during each of the years ended December 31,
1994, 1995 and 1996.
(9) 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. Pro forma amounts
include the Original Facilities, the Acquired Facilities, the Park Place
facility and the Leased Facilities.
(10) Cash-restricted represents amounts segregated for use in the payment of
real estate taxes and other operating activity in accordance with
governmental and debt agreement requirements. Letter of credit deposit
represents cash collateral for the proposed credit enhancement of $65.0
million of tax-exempt bonds that are secured by the Heritage and the
Devonshire facilities. The Company intends to earn interest income on both
cash-restricted and letter of credit deposit amounts. See Note 2 to both
the Combined Financial Statements of the Original Facilities and
Activelife Facilities and Notes (a), (b) and (f) to the Unaudited Pro
Forma Combined Condensed Balance Sheet of the Company.
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 organized in September 1996 to own, operate, acquire and
develop senior and assisted living facilities. The Original Facilities,
including the Hallmark facility, and the operations relating thereto were
formerly owned and operated by PGI. BLC Property, Inc. ("BLC") was recently
organized by PGI to facilitate the December 1996 sale and leaseback of PGI's
Hallmark facility. Pursuant to such sale and leaseback transaction, Health and
Retirement Properties Trust ("HRPT"), a publicly-traded health care real
estate investment trust, purchased the Hallmark facility from PGI and leased
such facility to BLC pursuant to a net operating lease. Concurrently with such
transaction, HRPT acquired the Springs of East Mesa and the Gables at Brighton
facilities from a third party and net leased such facilities to BLC, and BLC
in turn subleased each of the Hallmark, Springs of East Mesa and Gables at
Brighton facilities (collectively, the "Leased Facilities") to separate,
wholly owned subsidiaries of BLC. Upon completion of the Offering, PGI will
contribute to the Company all of the capital stock of BLC, its interests in
the Heritage and the Devonshire facilities, together with the operations
relating to its senior and assisted living division, and the Company will
acquire from third parties the Edina Park Plaza and the Hawthorn Lakes
facilities (collectively, the "Acquired Facilities"). The Original Facilities
had income before minority interest and extraordinary item of approximately
$2.4 million in 1996, compared to losses before minority interest of
approximately $1.4 million and $3.4 million in 1995 and 1994, respectively. On
a pro forma basis, after giving effect to the Formation and the net lease of
the Park Place facility from a third party, the Company would have had a net
loss in 1996 of approximately $1.3 million (after pro forma income taxes).
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 Leasehold Acquisition," "The Company and the Formation," "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LACK OF ARM'S LENGTH NEGOTIATIONS
The terms of the transactions between the Company and PGI that comprise a
portion of the Formation, including, without limitation, PGI's contribution to
the Company of the capital stock of BLC, its interests in the Heritage and the
Devonshire facilities and the operations relating to its senior and assisted
living division, were not determined by arm's length negotiations. No
independent third-party appraisals of the capital stock of BLC, such interests
in the Heritage and the Devonshire facilities or the operations relating to
PGI's senior and assisted living division were obtained on behalf of the
Company. 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 the capital stock of BLC, PGI's
interests in the Heritage and the Devonshire facilities and the operations
relating to PGI's senior and assisted living division are as favorable to the
Company as those the Company would have obtained from unaffiliated third
parties. See "The Company and the Formation" and "Certain Transactions."
UNCERTAINTY OF PROPOSED LEASEHOLD ACQUISITION
The Company has entered a definitive purchase agreement to acquire the Park
Place facility for approximately $14.4 million. The Company expects to enter a
transaction with a third party pursuant to which the Company will assign its
rights to purchase the Park Place facility to such third party, which will
purchase and in turn net lease such facility to the Company. The closing of
such transaction is subject to certain customary conditions, including
conditions regarding the status of the title to the real property, the results
of environmental investigations and the transfer or issuance of applicable
licenses and permits. If the above described net lease transaction does not
occur, Brookdale's pro forma as adjusted total revenue, operating income and
net loss for
6
<PAGE>
the year ended December 31, 1996 would be approximately $39.3 million, $3.4
million and $758,000, respectively. Although the Company expects the proposed
net lease transaction involving the Park Place facility to be consummated
within 60 days following the completion of the Offering, there can be no
assurance that the conditions to closing such transaction will be satisfied in
a timely manner, if at all. Any delay or failure to consummate the proposed
net lease of the Park Place facility could have an adverse effect on the
Company's operating results. Upon the completion of this net lease
transaction, the Park Place facility's units will represent approximately 9%
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 and the Park Place facility, it has not entered any agreements for
any material 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 at least two 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."
7
<PAGE>
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 $200.0
million in the aggregate, which substantially exceeds the net proceeds of the
Offering. Accordingly, the Company's future growth will depend on its ability
to obtain significant additional financing on acceptable terms. The Company
has no existing commitments for financing. The Company will from time to time
seek debt financing through a variety of sources, which may include tax-exempt
bonds, conventional mortgage financing and bank financing, leases with third
parties or other similar financing methods. If such debt financing is
unavailable or is not available on terms favorable to the Company, the Company
may obtain financing through additional equity offerings, the completion of
which may result in a dilution to the Company's stockholders. There can be no
assurance that future financing, whether debt or equity, 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 have a material adverse effect on the
Company's growth plans and on its business, financial condition and results of
operations. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ADVERSE CONSEQUENCES OF INDEBTEDNESS AND LEASE OBLIGATIONS; FLOATING RATE DEBT
The Company was subject to mortgage and other indebtedness in an aggregate
principal amount of approximately $96.4 million at December 31, 1996 on a pro
forma basis. The Company, through its wholly owned subsidiary BLC, is
presently a party to a long-term master lease covering the Leased Facilities.
This master lease requires minimum annual lease payments aggregating
approximately $8.3 million in 1997 and $8.8 million in 1998 and provides for
increases in minimum annual lease payments in 1999 and 2000 and additional
rent payments based on a percentage of any increases in the revenues generated
by the Leased Facilities beginning in 1999. The Company also expects to enter
a lease agreement with a third party, within 60 days following the completion
of the Offering, pursuant to which the Company will net lease the Park Place
facility from such third party. The Company intends to finance its senior and
assisted living facilities through tax-exempt bond financing, conventional
mortgage financing and bank financing, leases with third parties or other
similar financing methods. 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.
At December 31, 1996, approximately $65.0 million ($96.4 million pro forma
after giving effect to the Formation) in principal amount of the Company's
indebtedness bore interest at floating rates. In addition, indebtedness the
Company may incur in the future, including long-term, tax-exempt bond
financing, if available, may bear interest at floating rates and in such event
increases in prevailing interest rates could increase significantly the
Company's interest payment obligations. There can be no assurance that 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 or letters of
credit will restrict the payment of dividends by the Company or distributions
by its wholly owned partnerships or subsidiaries 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
of the Company.
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 facilities must comply with
certain federal income tax requirements, principally pertaining to the maximum
income level of a specified portion ("Qualified Residents") of the facilities'
residents. Failure to satisfy these requirements would constitute an event of
default under such bonds, thereby accelerating their maturity. In certain
cases, the Company's ability to increase prices to Qualified Residents at the
facilities with such bond financing (in response
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to higher operating costs or other factors) could be limited if it affects the
ability of the Company to attract and retain such Qualified Residents.
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."
BENEFITS TO AFFILIATES
PGI will realize substantial benefits from the Offering. In particular, upon
completion of the Offering, PGI will acquire 1,703,043 shares of Common Stock
(not including PGI's purchase of 2,500,000 of the 4,500,000 shares of Common
Stock offered hereby) with a market value of approximately $19.6 million
(assuming no exercise of the Underwriters' over-allotment option and at the
initial public offering price of $11.50 per share) in connection with its
contribution to the Company of all of the capital stock of BLC, its interests
in the Heritage and the Devonshire facilities and the operations relating to
its senior and assisted living division. Also, the Company will pay PGI
approximately $8.4 million to reimburse PGI for earnest monies previously paid
by PGI in connection with the acquisition of the Acquired Facilities, the Park
Place facility, a third party's interests in the Heritage and the Devonshire
facilities and the proposed acquisitions of the development sites located in
Glen Ellyn, Illinois, Southfield, Michigan and Austin, Texas, for certain
costs and fees previously paid by PGI relating to the replacement credit
enhancement on the $65.0 million of tax-exempt bonds relating to the Heritage
and the Devonshire facilities and for certain costs and expenses previously
paid by PGI relating to the issuance and distribution of Common Stock pursuant
to the Offering. In addition, PGI has agreed to purchase 2,500,000 of the
4,500,000 shares of Common Stock offered hereby at the initial price to the
public less underwriting discounts and commissions. Further, PGI will covenant
that the partnerships owning the Heritage and the Devonshire facilities will
have no less than $800,000 in the aggregate in unrestricted cash, plus any
cash balances in real estate tax and capital reserve accounts, upon the
completion of the Offering; however, any unrestricted cash in excess of
$800,000 then held by such partnerships will be distributed to PGI. In
addition, in accordance with the terms and conditions of the master lease
between HRPT and BLC governing the Leased Facilities, upon the closing of the
Offering and PGI's contribution of all of BLC's capital stock to the Company,
certain affiliates of PGI, including The Prime Group, Inc., will be released
by HRPT from such affiliates' guaranties of BLC's obligations under the master
lease. At the Formation, in accordance with a formation agreement, by and
among the Company, Mark J. Schulte and PGI (the "Formation Agreement"), Mr.
Schulte will transfer to the Company all of his interests in PGI's senior and
assisted living division in exchange for 296,957 shares of Common Stock from
the Company. See "--Lack of Arm's Length Negotiations," "The Company and the
Formation" and "Use of Proceeds."
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT
PGI will beneficially own approximately 64.7% of the outstanding Common
Stock after completion of the Offering (58.6% if the Underwriters' over-
allotment option is exercised in full) and executive officers and
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directors of the Company as a group will beneficially own approximately 69.7%
of the outstanding Common Stock after the Offering (63.1% if the Underwriters'
over-allotment option is exercised in full). As a result, PGI and the Company's
executive officers and directors will be in the position to elect all of the
directors of the Company and effectively control the management and operations
of the Company. Initially, three of the Company's seven directors will be
affiliates of PGI or employees of the Company and four of the Company's
directors will be independent directors who are neither affiliates of PGI nor
employees of the Company. Upon completion of the Offering, PGI will enter into
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. See "Certain Transactions--Voting Agreement." The
concentration of Common Stock ownership in PGI may have a limiting effect on
the price and trading volume of the Common Stock and may inhibit changes in
control of the Company. See "Principal Stockholders."
PGI will obtain a loan (the "Stock Acquisition Loan") to finance PGI's
purchase of 2,500,000 of the 4,500,000 shares of Common Stock offered hereby.
PGI expects to pledge all of such shares so purchased by it, together with some
or all of the shares of Common Stock acquired by PGI and Mark J. Schulte in
connection with the Formation, as collateral security for the repayment of the
Stock Acquisition Loan. PGI and Mr. Schulte will retain voting control of such
pledged Common Stock unless and until the lender were to foreclose on such
Common Stock because of an event of default under the Stock Acquisition Loan.
See "Risk Factors--Benefits to Affiliates," "The Company and the Formation,"
"Certain Transactions--Stock Acquisition Loan" and "Underwriting."
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. 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
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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 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.
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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 6,500,000 shares of
Common Stock outstanding (7,175,000 shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, the 4,500,000 shares sold in
the Offering (or a maximum of 5,175,000 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 (including 2,500,000 shares offered hereby to be
purchased by PGI) purchased by "affiliates" of the Company, as such term is
defined in Rule 144 promulgated under the Securities Act. The remaining
2,000,000 shares are "restricted securities" within the meaning of Rule 144
and are held by PGI and management of the Company. The Company, its directors
and executive officers, certain of its key employees and PGI have agreed (the
"lock-up agreement") 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 (other than the 2,500,000
shares offered hereby to be purchased by PGI which PGI has agreed not to sell
or otherwise dispose of for a period of 90 days) after the date of this
Prospectus (the "lock-up period") without the prior written consent of
Friedman, Billings, Ramsey & Co., Inc. ("FBR"). Notwithstanding the lock-up
agreement, PGI will be permitted to pledge all or any portion of its shares of
Common Stock to secure the repayment by PGI of a loan to be used by PGI to
purchase 2,500,000 shares of Common Stock offered hereby. See "Certain
Transactions--Stock Acquisition Loan." After expiration of the lock-up period,
PGI will be entitled to certain demand and incidental registration rights with
respect to its shares that constitute "restricted securities." If PGI, by
exercising its demand registration rights, causes a large number of shares to
be registered and sold in the public market, or if PGI sells, subject to
applicable Rule 144 limitations, a large number of the shares it acquired in
the Offering, 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 830,000 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 such 695,000 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 675,000 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 20,000 shares, at the
rate of 33.3% per year commencing on the first anniversary of their date of
grant. 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."
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 negotiations between the Company and the
representative of the
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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, as
amended (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
$6.29. See "Dilution."
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. BLC, a wholly owned subsidiary of PGI, was
incorporated in Delaware on December 12, 1996 to facilitate the December 1996
sale and leaseback of PGI's Hallmark facility. Pursuant to such sale and
leaseback transaction, HRPT purchased the Hallmark facility from PGI and leased
such facility to BLC pursuant to a net operating lease. Concurrently with such
transaction, HRPT acquired the Springs of East Mesa and the Gables at Brighton
facilities from a third party and net leased such facilities to BLC, and BLC in
turn subleased each of the Leased Facilities to separate, wholly owned
subsidiaries of BLC.
Pursuant to the Formation Agreement, in connection with the completion of the
Offering, PGI will contribute to the Company all of the capital stock of BLC,
its interests in the Heritage and the Devonshire
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facilities and the operations relating to its senior and assisted living
division (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) in exchange for 1,703,043
shares of Common Stock and the assumption by the Company of certain
indebtedness in the aggregate amount of $65.0 million. Further, PGI will
covenant that the partnerships owning the Heritage and the Devonshire
facilities will have no less than $800,000 in the aggregate in unrestricted
cash, plus any cash balances in real estate tax and capital reserve accounts,
upon the completion of the Offering; however, any unrestricted cash in excess
of $800,000 then held by such partnerships will be distributed to PGI. In
addition, in accordance with the terms and conditions of the master lease
between HRPT and BLC governing the Leased Facilities, upon the closing of the
Offering and PGI's contribution of all of BLC's capital stock to the Company,
certain affiliates of PGI, including The Prime Group, Inc., will be released
by HRPT from such affiliates' guaranties of BLC's obligations under the master
lease. In addition, the Company will pay PGI approximately $8.4 million to
reimburse PGI for earnest monies previously paid by PGI in connection with the
acquisition of the Acquired Facilities, the Park Place facility, a third
party's interests in the Heritage and the Devonshire facilities and the
proposed acquisitions of the development sites located in Glen Ellyn,
Illinois, Southfield, Michigan and Austin, Texas, for certain costs and fees
previously paid by PGI relating to the replacement credit enhancement on the
$65.0 million of tax-exempt bonds relating to the Heritage and the Devonshire
facilities and for certain costs and expenses previously paid by PGI relating
to the issuance and distribution of Common Stock pursuant to the Offering. 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 PGI's senior and assisted living division to the Company in
exchange for 296,957 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 "Risk Factors--
Benefits to Affiliates," "Use of Proceeds," "Business--Facilities" and
"Certain Transactions."
The Company currently has credit enhancement on the $65.0 million of tax-
exempt bonds relating to the Heritage and the Devonshire facilities which it
must replace on or before the date of the acquisition of these facilities.
Bank One, Illinois, NA and LaSalle National Bank have respectively approved
the issuance by them of letters of credit with a maturity of three years from
the date of issuance of such letters of credit that would provide replacement
credit enhancement for such tax-exempt bonds. On or prior to the completion of
the Offering, the Company will have executed definitive agreements with such
banks to issue the letters of credit. In addition to the mortgages on the
Heritage and the Devonshire facilities, it is anticipated that estimated cash
collateral of approximately $11.0 million from the net proceeds of the
Offering will be pledged as additional collateral and the letters of credit
will be guaranteed to the extent of 30% by the Company. The Company intends to
purchase two-year interest rate protection agreements with respect to such
tax-exempt indebtedness as soon as practicable following the completion of the
Offering, which, if so purchased, will have the effect of mitigating the
effect of inflation and higher interest rates on such indebtedness during the
terms of such contracts. There can be no assurance that the Company will be
able to purchase such interest rate protection contracts on terms favorable to
the Company, if at all.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,500,000 shares of
Common Stock offered hereby are estimated to be approximately $44.1 million
(at the initial public offering price of $11.50 per share) or approximately
$51.3 million if the Underwriters' over-allotment option is exercised in full,
after deducting the estimated underwriting discounts and commissions and
offering expenses (including approximately $1.0 million to be paid to PGI to
reimburse PGI for such expenses previously paid by PGI) payable by the
Company. Simultaneously with the completion of the Offering, the Company
intends to use approximately $21.5 million of the net proceeds to fund the
cash portion of the purchase price for the Acquired Facilities (including the
payment to PGI of approximately $50,000 to reimburse PGI for earnest monies
previously paid by PGI in connection with the acquisition of the Acquired
Facilities), and approximately $6.8 million of the net proceeds to reimburse
PGI for earnest monies previously paid by PGI in connection with the
acquisition of the Park Place facility, a
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third party's interests in the Heritage and the Devonshire facilities and the
proposed acquisitions of the development sites located in Glen Ellyn,
Illinois, Southfield, Michigan and Austin, Texas. In addition, the Company
intends to use approximately $1.6 million of the net proceeds to fund a
statutory escrow deposit with respect to the Hallmark facility pursuant to
Illinois law and in accordance with BLC's lease agreement with HRPT. The
Company also intends to use approximately $11.0 million of the net proceeds as
cash collateral for the proposed credit enhancement on $65.0 million of tax-
exempt bonds that are secured by the Heritage and the Devonshire facilities
and approximately $500,000 to reimburse PGI for its payment of a commitment
fee to the financial institutions providing such credit enhancement and for
certain costs previously paid by PGI in connection therewith. In addition, the
Company intends to use approximately $300,000 to purchase interest rate
protection contracts on the $65.0 million of tax-exempt bonds relating to the
Heritage and the Devonshire facilities. The foregoing uses of proceeds
represent the direct and indirect payment to PGI and its affiliates of an
aggregate of approximately $8.4 million, or approximately 19.1%, of the net
proceeds of the Offering (16.4% if the Underwriters' over-allotment is
exercised in full). The balance of the net proceeds, approximately $2.4
million (or approximately $9.6 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. 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."
15
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 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 (at the
initial public offering price of $11.50 per share 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 DECEMBER 31, 1996
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Unrestricted cash........................................ $ 4,044 $ 5,841
======== ========
Total long-term debt(1).................................. $ 65,000 $ 96,430
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; 6,500,000 shares issued and outstanding, pro
forma as adjusted(2).................................... -- 65
Additional paid-in capital............................... -- 17,762
Accumulated deficit...................................... (25,428) --
-------- --------
Total stockholders' and partners' equity (deficit)..... (25,428) 17,827
-------- --------
Total capitalization................................. $ 39,572 $114,257
======== ========
</TABLE>
- ---------------------
(1) See Note (i) 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 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 695,000 shares of Common Stock subject to options
expected to be granted at the initial public offering price. See
"Management--Stock Incentive Plan."
16
<PAGE>
DILUTION
The Company's net deficit in tangible book value as of December 31, 1996
prior to the Offering was approximately $14.6 million, or $7.31 per share. Net
deficit in tangible book value per share as of December 31, 1996 is equal to
the Original Facilities' total tangible assets less their total tangible
liabilities, divided by the 2,000,000 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 4,500,000 shares of Common Stock offered by the
Company hereby at the initial public offering price of $11.50 per share, the
pro forma net tangible book value of the Common Stock at December 31, 1996
would have been approximately $33.9 million, or $5.21 per share. This
represents an immediate increase in pro forma net tangible book value of
$12.52 per share to existing stockholders and immediate dilution of $6.29 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>
Initial public offering price per share.......................... $11.50
Net deficit in tangible book value prior to the Offering....... $(7.31)
Increase attributable to new investors......................... 12.52
------
Pro forma net tangible book value after the Offering............. 5.21
------
Dilution per share to new investors.............................. $ 6.29
======
</TABLE>
The following table summarizes the differences between PGI and management
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 the initial public offering price of $11.50 per
share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
New investors............... 2,000,000 30.8% $23,000,000 94.7% $11.50
PGI and management(1)(2).... 4,500,000 69.2 1,300,000 5.3 0.29
--------- ----- ----------- -----
Total................... 6,500,000 100.0% $24,300,000 100.0% $ 3.74
========= ===== =========== =====
</TABLE>
- ---------------------
(1) Does not include 695,000 shares of Common Stock subject to options
expected to be granted at the initial public offering price. See
"Management--Stock Incentive Plan."
(2) Total consideration provided by PGI and management for the shares of
Common Stock includes cash of $26.7 million and the Original Facilities
partners' deficit at December 31, 1996 of $25.4 million.
17
<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 December 31, 1995 and 1996, and for the years ended
December 31, 1994, 1995 and 1996, 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, 1992, 1993 and 1994
and for the years ended December 31, 1992 and 1993 have been derived from the
combined financial statements of the Original Facilities not included in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------- ---
1992 1993 1994 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.................. $ 5,044 $ 6,637 $ 15,205 $ 21,935 $23,437
Facilities operating expenses... (3,910) (5,279) (11,270) (13,253) (12,806)
General and administrative
expenses (1)................... -- -- -- -- --
Depreciation and amortization... (1,281) (1,626) (3,286) (3,721) (2,946)
------- ------- -------- -------- -------
Operating income (loss)......... (147) (268) 649 4,961 7,685
Interest and financing fees
expense........................ (1,742) (1,791) (4,053) (6,385) (5,320)
------- ------- -------- -------- -------
Income (loss) before minority
interest and extraordinary
item........................... (1,889) (2,059) (3,404) (1,424) 2,365
(Income) loss allocated to
minority interest.............. 1,415 1,266 1,178 802 (756)
------- ------- -------- -------- -------
Income (loss) before
extraordinary item............. (474) (793) (2,226) (622) 1,609
Extraordinary item (gain on
extinguishment of debt)........ -- -- -- 3,274 --
------- ------- -------- -------- -------
Net income (loss)............... $ (474) $ (793) $ (2,226) $ 2,652 $ 1,609
======= ======= ======== ======== =======
UNAUDITED PRO FORMA DATA:
Income (loss) before income
taxes and extraordinary item... $ (474) $ (793) $ (2,226) $ (622) $ 1,609
Pro forma benefit (provision)
for income taxes (2)........... 190 317 890 249 (643)
------- ------- -------- -------- -------
Income (loss) before
extraordinary item............. (284) (476) (1,336) (373) 966
Extraordinary item (gain on
extinguishment of debt), net of
income taxes of $1,310 (2)..... -- -- -- 1,964 --
------- ------- -------- -------- -------
Pro forma net income (loss)..... $ (284) $ (476) $ (1,336) $ 1,591 $ 966
======= ======= ======== ======== =======
Pro forma net income per share
(3)............................ $ 0.48
=======
Pro forma shares of common stock
outstanding (3)................ 2,000
=======
SELECTED OPERATING AND OTHER
DATA:
Total units operated (4)........ 323 577 918 918 918
Occupancy rate (4).............. 95.4% 79.9% 95.6% 98.1% 99.2%
Average monthly revenue per unit
(5)............................ $ 1,365 $ 1,454 $ 1,732 $ 2,015 $ 2,144
BALANCE SHEET DATA:
Total assets.................... $70,255 $65,149 $102,579 $100,325 $56,731
Total long-term debt............ 70,848 71,510 101,242 99,627 65,000
Partners' capital (deficit)..... (1,987) (2,780) 1,852 3,597 (25,428)
</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 of the Company.
(2) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Original Facilities as C Corporations. See Note 1 of
Notes to Combined Financial Statements of the Original Facilities.
18
<PAGE>
(3) Reflects the issuance of 2,000,000 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, with 341
units, was not acquired by PGI until June 1994 and was sold to HRPT and
leased back to BLC on December 27, 1996). Occupancy rate is calculated by
dividing total occupied units 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 during the period for the Original Facilities.
19
<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 Heritage and the Devonshire facilities 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
Hallmark facility, was acquired by HRPT and in turn leased to the Company), 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 Hawthorn Lakes and the
Edina Park Plaza facilities), the Park Place facility, two of the Leased
Facilities (consisting of the Springs of East Mesa and the Gables at Brighton
facilities) or the managed facilities. See "Risk Factors--Uncertainty of
Proposed Leasehold Acquisition" 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. Four of such facilities are owned by the Company, three
facilities are leased by the Company from HRPT 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. 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 to the Company all
of the capital stock of BLC, its interests in the Heritage and the Devonshire
facilities and the operations relating to its senior and assisted living
division (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) in exchange for 1,703,043 shares of
Common Stock and the assumption by the Company of certain indebtedness in the
aggregate amount of $65.0 million. Further, PGI will covenant that the
partnerships owning the Heritage and the Devonshire facilities will have no
less than $800,000 in the aggregate in unrestricted cash, plus any cash
balances in real estate tax and capital reserve accounts, upon the completion
of the Offering; however, any unrestricted cash in excess of $800,000 then held
by such partnerships will be distributed to PGI. In addition, in accordance
with the terms and conditions of the master lease between HRPT and BLC
governing the Leased Facilities, upon the closing of the Offering and PGI's
contribution of all of BLC's capital stock to the Company, certain affiliates
of PGI, including The Prime Group, Inc., will be released by HRPT from such
affiliates' guaranties of BLC's obligations under the master lease. In
addition, the Company will pay PGI approximately $8.4 million to reimburse PGI
for earnest monies previously paid by PGI in connection with the acquisition of
the Acquired Facilities, the Park Place facility, a third party's interests in
the Heritage and the Devonshire facilities and the proposed acquisitions of the
development sites located in Glen Ellyn, Illinois, Southfield, Michigan and
Austin, Texas, for certain costs and fees previously paid by PGI relating to
the replacement credit enhancement on the $65.0 million of tax-exempt bonds
relating to the Heritage and the Devonshire facilities and for certain costs
and expenses previously paid by PGI relating to the issuance and distribution
of Common Stock pursuant to the Offering. 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 PGI's senior and assisted
living division to the Company in exchange for 296,957 shares of Common 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 "Risk Factors--Benefits to Affiliates," "The Company and the
Formation," "Use of Proceeds," "Business--Facilities" and "Certain
Transactions."
20
<PAGE>
The Company currently plans to acquire or lease approximately three to five
facilities per year containing an aggregate of approximately 600 to 1,000
units, and to commence development of at least two new facilities per year
containing approximately 200 units each in major urban and suburban areas of
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. To
the extent available, the Company intends to use long-term, tax-exempt bonds
to finance the acquisition and renovation of existing facilities and the
development of new facilities. The Company has no existing commitments for
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," "--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 the years ended December 31, 1995 and 1996. Resident
fees typically are paid monthly by residents, their families or other
responsible parties. The Company estimates that approximately 99.9% of the
Company's pro forma 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 0.7% of the Company's revenues for the years
ended December 31, 1995 and 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 the 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. On a pro forma basis after giving effect to the Formation,
annual lease expenses will be recorded net of $806,000 per year related to the
amortization of a deferred gain on the sale and leaseback of the Hallmark
facility.
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
DECEMBER 31,
-----------------------
1994 1995 1996
<S> <C> <C> <C>
Resident fees......................................... 100.0% 100.0% 100.0%
Facility operating expenses........................... (74.1) (60.4) (54.6)
General and administrative expenses (1)............... -- -- --
Depreciation and amortization......................... (21.6) (17.0) (12.6)
------ ------ ------
Income from operations................................ 4.3 22.6 32.8
Interest and financing fees expense................... (26.7) (29.1) (22.7)
------ ------ ------
Income (loss) before minority interest and
extraordinary item................................... (22.4) (6.5) 10.1
(Income) loss allocated to minority interest.......... 7.7 3.7 (3.2)
------ ------ ------
Income (loss) before extraordinary item............... (14.7) (2.8) 6.9
Extraordinary item.................................... -- 14.9 --
------ ------ ------
Net income (loss)..................................... (14.7)% 12.1% 6.9%
====== ====== ======
Selected Operating and Other Data:
Total units operated (2).............................. 918 918 918
Occupancy rate (2).................................... 95.6% 98.1% 99.2%
Average monthly revenue per unit (3).................. $1,732 $2,015 $2,144
</TABLE>
21
<PAGE>
- ---------------------
(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 of the Company.
(2) Total units operated represents total units operated as of the end of the
period for the Original Facilities (the Hallmark facility, with 341 units,
was not acquired by PGI until June 1994 and was sold to HRPT and leased
back to BLC on December 27, 1996). 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 YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Revenue. Resident fees revenue increased approximately $1.5 million, or
6.8%, to $23.4 million for the year ended December 31, 1996 primarily due to a
6.4% increase in average monthly revenue per unit and a 1.1% increase in
occupancy percentage from the year ended December 31, 1995 to the year ended
December 31, 1996. The occupancy rate for the Original Facilities during the
year ended December 31, 1996 was 99.2% as compared to 98.1% during the year
ended December 31, 1995. The average monthly revenue per unit increased by
$129 per unit to $2,144 per unit for the year ended December 31, 1996 as
compared to $2,015 per occupied unit for the year ended December 31, 1995.
Operating Expenses. Facility operating expenses decreased approximately
$447,000, or 3.4%, to $12.8 million for the year ended December 31, 1996
primarily 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
54.6% for the year ended December 31, 1996 compared to 60.4% for the year
ended December 31, 1995. In addition, property management fees (such
management fees, which were paid to PGI, will not be payable after the
Formation) decreased approximately $513,000, or 35.6%, due primarily to a
reduction of the Hallmark facility's management fees, effective January 1,
1996, from 5.0% of net operating income to 3.0%.
Depreciation and amortization expense decreased approximately $775,000, or
20.8%, to $2.9 million for the year ended December 31, 1996 primarily due to
amortization of deferred marketing fees of approximately $591,000 in 1995
related to the Devonshire and the Heritage facilities that became fully
amortized in 1995 and certain furniture and equipment of the Devonshire
facility that was fully depreciated in 1995, representing a depreciation
expense of approximately $215,000 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 $1.1 million, or
16.7%, to $5.3 million for the year ended December 31, 1996 primarily due to
the refinancing of the Hallmark facility's mortgage payable at the end of
1995. This refinancing resulted in savings of approximately $594,000 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 year
ended December 31, 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 during the year ended
December 31, 1996 than during the year ended December 31, 1995, which resulted
in additional savings of approximately $292,000. Interest rates on these bonds
(exclusive of credit enhancement and other fees) averaged approximately 3.4%
for the year ended December 31, 1996 as compared to an average rate of
approximately 3.9% for the year ended December 31, 1995. These decreases in
interest expense were slightly offset by increased financing fees associated
with the Devonshire and the Heritage facilities' bonds for the year ended
December 31, 1996.
Income (Loss) Before Minority Interest and Net Income (Loss). Income before
minority interest increased approximately $3.8 million and net income
decreased by approximately $1.1 million to approximately $2.4 million and $1.6
million, respectively, for the year ended December 31, 1996 compared to a loss
before minority interest and net income of $1.4 million and $2.7 million,
respectively, for the year ended December 31, 1995
22
<PAGE>
primarily due to an increase in operating revenue and a decrease in operating
expenses, offset as described above by the extraordinary gain on
extinguishment of debt of $3.3 million on the Hallmark facility in the year
ended December 31, 1995.
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 for the year ended December 31, 1995. Of this
increase, $4.9 million related to a full year of operations at the Hallmark
facility during the year ended December 31, 1995 versus only seven months
during the year ended December 31, 1994, while the remainder of this increase
was primarily due to increases in average monthly revenue per unit and
occupancy rates at the Original Facilities for the year ended December 31,
1994 as compared to the year ended December 31, 1995. Occupancy rates for the
Original Facilities during the year ended December 31, 1995 increased 2.5% to
98.1% from 95.6% during the year ended December 31, 1994. The average monthly
revenue per unit increased by $283 per unit, to $2,015 per occupied unit, for
the year ended December 31, 1995 as compared to $1,732 per unit for the year
ended December 31, 1994.
Operating Expenses. Facility operating expenses increased approximately $2.0
million, or 17.6%, to $13.3 million for the year ended December 31, 1995
primarily due to 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 during the year ended December 31, 1994. Real estate taxes increased
approximately $120,000, or 13.4%, to $1.0 million for the year ended December
31, 1995 again due to a full year of taxes being expensed for the Hallmark
facility. Real estate taxes at both the Devonshire and the 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 for the year ended
December 31, 1995 primarily due to a full year of fees assessed at the
Hallmark facility and increased revenues at the Devonshire and the 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 of 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 for the year ended December 31, 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 for the year ended December 31, 1995. Of this increase,
approximately $1.7 million was due to 12 months of interest expense at the
Hallmark facility during the year ended December 31, 1995 versus only seven
months during the year ended December 31, 1994. In addition, approximately
$612,000 of additional interest expense related to the variable-rate bonds
that encumber both the Devonshire and the Heritage facilities was recognized
in the year ended December 31, 1995 due to increased interest rates. Interest
rates on the bonds (exclusive of credit enhancement and other fees) averaged
3.9% during the year ended December 31, 1995 versus 2.9% during the year ended
December 31, 1994. The Devonshire and the Heritage facilities also realized an
increase in financing fees during the year ended December 31, 1995 as a
standard fee of 1.35% of the outstanding bond balance was imposed, which
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 during the
year ended December 31, 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 $4.9 million to $2.7 million
for the year ended December 31, 1995 compared to a loss before minority
interest and net loss of $3.4 million and $2.2 million, respectively, for the
year ended December 31, 1994 primarily due to an extraordinary gain on the
extinguishment of the mortgage on the Hallmark facility 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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled approximately $5.3 million, $620,000
and $2.2 million for each of the three years ended December 31, 1996, 1995 and
1994, respectively. The variance in cash flows from operations during the
foregoing periods resulted primarily from the effects of increases in various
liabilities during the year ended December 31, 1994 due to the acquisition of
the Hallmark facility and improved operating results of the Original
Facilities during the year ended December 31, 1996. Cash totaled approximately
$4.0 million, $5.1 million and $4.1 million at December 31, 1996, 1995 and
1994, respectively.
Net cash provided by (used in) investing activities totaled approximately
$58.1 million, $689,000 and $(36.9) million for the years ended December 31,
1996, 1995 and 1994, respectively. Brookdale's investing activities included
proceeds from the sale of the Hallmark facility of $58.5 million during the
year ended December 31, 1996, capital expenditures of $42.1 million related to
the acquisition of the Hallmark facility during the year ended December 31,
1994 and improvements to existing operations totaling approximately $359,000,
$239,000 and $1.1 million for the years ended December 31, 1996, 1995 and
1994, 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 will be derived from
additional debt financing.
Net cash provided by (used in) financing activities was approximately
$(64.4) million, ($349,000) and $38.3 million for the years ended December 31,
1996, 1995 and 1994, respectively. The activity primarily relates to the
repayment of the mortgage note payable on the Hallmark facility of $34.6
million, distributions to partners of $26.2 million and advances of $4.5
million made to the general partner during the year ended December 31, 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 during the year ended December 31, 1994.
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 600 to 1,000
units, and to commence development of at least two new facilities per year
containing approximately 200 units each in urban and suburban areas of 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 $20.0 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, will be sufficient to
fund its acquisition and development plans for approximately 24 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 financing. The Company presently has no commitment, arrangement or
understanding regarding financing to fund the debt portion of the Company's
acquisition and development plans. There can be no assurance that the Company
will be able to obtain financing for its acquisition and development programs.
See "Risk Factors--Need for Additional Financing."
The Company has $65.0 million of long-term indebtedness as of December 31,
1996 ($96.4 million pro forma after giving effect to the Formation) in tax-
exempt bonds with floating rates. See Unaudited Pro Forma
24
<PAGE>
Combined Condensed Financial Statements of the Company contained elsewhere in
this Prospectus. The interest rates (exclusive of credit enhancement and other
fees) on such debt averaged 3.4%, 3.9% and 2.9% during the years ended
December 31, 1996, 1995 and 1994, respectively. 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 and
Lease Obligations; Floating Rate Debt."
Following the Offering, the Company will be dependent on third-party
financing for its acquisition and development program. The Company has no
arrangements for financing but the documentation for any such financing
obtained in the future is expected to contain terms and conditions and
representations and warranties that are customary for such loans and is
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 and Lease Obligations;
Floating Rate Debt." 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.
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.
In addition, employee compensation expense is a principal cost element of
facility operations. There can be no assurance that resident fees will
increase or that costs will not increase due to inflation or other causes. In
addition, approximately $65.0 million ($96.4 million pro forma after giving
effect to the Formation) in principal amount of the Company's indebtedness
bears interest at floating rates and future indebtedness may bear floating
rate interest. Inflation, and its impact on floating interest rates, could
materially affect the amount of interest payments due on such indebtedness.
The Company intends to purchase two-year interest rate protection agreements
with respect to $65.0 million of such indebtedness as soon as practicable
following the completion of the Offering, which, if so purchased, will have
the effect of mitigating the effect of inflation and higher interest rates on
such indebtedness during the terms of such contracts. There can be no
assurance that the Company will be able to purchase such interest rate
protection contracts on terms favorable to the Company, if at all. See "Risk
Factors--Competition" and "--Adverse Consequences of Indebtedness and Lease
Obligations; Floating Rate Debt."
25
<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 December 31, 1996,
were approximately 99% occupied. The Company owns four of such facilities,
leases three facilities under a long-term net operating lease and manages two
other facilities pursuant to management contracts. In addition, the Company
has entered an agreement to acquire the 200-unit Park Place facility, which is
expected to be purchased by a third party, and in turn net leased to the
Company, within 60 days following the completion of the Offering. With
facilities that contain an average of 220 units, the Company believes it 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 600 to 1,000 units, and to commence
development of at least two new facilities per year containing approximately
200 units each. The Company has entered agreements to acquire development
sites located in Glen Ellyn, Illinois, Southfield, Michigan and Austin, Texas,
the closings of which are expected to occur within 12 months following the
completion of the Offering. Brookdale had pro forma revenues and a net loss
for the year ended December 31, 1996 of approximately $41.5 million and $1.3
million, respectively. The Company estimates that approximately 99.9% of the
Company's pro forma revenues are derived from private pay sources. See "Risk
Factors--Uncertainty of Proposed Leasehold Acquisition," "--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. The Company intends to bring "in-house" as many of these services as
practicable and has established a program providing various levels and
combinations of these services called "Personally Yours"SM.
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. The senior living industry
serves the needs of the elderly who benefit from living in a supportive
environment and may 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
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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.
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, particularly with respect to
prospective residents who do not require the level of care or institutional
setting of 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.
27
<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, by improving or enhancing available services and amenities, 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. See "--Acquisitions and Development" and "Risk Factors--
Uncertainty of Proposed Leasehold Acquisition" and "--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 at least two 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 "--Acquisitions and Development" and "Risk Factors--
Development and Construction Risks."
FOCUS ON OPPORTUNITIES FOR LOWER COST OF CAPITAL. The Company intends to
utilize long-term, tax-exempt bond financing, when available, to finance the
acquisition and renovation of existing senior and assisted facilities and the
development of new facilities. The cost benefit of tax-exempt bond financing,
which can be a low cost source of funds in certain circumstances, is partially
offset in certain cases by the potential limit on the Company's ability to
increase prices to Qualified Residents at facilities subject to such bond
financing to the extent such increases affect the ability of the Company to
attract and retain such Qualified Residents. See "Risk Factors--Adverse
Consequences of Indebtedness and Lease Obligations; Floating Rate Debt."
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 that allows its residents' to age in place. 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 incremental 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 "--Company Operations--Hospital
Affiliations."
UTILIZE SOPHISTICATED MARKETING PROGRAMS TO MAINTAIN HIGH OCCUPANCY RATES.
The Company utilizes sophisticated marketing programs to achieve high
occupancy rates, which as of December 31, 1996 were approximately 99% for 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."
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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 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--
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 at a facility while leveraging such
facility's existing infrastructure such as the laundry equipment 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(2) OWNERSHIP
FACILITY(1) LOCATION UNITS OPENED 1994 1995 1996 STATUS(3)
<S> <C> <C> <C> <C> <C> <C> <C>
The Hallmark(4)(5)...... Chicago, IL 341 1990 91% 99% 100% Leased
The Devonshire(4)....... Lisle, IL 323 1990 99% 98% 98% Owned
The Heritage(4)......... Des Plaines, IL 254 1993 99% 100% 100% Owned
The Island on Lake
Travis(6).............. Lago Vista, TX 206 1988 94% 95% 98% Managed
Hawthorn Lakes(7)....... Vernon Hills, IL 202 1987 -- -- 100% Owned
Edina Park Plaza(7)..... Edina, MN 201 1987 -- -- 99% Owned
The Springs of East
Mesa(5)................ Mesa, AZ 185 1986 -- -- 100% Leased
The Kenwood(8).......... Minneapolis, MN 153 1987 -- -- 100% Managed
The Gables at
Brighton(5)............ Brighton, NY 103 1988 -- -- 100% Leased
-----
Total Units......... 1,968(9)
</TABLE>
- ---------------------
(1) The Company has entered a definitive purchase agreement to acquire the
Park Place facility, a 200-unit facility located in Spokane, Washington
for approximately $14.4 million. The Company expects to assign its rights
to purchase the Park Place facility to a third party, and that such third
party will purchase and in turn net lease such facility to the Company,
within 60 days following the completion of the Offering. See "Risk
Factors--Uncertainty of Proposed Leasehold Acquisition."
(2) 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 December 31, 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.
(3) All facilities indicated as "Owned" are 100% owned by Brookdale.
(4) This facility is one of the Original Facilities.
(5) This facility is one of the Leased Facilities, which facilities are net
leased from HRPT to BLC pursuant to a long-term master lease. The master
lease has an initial term that expires on December 31, 2019, and BLC has
the right to extend the term of the master lease for two consecutive 25-
year renewal periods. The master lease requires minimum annual lease
payments aggregating approximately $8.3 million in 1997 and $8.8 million
in 1998 and provides for increases in minimum annual lease payments in
1999 and 2000 and additional rent payments based on a percentage of any
increases in the revenues generated by the Leased Facilities beginning in
1999. See Note 4 of Notes to Consolidated Financial Statements of BLC
Property, Inc. and Subsidiaries.
(6) This facility is owned by PGI and will be managed by the Company pursuant
to a management agreement which 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."
(7) This facility is one of the Acquired Facilities.
(8) The management agreement for this facility is expected to have a 10-year
term, cancellable upon six months' notice after the 29th month of its
term, and a management fee of 3.0% of gross revenues, an incentive fee
providing the Company with a share of certain levels of any future growth
in this facility's net operating income and reimbursement of expenses. In
addition, the management agreement is expected to provide the Company with
an option to purchase this facility.
(9) Total units exclude the planned 82-bed skilled nursing facility at the
Devonshire facility and the planned 57-unit expansion at the Hawthorn
Lakes facility.
29
<PAGE>
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 have
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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<PAGE>
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
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.
31
<PAGE>
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 the 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 currently
pursuing hospital affiliations for the Gables at Brighton, the Springs of East
Mesa, the Hawthorn Lakes and the Edina Park Plaza facilities and has not
assumed 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 markets.
ACQUISITIONS
The Company currently expects to acquire three to five facilities per year
containing an aggregate of approximately 600 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 or enhance a facility's available services
and amenities. 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."
PGI acquired the Hallmark, a 341-unit facility in Chicago, Illinois in June
1994. Simultaneously with the completion of the Offering, the Company will
acquire Hawthorn Lakes, a 202-unit facility in Vernon Hills,
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<PAGE>
Illinois and Edina Park Plaza, a 201-unit facility in Edina, Minnesota. In
addition, the Company will enter into a management contract to operate the
Kenwood, a 150-unit facility in Minneapolis, Minnesota, which also provides
Brookdale with an option to acquire such facility. Also, the Company has
entered a definitive purchase agreement to acquire the Park Place facility, a
200-unit facility in Spokane, Washington. The Company expects to assign its
rights to purchase the Park Place facility to a third party, and that such
third party will purchase and in turn net lease such facility to the Company,
within 60 days following the completion of the Offering. See "Risk Factors--
Uncertainty of Proposed Leasehold Acquisition" and "--Difficulties of
Integration; Future Acquisition Risks."
DEVELOPMENT
The Company currently intends to commence the development of at least two
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."
The Company has entered definitive purchase agreements to acquire
development sites located in Glen Ellyn, Illinois, Southfield, Michigan and
Austin, Texas for approximately $7.2 million in the aggregate. The closings of
the Company's purchase of the development sites is subject to certain
customary conditions, including zoning and other governmental approvals.
Although the Company expects the acquisitions of the development sites to be
consummated within 12 months following the completion of the Offering, there
can be no assurance that the conditions to closing such acquisitions will be
satisfied in a timely manner, if at all. See "Risk Factors--Development and
Construction Risks."
COMPETITION
The senior and assisted living industry is highly competitive and the
Company expects that it 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
33
<PAGE>
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.
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 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.
34
<PAGE>
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.
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. BLC, a wholly owned subsidiary of PGI, was
incorporated in Delaware on December 12, 1996 to facilitate the December 1996
sale and leaseback of PGI's Hallmark facility. Pursuant to such sale and
leaseback transaction, HRPT purchased the Hallmark facility from PGI and
leased such facility to BLC pursuant to a net operating lease. Concurrently
with such transaction, HRPT acquired the Springs of East Mesa and the Gables
at Brighton facilities from a third party and net leased such facilities to
BLC, and BLC in turn subleased each of the Leased Facilities to separate,
wholly owned subsidiaries of BLC.
Pursuant to the Formation Agreement, in connection with the completion of
the Offering, PGI will contribute to the Company all of the capital stock of
BLC, its interests in the Heritage and the Devonshire facilities and the
operations relating to its senior and assisted living division (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) in exchange for 1,703,043 shares of Common Stock and the
assumption by the Company of certain indebtedness in the aggregate amount of
$65.0 million. Further, PGI will covenant that the partnerships owning the
Heritage and the Devonshire facilities will have no less than $800,000 in the
aggregate in unrestricted cash, plus any cash balances in real estate tax and
capital reserve accounts, upon the completion of the Offering; however, any
unrestricted cash in excess of $800,000 then held by such partnerships will be
distributed to PGI. In addition, in accordance with the terms and conditions
of the master lease between HRPT and BLC governing the Leased Facilities, upon
the closing of the Offering and PGI's contribution of all of BLC's capital
stock to the Company, certain affiliates of PGI, including The Prime Group,
Inc., will be released by HRPT from such affiliates' guaranties of BLC's
obligations under the master lease. In addition, the Company will pay PGI
approximately $8.4 million to reimburse PGI for earnest monies previously paid
by PGI
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<PAGE>
in connection with the acquisition of the Acquired Facilities, the Park Place
facility, a third party's interests in the Heritage and the Devonshire
facilities and the proposed acquisitions of the development sites located in
Glen Ellyn, Illinois, Southfield, Michigan and Austin, Texas, for certain costs
and fees previously paid by PGI relating to the replacement credit enhancement
on the $65.0 million of tax-exempt bonds relating to the Heritage and the
Devonshire facilities and for certain costs and expenses previously paid by PGI
relating to the issuance and distribution of Common Stock pursuant to the
Offering. 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 senior and assisted living division to the Company
in exchange for 296,957 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 "Risk Factors--
Benefits to Affiliates," "Use of Proceeds," "--Facilities" and "Certain
Transactions."
The Company currently has credit enhancement on the $65.0 million of tax-
exempt bonds relating to the Heritage and the Devonshire facilities which it
must replace on or before the date of the acquisition of these facilities. Bank
One, Illinois, NA and LaSalle National Bank have respectively approved the
issuance by them of letters of credit with a maturity of three years from the
date of issuance of such letters of credit that would provide replacement
credit enhancement for such tax-exempt bonds. On or prior to the completion of
the Offering, the Company will have executed definitive agreements with such
banks to issue the letters of credit. In addition to the mortgages on the
Heritage and the Devonshire facilities, it is anticipated that estimated cash
collateral of approximately $11.0 million from the net proceeds of the Offering
will be pledged as additional collateral and the letters of credit will be
guaranteed to the extent of 30% by the Company. The Company intends to purchase
two-year interest rate protection agreements with respect to such tax-exempt
indebtedness as soon as practicable following the completion of the Offering,
which, if so purchased, will have the effect of mitigating the effect of
inflation and higher interest rates on such indebtedness during the terms of
such contracts. There can be no assurance that the Company will be able to
purchase such interest rate protection contracts on terms favorable to the
Company, if at all.
EMPLOYEES
The Company has approximately 713 employees, of which 20 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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<PAGE>
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...... 41 Chairman of the Board, Director
Mark J. Schulte......... 43 President and Chief Executive Officer, Director
Darryl W. Copeland, Jr.. 37 Executive Vice President, 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
Stephan T. Beck......... 41 Vice President--Operations
Sheryl A. Wolf.......... 34 Controller
Margaret B. Shontz...... 37 Vice President--Human Resources
Wayne D. Boberg......... 44 Director
Bruce L. Gewertz........ 47 Director
Darryl W. Hartley-
Leonard................ 51 Director
Daniel J. Hennessy...... 39 Director
</TABLE>
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. Mr. Reschke
also serves on the Board of Visitors of the University of Illinois Law School.
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 the 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.
Darryl W. Copeland, Jr. is Executive Vice President of the Company and is
also a director of the Company. From March 1997 to immediately prior to the
Offering, Mr. Copeland was working for PGI's Senior Housing Division. From
August 1989 to February 1997, Mr. Copeland was employed by Donaldson, Lufkin &
Jenrette Securities Corporation as an investment banker, most recently serving
as Senior Vice President in the Health Care and Leveraged Finance groups.
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 employed by 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.
37
<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.
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.
Wayne D. Boberg is a director of the Company. Mr. Boberg is licensed to
practice law in the State of Illinois and has been a partner of the law firm of
Winston & Strawn since 1985, specializing in the representation of corporate
clients in connection with debt and equity financings and acquisitions. Mr.
Boberg serves on the Board of Visitors of the Indiana University School of Law.
Dr. Bruce L. Gewertz is a director of the Company. Dr. Gewertz has served as
The Dallas B. Phemister Professor and Chairman, Department of Surgery since
1992 and served as the first Faculty Dean of Medical Education from 1989 to
1992 at the University of Chicago Pritzker School of Medicine. Dr. Gewertz is
Editor of the Journal of Surgical Research and serves on the Editorial Board of
Annals of Vascular Surgery.
Darryl W. Hartley-Leonard is a director of the Company. 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 in
1996 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.
Daniel J. Hennessy is a director of the Company. 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 are divided into three classes, each class consisting
of approximately one-third of the total number of directors. Class I directors,
consisting of Mr. Reschke and Dr. Gewertz, will hold office until the 1998
annual meeting of stockholders; Class II directors, consisting of Messrs.
Hartley-Leonard and Copeland,
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<PAGE>
will hold office until the 1999 annual meeting of stockholders; and Class III
directors, consisting of Messrs. Schulte, Boberg and Hennessy, will hold office
until the 2000 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 consist of Dr. Gewertz
and Messrs. Boberg, Hartley-Leonard and Hennessy. 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 consist of
Dr. Gewertz and Messrs. Hartley-Leonard and Hennessy. 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 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, did not conduct any operations
and, accordingly, did not pay any cash compensation to its executive officers
for the year ended December 31, 1996. The following table sets forth the 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, 1997. 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) 1997 BASE SALARY
<S> <C> <C>
Michael W.
Reschke Chairman of the Board $100,000
Mark J.
Schulte President and Chief Executive Officer 275,000
Darryl W.
Copeland,
Jr. Executive Vice President 250,000
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)
Stephan T.
Beck Vice President--Operations 100,000
</TABLE>
39
<PAGE>
- ---------------------
(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, 830,000 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 675,000 Options (the
"Initial Grants") to the following key officers and employees of the Company:
Michael W. Reschke (100,000); Mark J. Schulte (175,000); Darryl W. Copeland,
Jr. (250,000); Craig G. Walczyk (25,000); Matthew F. Whitlock (25,000); Mark
J. Iuppenlatz (25,000); Stephan T. Beck (25,000); Sheryl A. Wolf (25,000); and
Margaret B. Shontz (25,000).
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.
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 applicable laws
of descent and distribution.
The Company also anticipates that it will grant an aggregate of 20,000
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 10 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.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company will enter employment agreements with Messrs. Reschke, Schulte,
Copeland, Whitlock and Iuppenlatz. These agreements will provide that the
executive officers shall devote substantially all of their business time to
the operation of the Company, except for 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 with
Messrs. Reschke, Schulte, Copeland, Whitlock and Iuppenlatz will establish the
initial base salaries set forth in the executive compensation table and
provide for an initial three year term (except in the case of the agreement
with Mr. Copeland, which will provide for an initial four 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. The agreements with Messrs. Reschke, Schulte and Copeland will
also provide for an annual bonus of up to 100% of the base salary based on
certain performance criteria. In addition, the agreement with Mr. Copeland
will provide for a signing bonus of $150,000. The agreements with Messrs.
Whitlock and Iuppenlatz will also provide for annual bonuses based on certain
performance criteria. If any of such agreements are terminated by the Company
"without cause" or due to disability, 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, Schulte and Copeland, such executives
will receive a lump sum payment equal to the base salary for one year plus a
pro rata portion of the annual bonus. Messrs. Reschke, Schulte and Copeland
may terminate their respective agreements and be entitled to approximately two
times their annual compensation and bonus 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,
Copeland, Whitlock and Iuppenlatz voluntarily terminates his employment with
the Company or in the event the employment of any of Messrs. Schulte,
Copeland, Whitlock and Iuppenlatz is terminated by the Company "with cause,"
the executive will be subject to a non-compete covenant which has a term of
two years for Messrs. Schulte and Copeland and which has a term of one year
for Messrs. Whitlock and Iuppenlatz. Mr. Reschke is bound by the non-compete
agreement among PGI, the Company and Mr. Reschke. See "Certain Transactions--
Non-Compete Agreement." In addition, The Prime Group, Inc., Mr. Schulte and
Mr. Copeland will enter certain agreements pursuant to which Mr. Copeland may
receive additional shares of Common Stock. See "Certain Transactions--Stock
Option Agreement" and "--Share Transfer Agreement."
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<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 the Formation
Agreement, PGI will transfer to the Company all of the capital stock of BLC,
its interests in the Heritage and the Devonshire facilities and the operations
relating to its senior and assisted living division. In return for such
contribution, the Company will exchange 1,703,043 shares of its Common Stock
and will assume certain indebtedness in the aggregate amount of $65.0 million.
In addition, the Company will pay PGI approximately $8.4 million to reimburse
PGI for earnest monies previously paid by PGI in connection with the
acquisition of the Acquired Facilities, the Park Place Facility, a third
party's interests in the Heritage and the Devonshire facilities and the
proposed acquisitions of the development sites located in Glen Ellyn,
Illinois, Southfield, Michigan and Austin, Texas, for certain costs and fees
previously paid by PGI relating to the replacement credit enhancement on the
$65.0 million of tax-exempt bonds relating to the Heritage and the Devonshire
facilities and for certain costs and expenses previously paid by PGI relating
to the issuance and distribution of Common Stock pursuant to the Offering. In
accordance with the Formation Agreement, Mark J. Schulte will transfer all of
his interests in PGI's senior and assisted living division to the Company in
exchange for 296,957 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 December 31, 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 will covenant that the partnerships owning the Heritage and the
Devonshire facilities will have no less than $800,000 in the aggregate in
unrestricted cash, plus any cash balances in real estate tax and capital
reserve accounts, upon the completion of the Offering; however, any
unrestricted cash in excess of $800,000 then held by such partnerships will be
distributed to PGI. See "Risk Factors--Lack of Arm's 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.
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 closing date of the Offering and the date
PGI first owns less than 10% of the outstanding Common Stock.
Non-Compete Agreement. The Company, PGI and Michael W. Reschke will enter a
Non-Compete Agreement that will prevent PGI and Mr. Reschke from developing,
acquiring, owning, managing or operating senior and assisting living
facilities and semi-acute care facilities in the United States for a period
expiring on the earlier of (i) four years from the closing 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
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<PAGE>
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. See "Risk
Factors--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 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 space sharing
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 a pro rata share of
real estate taxes and operating expenses.
Stock Acquisition Loan. PGI will obtain the Stock Acquisition Loan to
finance PGI's purchase of 2,500,000 of the 4,500,000 shares of Common Stock
offered hereby. PGI expects to pledge all of such shares so purchased by it,
together with some or all of the shares of Common Stock acquired by PGI and
Mark J. Schulte in connection with the Formation, as collateral security for
the repayment of the Stock Acquisition Loan. PGI and Mr. Schulte will retain
voting control of such pledged Common Stock unless and until the lender were
to foreclose on such Common Stock because of an event of default under the
Stock Acquisition Loan. See "Risk Factors--Benefits to Affiliates" and "--
Control by Existing Stockholders and Management," "The Company and the
Formation" and "Underwriting."
Stock Option Agreement. The Prime Group, Inc. will enter a stock option
agreement with Darryl W. Copeland, Jr. pursuant to which Mr. Copeland will
receive an option, subject to a one year vesting period, to purchase 100,000
shares of Common Stock from The Prime Group, Inc. at a purchase price of $0.01
per share. In the event the employment of Mr. Copeland is terminated by the
Company for any reason or in the event Mr. Copeland voluntarily terminates his
employment with the Company due to a "change of control" of the Company and a
material diminution of his duties and responsibilities or compensation prior
to the expiration of the vesting period, the option will immediately vest.
Wayne D. Boberg, a director of the Company, is a partner of the law firm of
Winston & Strawn, which has provided, and continues to provide, legal services
to the Company.
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the Common Stock as of the date hereof, 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)......................... 4,203,043 -- 64.7%
Michael W. Reschke(3)............................ 4,203,043 100.0% 64.7
Mark J. Schulte.................................. 296,957 -- 4.6
Darryl W. Copeland, Jr.(4)....................... 12,000 -- *
Wayne D. Boberg.................................. 2,500 -- *
Bruce L. Gewertz................................. -- -- --
Darryl W. Hartley-Leonard........................ 1,000 -- *
Daniel J. Hennessy............................... 9,000 -- *
Craig G. Walczyk ................................ 700 -- *
Matthew F. Whitlock ............................. 750 -- *
Mark J. Iuppenlatz .............................. 2,500 -- *
Stephan T. Beck ................................. -- -- --
Executive officers and directors
as a group (11 persons)......................... 4,528,450 100.0% 69.7%
</TABLE>
- ---------------------
* Less than 1%.
(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 shares of Common Stock to be held by certain affiliates of The
Prime Group, Inc. and 100,000 shares of Common Stock subject to an option
to purchase to be held by Darryl W. Copeland, Jr. pursuant to the stock
option agreement between The Prime Group, Inc. and Mr. Copeland. See
"Certain Transactions--Stock Option Agreement." The address of The Prime
Group, Inc. is 77 West Wacker Drive, Chicago, Illinois 60601.
(3) Includes 4,203,043 shares of Common Stock to be held by The Prime Group,
Inc. and certain of its affiliates, including 100,000 shares of Common
Stock subject to an option to purchase to be held by Darryl W. Copeland,
Jr. pursuant to the stock option agreement between The Prime Group, Inc.
and Mr. Copeland. See "Certain Transactions--Stock Option Agreement." Mr.
Reschke is the Chairman, Chief Executive Officer and President of The Prime
Group, Inc.
(4) Mr. Copeland will enter the stock option agreement with The Prime Group,
Inc. pursuant to which Mr. Copeland will receive an option to purchase
100,000 shares of Common Stock from The Prime Group, Inc. See "Certain
Transactions--Stock Option Agreement."
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<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, 6,500,000 shares of
Common Stock will be issued and outstanding (7,175,000 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, as amended (the "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
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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.
Indemnification. To the maximum extent permitted by law, the Company's
Amended and Restated By-laws (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 terms of Class I, Class II and Class III directors
will expire at the 1998, 1999 and 2000 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 class 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
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<PAGE>
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 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 an 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
Bank.
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<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 6,500,000 shares of
Common Stock outstanding, (7,175,000 shares if the Underwriters' over-
allotment option is exercised in full). Of those shares, the 4,500,000 shares
sold in the Offering (5,175,000 shares if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable without restriction
(except as to any shares, including 2,500,000 shares offered hereby to be
purchased by PGI, purchased by affiliates of the Company) or further
registration under the Securities Act. The remaining 2,000,000 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 one year, 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 two 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.
The Company, its directors and executive officers, certain of its key
employees and PGI have agreed not to offer to sell, sell, distribute, grant
any option to purchase, 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 (other than 2,500,000 shares offered hereby to be purchased by PGI
which PGI has agreed not to sell or otherwise dispose of for a period of 90
days) from the date of this Prospectus, except (i) with the prior written
consent of FBR, (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 the 1,703,043
shares of Restricted Securities to be received by PGI in connection with the
Formation subject to the volume and other limitations of Rule 144 after the
expiration of the Rule 144 holding period. In addition, after the expiration
of the 90-day lock-up period described above, PGI may sell the 2,500,000 of
the 4,500,000 shares offered hereby which PGI has agreed to purchase subject
to the volume and other limitations of Rule 144.
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 shares held by PGI pursuant to the
exercise of its registration rights, or if PGI sells, subject to applicable
Rule 144 limitations, a large number of the shares it acquired in the
Offering, 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."
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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 period described above.
49
<PAGE>
UNDERWRITING
Subject to the terms and certain conditions contained in the Underwriting
Agreement, the underwriters named below (the "Underwriters"), for whom
Friedman, Billings, Ramsey & Co., Inc. ("FBR") is acting as representative,
have severally agreed to purchase from the Company an aggregate of 4,500,000
shares of Common Stock. PGI has agreed to purchase 2,500,000 of such 4,500,000
shares of Common Stock offered hereby. 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>
Friedman, Billings, Ramsey & Co., Inc........................... 3,620,000
ABN Amro Chicago Corporation.................................... 55,000
Crowell, Weedon & Co............................................ 55,000
Cruttenden Roth Incorporated.................................... 55,000
Dain Bosworth Incorporated...................................... 55,000
Equitable Securities Corporation................................ 55,000
Everen Securities, Inc.......................................... 55,000
J.J.B. Hilliard, W.L. Lyons, Inc................................ 55,000
Howe Barnes Investments Inc..................................... 55,000
McDonald & Company Securities, Inc.............................. 55,000
Morgan Keegan & Company, Inc.................................... 55,000
The Ohio Company................................................ 55,000
Ragen MacKenzie Incorporated.................................... 55,000
Rauscher Pierce Refsnes, Inc.................................... 55,000
Sutro & Co. Incorporated........................................ 55,000
Tucker Anthony Incorporated..................................... 55,000
Wheat First Securities, Inc..................................... 55,000
---------
Total....................................................... 4,500,000
=========
</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 FBR. 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 price of the 2,500,000 shares to be purchased by
PGI will be the initial price to the public less underwriting discounts and
commissions.
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 $0.47
per share. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of $0.10 per share to any other Underwriter and certain other
dealers.
50
<PAGE>
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
675,000 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 and executive
officers, certain of its 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 (other than 2,500,000 shares offered hereby to be
purchased by PGI which PGI has agreed not to sell or otherwise dispose of for a
period of 90 days) from the date of this Prospectus, without the prior written
consent of FBR. See "Shares Eligible for Future Sale."
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.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in this Offering may
engage in transactions that may stabilize, maintain or otherwise affect the
market price of the Common Stock at levels above those which might otherwise
prevail in the open market, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids. A "stabilizing bid" is a bid
for, or the purchase of, the Common Stock on behalf of the Underwriters for the
purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for, or the purchase of, the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with this Offering. A "penalty bid" is an
arrangement permitting the managing underwriter to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with this Offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Underwriters in a syndicate
covering transaction and has therefore not been effectively placed by such
Underwriter or syndicate member. The Underwriters have advised the Company that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
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. Wayne D.
Boberg, a partner of Winston & Strawn, is a director of the Company.
EXPERTS
The balance sheet of Brookdale Living Communities, Inc. as of December 31,
1996, the combined financial statements of the Original Facilities as of
December 31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, the combined financial statements of the Activelife
Facilities as of December
51
<PAGE>
31, 1995 and 1996, and for each of the three years in the period ended December
31, 1996, the financial statements of the Gables at Brighton Associates as of
December 31, 1995, and for each of the two years in the period ended December
31, 1996, the combined financial statements of the Park Place Facilities as of
December 31, 1995 and 1996, and for each of the two years in the period ended
December 31, 1996, and the consolidated financial statements of BLC Property,
Inc. as of December 31, 1996, and for the period from December 12, 1996
(inception) to December 31, 1996, 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 such 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 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.
52
<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 December 31, 1996...... F-4
Pro Forma Combined Condensed Statement of Operations for the year ended
December 31, 1996...................................................... F-5
Notes to Pro Forma Combined Condensed Balance Sheet..................... F-6
Notes to Pro Forma Combined Condensed Statement of Operations for the
year ended December 31, 1996........................................... F-10
AUDITED BALANCE SHEET
Report of Independent Auditors.......................................... F-13
Balance Sheet as of December 31, 1996................................... F-14
Notes to Balance Sheet.................................................. F-15
ORIGINAL FACILITIES (THE DEVONSHIRE, THE HERITAGE AND THE HALLMARK
FACILITIES)
Report of Independent Auditors.......................................... F-16
Combined Balance Sheets as of December 31, 1995 and 1996................ F-17
Combined Statements of Operations for the years ended December 31, 1994,
1995 and 1996.......................................................... F-18
Combined Statements of Changes in Partners' Capital (Deficit) for the
years ended December 31, 1994, 1995 and 1996........................... F-19
Combined Statements of Cash Flows for the years ended December 31, 1994,
1995 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, 1995 and 1996................ F-28
Combined Statements of Operations for the years ended December 31, 1994,
1995 and 1996.......................................................... F-29
Combined Statements of Changes in Partners' Deficit for the years ended
December 31, 1994, 1995 and 1996....................................... F-30
Combined Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996.......................................................... F-31
Notes to Combined Financial Statements.................................. F-32
GABLES AT BRIGHTON ASSOCIATES
Report of Independent Auditors.......................................... F-35
Balance Sheet as of December 31, 1995................................... F-36
Statements of Income for the years ended December 31, 1995 and 1996..... F-37
Statements of Changes in Partners' Capital for the years ended December
31, 1995 and 1996...................................................... F-38
Statements of Cash Flows for the years ended December 31, 1995 and 1996. F-39
Notes to Financial Statements........................................... F-40
PARK PLACE FACILITIES (PARK PLACE PHASE I AND PARK PLACE PHASE II)
Report of Independent Auditors.......................................... F-41
Combined Balance Sheets as of December 31, 1995 and 1996................ F-42
Combined Statements of Operations for the years ended December 31, 1995
and 1996............................................................... F-43
Combined Statements of Changes in Partners' Capital/Owners' Equity for
the years ended December 31, 1995 and 1996............................. F-44
Combined Statements of Cash Flows for the years ended December 31, 1995
and 1996............................................................... F-45
Notes to Combined Financial Statements.................................. F-46
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BLC PROPERTY, INC. AND SUBSIDIARIES
Report of Independent Auditors.......................................... F-49
Consolidated Balance Sheet as of December 31, 1996...................... F-50
Consolidated Statement of Operations for the period from December 12,
1996 (inception) to December 31, 1996.................................. F-51
Consolidated Statement of Stockholder's Equity for the period from
December 12, 1996
(inception) to December 31, 1996....................................... F-52
Consolidated Statement of Cash Flows for the period from December 12,
1996 (inception) to December 31, 1996.................................. F-53
Notes to Consolidated Financial Statements.............................. F-54
</TABLE>
F-2
<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 December 31, 1996, the Company had sold 4.5 million shares
of its common stock (including PGI's purchase of up to 2.5 million shares) at a
sale price of $11.50 per share, issued 2 million shares of its common stock to
PGI and management, acquired owned or leased interests in the Original
Facilities, the Activelife Facilities, the Gables at Brighton facility the Park
Place Facilities and BLC Property, Inc. as described under "Use of Proceeds".
The unaudited Pro Forma Combined Condensed Statement of Operations for the year
ended December 31, 1996 is presented as if the above transactions occurred as
of January 1, 1996. 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 Statement 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.
F-3
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
BLC
ORIGINAL ACTIVELIFE PARK PLACE PROPERTY, PRO FORMA PRO FORMA
COMPANY FACILITIES FACILITIES FACILITIES INC. SUBTOTAL ADJUSTMENTS AS ADJUSTED
------- ---------- ---------- ---------- --------- -------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash.................... $ 1 $ 4,044 $10,502 $ 270 $ 186 $ 15,003 (a) $(9,162) $ 5,841
Cash-restricted......... -- 1,089 758 51 -- 1,898 (b) 1,465 3,363
Accounts receivable..... -- 143 103 -- 22 268 (c) (103) 165
Prepaid rent and other.. -- 491 -- -- 760 1,251 (d) (491) 760
------ ------- ------- ------- ------ -------- ------- --------
Total current assets.... 1 5,767 11,363 321 968 18,420 (8,291) 10,129
Real estate, net........ -- 49,224 22,496 9,388 -- 81,108 (e) 34,295 115,403
Letter of credit
deposit................ -- -- -- -- -- -- (f) 11,000 11,000
Deferred costs, net..... -- 1,483 692 134 232 2,541 (g) (48) 2,493
Other................... 2,580 257 175 198 6 3,216 (h) (2,953) 263
------ ------- ------- ------- ------ -------- ------- --------
Total assets............ $2,581 $56,731 $34,726 $10,041 $1,206 $105,285 $34,003 $139,288
====== ======= ======= ======= ====== ======== ======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
AND PARTNERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current liabilities:
Debt, current........... $ -- $ -- $ 263 $ 4,883 $ -- $ 5,146 (i) $(4,883) $ 263
Deferred gain on sale of
property, current...... -- 806 -- -- -- 806 -- 806
Prepaid rent............ -- -- -- -- 616 616 (d) (491) 125
Accrued interest
payable................ -- 182 195 -- -- 377 -- 377
Accrued real estate
taxes.................. -- 996 669 -- 35 1,700 -- 1,700
Accounts payable........ -- 316 340 189 127 972 (j) (529) 443
Tenant security
deposits............... -- 2,307 752 37 307 3,403 -- 3,403
Due to affiliates and
other.................. 2,580 1,073 2,095 -- 120 5,868 (k) (5,419) 449
------ ------- ------- ------- ------ -------- ------- --------
Total current
liabilities............ 2,580 5,680 4,314 5,109 1,205 18,888 (11,322) 7,566
Debt, long-term......... -- 65,000 30,780 3,286 -- 99,066 (i) (2,899) 96,167
Deferred gain on sale of
property, long-term.... -- 17,728 -- -- -- 17,728 -- 17,728
------ ------- ------- ------- ------ -------- ------- --------
Total liabilities....... 2,580 88,408 35,094 8,395 1,205 135,682 (14,221) 121,461
Commitments (p)......... -- -- -- -- -- -- -- --
Minority interest....... -- (6,249) -- -- -- (6,249)(l) 6,249 --
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, 6,500
shares issued and
outstanding............ -- -- -- -- -- -- (m) 65 65
Additional paid-in
capital................ 1 -- -- -- 1 2 (n) 17,760 17,762
Partners' equity
(deficit).............. -- (25,428) (368) 1,646 -- (24,150)(o) 24,150 --
------ ------- ------- ------- ------ -------- ------- --------
Total stockholders' and
partners' equity
(deficit).............. 1 (25,428) (368) 1,646 1 (24,148) 41,975 17,827
------ ------- ------- ------- ------ -------- ------- --------
Total liabilities and
stockholders' and
partners' equity
(deficit).............. $2,581 $56,731 $34,726 $10,041 $1,206 $105,285 $34,003 $139,288
====== ======= ======= ======= ====== ======== ======= ========
</TABLE>
See accompanying notes to the Pro Forma Combined Condensed Balance Sheet.
F-4
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BLC
ORIGINAL ACTIVELIFE GABLES AT PARK PLACE PROPERTY, PRO FORMA PRO FORMA
FACILITIES FACILITIES BRIGHTON FACILITIES INC. SUBTOTAL ADJUSTMENTS AS ADJUSTED(J)
---------- ---------- --------- ---------- --------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Resident fees........... $23,437 $12,718 $2,743 $2,201 $ 84 $41,183 $ -- $41,183
Management services
income................. -- -- -- -- -- -- (a) 280 280
------- ------- ------ ------ ---- ------- ------- -------
Total revenue........... 23,437 12,718 2,743 2,201 84 41,183 280 41,463
Facility operating
expenses............... (12,806) (8,486) (1,829) (1,692) (54) (24,867)(b) 2,408 (22,459)
Lease expenses.......... -- -- -- -- (31) (31)(c) (10,239) (10,270)
General and
administrative
expenses............... -- -- -- -- -- -- (d) (2,837) (2,837)
Depreciation and
amortization........... (2,946) (1,026) (295) (487) -- (4,754)(e) 1,299 (3,455)
------- ------- ------ ------ ---- ------- ------- -------
Income (loss) from
operations............. 7,685 3,206 619 22 (1) 11,531 (9,089) 2,442
Interest and financing
fees expense........... (5,320) (2,986) -- (478) -- (8,784)(f) 3,616 (5,168)
------- ------- ------ ------ ---- ------- ------- -------
Income (loss) before
income taxes (h)....... 2,365 220 619 (456) (1) 2,747 (5,473) (2,726)
Pro forma (provision)
benefit for income
taxes.................. (946) -- -- -- 1 (945)(g) 2,358 1,413
------- ------- ------ ------ ---- ------- ------- -------
Pro forma net income
(loss)................. $ 1,419 $ 220 $ 619 $ (456) $-- $ 1,802 $(3,115) $(1,313)
======= ======= ====== ====== ==== ======= ======= =======
Pro forma net income
(loss) per share....... $ 0.71 $ (0.20)
======= =======
Pro forma common shares
outstanding (i)........ 2,000 6,500
======= =======
</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 DECEMBER 31, 1996
(IN THOUSANDS)
BASIS OF PRESENTATION
The pro forma combined condensed financial statements of the Company include
the historical financial statements of the Original Facilities, the Activelife
Facilities, the Gables at Brighton facility (balance sheet is not included due
to there being no operations remaining at December 31, 1996), the Park Place
Facilities [Park Place Phase II is an 83 unit facility that commenced
operations in 1996 (special care facility in February 1996 and assisted living
facility in May 1996)] and BLC Property, Inc. (BLC), each of which consists of
the following properties:
<TABLE>
<CAPTION>
ORIGINAL
FACILITIES ACTIVELIFE FACILITIES GABLES AT BRIGHTON FACILITY PARK PLACE FACILITIES
---------- --------------------- --------------------------- ---------------------
<S> <C> <C> <C>
The Devonshire (1) Springs of East Mesa (3) Gables at Brighton (3) Park Place Phase I (4)
The Heritage (1) Edina Park Plaza (2) Park Place Phase II (4)
The Hallmark (3) Hawthorn Lakes (2)
</TABLE>
- ---------------------
(1) These properties will be contributed to the Company by PGI and management.
(2) These properties will be purchased by the Company from proceeds of the
Offering.
(3) These properties are leased by BLC from Health and Retirement Properties
Trust (HRPT).
(4) The Company intends to lease these properties within 60 days of the
closing of the Offering from a third party.
Collectively (2) properties are referred to as the Acquired Facilities and
(3) properties are referred to as the Leased Facilities.
The Company will purchase the real estate and certain other assets, and
receive credits at closings for assuming certain debt, 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 Offering, the Formation and
the above activity:
<TABLE>
<C> <S> <C>
(a) Cash:
Gross proceeds from Offering (2,000 shares sold to the public
at $11.50 per share and 2,500 shares sold to PGI at $10.70 per
share)........................................................ $49,738
Estimated cost of the Offering ($4,000) and underwriters'
discount ($1,610)............................................. (5,610)
Payments to be made to PGI from the proceeds of the Offering
for consideration to be paid to Third Party for its ownership
interests in the Original Facilities ($6,150). Adjustment
required to cash to reflect PGI's net contribution of $800 of
unrestricted cash plus real estate tax and capital reserve
accounts of the Devonshire and the Heritage as part of its
contribution ($1,619). (Prior to the offering PGI made $660 in
escrow deposits on the Park Place Facilities and certain
development sites on behalf of the Company. The Company
intends to reimburse PGI from the proceeds of the Offering.).. (7,769)
Payment made for the acquisition of the Edina Park Plaza and
Hawthorn Lakes (See Note e)................................... (21,450)
Elimination of historical unrestricted cash accounts of the
Activelife Facilities ($10,502) and Park Place Facilities
($270) not being acquired by the Company, net of security
deposit cash accounts ($37) related to the Park Place
Facilities being reimbursed to the Company by a third party... (10,735)
Cash to be used for an interest bearing letter of credit
deposit on the Devonshire's and the Heritage's $65,000 of tax
exempt bonds.................................................. (11,000)
Payment made for the Hallmark facility Life Care Escrow (See
Note b)....................................................... (1,558)
Payment made for the interest rate protection contracts ($300)
and reimbursement to PGI for the fees and costs for credit
enhancements paid by PGI on the Devonshire's and the
Heritage's $65,000 of tax exempt bonds ($478) (See Note g).... (778)
-------
$(9,162)
=======
(b) Cash-restricted:
Additional cash requirement on the Hallmark facility's Life
Care Escrow................................................... $ 1,558
Elimination of historical cash-restricted accounts of the
Activelife Facilities ($42) and Park Place Facilities ($51)
not being acquired by the Company............................. (93)
-------
$ 1,465
=======
</TABLE>
F-6
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET--(CONTINUED)
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<C> <S> <C>
(c) Accounts receivable:
Elimination of historical accounts receivable accounts of the
Activelife Facilities ($103) not being acquired by the
Company..................................................... $ (103)
========
(d) Prepaid rent:
Elimination of prepaid rent on the Hallmark (asset and
liability between the Original Facilities and BLC Property,
Inc.)....................................................... $ (491)
========
(e) 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>
EDINA
PARK HAWTHORN
PLAZA LAKES
------- --------
<S> <C> <C> <C> <C>
Purchase price................................... $23,980 $29,800
Plus: other assets being acquired
Cash--restricted................................ 357 359
Less: liabilities being assumed..................
Mortgage and other notes payable................ 15,106 16,324
Accrued interest................................ 100 95
Accrued real estate taxes....................... 326 343
Tenant security deposits........................ 300 452
------- -------
Cash payments made for acquisitions (see Note a). $ 8,505 $12,945
======= =======
The Company is acquiring the real estate assets and assuming liabilities
of the above entities which, in management's opinion, are stated at their
estimated fair market values. The adjustments to reflect the purchases
are reflected below.
</TABLE>
<TABLE>
<C> <S> <C>
Adjustments to the historical cost bases of the Edina Park
Plaza facility ($11,137) and the Hawthorn Lakes facility
($20,147) to reflect an allocation of purchase prices to the
fair value of the acquired real estate........................ $31,284
Increase in basis resulting from the elimination ($6,249--See
Note l) and purchase for cash of the Third Party owner's
interest in The Original Facilities ($6,150) ................. 12,399
Elimination of the historical cost bases of the Park Place
Facilities.................................................... (9,388)
-------
$34,295
=======
(f) Letter of credit deposit:
Cash to be used in an interest bearing letter of credit deposit
on the Devonshire's and the Heritage's $65,000 of tax exempt
bonds......................................................... $11,000
=======
(g) Deferred costs, net:
Payments made for the interest rate protection contracts ($300
for a 2 year term) and reimbursement to PGI for fees and costs
for credit enhancements paid by PGI on the Devonshire's and
the Heritage's $65,000 of tax exempt bonds ($478 for a 3 year
term) ........................................................ $ 778
Elimination of historical cost deferred costs accounts of the
Activelife Facilities ($692) and the Park Place Facilities
($134) not being acquired by the Company...................... (826)
-------
$ (48)
=======
</TABLE>
F-7
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET--(CONTINUED)
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<C> <S> <C>
(h) Other assets:
Reclassification of deferred offering costs, incurred by an
affiliate, to paid-in capital................................. $(2,580)
Elimination of historical other asset accounts of the
Activelife Facilities ($175) and the Park Place Facilities
($198) not being acquired by the Company...................... (373)
-------
$(2,953)
=======
(i) Debt, current:
Elimination of historical current portion debt accounts of the
Park Place Facilities ($4,883) not being assumed by the
Company....................................................... $(4,883)
=======
Debt, long-term:
Note payable related to the acquisition of Hawthorn Lakes
facility (Interest at an effective rate of 8.25%, with
principal and interest payable in April 1999)(1).............. $ 3,000
Elimination of historical long-term debt accounts of the
Activelife Facilities ($2,613) and Park Place Facilities
($3,286) not being assumed by the Company..................... (5,899)
-------
$(2,899)
=======
</TABLE>
After giving effect to the formation, the Company will have principal
payments relating to mortgage and other notes and bonds payable as of December
31, 1996 as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997............................ $ 263
1998............................ 286
1999............................ 3,310
2000(2)......................... 65,336
2001............................ 365
Thereafter...................... 26,870
-------
$96,430
=======
</TABLE>
- ---------------------
(1) The note payable relates to the acquisition of a land parcel currently
under development by the existing owner. The Company intends to continue
the development process.
(2) The proposed letter of credit agreement extends the credit enhancement on
$65,000 of tax-exempt bonds that are secured by the Devonshire and the
Heritage until the year 2000.
<TABLE>
<C> <S> <C>
(j) Accounts payable:
Elimination of historical accounts payable accounts of the
Activelife Facilities ($340) and the Park Place Facilities
($189) not being assumed by the Company...................... $ (529)
=======
(k) Due to affiliates and Other:
Repayment of deferred offering costs of the Company ($2,580)
and reclassification of amounts from due to affiliates for
costs associated with BLC's organization and lease agreement
with HRPT incurred by PGI to equity ($744) (The Company
intends to reimburse PGI $1,129 for cash payments made for
offerings costs and escrow deposits for the Acquired
Facilities).................................................. $(3,324)
Elimination of historical due to affiliates and other
liabilities accounts of the Activelife Facilities, not being
assumed by the Company....................................... (2,095)
-------
$(5,419)
=======
</TABLE>
F-8
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET--(CONTINUED)
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<C> <S> <C>
(l) Minority interest:
Elimination of Third Party's minority interest balance in the
Original Facilities.......................................... $ 6,249
========
(m) Common stock:
Issuance of 4,500 shares of common stock, $.01 par value,
pursuant to the initial public offering...................... $ 45
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 BLC.............................. 20
--------
$ 65
========
(n) Additional paid-in capital:
Issuance of 4,500 shares of common stock (2,000 shares sold to
the public at $11.50 per share and 2,500 shares sold to PGI
at $10.70 per share), $.01 par value, pursuant to the initial
public offering.............................................. $ 49,693
Issuance of 2,000 shares of common stock, $.01 par value, to
PGI and management in consideration for its contribution of
its interests in the Original Facilities and BLC............. (20)
Estimated costs of the Offering ($4,000) and underwriters
discount ($1,610)............................................ (5,610)
Adjustment to reflect PGI's net contribution of $800 of
unrestricted cash plus real estate tax and capital reserve
accounts of the Devonshire and the Heritage ($1,619) net of
the reclassification of amounts due to affiliates for costs
associated with BLC's organization and lease agreements with
HRPT incurred by PGI ($744).................................. (875)
Reclassification of historical partners' equity (deficit)..... (24,150)
Elimination of carry over historical cost basis of the net
assets and liabilities of the Activelife Facilities
(Deficit--$368) and the Park Place Facilities (Equity--
$1,646)...................................................... (1,278)
--------
$ 17,760
========
(o) Partners' equity (deficit):
Reclassification of historical partners' equity (deficit)..... $ 24,150
========
(p) Commitments:
Upon the completion of the Formation and the Offering the
Company will (i) lease the Leased Facilities (see "Leases" in
footnote 4 to the consolidated financial statements of BLC)
and the Park Place Facilities (see "Risk Factors--Uncertainty
of Proposed Leasehold Acquisition") (ii) provide a stock
incentive plan for directors, executive officers and other
key employees (See "Business--Stock Incentive Plan"), (iii)
guarantee up to 30% of the letters of credit on the
Devonshire's and the Heritage's $65,000 of tax exempt bonds
(See "The Company and the Formation"), (iv) enter into a
space sharing agreement with PGI (See "Certain Transactions--
Space Sharing Agreement") and (v) 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
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<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.......................................... $ 280
========
(b) Facility operating expenses:
Reclassification of lease expense incurred by the
Original Facilities included in facility operating
expenses in the combined historical financial
statements............................................... $ 75
Elimination of historical management fees paid by the
Original Facilities ($930), the Activelife Facilities
($785), the Gables at Brighton facility ($115) and the
Park Place Facilities ($131) and administrative fees
paid by the Original Facilities ($372) which will not be
incurred by the Company.................................. 2,333
--------
$ 2,408
========
(c) Lease expenses:
Reclassification of lease expense incurred by the
Original Facilities included in facility operating
expenses in the combined historical financial statements
(See Note 7 to the Original Facilities combined
financial statements).................................... $ (75)
Adjustment to reflect a full year of lease payments
related to the lease of the Park Place Facilities........ (1,565)
Adjustment to reflect a full year of lease payments
related to the Leased Facilities (See Note 4 to the
consolidated financial statements of BLC Property,
Inc.).................................................... (8,599)
--------
$(10,239)
========
Total annual lease expenses ($9,511) less
amortization of deferred gain on sale of the
Hallmark ($806)................................. $(8,705)
Less: lease expense recognized in 1996:
BLC Property, Inc................................ 31
Original Facilities.............................. 75
-------
Adjustment required.............................. $(8,599)
=======
(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........................................ $ (1,812)
Directors' and officers' insurance and fees............... (160)
Legal and accounting...................................... (210)
Other..................................................... (655)
--------
$ (2,837)
========
The Company anticipates hiring new employees and incur
other administrative costs based upon its future
expansion plans. The Company estimates these costs to be
$1,916 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)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<C> <S> <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 Devonshire and the Heritage
facilities.................................................... $ 213
Additional depreciation associated with the increase in basis
resulting from the purchase of the Third Party owners'
interest in the Original Facilities........................... (357)
Adjustment to depreciation expense associated with the increase
in the basis from the purchase and the increase in depreciable
lives of Edina Park Plaza and Hawthorn Lakes facilities....... (652)
Elimination of historical depreciation and amortization expense
of the Leased Facilities (the Hallmark facility $1,239, the
Springs of East Mesa facility $383 and the Gables at Brighton
facility $295), and the Park Place Facilities ($487).......... 2,404
Additional amortization expense associated with the fees and
costs for credit enhancement on the Devonshire's and the
Heritage's $65,000 of tax exempt bonds ($478 over 3 years) and
interest rate protection contracts ($300 over 2 years)........ (309)
-------
$ 1,299
=======
*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 over their remaining lives. Depreciation expense
included in the "Pro Forma As Adjusted" column was based upon the Company's
new estimated useful lives.
(f) Interest expense:
Elimination of interest expense incurred related to the debt of
the Leased Facilities (the Hallmark facility $2,505, and the
Springs of East Mesa facility $439), the Acquired Facilities
($194) and the Park Place Facilities ($478)................... $ 3,616
=======
</TABLE>
F-11
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS--
(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<C> <S> <C> <C>
(g) (Provision) benefit for income taxes:
The Original Facilities and the entities that
operated the Activelife Facilities, the Gables at
Brighton facility and Park Place Facilities prior
to the acquisition were not taxable entities. The
realization of the deferred gain on the sale of the
Hallmark as a reduction of lease expenses (see Note
c) is considered a permanent difference between
book income (loss) and tax income (loss) and is not
taxable. The difference has the following impact on
the Company's benefit for income tax at a 40% rate
(includes, federal and state statutory income tax
rates). This adjustment provides pro forma benefit
for income taxes at a 40% effective income tax
rate............................................... $ 2,358
============
Benefit on loss before permanent difference......... $1,090
Benefit related to permanent difference............. 323
------
Pro forma benefit for income taxes.................. $1,413
======
(h) 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;
the Activelife Facilities is before gain on sale of
property and; the Gables at Brighton facility is
before gain on sale of property 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 gains on sale of
properties are not included due to the non-
recurring nature of the transactions.
(i) Pro forma net loss per share is based upon the
number of common shares issued consisting of the
2,500 shares issued to PGI and management in
exchange for their interest in the Original
Facilities plus the issuance of all 5,000 shares in
the initial offering
Original Facilities................................. 2,000 shares
============
The Company......................................... 6,500 shares
============
(j) The Company is anticipating leasing the Park Place
Facilities located in Spokane, Washington from a
third party. Although the Company expects to
consummate the lease of the Park Place facility
within 60 days from the closing of the Offering,
there can be no assurance that the conditions to
closing such a transaction will be satisfied in a
timely manner, if at all. If such facility is not
leased by the Company, pro forma as adjusted total
revenue, operating income and net loss would be
$39,262, $3,367 and $758, respectively, for the
year ended December 31, 1996. See "Risk Factors--
Uncertainty of Proposed Leasehold Acquisition."
</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 December 31, 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 December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
F-13
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash................................................................ $ 1,000
Deferred offering costs............................................. 2,580,000
----------
Total assets........................................................ $2,581,000
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'S EQUITY
<S> <C>
Due to affiliate.................................................... $2,580,000
----------
Total liabilities................................................... 2,580,000
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.......................... $2,581,000
==========
</TABLE>
See notes to balance sheet.
F-14
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO BALANCE SHEET
DECEMBER 31, 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
and BLC Property, Inc. 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 Original Facilities and BLC Property, Inc. in
exchange for 2 million shares of common stock of the Company.
2. DEFERRED COSTS
As of December 31, 1996, PGI has incurred approximately $2,580,000 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 December 31,
1996 through the date the Offering, will be deducted from the gross proceeds
of the Offering.
3. USE OF ESTIMATES
The preparation of the balance sheet in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the balance sheet and accompanying notes.
Actual results could differ from those estimates.
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, 1995 and 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, 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, 1995 and 1996, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
F-16
<PAGE>
ORIGINAL FACILITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 5,086,428 $ 4,044,601
Cash--restricted..................................... 1,732,854 1,088,797
Accounts receivable.................................. 160,580 142,789
Prepaid rent-affiliate............................... -- 490,834
Due from affiliates.................................. 93,500 101,327
------------ -----------
Total current assets................................. 7,073,362 5,868,348
Real estate, at cost:
Land................................................. 8,336,937 3,684,794
Buildings and improvements........................... 88,382,978 52,418,455
Furniture and equipment.............................. 3,794,756 2,280,147
------------ -----------
100,514,671 58,383,396
Accumulated depreciation............................. (9,476,602) (9,158,919)
------------ -----------
91,038,069 49,224,477
Deferred costs, net.................................. 1,982,270 1,481,955
Other................................................ 231,521 156,568
------------ -----------
Total assets......................................... $100,325,222 $56,731,348
============ ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Mortgage note payable................................ $ 334,165 $ --
Deferred gain on sale of property.................... -- 805,835
Accrued interest payable............................. 204,063 182,153
Accrued real estate taxes............................ 992,570 995,544
Accounts payable..................................... 199,602 316,097
Tenant security deposits............................. 2,259,846 2,307,302
Due to affiliates.................................... 272,578 694,063
Other................................................ 177,614 379,157
------------ -----------
Total current liabilities............................ 4,440,438 5,680,151
Mortgage note payable................................ 34,292,835 --
Bonds payable........................................ 65,000,000 65,000,000
Deferred gain on sale of property.................... -- 17,728,380
------------ -----------
Total liabilities.................................... 103,733,273 88,408,531
Minority interest.................................... (7,005,255) (6,249,661)
Partners' capital (deficit).......................... 3,597,204 (25,427,522)
------------ -----------
Total liabilities and partners' capital (deficit).... $100,325,222 $56,731,348
============ ===========
</TABLE>
See notes to combined financial statements.
F-17
<PAGE>
ORIGINAL FACILITIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
<S> <C> <C> <C>
REVENUE
Resident fees........................... $15,204,692 $21,934,680 $23,437,114
EXPENSES
Facility operating...................... 8,848,494 10,804,692 10,842,704
Real estate taxes....................... 886,533 1,005,620 1,032,733
Depreciation and amortization........... 3,285,812 3,720,612 2,945,562
Interest................................ 3,310,052 5,507,289 4,739,947
Financing fees.......................... 743,002 877,500 581,441
Property management and other fees--
affiliate.............................. 1,535,224 1,443,195 929,831
----------- ----------- -----------
Total expenses.......................... 18,609,117 23,358,908 21,072,218
----------- ----------- -----------
Income (loss) before minority interest
and extraordinary item................. (3,404,425) (1,424,228) 2,364,896
(Income) loss allocated to minority
interest............................... 1,178,257 802,687 (755,594)
----------- ----------- -----------
Income (loss) before extraordinary item. (2,226,168) (621,541) 1,609,302
Extraordinary item--gain on
extinguishment of debt................. -- 3,274,207 --
----------- ----------- -----------
Net income (loss)....................... $(2,226,168) $ 2,652,666 $ 1,609,302
=========== =========== ===========
UNAUDITED PRO FORMA DATA:
Income (loss) before income taxes and
extraordinary item..................... $(2,226,168) $ (621,541) $ 1,609,302
Pro forma benefit (provision) for income
taxes.................................. 890,467 248,616 (643,721)
----------- ----------- -----------
Income (loss) before extraordinary item. (1,335,701) (372,925) 965,581
Extraordinary item, net of income taxes
of $1,309,683.......................... -- 1,964,524 --
----------- ----------- -----------
Pro forma net income (loss)............. $(1,335,701) $ 1,591,599 $ 965,581
=========== =========== ===========
Pro forma net income per share.......... $ 0.48
===========
Pro forma common shares outstanding..... 2,000,000
===========
</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, 1994........ $ (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......... 49,859 -- -- -- 49,859 -- 49,859
Distributions......... -- -- (261,523) (25,890,737) (261,523) (25,890,737) (26,152,260)
Advances made to
general partners..... (1,600,527) (2,931,100) -- -- (4,531,627) -- (4,531,627)
Net income............ 139,890 335,925 11,335 1,122,152 487,150 1,122,152 1,609,302
------------ ------------ ---------- ------------ ----------- ------------- -------------
Partners' deficit at
December 31, 1996...... $ (3,286,824) $ (3,732,069) $ (231,466) $(18,177,163) $(7,250,359) $ (18,177,163) $ (25,427,522)
============ ============ ========== ============ =========== ============= =============
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
ORIGINAL FACILITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $(2,226,168) $ 2,652,666 $ 1,609,302
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation and amortization........ 3,285,812 3,720,612 2,945,562
Minority interest.................... (1,178,257) (802,687) 755,594
Extraordinary item................... -- (3,274,207) --
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable........................ (103,585) (39,628) 17,791
(Increase) in prepaid rent-
affiliate......................... -- -- (490,834)
(Increase) decrease in other
assets............................ (99,646) 12,252 74,953
Increase (decrease) in accrued
interest payable.................. 714,707 (680,108) (21,910)
Increase (decrease) in accrued real
estate taxes...................... 600,016 (134,930) 2,974
Increase (decrease) in accounts
payable........................... 74,473 (46,029) 116,495
Increase in tenant security
deposits.......................... 1,026,802 111,614 47,456
Decrease in arbitrage rebate
payable........................... (73,678) (806,418) --
Increase (decrease) in other
liabilities....................... 187,963 (93,219) 201,543
----------- ----------- ------------
Net cash provided by operating
activities........................... 2,208,439 619,918 5,258,926
INVESTING ACTIVITIES
Proceeds from sale of property....... -- -- 58,474,380
Additions to real estate............. (43,224,823) (238,633) (359,249)
Decrease in construction costs
payable............................. (606,781) -- --
Reimbursement of building
improvements from tenants........... -- 139,559 --
Decrease (increase) in due from
affiliate........................... 41,800 (68,016) (7,827)
Decrease in cash -- restricted....... 6,938,354 856,017 --
----------- ----------- ------------
Net cash (used in) provided by
investing activities................. (36,851,450) 688,927 58,107,304
FINANCING ACTIVITIES
Repayment of mortgage note payable... -- (32,967,418) (34,627,000)
Repayment of bonds payable........... (4,000,000) -- --
Repayment of note payable --
affiliate........................... (2,510,081) -- --
Proceeds from mortgage note payable.. 36,241,625 34,627,000 --
(Increase) decrease in cash --
restricted.......................... (527,778) (542,013) 644,057
Increase in deferred financing
costs............................... (110,126) (626,662) --
Increase in deferred leasing costs... -- -- (212,571)
Increase in due to affiliate......... 126,609 66,899 421,485
Advances to general partner.......... -- -- (4,531,627)
Contributions from partners.......... 6,857,863 54,875 49,859
Contributions from minority
interest............................ 2,194,993 -- --
Distributions to partners............ -- (962,002) (26,152,260)
----------- ----------- ------------
Net cash provided by (used in)
financing activities................. 38,273,105 (349,321) (64,408,057)
----------- ----------- ------------
Net increase (decrease) in cash....... 3,630,094 959,524 (1,041,827)
Cash at beginning of year............. 496,810 4,126,904 5,086,428
----------- ----------- ------------
Cash at end of year................... $ 4,126,904 $ 5,086,428 $ 4,044,601
=========== =========== ============
</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) 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 year ended
December 31, 1994 combined revenue would have increased by approximately $2.6
million and combined net loss would have increased by approximately $1.0
million in the combined statements of operations had the Hallmark been owned
by PGI since January 1, 1994).
On December 27, 1996 The Hallmark was sold by Hallmark Partners, L.P. (HP)
to Health and Retirement Properties Trust (HRPT) which then leased The
Hallmark to BLC Property, Inc. (BLC), an affiliate of PGI, which subleased the
property back to HP (see Note 7), in a sale-leaseback transaction. HP received
net proceeds from the sale of $58.5 million, resulting in a gain of $18.5
million net of a prepayment fee of $2.8 million and the writeoff of deferred
financing fees of $579,601. The above gain is deferred and is being amortized
using the straight-line method over the life of the sublease.
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
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.
F-21
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
DEFERRED COSTS
Deferred financing costs are amortized using the straight-line method over
the term of the mortgage notes and bonds. Deferred lease costs are amortized
using the straight-line method over the term of the sublease. 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 at December 31, 1996 exceeds the basis used for federal
income tax purposes by approximately $2.2 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.
PRO FORMA PRESENTATION (UNAUDITED)
The pro forma net income per share for the year ended December 31, 1996 was
determined based upon 2 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) which 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, 1995 and 1996 was
$652,503 and $1,088,797, respectively.
In accordance with the mortgage note payable described in Note 5, The
Hallmark was 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.
F-22
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to Internal Revenue Code Section 148(f), The 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 from unused restricted Bond proceeds to
the United States government as a final settlement of its arbitrage rebate
payable. No amounts were paid in 1994 or 1996.
3. DEFERRED COSTS
Deferred costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
<S> <C> <C>
Financing costs.................................. $2,656,553 $2,056,966
Lease costs...................................... -- 212,571
---------- ----------
2,656,553 2,269,537
Less: Accumulated amortization................... (674,283) (787,582)
---------- ----------
$1,982,270 $1,481,955
========== ==========
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
<S> <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) (B)............. $34,627,000 $ --
BONDS PAYABLE
Variable rate tax-exempt bonds issued by state and
local governmental authorities. (C)................... $65,000,000 $65,000,000
</TABLE>
- ---------------------
(A) The mortgage note payable was collateralized by The Hallmark's real
estate.
(B) On December 27, 1996, The Hallmark was sold and a portion of the proceeds
were used to repay the mortgage note payable. In addition, The Hallmark
was required to pay a prepayment fee of $2,722,679 which has been included
as a reduction in calculating the gain on sale of property. The Hallmark
repaid a previous note payable on December 18, 1995 from proceeds of the
above mentioned mortgage note payable which resulted in an extraordinary
gain of $3,274,207 in 1995.
(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 1.65% to 5.50% during 1994, 2.55% to 5.20% during 1995 and 2.30% to
4.40% during 1996. The rates at December 31, 1995 were 5.05% and 5.20%, and
December 31, 1996 were 4.00% and 4.10%.
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, 1997 and December, 1998. 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. The Partnerships incurred financing fees of $743,002, $877,500
and $581,441 during the years ended December 31, 1994, 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 year ended December 31, 1994 is
$117,318 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 $155,608, $118,642 and
$113,696 for the years ended December 31, 1994, 1995 and 1996, respectively.
Total interest paid on the mortgage note payable and bonds payable was
$2,633,635, $6,306,039 and $4,761,857 for the years ended December 31, 1994,
1995, and 1996, respectively.
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
F-24
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
interest are received. For the years ended December 31, 1994, 1995, and 1996,
The Heritage received principal and interest payments totaling $144,389,
$144,089 and $610,804, respectively.
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, $16,480 and $29,782 for the years ended December 31,
1994, 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, 1994, 1995, and 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
<S> <C> <C> <C>
Property management fee (a)....................... $743,977 $1,071,195 $929,831
Administration fee (b)............................ 291,247 372,000 372,000
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.
(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, 1994, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
<S> <C> <C> <C>
Due from affiliates.................................. $ 46,300 $ 59,500 $ 97,400
Due to affiliates.................................... 142,400 239,100 483,300
</TABLE>
In 1996, The Devonshire and The Heritage made advances to PGI in the amount
of $4,531,627 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 an increase in
partners' deficit in the combined financial statements.
F-25
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the sale of the Hallmark (see Note 1) BLC leased The
Hallmark from the third party and then subleased (Sublease Agreement) the
property to Hallmark Partners, L.P. The Sublease Agreement has an initial term
of 23 years with options to extend the term for two consecutive 25-year terms,
and requires monthly lease payments ranging from $490,834 to $568,334 over the
life of the sublease. Future minimum annual rental expense to be recorded over
the life of the Sublease Agreement is $5,933,301 (Gross expense of $6,739,136
less amortization of deferred gain on sale of property of $805,835). During
1996, the Partnerships recorded $74,875 of rental expense (included in
facility operating expense in the combined statements of operations) related
to the Sublease Agreement.
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, 1995 and 1996 and the related combined
statements of operations, changes in partners' deficit and cash flows for each
of the three years in the period ended December 31, 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, 1995 and 1996, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
F-27
<PAGE>
ACTIVELIFE FACILITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 2,055,227 $10,502,184
Cash--restricted.................................... 792,223 758,423
Accounts receivable................................. 82,208 103,054
----------- -----------
Total current assets................................ 2,929,658 11,363,661
Real estate, at cost:
Land................................................ 1,731,721 1,359,721
Buildings and improvements.......................... 33,169,840 27,082,944
Furniture and equipment............................. 1,190,196 1,044,651
----------- -----------
36,091,757 29,487,316
Accumulated depreciation............................ (6,773,607) (6,991,344)
----------- -----------
29,318,150 22,495,972
Deferred financing fees, net of accumulated
amortization of $488,898 and $316,671at December
31, 1995 and 1996, respectively.................... 908,863 691,663
Other............................................... 185,457 174,843
----------- -----------
Total assets........................................ $33,342,128 $34,726,139
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Mortgage notes payable.............................. $ 323,283 $ 263,328
Accrued interest payable............................ 234,307 195,364
Accrued real estate taxes........................... 655,859 668,974
Accounts payable and accrued expenses............... 439,333 340,047
Tenant security deposits............................ 780,676 751,664
Due to affiliates................................... 1,852,587 2,092,241
Other............................................... 39,074 2,462
----------- -----------
Total current liabilities........................... 4,325,119 4,314,080
Mortgage notes payable.............................. 36,022,624 30,779,811
----------- -----------
Total liabilities................................... 40,347,743 35,093,891
Partners' deficit................................... (7,005,615) (367,752)
----------- -----------
Total liabilities and partners' deficit............. $33,342,128 $34,726,139
=========== ===========
</TABLE>
See notes to combined financial statements.
F-28
<PAGE>
ACTIVELIFE FACILITIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
<S> <C> <C> <C>
REVENUE
Resident fees............................. $11,495,016 $12,336,745 $12,717,784
EXPENSES
Facility operating........................ 6,505,485 6,867,193 6,937,729
Real estate taxes......................... 654,188 689,255 763,318
Depreciation and amortization............. 994,336 1,010,252 1,026,170
Interest.................................. 2,994,039 2,995,823 2,986,414
Property management fee--affiliate........ 701,054 755,130 784,620
----------- ----------- -----------
Total expenses............................ 11,849,102 12,317,653 12,498,251
----------- ----------- -----------
Income (loss) before gain on sale of
property and extraordinary item.......... (354,086) 19,092 219,533
Gain on sale of property.................. -- -- 7,416,330
----------- ----------- -----------
Income (loss) before extraordinary item... (354,086) 19,092 7,635,863
Extraordinary item--loss on extinguishment
of debt.................................. (304,407) -- --
----------- ----------- -----------
Net income (loss)......................... $ (658,493) $ 19,092 $ 7,635,863
=========== =========== ===========
</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... (38,400) (269,600) -- -- (6,900) (683,100) (45,300) (952,700) (998,000)
Net income
(loss)......... 76,730 7,596,299 (4,428) (438,415) 4,057 401,620 76,359 7,559,504 7,635,863
-------- ---------- --------- ----------- -------- ----------- --------- ----------- -----------
Partners' capital
(deficit) at
December 31,
1996............. $(31,198) $8,426,267 $(106,858) $(6,485,893) $(75,709) $(2,094,361) $(213,765) $ (153,987) $ (367,752)
======== ========== ========= =========== ======== =========== ========= =========== ===========
</TABLE>
See notes to combined financial statements.
F-30
<PAGE>
ACTIVELIFE FACILITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................ $ (658,493) $ 19,092 $ 7,635,863
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization.......... 994,336 1,010,252 1,026,170
Interest expense added to mortgage note
payable
principal............................. 151,524 172,774 193,803
Gain on sale of property............... -- -- (7,416,330)
Extraordinary item..................... 304,407 -- --
Changes in operating assets and
liabilities:
(Increase) decrease in cash-
restricted.......................... (64,613) (7,157) 33,800
(Increase) decrease in accounts
receivable.......................... (73,962) 41,197 (20,846)
(Increase) decrease in other assets.. (7,177) 31,203 10,614
Increase (decrease) in accrued
interest payable.................... 794 (2,036) (38,943)
Increase in accrued real estate
taxes............................... 2,459 19,066 13,115
Decrease in accounts payable and
accrued expenses.................... (117,733) (43,729) (99,286)
Increase (decrease) in tenant
security deposits................... 32,423 (16,280) (29,012)
Increase in due to affiliate......... 124,320 275,595 239,654
Decrease in other liabilities........ (36,317) (22,896) (36,612)
---------- ---------- -----------
Net cash provided by operating
activities.............................. 651,968 1,477,081 1,511,990
INVESTING ACTIVITIES
Proceeds from sale of property........... -- -- 13,778,137
Additions to real estate................. (176,055) (169,379) (348,599)
---------- ---------- -----------
Net Cash provided by (used in) investing
activities.............................. (176,055) (169,379) 13,429,538
FINANCING ACTIVITIES
Repayment of mortgage notes payable...... (5,514,747) (297,956) (5,666,571)
Mortgage note payable prepayment fee..... (200,000) -- --
Proceeds from mortgage note payable...... 5,670,000 170,000 170,000
Increase in deferred financing costs..... (203,332) -- --
Contributions from partners.............. 500,000 -- --
Distributions to partners................ (766,191) (743,297) (998,000)
---------- ---------- -----------
Net cash used in financing activities.... (514,270) (871,253) (6,494,571)
---------- ---------- -----------
Net (decrease) increase in cash.......... (38,357) 436,449 8,446,957
Cash and cash equivalents at beginning of
year.................................... 1,657,135 1,618,778 2,055,227
---------- ---------- -----------
Cash and cash equivalents at end of year. $1,618,778 $2,055,227 $10,502,184
========== ========== ===========
</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 at December 31, 1996 being approximately $15.1 million lower for
federal income tax basis.
On December 27, 1996 the Springs of East Mesa was sold by East Mesa Senior
Living Limited Partnership to a third party for net proceeds of $13.8 million,
resulting in a gain of $7.4 million net of the writeoff of deferred financing
fees of $170,650. A portion of the proceeds were used to repay the mortgage
note payable on the Springs of East Mesa.
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, 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.
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,
-----------------------
1995 1996
<S> <C> <C>
MORTGAGE NOTES PAYABLE
Fixed rate mortgage notes payable issued by local
municipalities (A) (B)................................ $28,672,794 $28,430,113
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)........ 5,423,890 --
Interest reduction loan provided by Housing and
Redevelopment Authority of Edina, Minnesota (HRA) (A)
(D)................................................... 2,249,223 2,613,026
----------- -----------
$36,345,907 $31,043,139
=========== ===========
</TABLE>
- ---------------------
(A) Mortgage notes payable are collateralized by the Partnerships' real estate
assets.
(B) The notes bear interest at 8% ($15,264,543 and $15,105,842 at December 31,
1995 and 1996, respectively) and 8.525% ($13,408,251 and $13,324,270 at
December 31, 1995 and 1996, respectively, with monthly principal and
interest payments through maturity in 2027.
(C) On December 27, 1996 the mortgage note was repaid from proceeds from the
sale of the Springs of East Mesa. 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
F-33
<PAGE>
ACTIVELIFE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
with interest at maturity. Included in the balance is accrued interest of
$789,112 and $982,915 at December 31, 1995 and 1996, respectively. 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>
1997......................... $ 263,328
1998......................... 285,904
1999......................... 309,959
2000......................... 336,211
2001......................... 364,696
Thereafter................... 29,483,041
-----------
$31,043,139
===========
</TABLE>
Total interest paid on the mortgage notes payable was $2,841,721,
$2,825,085, and $2,831,554 for the years ended December 31, 1994, 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, 1995, and 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1995 1996
<S> <C> <C> <C>
Property management fees (a).................. $701,054 $755,130 $784,620
Development fees (b).......................... 175,405 224,142 135,249
Sales commissions(c).......................... -- -- 727,500
</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.
(c) As part of the sale of the Springs of East Mesa on December 27, 1996, the
general partner of the East Mesa Senior Living Limited Partnership
received a sales commission equal to 5% of sales price which was included
in calculating the gain on sale of property. The payment of the sales
commission was consented to by the limited partners of this partnership.
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 sheet of the Gables at Brighton
Associates (the "Partnership") as of December 31, 1995 and the related
statements of income, changes in partners' capital and cash flows for each of
the two years in the period ended December 31, 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 the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
F-35
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $ 562,453
Other......................................................... 99,692
-----------
Total current assets.......................................... 662,145
Real estate, at cost:
Land.......................................................... 702,666
Building and improvements..................................... 6,873,764
Furniture and equipment....................................... 399,591
-----------
7,976,021
Accumulated depreciation...................................... (2,188,848)
-----------
5,787,173
-----------
Total assets.................................................. $ 6,449,318
===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses......................... $ 44,840
Tenant security deposits...................................... 226,254
Due to affiliate.............................................. 8,165
Other......................................................... 123,518
-----------
Total current liabilities..................................... 402,777
Partners' capital............................................. 6,046,541
-----------
Total liabilities and partners' capital....................... $ 6,449,318
===========
</TABLE>
See notes to financial statements.
F-36
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996
<S> <C> <C>
REVENUE
Resident fees............................................ $2,638,072 $2,742,751
EXPENSES
Facility operating....................................... 1,485,766 1,490,914
Real estate taxes........................................ 227,562 223,291
Depreciation............................................. 292,334 295,025
Property management fee--affiliate....................... 107,975 115,003
---------- ----------
Total expenses........................................... 2,113,637 2,124,233
---------- ----------
Income before gain on sale of property................... 524,435 618,518
Gain on sale of property................................. -- 4,856,981
---------- ----------
Net income............................................... $ 524,435 $5,475,499
========== ==========
</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.................................................... (11,522,040)
Net income....................................................... 5,475,499
-----------
Partners' capital at December 31, 1996............................. $ --
===========
</TABLE>
See notes to financial statements.
F-38
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 524,435 $ 5,475,499
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 292,334 295,025
Gain on sale of property............................ -- (4,856,981)
Changes in operating assets and liabilities:
Decrease in other assets.......................... 486 99,692
Decrease in accounts payable and accrued expenses. (9,979) (44,840)
Increase in tenant security deposits.............. 12,175 (226,254)
Decrease in due to affiliate...................... (1,748) (8,165)
Increase (decrease) in other liabilities.......... 83,111 (123,518)
--------- -----------
Net cash provided by operating activities............. 900,814 610,458
INVESTING ACTIVITIES
Proceeds from sale of property........................ -- 10,418,887
Additions to real estate.............................. (54,059) (69,758)
--------- -----------
Net cash (used in) provided by investing activities... (54,059) 10,349,129
--------- -----------
FINANCING ACTIVITIES
Distributions to partners............................. (724,974) (11,522,040)
--------- -----------
Cash used in financing activities..................... (724,974) (11,522,040)
--------- -----------
Net increase (decrease) in cash....................... 121,781 (562,453)
Cash at beginning of year............................. 440,672 562,453
--------- -----------
Cash at end of year................................... $ 562,453 $ --
========= ===========
</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 owned, operated, and managed an assisted living facility known as The
Gables at Brighton ("Property") located in Rochester, New York. On December
27, 1996 the Property was sold by the Partnership to a third party for net
proceeds of $10.4 million, resulting in a gain of $4.9 million. As of December
31, 1996 the proceeds from the sale have been distributed to the partners and
the Partnership has no assets or liabilities at that date.
RESIDENT FEE REVENUE
Resident fee revenue was recorded when services were rendered and consisted
of fees for basic housing, support services and fees associated with
additional services such as personalized health and assisted living care.
REAL ESTATE
Expenditures for ordinary maintenance and repairs were expensed to
operations as incurred. Significant renovations and improvements which improve
and/or extend the useful life of the asset were capitalized and depreciated
over their estimated useful life. Interest incurred during construction
periods was capitalized as a component of the building cost.
Depreciation was calculated using the straight-line method over the
estimated useful lives of assets, which were 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.
2. RELATED PARTY TRANSACTIONS
In connection with the operation of the Property, an affiliate of one of the
partners was 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>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Brookdale Living Communities, Inc.
We have audited the accompanying combined balance sheets of the Park Place
Facilities as of December 31, 1995 and 1996 and the related combined
statements of operations, changes in partners' capital/owners' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Park Place 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 Park Place
Facilities at December 31, 1995 and 1996, and the combined results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
F-41
<PAGE>
PARK PLACE FACILITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 536,798 $ 269,913
Cash--restricted...................................... 46,976 50,594
---------- -----------
Total current assets.................................. 583,774 320,507
Real estate, at cost:
Land.................................................. 285,168 285,168
Buildings and improvements............................ 4,944,247 9,271,066
Furniture and equipment............................... 500,058 1,176,323
Construction-in-progress.............................. 2,784,825 --
---------- -----------
8,514,298 10,732,557
Accumulated depreciation.............................. (871,146) (1,344,130)
---------- -----------
7,643,152 9,388,427
Deferred financing fees, net of accumulated
amortization of $13,548 at
December 31, 1996.................................... -- 134,250
Other................................................. 4,017 197,885
---------- -----------
Total assets.......................................... $8,230,943 $10,041,069
========== ===========
LIABILITIES AND PARTNERS' CAPITAL/OWNERS' EQUITY
Current liabilities:
Mortgage notes payable................................ $ 242,904 $ 4,883,439
Accounts payable and accrued expenses................. 59,465 188,614
Tenant security deposits.............................. 21,600 36,500
---------- -----------
Total current liabilities............................. 323,969 5,108,553
Mortgage notes payable................................ 5,489,411 3,286,888
---------- -----------
Total liabilities..................................... 5,813,380 8,395,441
Partners' capital/owners' equity...................... 2,417,563 1,645,628
---------- -----------
Total liabilities and partners' capital/owners'
equity............................................... $8,230,943 $10,041,069
========== ===========
</TABLE>
See notes to combined financial statements.
F-42
<PAGE>
PARK PLACE FACILITIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
<S> <C> <C>
REVENUE
Resident fees.......................................... $1,130,722 $2,200,534
EXPENSES
Facility operating..................................... 593,593 1,494,178
Real estate taxes...................................... 61,675 67,628
Depreciation and amortization.......................... 239,405 486,532
Interest............................................... 193,303 477,520
Property management fee--affiliate..................... 55,688 131,047
---------- ----------
Total expenses......................................... 1,143,664 2,656,905
---------- ----------
Net loss............................................... $ (12,942) $ (456,371)
========== ==========
</TABLE>
See notes to combined financial statements.
F-43
<PAGE>
PARK PLACE FACILITIES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL/OWNERS' EQUITY
<TABLE>
<CAPTION>
PARK PLACE
GENERAL PARTNERSHIP PARK PLACE II, LLC TOTAL
------------------- ------------------ ----------
<S> <C> <C> <C>
Partners'
capital/owners'equity at
January 1, 1995............ $805,505 $ -- $ 805,505
Contributions............. -- 1,650,000 1,650,000
Distributions............. (25,000) -- (25,000)
Net income (loss)......... (23,506) 10,564 (12,942)
-------- ---------- ----------
Partners'
capital/owners'equity at
December 31, 1995.......... 756,999 1,660,564 2,417,563
Distributions............. (25,000) (290,564) (315,564)
Net income (loss)......... 95,958 (552,329) (456,371)
-------- ---------- ----------
Partners'
capital/owners'equity at
December 31, 1996.......... $827,957 $ 817,671 $1,645,628
======== ========== ==========
</TABLE>
See notes to combined financial statements.
F-44
<PAGE>
PARK PLACE FACILITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ $ (12,942) $ (456,371)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 239,405 486,532
Changes in operating assets and liabilities:
Increase in cash-restricted..................... (19,528) (3,618)
Increase in other assets........................ (1,640) (193,868)
Increase in accounts payable and accrued
expenses....................................... 49,107 129,149
Increase in tenant security deposits............ 600 14,900
----------- -----------
Net cash provided by (used in) operating activities. 255,002 (23,276)
INVESTING ACTIVITIES
Additions to real estate............................ (2,839,186) (2,218,259)
----------- -----------
Cash used in investing activities................... (2,839,186) (2,218,259)
FINANCING ACTIVITIES
Repayment of mortgage notes payable................. (381,091) (242,904)
Proceeds from mortgage note payable................. 1,771,648 2,680,916
Increase in deferred financing costs................ -- (147,798)
Contributions from partners......................... 1,650,000 --
Distributions to partners........................... (25,000) (315,564)
----------- -----------
Net cash provided by financing activities........... 3,015,557 1,974,650
----------- -----------
Net increase (decrease) in cash..................... 431,373 (266,885)
Cash and cash equivalents at beginning of year...... 105,425 536,798
----------- -----------
Cash and cash equivalents at end of year............ $ 536,798 $ 269,913
=========== ===========
</TABLE>
See notes to combined financial statements.
F-45
<PAGE>
PARK PLACE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Park Place Facilities ("Park Place") represents a combination of a
general partnership and a limited liability corporation described below
("Ownership Entities") that own, operate, and manage assisted living
facilities ("Properties"). The Properties are under the common management of
Senior Living Management Services ("SLM"). A principal of SLM also has
ownership interests in the Ownership Entities. Pursuant to the formation
transactions more fully described elsewhere in this Registration Statement and
Prospectus, the Park Place Facilities will be owned and operated by a newly
formed corporation Brookdale Living Communities, Inc. (the "Company"), whose
shares are being registered pursuant to this Registration Statement.
The Ownership Entities and Properties owned and operated by SLM are as
follows:
<TABLE>
<CAPTION>
PARTNERSHIP PROPERTY LOCATION
<S> <C> <C>
Park Place General Partnership Park Place Phase I Spokane, Washington
Park Place II, LLC Park Place Phase II Spokane, Washington
</TABLE>
The combined financial statements include the operations of Park Place Phase
I from January 1, 1995 and Park Place Phase II from February 1996 (facility
commenced operations--special care facility in February 1996 and assisted
living facility in May 1996). 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, 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. Interest and other direct costs incurred during
construction periods are capitalized as a component of building cost.
Depreciation is calculated using straight-line and accelerated methods over
the estimated useful lives of assets, which are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 27.5-39 years
Furniture and equipment..................................... 5-7 years
</TABLE>
CASH AND CASH EQUIVALENTS
The Ownership Entities 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.
F-46
<PAGE>
PARK PLACE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED FINANCING FEES
Deferred financing fees are amortized using the straight-line method over
the term of the mortgage notes payable.
INCOME TAXES
The Ownership Entities pay no income taxes and the income or loss from the
Ownership Entities is includable on the respective federal income tax returns
of the partners/members.
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.
2. CASH--RESTRICTED
In accordance with mortgage note payable agreements described in Note 3, the
Ownership Entities are required to maintain escrow deposits for real estate
taxes, repairs, and other operating activities.
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
<S> <C> <C>
MORTGAGE NOTES PAYABLE
Fixed rate mortgage notes payable, financial
institution, interest at 3.25% with monthly principal
and interest payments through maturity in 2012. (A)... $3,513,852 $3,365,758
Mortgage note payable, financial institution, interest
at prime plus 1% per annum payable monthly, with a
lump-sum payment at maturity in May, 1997. (A)........ 1,771,648 4,452,564
Notes payable various individuals, are unsecured and
bear interest at prime plus 1% per annum with monthly
principal and interest payments through maturities in
1997 through 1999..................................... 446,815 352,005
---------- ----------
$5,732,315 $8,170,327
========== ==========
</TABLE>
- ---------------------
(A) Mortgage notes payable are collateralized by the Ownership Entities real
estate assets.
The aggregate amount of all principal payments for the mortgage notes payable
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1997.......................... $4,883,439
1998.......................... 204,409
1999.......................... 248,425
2000.......................... 184,203
2001.......................... 190,280
Thereafter.................... 2,459,571
----------
$8,170,327
==========
</TABLE>
Total interest incurred and paid on the mortgage notes and other notes
payable was $193,303 and $510,813 for the years ended December 31, 1995, and
1996, respectively, of which $33,293 was capitalized in 1996.
F-47
<PAGE>
PARK PLACE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. RELATED PARTY TRANSACTIONS
In connection with the organization of the Ownership Entities and the
development and financing of the Properties, SLM and certain ownership members
are entitled to payments and fees for various services provided. Such amounts
incurred for the years ended December 31, 1995, and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1996
<S> <C> <C>
Property management fees (a)..................... $ 55,688 $ 131,047
Development fees(b).............................. 550,000 --
</TABLE>
- ---------------------
(a) SLM is entitled to the following management fees:
.Base fees range from the greater of 5% of monthly gross revenue or $5,000
up to 95% occupancy.
. Incentive fees are 12% of incremental gross revenue, as defined at
occupancy over 95%.
(b) Certain ownership members of the Park Place II, LLC received development
fees of $550,000 related to the development and financing of Park Place
Phase II. These fees were capitalized as a component of real estate costs.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, cash-restricted, fixed and variable rate mortgage
notes payable and other variable rate 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 SLM's current borrowing rate for debt with similar
maturities.
F-48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Brookdale Living Communities, Inc.
We have audited the accompanying consolidated balance sheet of BLC Property,
Inc. and subsidiaries, a Delaware corporation, as of December 31, 1996 and the
related consolidated statements of operations, stockholder's equity and cash
flows for the period from December 12, 1996 (inception) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit of the financial statements
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BLC Property,
Inc. and subsidiaries at December 31, 1996, and the consolidated results of
their operations and their cash flows for the period from December 12, 1996
(inception) to December 31, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
F-49
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash............................................................... $ 185,742
Accounts receivable................................................ 21,696
Prepaid rent and other............................................. 760,185
----------
Total current assets............................................... 967,623
Deferred costs..................................................... 231,722
Other.............................................................. 6,317
----------
Total assets....................................................... $1,205,662
==========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C>
Current liabilities:
Prepaid sublease rent-affiliate.................................... $ 490,834
Prepaid tenant rent................................................ 124,889
Accrued real estate taxes.......................................... 34,958
Accounts payable and accrued expenses.............................. 126,994
Tenant security deposits........................................... 306,531
Due to affiliate................................................... 117,258
Other.............................................................. 3,879
----------
Total current liabilities.......................................... 1,205,343
Stockholder's equity:
Common Stock, $.01 par value, 100 shares authorized, issued and
outstanding....................................................... 1
Additional paid-in capital......................................... 999
Retained deficit................................................... (681)
----------
Total stockholder's equity......................................... 319
----------
Total liabilities and stockholder's equity......................... $1,205,662
==========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 12, 1996 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
REVENUE
<S> <C>
Resident fees......................................................... $83,962
EXPENSES
Facility operating.................................................... 50,459
Real estate taxes..................................................... 3,843
Rent.................................................................. 30,795
-------
Total expenses........................................................ 85,097
-------
Loss before income taxes.............................................. (1,135)
Income tax benefit.................................................... 454
-------
Net loss.............................................................. $ (681)
=======
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD FROM DECEMBER 12, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL PAID-IN
CAPITAL
COMMON STOCK ----------------------
------------- PAID-IN NOTE RETAINED
SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS TOTAL
------ ------ ---------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.................. 100 $1 $ 999 $ -- $ -- $1,000
Additional contribution. -- -- 8,543,911 (8,543,911) -- --
Net loss for the period. -- -- -- -- (681) (681)
--- --- ---------- ----------- ----- ------
Balance at December 31,
1996................... 100 $1 $8,544,910 $(8,543,911) $(681) $ 319
=== === ========== =========== ===== ======
</TABLE>
See Notes to consolidated financial statements.
F-52
<PAGE>
BLC PROPERTY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM DECEMBER 12, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................... $ (681)
Adjustments to reconcile net loss to net cash provided by operating
activities
Increases in operating assets and liabilities:
Accounts receivable............................................ (21,696)
Prepaid rent and other......................................... (760,185)
Deferred costs................................................. (231,722)
Other assets................................................... (6,317)
Prepaid sublease rent-affiliate................................ 490,834
Prepaid tenant rent............................................ 124,889
Accrued real estate taxes...................................... 34,958
Accounts payable and accrued expenses.......................... 126,994
Tenant security deposits....................................... 306,531
Other current liabilities...................................... 3,879
---------
Net cash provided by operating activities.......................... 67,484
FINANCING ACTIVITIES
Proceeds from issuance of common stock........................... 1,000
Increase due to affiliate........................................ 117,258
---------
Cash provided by financing activities.............................. 118,258
---------
Net increase in cash and cash at end of period..................... $ 185,742
=========
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
BLC Property, Inc. (the "Company") was incorporated in Delaware under the
Delaware General Corporation Law on December 12, 1996. The Company was formed
in order to consolidate and expand the senior and assisted living facilities
owned and operated by The Prime Group, Inc. and its affiliates ("PGI").
Pursuant to the formation transactions more fully described elsewhere in this
Registration Statement and Prospectus, the Company will be operated by a newly
formed corporation, Brookdale Living Communities, Inc. ("Brookdale"), whose
shares are being registered pursuant to this Registration Statement.
The Company formed the following wholly owned subsidiaries (collectively--
the Operating Subsidiaries):
Brookdale Living Communities of Illinois, Inc.
Brookdale Living Communities of Arizona, Inc.
Brookdale Living Communities of New York, Inc.
The Company began leasing the following properties (Leased Facilities) on
December 27, 1996 (see Note 4):
<TABLE>
<CAPTION>
PROPERTY PREVIOUS OWNER
-------- --------------
<S> <C>
The Hallmark.................. Hallmark Partners, L.P.
(Original Facilities)
Springs of East Mesa.......... East Mesa Senior Living Limited Partnership
(Activelife Facilities)
The Gables at Brighton........ Gables at Brighton Associates
</TABLE>
The Company has subleased The Hallmark to Hallmark Partners, L.P. (see Note
4). The previous owners and related financial statements are more fully
described elsewhere in this Registration Statement and Prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements includes the operations of the Company
and the Operating Subsidiaries for the period from December 12, 1996
(inception) to December 31, 1996. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
Deferred Costs
Deferred leasing costs are amortized using the straight-line method over the
term of the related leases. Deferred organization costs are amortized using
the straight-line method over five years.
Income Taxes
The Company and its wholly owned subsidiaries file federal and certain state
income tax returns on a consolidated basis.
F-54
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. DEFERRED COST
Deferred costs consist of the following:
<TABLE>
<S> <C>
Deferred leasing......................... $187,243
Deferred organization.................... 44,479
--------
$231,722
========
</TABLE>
No amortization expense was recorded in 1996.
4. LEASES
BLC entered into a lease agreement (Lease Agreement) with Health and
Retirement Properties Trust (HRPT), to lease the Leased Facilities. The Lease
Agreement has an initial term of 23 years with options to extend the term for
two consecutive 25 year terms and requires monthly payments ranging from
$692,709 to $802,084. The Lease Agreement also requires additional rent
beginning in 1999 related to increases in revenue, as defined, generated by
the Leased Facilities. Future minimum annual rental expense to be recorded
over the term of the Lease Agreement is $9,510,877. Included in prepaid rent
and other at December 31, 1996 is $692,709 of prepaid rent related to these
leases. Included in other liabilities at December 31, 1996 is $13,309 for the
effect of straight-lining of rental payments in 1996, net of $9,430 for the
effect of straight-lining sublease rental payments in 1996 described below.
The Lease Agreement provides for various operating covenants including that
the Company maintain a tangible net worth equal to one year's minimum rent.
The Lease Agreement provides that any demand notes receivable from the
Company's stockholder can be included in calculating tangible net worth (see
Note 5).
The Company has subleased The Hallmark to Hallmark Partners, L.P., an
affiliate of PGI, under comparable lease terms with monthly lease payments
ranging from $490,834 to $568,334 over the life of the lease. Future minimum
annual sublease rental income to be recorded over the life of the sublease
agreement is $6,739,136. Included in prepaid sublease rent-affiliate at
December 31, 1996 is $490,834 of prepaid rent from this sublease.
Rent expense in the consolidated statement of operations is recorded net of
sublease income of $74,875 received from the above sublease.
5. NOTE RECEIVABLE--STOCKHOLDER
As described in Note 4 the Company is required to maintain a minimum net
worth equal to one year of minimum rental payments. The Company's stockholder
has provided a capital contribution evidenced by a note. The note bears
interest at prime, per annum, and is due on demand. The balance of the note
receivable will be adjusted as necessary for the Company to maintain the
minimum net worth requirement of the Lease Agreement.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-55
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS
Amounts due to affiliates are advances made by affiliates that bear interest
at prime rate and are due on the earlier of the closing of Brookdale's initial
public offering or January 1, 1998. Payments of amounts due to affiliates are
subordinated to payments required under the Lease Agreement.
8. EMPLOYEE BENEFIT PLAN
The Company 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 Company 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
Company contributions over five years. The Company made no contributions for
the period ended December 31, 1996.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and the variable rate note receivable-stockholder are reflected in the
accompanying consolidated balance sheet at amounts considered by management to
reasonably approximate fair value.
F-56
<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>
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- --------------------------------------------------------------------------------
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 SOLICITATION
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 SO-
LICITATION 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 SO-
LICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
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............................................. 13
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 26
Management................................................................ 37
Certain Transactions...................................................... 42
Principal Stockholders.................................................... 44
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 52
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL MAY 26, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING 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 UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 SHARES
LOGO
COMMON STOCK
----------------
PROSPECTUS
----------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MAY 1, 1997
- --------------------------------------------------------------------------------
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