<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-41191
PROSPECTUS
DECEMBER 18, 1997
2,000,000 SHARES
[LOGO OF BROOKDALE LIVING COMMUNITIES, INC.]
COMMON STOCK
All of the 2,000,000 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 Common Stock is
quoted in the Nasdaq National Market under the trading symbol "BLCI." On
December 18, 1997, the last reported per share sale price of the Common Stock on
the Nasdaq National Market was $16.6875. See "Price Range of Common Stock."
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.
---------------------
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share of Common
Stock.................. $16.6875 $0.834375 $15.853125
Total(3)................ $33,375,000 $1,668,750 $31,706,250
- --------------------------------------------------------------------------------
</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 $600,000,
and before deducting a fee equal to 0.5% of the gross proceeds of the
Offering for financial advisory and related services rendered in
connection with the Offering.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days hereof, to purchase up to an aggregate of 300,000 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,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$38,381,250, $1,919,063 and $36,462,187, respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain 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 December 24, 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. COWEN & COMPANY
<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 certain of the facilities owned
or leased by the Company together with a corresponding caption identifying
such facility by name and the city of its location, and interior views of
certain of the facilities. 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."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<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. Unless otherwise indicated, all share
and financial information set forth herein assume that 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
and its subsidiaries.
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 11 senior and assisted living facilities containing a total of 2,350
units which, as of September 30, 1997, were approximately 97% occupied. The
Company owns four facilities, leases five facilities and manages two other
facilities pursuant to management contracts. With facilities that contain an
average of approximately 214 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 four
to six senior and assisted living facilities per year containing an aggregate
of approximately 800 to 1,200 units and to commence development of two to three
new facilities per year containing approximately 220 units each.
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. This
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. 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 levels of care provided by the Company to residents vary
depending upon the licensure requirements of the states in which the facilities
are located.
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. An element of this philosophy is to establish affiliations
between Brookdale's facilities and local hospitals or health care networks. The
Company has successfully implemented hospital affiliations at three of its
facilities and intends to arrange hospital and health care network affiliations
for its other facilities and those that it acquires, develops or leases in the
future. Hospital or health care network affiliations generally 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 choose not to or
cannot 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
1
<PAGE>
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 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; (vi) utilizing its
operational expertise to enhance the profitability of its existing and future
facilities; and (vii) expanding facilities where economically advantageous.
Brookdale Living Communities, Inc. was incorporated in Delaware in September
1996 to continue and expand the business and operations of the senior and
assisted living division of The Prime Group, Inc. and certain of its affiliates
(collectively, "PGI"). The Company's principal executive offices are located at
77 West Wacker Drive, Suite 4800, Chicago, Illinois 60601, and its telephone
number is (312) 977-3700.
RECENT DEVELOPMENTS
In November 1997, The Gables at Farmington, a 173-unit facility located in
Farmington, Connecticut, was acquired by an unaffiliated third party for $23.1
million and simultaneously net leased to the Company. The Company also recently
entered into agreements to purchase The Classic at West Palm Beach, a 296-unit
facility located in West Palm Beach, Florida, for $28.0 million, The
Brendenwood Retirement Community, a 149-unit facility located in Voorhees, New
Jersey, for $15.8 million, and Harbor Village, a 276-unit facility located in
Chicago, Illinois, for $16.8 million. The closings of The Classic at West Palm
Beach and The Brendenwood Retirement Community are expected to occur in
December 1997. The closing of Harbor Village is expected to occur prior to
January 31, 1998. There can be no assurance that any or all of such
transactions will be consummated in a timely manner, if at all. The Company
expects to assign the purchase agreements for these facilities to unaffiliated
third parties which will acquire the facilities and in turn net lease them to
the Company. The Company has acquired development sites located in Austin,
Texas and Southfield, Michigan for the construction of facilities with
approximately 220 units at each site and has commenced construction at the
Austin, Texas site. In addition, the Company has entered into agreements to
acquire development sites located in Glen Ellyn, Illinois and Raleigh, North
Carolina for the construction of facilities with approximately 220 units at
each site, the closings of which are contingent upon the receipt of all
necessary approvals for the development of the respective sites and are
expected to occur within 12 months following the completion of the Offering.
The Company has also been selected by Battery Park City Authority to be the
developer and operator of a senior and assisted living facility to be located
in Battery Park City in New York, New York.
In October 1997, the Company obtained a $10.0 million revolving credit
facility from LaSalle National Bank ("LaSalle") for working capital and general
corporate purposes. LaSalle has agreed to increase the amount of the credit
facility to $20.0 million. The credit facility will terminate upon the
completion of the Offering. In September 1997, the Company obtained a
commitment from Nomura Asset Capital Corporation ("Nomura") for a $100.0
million construction and permanent financing facility. The facility may be used
to finance up to 80% of the development costs of facilities.
In May 1997, the Company completed an initial public offering of 4.5 million
shares of Common Stock at $11.50 per share (the "IPO"). The proceeds from the
IPO, net of related underwriting discounts and commissions and offering costs,
totaled approximately $44.2 million. The underwriters of the IPO exercised
their over-allotment option, and in June 1997, the Company sold an additional
675,000 shares of Common Stock at $11.50 per share. The Company received net
proceeds of approximately $7.2 million from the sale of these additional
shares.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company........................... 2,000,000 shares
Common Stock to be outstanding
after the Offering................ 9,175,000 shares (1)
Use of Proceeds.................... To repay certain indebtedness, 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
</TABLE>
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(1) Does not include 751,000 shares of Common Stock subject to outstanding
options at December 18, 1997 at a weighted average exercise price of $11.53
per share. See "Management--Stock Incentive Plan."
3
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -----------------------------
PRO FORMA
AS
ADJUSTED
1995(1) 1996(1) 1996(1) 1997(2) 1997(2)(3)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING
DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue:
Resident fees........... $ 21,935 $ 23,437 $16,827 $ 28,204 $ 46,849
Management services
income................. -- -- -- 82 158
-------- -------- ------- -------- --------
Total revenue......... 21,935 23,437 16,827 28,286 47,007
Facility operating
expenses (4)........... (13,253) (12,806) (9,346) (15,041) (25,756)
Lease expenses.......... -- -- -- (7,152) (12,039)
General and
administrative expenses
(4).................... -- -- -- (1,137) (2,083)
Depreciation and
amortization........... (3,721) (2,946) (3,013) (2,706) (3,560)
-------- -------- ------- -------- --------
Operating income........ 4,961 7,685 4,468 2,250 3,569
Interest and financing
fees expense, net...... (6,385) (5,320) (3,371) (2,293) (2,151)
-------- -------- ------- -------- --------
Income (loss) before
minority interest,
deferred tax benefit
and
extraordinary item..... (1,424) 2,365 1,097 (43) 1,418
(Income) loss allocated
to minority interest... 802 (756) (87) (138) --
-------- -------- ------- -------- --------
Income (loss) before
deferred tax benefit
and extraordinary item. (622) 1,609 1,010 (181) 1,418
Deferred tax benefit
(provision)............ -- -- -- 222 (325)
Extraordinary item (gain
on extinguishment of
debt).................. 3,274 -- -- -- --
-------- -------- ------- -------- --------
Net income.............. $ 2,652 $ 1,609 $ 1,010 $ 41 $ 1,093
======== ======== ======= ======== ========
Net income per share ... -- -- -- $ .01 $ .12
Weighted average shares
outstanding............ -- -- -- 4,720 9,175
SELECTED OPERATING AND
OTHER DATA:
Number of facilities (at
end of period) (5)..... 3 3 3 10 14
Total units operated
(5)(6)................. 918 918 918 2,177 3,071
Occupancy rate (6)...... 98.1% 99.2% 99.4% 97.3% 94.7%
Average monthly revenue
per unit (7)........... $ 2,015 $ 2,144 $ 2,037 $ 1,964 $ 1,936
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1997
-------------------
PRO FORMA
AS
ACTUAL ADJUSTED(3)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 4,402 $ 12,380
Cash-restricted (8)........................................ 3,885 3,885
Letter of credit deposit (8)............................... 11,702 11,702
Investments collateralizing lease obligations (9).......... -- 22,961
Total assets............................................... 149,313 180,252
Total long-term debt....................................... 96,235 96,235
Total stockholders' equity................................. 27,044 57,983
</TABLE>
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(1) The historical financial and operating data for the years ended December
31, 1995 and December 31, 1996 and the nine months ended September 30, 1996
represent combined historical financial data for the senior and assisted
living division of PGI.
(2) The financial and operating data for the nine months ended September 30,
1997 represent combined historical financial data for the senior and
assisted living division of PGI until the completion of the IPO on May 7,
1997 and thereafter, the operations of the Company.
(3) The pro forma as adjusted data as of September 30, 1997 and for the nine
months ended September 30, 1997 give effect to the net lease by the Company
of The Gables at Farmington, The Classic at West Palm Beach, The
Brendenwood Retirement Community and Harbor Village and the Offering. In
November 1997, The Gables at Farmington, a facility located in Farmington,
Connecticut, was acquired by an unaffiliated third party for $23.1 million
and simultaneously net leased to the Company. In addition, the Company has
entered into
4
<PAGE>
definitive purchase agreements to acquire The Classic at West Palm Beach, a
facility located in West Palm Beach, Florida, for approximately $28.0
million, The Brendenwood Retirement Community, a facility located in
Voorhees, New Jersey, for approximately $15.8 million, and Harbor Village, a
facility located in Chicago, Illinois, for approximately $16.8 million.
Although the Company expects to assign its rights to purchase these
facilities to unaffiliated third parties and that such third parties will
purchase and in turn net lease such facilities to the Company, there can be
no assurance that the conditions to closing such transactions will be
satisfied in a timely manner, if at all. If The Classic at West Palm Beach,
The Brendenwood Retirement Community and Harbor Village are not acquired by
such third parties and in turn net leased to the Company, pro forma as
adjusted total revenue, operating income and net loss would be $36,229,
$2,461 and $89, respectively, for the nine months ended September 30, 1997.
Pro forma as adjusted data does not give effect to interest income on cash
and cash equivalents and cash-restricted. See Unaudited Pro Forma
Consolidated Condensed Financial Statements of the Company.
(4) Prior to the IPO, general and administrative expenses were allocated to
the then existing facilities; however, following the IPO, the Company
began reporting general and administrative expenses as a separate item.
(5) As of December 18, 1997, the Company operated 11 facilities with 2,350
units.
(6) Total units operated represents the total units operated as of the end of
the period. Occupancy rate is calculated by dividing total occupied units
by total units operated as of the end of the period. Pro forma amounts
include The Gables at Farmington, The Classic at West Palm Beach, The
Brendenwood Retirement Community and Harbor Village.
(7) 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. Pro forma amounts include The Gables at
Farmington, The Classic at West Palm Beach, The Brendenwood Retirement
Community and Harbor Village.
(8) 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 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
Consolidated Condensed Balance Sheet of the Company.
(9) The Company has pledged investment securities with a value of
approximately $4.7 million to secure its obligations under the lease with
respect to The Gables at Farmington. The Company expects to pledge similar
collateral with respect to leases of The Classic at West Palm Beach, The
Brendenwood Retirement Community and Harbor Village.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Risk Factors,"
"Recent Developments," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and in a number of other
places constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this
Prospectus, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-
looking statements. Statements that describe the Company's future strategic
plans, goals or objectives are also forward-looking statements. Readers of
this Prospectus are cautioned that any forward-looking statements, including
those regarding the intent, belief, or current expectations of the Company or
management, are not guarantees of future performance, results or events and
involve risks and uncertainties, and that actual results and events may differ
materially from those in the forward-looking statements as a result of various
factors including, but not limited to (i) general economic conditions in the
markets in which the Company operates, (ii) competitive pressures within the
industry and/or the markets in which the Company operates, (iii) the effect of
future legislation or regulatory changes on the Company's operations and (iv)
other factors described in "Risk Factors" beginning on page 6 of this
Prospectus. The forward-looking statements included in this Prospectus are
made only as of the date of this Prospectus. The Company undertakes no
obligation to update such forward-looking statements to reflect subsequent
events or circumstances.
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.
FUTURE ACQUISITION AND LEASE RISKS; POTENTIAL DIFFICULTIES OF INTEGRATION
The Company currently plans to acquire or lease four to six additional
senior and assisted living facilities per year. While the Company is actively
pursuing acquisition opportunities, it has not entered into agreements for any
material acquisitions other than its contracts to acquire The Classic at West
Palm Beach, The Brendenwood Retirement Community and Harbor Village. There can
be no assurance that the Company's acquisitions will be completed at the rate
currently expected, if at all. In connection with certain acquisitions, the
Company may seek to obtain certain licenses which may delay the closing of an
acquisition. 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. In addition, there can be no assurance that the Company will
successfully integrate the operations of recently acquired or leased
facilities with the Company. If the Company is unsuccessful in achieving its
acquisition plans or in operating acquired or leased facilities and
integrating them into its operations, the Company's business, financial
condition and results of operations could be materially and adversely
affected. See "Business--Business and Growth Strategy."
DEVELOPMENT AND CONSTRUCTION RISKS
In addition to acquisitions, the Company currently plans to commence
development of two to three new senior and assisted living facilities per year
containing approximately 220 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 95% occupancy rate (a stabilized rate) for approximately 26 months
from commencement of construction, if at all. The successful development of
additional facilities will involve a number of risks, including the
possibility that the Company may be unable to locate suitable sites at
acceptable prices or may be unable to obtain, or may experience delays in
obtaining, necessary zoning, land use, building, occupancy, licensing and
other required governmental permits and authorizations. The Company may also
incur construction costs that exceed original estimates, may not complete
construction projects on schedule and may experience competition in the search
for suitable development sites. There can be no assurance that the Company
will not suffer delays in its development program, which could slow the
Company's growth. The Company relies and will continue to rely on third party
general contractors to construct its new facilities. There can be no assurance
that the Company will not experience difficulties in working with general
contractors and subcontractors, which could result in increased construction
costs and delays. Further, facility development is subject to a number of
contingencies over which the Company will have little control and that may
adversely affect project cost and completion time, including shortages of, or
the inability to obtain, labor or materials, the inability of the general
contractor or subcontractors to perform under their contracts, strikes,
adverse weather conditions and changes in applicable laws or regulations or in
the method of applying such laws and regulations. Accordingly, if the Company
is unable to achieve its development plans, its business, financial condition
and results of operations could be materially and adversely affected. See
"Business--Business and Growth Strategy."
NEED FOR ADDITIONAL FINANCING
To achieve its acquisition and development plans and growth objectives, the
Company will need to obtain significant additional financial resources. The
Company estimates the cost to acquire and develop the new facilities targeted
for acquisition or development over the next two years is approximately $225.0
million to
6
<PAGE>
$350.0 million in the aggregate (including mortgage debt financing and other
incurred or assumed debt), which substantially exceeds the Company's cash on
hand, existing credit facilities and commitments and 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 obtained a commitment for a $100.0 million construction and permanent
financing facility. The Company will from time to time seek additional 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. 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 $96.2 million at September 30, 1997. The
Company is currently party to various operating leases which will require
payments of approximately $11.7 million in 1998 and which contain certain
provisions for rent increases beyond base rent. In addition, the Company is
currently planning to enter into leases in connection with The Classic at West
Palm Beach, The Brendenwood Retirement Community and Harbor Village. The
Company intends to finance its senior and assisted living facilities through
conventional mortgage financing and bank financing, leases with third parties,
tax-exempt bond financing 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, the Company will continue to
be subject to risks normally associated with significant financing leverage.
At September 30, 1997, approximately $65.0 million 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 Consolidated 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 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
7
<PAGE>
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."
LIMITED OPERATING HISTORY
The Company was organized in September 1996 to own, operate, acquire and
develop senior and assisted living facilities. The Company did not begin
operations until May 7, 1997 when, upon completion of the IPO, PGI contributed
to the Company its interests in the Hallmark, Heritage, Devonshire, Springs of
East Mesa and Gables at Brighton facilities, the Company acquired a third
party's interest in the Devonshire and Heritage facilities, the Company
acquired the Hawthorn Lakes and Edina Park Plaza facilities from unaffiliated
third parties, the Company entered into an agreement to net lease the Park
Place facility, and the Company entered into a contract to manage the Island
at Lake Travis facility. In addition, the Company entered into a contract
effective July 1997 to manage the Kenwood facility. Accordingly, the Company
has only a limited operating history upon which an evaluation of the Company
and its prospects may be based. Although the Company has experienced revenue
and net income growth in recent periods, there can be no assurance that the
Company's operations will be profitable in the future or that the Company will
be able to integrate and oversee successfully the combined entity. Failure to
integrate successfully the operations of its facilities and to implement the
Company's operating and growth strategy could have a material adverse effect
on the Company's net revenue and earnings. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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."
SIGNIFICANT INFLUENCE BY EXISTING STOCKHOLDERS AND MANAGEMENT
Following the Offering, PGI will beneficially own approximately 45.8% of the
outstanding Common Stock and executive officers and directors of the Company
as a group will beneficially own approximately 49.4% of the outstanding Common
Stock. PGI and the Company's executive officers and directors are therefore in
the position to significantly influence the election of the directors of the
Company and the management and operations of the Company. Three of the
Company's seven directors are affiliates of PGI or employees of the Company
and four of the Company's directors are independent directors who are neither
affiliates of PGI nor employees of the Company. PGI is party to a Voting
Agreement pursuant to which it has agreed 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 May 7, 2000 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."
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
8
<PAGE>
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
certain states, where the Company operates and where the Company may operate
in the future, the Company may be unable to provide certain higher levels of
senior care 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 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 and other health care providers with which it
has affiliations do participate in those programs, and the Company may
participate in the Medicare program at the skilled nursing facility to be
constructed at the Devonshire facility. In the State of Washington, the
Company is paid for services it provides to 8 residents (as of September 30,
1997) by the Department of Social and Health Services of the State of
Washington. Some portion of such funds are received by such department from
the federal Medicaid program. Accordingly, the Park Place facility is subject
to laws applicable to state governmental contractors receiving federal funds.
Also, most 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. Congress and state legislatures have proposed
legislation that would significantly expand the 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
9
<PAGE>
issue, (ii) the Company plans to build and operate a skilled nursing facility
at its Devonshire facility and may in the future establish licensed home
health agencies which may participate in Medicare, (iii) as required under
some state licensure laws, or for the convenience of its residents, some of
the Company's senior and assisted living facilities maintain contracts with
hospitals and other health care providers, 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, and (iv) the contract between the
Park Place facility and the State of Washington Department of Social and
Health Services for the provision of services to eight residents is funded in
part by the federal Medicaid program. 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 facilities are 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.
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 has secured 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 9,175,000 shares of
Common Stock outstanding (9,475,000 shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, 7,175,000 shares (or a maximum
of 7,475,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or limitation under the
Securities Act of 1933, as amended (the "Securities Act"), except for any
shares owned by "affiliates" of the Company, as such term is defined in Rule
144 promulgated under the Securities Act (including 2,500,000 of the shares
owned by PGI). The remaining 2,000,000 shares are "restricted securities"
within the meaning of Rule 144 and are held by PGI and
10
<PAGE>
management of the Company. PGI has issued an exchangeable note having a
principal amount of $20.0 million and a term of five years (the "Exchangeable
Note") to an unaffiliated third party (the "Noteholder"), the repayment of
which is secured by the pledge of 1,370,000 shares of the Common Stock of the
Company held by PGI. Pursuant to the terms of the Exchangeable Note, the
Noteholder will have the right, commencing on November 15, 1998, and
thereafter on certain dates through maturity, to exchange specified portions
of the outstanding principal amount of the Exchangeable Note, plus the accrued
interest thereon, for shares of the Common Stock of the Company held by PGI,
at the exchange rates specified therein. See "Certain Transactions--
Exchangeable Note Transaction." 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 90 days after the date of this Prospectus (the
"lock-up period") without the prior written consent of Friedman, Billings,
Ramsey & Co., Inc. ("FBR"). 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 owns, such
sales could have an adverse effect on the market price for the Common Stock.
Further, 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.
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."
POSSIBLE VOLATILITY OF STOCK PRICE
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, 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."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are approximately $31.1 million (approximately $35.9 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. Approximately $0.2 million of such net proceeds will be used
to pay a fee for financial advisory and related services rendered in
connection with the Offering. Simultaneously with the completion of the
Offering, the Company expects to use $20.0 million of such net proceeds to
repay outstanding indebtedness under its $20.0 million revolving credit
facility with LaSalle, which bears interest at the prime rate plus one percent
per annum (9.5% as of December 18, 1997) and which terminates upon the
completion of the Offering. In addition, the Company may use approximately
$4.5 million to finance the purchase of investment securities expected to be
required to secure the Company's obligations under the lease with respect to
Harbor Village. The net proceeds not used to either repay indebtedness under
the LaSalle credit facility or to fund such deposit are approximately $6.4
million (approximately $11.2 million if the Underwriters' over-allotment
option is exercised in full). Such amount 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" and "Business--Business and
Growth Strategy."
PRICE RANGE OF COMMON STOCK
The Common Stock is listed and traded on the Nasdaq National Market under
the symbol "BLCI." The following table sets forth the high and low closing
sales prices for the Common Stock, as reported by the Nasdaq National Market,
for the periods indicated:
<TABLE>
<CAPTION>
CLOSING PRICE
PER SHARE
-------------
HIGH LOW
<S> <C> <C>
Fiscal year ending December 31, 1997:
Second Quarter (1).............................................. $12.13 $11.50
Third Quarter................................................... 19.00 11.88
Fourth Quarter (through December 18)............................ 20.63 16.69
</TABLE>
- ---------------------
(1) The Common Stock commenced trading on May 2, 1997.
On December 18, 1997, the closing price for the Common Stock as reported by
the Nasdaq National Market was $16.6875 per share. At such date, the Company
had approximately 300 holders of record of Common Stock.
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."
12
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the actual
capitalization of the Company and the pro forma capitalization of the Company,
as adjusted to give effect to the receipt and application of the net proceeds
of the Offering (after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company) as discussed in "Use
of Proceeds," and the net leases of The Gables at Farmington, The Classic at
West Palm Beach, The Brendenwood Retirement Community and Harbor Village. The
table should be read in conjunction with the Unaudited Pro Forma Consolidated
Condensed Financial Statements of the Company and the Unaudited Consolidated
and Combined Financial Statements of the Company, and the related notes to
each thereto, contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 4,402 $ 12,380
Cash-restricted....................................... 3,885 3,885
Letter of credit deposit.............................. 11,702 11,702
Investments collateralizing lease obligations......... -- 22,961
-------- --------
Cash and investments................................ $ 19,989 $ 50,928
======== ========
Total long-term debt.................................. $ 96,235 $ 96,235
Stockholders' equity:
Preferred Stock, $0.01 par value, 20,000,000 shares
authorized; 0 shares issued or outstanding......... -- --
Common Stock, $0.01 par value, 75,000,000 shares
authorized; 7,175,000 shares issued and outstanding
(9,175,000 shares issued and outstanding pro forma
as adjusted) (1)................................... 72 92
Additional paid-in-capital.......................... 26,863 57,782
Accumulated earnings................................ 109 109
-------- --------
Total stockholders' equity........................ 27,044 57,983
-------- --------
Total capitalization.............................. $123,279 $154,218
======== ========
</TABLE>
- ---------------------
(1) Does not include 751,000 shares of Common Stock subject to outstanding
options at December 18, 1997 at a weighted average exercise price of
$11.53 per share.
13
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial and operating data for the
Company. The selected financial data as of September 30, 1996 and 1997 have
been derived from the unaudited consolidated and combined financial statements
of the Company included elsewhere in this Prospectus. 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 Heritage, Hallmark and Devonshire facilities (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>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ----------------
1992(1) 1993(1) 1994(1) 1995(1) 1996(1) 1996(1) 1997(2)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue:
Resident fees.......... $5,044 $6,637 $15,205 $21,935 $ 23,437 $16,827 $28,204
Management services
income................ -- -- -- -- -- -- 82
------ ------ ------- ------- -------- ------- -------
Total revenue........ 5,044 6,637 15,205 21,935 23,437 16,827 28,286
Facility operating
expenses (3).......... (3,910) (5,279) (11,270) (13,253) (12,806) (9,346) (15,041)
Lease expenses......... -- -- -- -- -- -- (7,152)
General and
administrative
expenses (3).......... -- -- -- -- -- -- (1,137)
Depreciation and
amortization.......... (1,281) (1,626) (3,286) (3,721) (2,946) (3,013) (2,706)
------ ------ ------- ------- -------- ------- -------
Operating income
(loss)................ (147) (268) 649 4,961 7,685 4,468 2,250
Interest and financing
fees expense, net..... (1,742) (1,791) (4,053) (6,385) (5,320) (3,371) (2,293)
------ ------ ------- ------- -------- ------- -------
Income (loss) before
minority interest,
deferred tax benefit
and extraordinary
item.................. (1,889) (2,059) (3,404) (1,424) 2,365 1,097 (43)
(Income) loss allocated
to minority interest.. 1,415 1,266 1,178 802 (756) (87) (138)
------ ------ ------- ------- -------- ------- -------
Income (loss) before
deferred tax benefit
and extraordinary
item.................. (474) (793) (2,226) (622) 1,609 1,010 (181)
Deferred tax benefit... -- -- -- -- -- -- 222
Extraordinary item
(gain on
extinguishment of
debt)................. -- -- -- 3,274 -- -- --
------ ------ ------- ------- -------- ------- -------
Net income (loss)...... $ (474) $ (793) $(2,226) $ 2,652 $ 1,609 $ 1,010 $ 41
====== ====== ======= ======= ======== ======= =======
Net income per share... -- -- -- -- -- -- $ .01
Weighted average shares
outstanding........... -- -- -- -- -- -- 4,720
SELECTED OPERATING AND
OTHER DATA:
Number of facilities
(at end of period)
(4)................... 1 2 3 3 3 3 10
Total units operated
(4)(5)................ 323 577 918 918 918 918 2,177
Occupancy rate (5)..... 95.4% 79.9% 95.6% 98.1% 99.2% 99.4% 97.3%
Average monthly revenue
per unit (6).......... $1,365 $1,454 $ 1,732 $ 2,015 $ 2,144 $ 2,037 $ 1,964
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 26 $ 497 $ 4,127 $ 5,086 $ 4,230 $ 1,886 $ 4,402
Cash-restricted (7).... 30 8,457 2,047 1,733 1,089 2,108 3,885
Letter of credit
deposit (7)........... -- -- -- -- -- -- 11,702
Total assets........... 70,255 65,149 102,579 100,325 57,937 95,368 149,313
Total long-term debt... 70,848 71,510 101,242 99,627 65,000 99,407 96,235
Total stockholders'
equity and partners'
(deficit) capital..... (1,987) (2,780) 1,852 3,597 (25,427) (8,315) 27,044
</TABLE>
- ---------------------
(1) The historical financial and operating data for the years ended December
31, 1992, December 31, 1993, December 31, 1994, December 31, 1995 and
December 31, 1996 and the nine months ended September 30, 1996 represent
combined historical financial data for the senior and assisted living
division of PGI.
(2) The financial and operating data for the nine months ended September 30,
1997 represent combined historical financial data for the senior and
assisted living division of PGI until the completion of the IPO on May 7,
1997 and thereafter, the operations of the Company.
(3) Prior to the IPO, general and administrative expenses were allocated to
the then existing facilities; however, following the IPO, the Company
began reporting general and administrative expenses as a separate item.
(4) As of December 18, 1997, the Company operated 11 facilities with 2,350
units.
(5) Total units operated represents the total units operated as of the end of
the period. Occupancy rate is calculated by dividing total occupied units
by total units operated as of the end of the period.
(6) 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.
(7) 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 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.
14
<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," the Combined Financial Statements of the Original Facilities
and Notes thereto and the Consolidated and Combined Financial Statements of
the Company and Notes thereto, each appearing elsewhere in this Prospectus.
Historical results as set forth herein are not necessarily indicative of
future results from operations.
OVERVIEW
The Company operates 11 senior and assisted living facilities containing a
total of 2,350 units as of December 18, 1997. Four of such facilities are
owned by the Company, five facilities are leased by the Company and two
facilities (one of which is owned by PGI) are managed by Brookdale pursuant to
management contracts. The Company's senior and assisted living facilities
offer residents a supportive, "home-like" setting as well as 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 decisions for their elderly relatives.
The Company currently plans to acquire or lease approximately four to six
facilities per year containing an aggregate of approximately 800 to 1,200
units, and to commence development of two to three new facilities per year
containing approximately 220 units each in major urban and suburban areas of
major metropolitan markets. The Company anticipates that it will use a
combination of cash on hand, existing debt commitments, 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. In order to achieve its growth plans, the Company will be required
to obtain a substantial amount of additional financing. If available, the
Company may use long-term, tax-exempt bonds to finance the acquisition and
renovation of existing facilities and the development of new facilities. 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--Future Acquisition and Lease Risks;
Potential Difficulties of Integration," "--Development and Construction
Risks," and "--Need for Additional Financing" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Company derives its revenues from resident fees and management fees. In
the future, the Company may derive revenue from development fees. Resident
fees typically are paid monthly by residents, their families or other
responsible parties. The Company estimates that approximately 99.6% of the
Company's revenue has been derived from private pay sources. Management
services income 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. The
Company does not receive management fees from facilities that it owns and
leases.
15
<PAGE>
The Company classifies its operating expenses into the following categories:
(i) facility operating expenses, which include 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; (iii) lease payments; and (iv) depreciation and
amortization.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER ENDED
31, SEPTEMBER 30,
----------------------- --------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Total revenue......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Facility operating expenses (1)....... (74.1) (60.4) (54.6) (55.5) (53.2)
Lease expenses........................ -- -- -- -- (25.3)
General and administrative expenses
(1).................................. -- -- -- -- (4.0)
Depreciation and amortization......... (21.6) (17.0) (12.6) (17.9) (9.6)
------ ------ ------ ------ ------
Operating income (loss)............... 4.3 22.6 32.8 26.6 7.9
Interest and financing fees expense,
net.................................. (26.7) (29.1) (22.7) (20.0) (8.1)
------ ------ ------ ------ ------
Income (loss) before minority
interest, deferred tax benefit and
extraordinary item................... (22.4) (6.5) 10.1 6.6 (0.2)
(Income) loss allocated to minority
interest............................. 7.7 3.7 (3.2) (0.5) (0.5)
------ ------ ------ ------ ------
Income (loss) before deferred tax
benefit and extraordinary item....... (14.7) (2.8) 6.9 6.1 (0.7)
Deferred tax benefit.................. -- -- -- -- 0.8
Extraordinary item (gain on
extinguishment of debt).............. -- 14.9 -- -- --
------ ------ ------ ------ ------
Net income (loss)..................... (14.7)% 12.1% 6.9% 6.1% 0.1%
====== ====== ====== ====== ======
Selected Operating and Other Data:
Number of facilities (at end of
period) (2)........................ 3 3 3 3 10
Total units operated (2)(3)......... 918 918 918 918 2,177
Occupancy rate (3).................. 95.6% 98.1% 99.2% 99.4% 97.3%
Average monthly revenue per unit
(4)................................ $1,732 $2,015 $2,144 $2,037 $1,964
</TABLE>
- ---------------------
(1) Prior to the IPO, general and administrative expenses were allocated to
the then existing facilities; however, following the IPO, the Company
began reporting general and administrative expenses as a separate item.
(2) As of December 18, 1997, the Company operated 11 facilities with 2,350
units.
(3) Total units operated represents the total units operated as of the end of
the period. Occupancy rate is calculated by dividing total occupied units
by total units operated as of the end of the period.
(4) 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.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
For the period ended September 30, 1996, results reflect operations of the
Hallmark, Heritage and Devonshire facilities. For the period ended September
30, 1997, results reflect operations of the Hallmark, Heritage, Devonshire,
Springs of East Mesa and Gables at Brighton facilities through May 7, 1997 and
all of the Company's facilities except The Gables at Farmington thereafter.
Revenue. Total revenue increased by $11.5 million, or 68.1%, to $28.3
million for the nine months ended September 30, 1997 when compared to the same
period in 1996. Of this increase, approximately $1.4 million (or an increase
of 8.2%) relates to increased resident fees at the properties that have been
operated for both respective periods which were the Original Facilities. The
remainder of the increase, or approximately $10.1 million, relates
16
<PAGE>
to revenue of the Springs of East Mesa, Gables at Brighton, Hawthorn Lakes,
Edina Park Plaza and Park Place facilities (the "New Facilities").
Operating Expenses. Total operating expenses increased $13.7 million, or
110.7%, to $26.0 million for the nine months ended September 30, 1997 when
compared to the same period in 1996. Facility operating expenses increased
$6.2 million, or 71.2%, to $14.8 million primarily due to the inclusion of the
New Facilities. From the commencement of operations on May 7, 1997 through
September 30, 1997, the Company managed its facilities and, accordingly, did
not pay any property management fees, but incurred general and administrative
expenses of approximately $1.1 million. Lease expense increased $7.2 million
due to the inclusion of the Springs of East Mesa, Gables at Brighton, Hallmark
and Park Place facilities.
Depreciation and amortization decreased approximately $307,000 or 10.2%, to
$2.7 million primarily due to the sale and lease-back of the Hallmark Facility
on December 27, 1996. Prior to this date, the Company owned and, accordingly,
recorded depreciation relating to this facility. The decrease in depreciation
and amortization due to the sale and lease-back of the Hallmark Facility was
slightly offset by an increase in depreciation associated with the purchase of
the Edina Park Plaza and Hawthorn Lakes facilities (the "Acquired Facilities")
on May 7, 1997.
Interest and financing fees decreased approximately $778,000, or 22.0%, to
$2.8 million primarily due to the sale and lease-back of the Hallmark
facility. As a result of the sale and lease-back of such facility on December
27, 1996, it was no longer encumbered by the debt. This decrease was slightly
offset by the assumption of debt of certain of the Acquired Facilities in
connection with the purchase of these properties. Interest income increased
approximately $300,000, or 178.6%, to $468,000 due to an increase in average
cash balances. Property management fee--affiliate decreased approximately
$465,000, or 66.9%, to $230,000 due to the elimination of all management fees
charged to the Company once the Company commenced operations on May 7, 1997.
Net Income. For the nine months ended September 30, 1997, net income
decreased approximately $969,000, or 95.9%, to net income of $41,000 when
compared to the same period in 1996. This decrease was primarily due to an
increase in total expenses partially offset by an increase in total revenue of
the Company.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
For these periods, results reflect operations of the Hallmark, Heritage and
Devonshire facilities.
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, have not been paid since the IPO and
will not be paid in the future) 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%.
17
<PAGE>
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 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
For these periods, results reflect operations of the Hallmark, Heritage and
Devonshire facilities.
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, have not been paid since the IPO and will not be
paid in the future) 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.
18
<PAGE>
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 relating 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 in 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.
LIQUIDITY AND CAPITAL RESOURCES
On May 7, 1997, the Company completed the IPO of 4,500,000 shares of Common
Stock, $.01 par value per share, at $11.50 per share. The underwriters of the
IPO exercised their over-allotment option, and on June 3, 1997, the Company
sold an additional 675,000 shares of the Company's Common Stock at $11.50 per
share. The proceeds from such IPO (including the exercise of the underwriters'
over-allotment option), net of related underwriting discounts and commissions
and offering costs, totaled approximately $51.4 million. The Company used
approximately $42.1 million of such net proceeds to fund various transactions
or deposits completed or made in connection with the IPO. The remaining net
proceeds have been used to finance a portion of future acquisitions and
developments of senior and assisted living facilities and for working capital
and general corporate purposes.
The net proceeds to the Company from the Offering are estimated to be
approximately $31.1 million (approximately $35.9 million if the Underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. Approximately $0.2 million of such net proceeds will be used to pay a
fee for financial advisory and related services rendered in connection with
the Offering. Simultaneously with the completion of the Offering, the Company
expects to use $20.0 million of the net proceeds to repay outstanding
indebtedness under its $20.0 million revolving credit facility with LaSalle,
which terminates upon the completion of the Offering. In addition, the Company
may use approximately $4.5 million to finance the purchase of investment
securities expected to be required to be used to secure the Company's
obligations under the lease with respect to Harbor Village. The net proceeds
not used to either repay indebtedness under the LaSalle credit facility or to
fund such deposit are
19
<PAGE>
estimated to be approximately $6.4 million (approximately $11.2 million if the
Underwriters' over-allotment option is exercised in full). Such amount 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.
Cash and cash equivalents (which excludes cash-restricted of $3.9 million
and the letter of credit deposit of $11.7 million) increased $2.5 million to
$4.4 million at September 30, 1997 compared to September 30, 1996 primarily
due to cash remaining after the use of the IPO proceeds. The increases in net
cash provided by operating and financing activities were partially offset by
an increase in net cash used in investing activities.
Net cash (used in) provided by operating activities decreased $3.2 million
to $1.0 million for the nine months ended September 30, 1997 compared to the
same period in 1996. The primary reasons for the net decreases in cash (used
in) provided by operating activities were the overall decrease in net income
as compared to the Predecessor Properties and the increase in the deferred tax
asset related to the book-tax difference in the carryover basis of the
Heritage and Devonshire facilities, partially offset by the decrease in the
prepaid rent asset due to prepayment at lease inception on December 27, 1996.
Cash used in investing activities increased $46.7 million to $46.9 million
for the nine months ended September 30, 1997 compared to the same period in
1996. The increase was primarily attributable to cash used in the acquisition
of the Hawthorn Lakes and Edina Park Plaza facilities and cash used to acquire
a third party's interest in the Heritage and Devonshire facilities.
Net cash provided by financing activities increased $52.3 million to $46.1
million for the nine months ended September 30, 1997 compared to the same
period in 1996. The increase was primarily due to proceeds received from the
IPO and the exercise of the underwriters' over-allotment options. These
increases were partially offset by an initial cash deposit required to secure
the Company's obligations related to the credit enhancement for the tax-exempt
bonds for the Heritage and Devonshire facilities.
The Company currently plans to acquire or lease four to six senior and
assisted living facilities per year containing an aggregate of approximately
800 to 1,200 units, and to commence development of two to three new facilities
per year containing approximately 220 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 a
stabilized occupancy rate of approximately 95%. The total construction costs,
including construction period financing costs and operating deficits during
the lease-up period, for the 220-unit prototype are estimated to be
approximately $28.0 million, or approximately $127,000 per unit. The Company
anticipates that it will use a combination of cash on hand, net proceeds from
the Offering, additional equity financing and debt financing, lease
transactions and cash generated from operations to fund its acquisition and
development activities. The Company currently estimates that the net proceeds
from the Offering, together with cash on hand, existing debt facilities and
commitments and anticipated financing, will be sufficient to fund its
acquisition and development plans for at least 12 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 other than the $100.0 million commitment from Nomura. There
can be no assurance that the Company will be able to obtain the financing
necessary for its acquisition and development programs. See "Risk Factors--
Need for Additional Financing."
As of September 30, 1997, the Company had $65.0 million of long-term
indebtedness in tax-exempt bonds with floating rates. 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, and 3.7% for the
20
<PAGE>
nine months ended September 30, 1997. Such tax-exempt bonds contain covenants
requiring the facilities to maintain a minimum number of units for income
qualified residents. The Company may obtain similar bond financing for future
facilities. See "Risk Factors--Adverse Consequences of Indebtedness and Lease
Obligations; Floating Rate Debt."
The Company is dependent on third-party financing for its acquisition and
development program. 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 financing covenants and
other restrictions that (i) require the Company to meet certain financial
tests and maintain certain amounts of funds in escrow, (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
resident fee rates and facility occupancy rates. The rates charged for 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 have terms of approximately one year
and allow, at the time of renewal, for adjustments in the monthly fees payable
thereunder, thereby enabling 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 and is also
dependent upon local market conditions. There can be no assurance that
resident fees will increase or that costs will not increase due to inflation
or other causes. In addition, as of September 30, 1997, approximately $65.0
million in principal amount of the Company's indebtedness bore 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. See "Risk Factors--
Competition" and "--Adverse Consequences of Indebtedness and Lease
Obligations; Floating Rate Debt."
21
<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 11 senior and assisted living
facilities containing a total of 2,350 units which, as of September 30, 1997,
were approximately 97% occupied. The Company owns four of such facilities,
leases five facilities and manages two other facilities pursuant to management
contracts. With facilities that contain an average of approximately 214 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 four to
six facilities per year containing an aggregate of approximately 800 to 1,200
units, and to commence development of two or three new facilities per year
containing approximately 220 units each.
The Company recently entered into a net lease for a facility located in
Farmington, Connecticut. The Company also entered into agreements to purchase
facilities located in West Palm Beach, Florida, Voorhees, New Jersey and
Chicago, Illinois. The closings of the West Palm Beach, Florida and Voorhees,
New Jersey facilities are expected to occur in December 1997. The closing of
the Chicago, Illinois facility is expected to occur prior to January 31, 1998.
There can be no assurance that any or all of such transactions will be
consummated in a timely manner if at all. The Company expects to assign the
purchase agreements for these facilities to unaffiliated third parties which
will acquire the facilities and in turn net lease them to the Company. The
Company has acquired development sites located in Austin, Texas and
Southfield, Michigan for the construction of facilities with approximately 220
units at each site and has commenced construction at the Austin, Texas site.
In addition, the Company has entered into agreements to acquire development
sites located in Glen Ellyn, Illinois and Raleigh, North Carolina for the
construction of facilities with approximately 220 units at each site, the
closings of which are contingent upon the receipt of all necessary approvals
for the development of the respective sites and are expected to occur within
12 months following the completion of the Offering. The Company has also been
selected by Battery Park City Authority to be the developer and operator of a
senior and assisted living facility to be located in Battery Park City in New
York, New York. See "Risk Factors--Future Acquisition and Lease Risks;
Potential Difficulties of Integration," "--Development and Construction Risks"
and "--Need for Additional Financing."
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. 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 levels of care provided by the
Company to residents vary depending upon the licensure requirements of the
state in which the facility is located.
22
<PAGE>
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 rapid growth of the senior and assisted living industry is supported by
several significant trends, including the following:
FAVORABLE DEMOGRAPHICS. The primary consumers of senior and assisted living
services are persons over age 65. This group represents one of the fastest
growing segments of the U.S. population. According to U.S. Bureau of the
Census data, the number of people in the U.S. age 65 and older increased by
more than 27% from 1981 to 1994, growing from 26.2 million to 33.2 million.
The segment of the population over 85 years of age, which comprises the
largest percentage of residents at senior care facilities, is projected to
increase by more than 40% between the years 1990 and 2000. Brookdale believes
that these trends, depicted in the graph below, will contribute to continued
strong demand for senior and assisted living services.
PROJECTED PERCENTAGE CHANGE IN THE ELDERLY POPULATION OF THE U.S.
[GRAPH]
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 those 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.
23
<PAGE>
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 providing less intensive care. 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
[GRAPH]
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.
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 approximately 214 units, located in urban and suburban
areas of major metropolitan markets. See "--Acquisitions and Development" and
"Risk Factors--Future Acquisition and Lease Risks; Potential Difficulties of
Acquisition."
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 220 units, but can be constructed to accommodate
between 150 and 250 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 two to three facilities in each of the
next five years and anticipates that each development will require
approximately 20 to 24 months from pre-development to completion of
construction. See "--Acquisitions and Development" and "Risk Factors--
Development and Construction Risks."
24
<PAGE>
UTILIZE TAX-EXEMPT BOND FINANCING. 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. As of September 30, 1997, the Company had
$65.0 million of long-term indebtedness in tax-exempt bonds with floating
rates. The interest rates (exclusive of credit enhancement and other fees) on
such debt averaged 3.7% for the nine months ended September 30, 1997. 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 or health care network affiliations
for each of its facilities. Hospital and health care network 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 an expanded 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 and Health Care Network
Affiliations."
UTILIZE SOPHISTICATED MARKETING PROGRAMS TO MAINTAIN HIGH OCCUPANCY RATES.
The Company utilizes sophisticated marketing programs to achieve high
occupancy rates, which as of September 30, 1997 were approximately 97% for its
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 three of its facilities, which provide referrals of prospective
residents. The Company believes that the success of its marketing programs is
demonstrated not only by its high occupancy rates, but also by the Company's
ability to maintain waiting lists at its facilities for prospective residents
who pay a deposit in order to be included on such lists. See "--Company
Operations--Marketing and Sales."
UTILIZE OPERATIONAL EXPERTISE TO ENHANCE PROFITABILITY. The Company has
developed and implemented sophisticated management and operational procedures
resulting in strong operating margins and occupancy rates. 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--
Future Acquisition and Lease Risks; Potential Difficulties of Integration" 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."
25
<PAGE>
FACILITIES
The following table sets forth certain information regarding the Company's
facilities:
<TABLE>
<CAPTION>
OCCUPANCY
RATE AT
YEAR SEPTEMBER 30, OWNERSHIP
FACILITY LOCATION UNITS OPENED 1997(1) STATUS(2)
<S> <C> <C> <C> <C> <C>
The Hallmark............ Chicago, IL 341 1990 100% Leased
The Devonshire (3)...... Lisle, IL 323 1990 99% Owned
The Heritage............ Des Plaines, IL 254 1993 99% Owned
The Park Place.......... Spokane, WA 208 1992 87% Leased
The Island on Lake
Travis................. Lago Vista, TX 207 1988 92% Managed
Hawthorn Lakes (3)...... Vernon Hills, IL 202 1987 100% Owned
Edina Park Plaza........ Edina, MN 201 1987 100% Owned
The Springs of East
Mesa................... Mesa, AZ 185 1986 100% Leased
The Gables at
Farmington............. Farmington, CT 173 1984 98% Leased
The Kenwood............. Minneapolis, MN 153 1987 98% Managed
The Gables at Brighton.. Brighton, NY 103 1988 95% Leased
-----
Total Units........... 2,350(3)
</TABLE>
- ---------------------
(1) Occupancy rate is calculated by dividing total occupied units by total
units operated as of such date.
(2) All facilities indicated as "Owned" are 100% owned by Brookdale.
(3) 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.
The following table sets forth certain information regarding The Classic at
West Palm Beach and The Brendenwood Retirement Community, which the Company
anticipates that it will begin leasing in December 1997 and Harbor Village,
which the Company anticipates it will begin leasing prior to January 31, 1998.
There can be no assurance that any or all of such transactions will be
consummated in a timely manner if at all.
<TABLE>
<CAPTION>
OCCUPANCY
RATE AT
YEAR SEPTEMBER 30,
FACILITY LOCATION UNITS OPENED 1997(1)
<S> <C> <C> <C> <C>
The Classic at West Palm
Beach........................ West Palm Beach, FL 296 1990 91%
Harbor Village................ Chicago, IL 276 1954(2) 77%
The Brendenwood Retirement
Community.................... Voorhees, NJ 149 1987 91%
---
Total Units................. 721
</TABLE>
- ---------------------
(1) Occupancy rate is calculated by dividing total occupied units by total
units operated as of such date.
(2) This facility was operated as an apartment building until 1991 when the
current owner purchased and renovated it and began operating it as a
senior and assisted living facility.
The following table sets forth certain information regarding facilities
under development by the Company:
<TABLE>
<CAPTION>
ESTIMATED
LOCATION UNITS STATUS EXPECTED OPENING
<S> <C> <C> <C>
Austin, TX.................... 220 Under Construction First Quarter 1999
Southfield, MI................ 220 In Development Second Quarter 1999
Glen Ellyn, IL................ 220 In Development Third Quarter 1999
Raleigh, NC................... 220 In Development Third Quarter 1999
New York (Battery Park City),
NY........................... 216 In Development 2000
-----
Total Estimated Units....... 1,096
</TABLE>
26
<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.
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. At
present, many residents receive supplemental health care services from outside
third parties. The Company's ability to provide certain services depends on
licensure requirements of particular states. However, the Company's general
strategy is to provide assistance with activities of daily living subject to
state licensure limitations.
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 through a combination of the
implementation of efficient operating procedures and the economies of scale
associated with the size of its 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, finance, hospitality,
marketing and real estate operations expertise.
27
<PAGE>
Brookdale has implemented intensive standards, policies and procedures
systems, including detailed staff manuals, which the Company believes have
contributed to Brookdale's 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 and efficient operations. Headquarters staff
in 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,
28
<PAGE>
clergy, area agencies for the elderly, skilled nursing facilities, home health
agencies and social workers. 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 AND HEALTH CARE NETWORK AFFILIATIONS
Another key element in the Company's strategy is to establish affiliations
between Brookdale's facilities and hospitals and health care networks. 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 intends to arrange hospital and
health care network affiliations for its other facilities and those that it
acquires, develops or leases in the future. Hospital and health care network
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, LEASES AND DEVELOPMENT
The Company evaluates markets for acquisition, lease and development
opportunities based on demographics and market studies. The Company's
acquisition, lease and development strategy will focus on the urban and
suburban areas of major metropolitan markets.
ACQUISITIONS AND LEASES
The Company currently expects to acquire or lease four to six facilities per
year containing an aggregate of approximately 800 to 1,200 units. In some
cases, the purchase contract for a facility may be assigned to an unaffiliated
third party which would acquire the facility and in turn net lease it to the
Company. 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 214 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--Future Acquisition and Lease Risks; Potential Difficulties of
Integration" and "--Need for Additional Financing."
The Company recently entered into a net lease for The Gables at Farmington,
a 173-unit facility in Farmington, Connecticut. The Company also entered into
agreements to purchase The Classic at West Palm Beach, a 296-unit facility in
West Palm Beach, Florida, The Brendenwood Retirement Community, a 149-unit
facility in Voorhees, New Jersey, and Harbor Village, a 276-unit facility in
Chicago, Illinois. The closings of
29
<PAGE>
The Classic at West Palm Beach and The Brendenwood Retirement Community are
expected to occur in December 1997. The closing of Harbor Village is expected
to occur prior to January 31, 1998. There can be no assurance that any or all
of such transactions will be consummated in a timely manner if at all. The
Company expects to assign the purchase agreements for these facilities to
unaffiliated third parties which will acquire the facilities and in turn net
lease them to the Company. See "Risk Factors--Future Acquisition and Lease
Risks; Potential Difficulties of Integration."
DEVELOPMENT
The Company currently intends to commence the development of two to three
facilities per year. The Company's flexible prototype facility contains 220
units, but can be constructed to accommodate between 150 to 250 units. The
size of a particular facility will depend on site size, zoning and underlying
market characteristics. The Company's 220-unit prototype contains
approximately 220,000 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 total construction costs, including construction
period financing costs and operating deficits during the lease-up period, for
the 220-unit prototype are estimated to be approximately $28.0 million, or
approximately $127,000 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 acquired development sites located in Southfield, Michigan
and Austin, Texas for the construction of facilities with approximately 220
units at each site and has commenced construction at the Austin, Texas site.
In addition, the Company has entered into agreements to acquire development
sites located in Glen Ellyn, Illinois and Raleigh, North Carolina for the
construction of facilities with approximately 220 units at each site, the
closings of which are contingent upon the receipt of all necessary approvals
for the development of the respective sites and are expected to occur within
12 months following completion of the Offering. The Company has also been
selected by Battery Park City Authority to be the developer and operator of a
senior and assisted living facility to be located in Battery Park City in New
York, New York. The closings of the Company's purchases or ground lease of the
development sites is subject to certain customary conditions, including zoning
and other governmental approvals. Although the Company expects the
acquisitions or ground lease of the development sites to be consummated, there
can be no assurance that the conditions to closing such acquisitions or ground
lease will be satisfied in a timely manner, if at all. See "Risk Factors--
Development and Construction Risks."
30
<PAGE>
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 providers primarily on the basis of cost, quality of care
and the array of services provided. The Company will also compete with
companies providing home based health care based on those factors as well as
the reputation, geographic location and physical appearance of facilities and
family preferences. Some of the Company's competitors operate on a not-for-
profit basis or as charitable organizations or have, or may obtain, greater
financial resources than those of the Company.
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 certain states where the Company
operates and where 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 whether a need exists for certain new bed additions or new
services. Certain 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 and other health care providers with which it
has affiliations do participate in those programs, and the Company may
participate in the Medicare program at the skilled nursing facility to be
constructed at the Devonshire facility. In the State of Washington, the
Company is paid for services it provides to 8 residents (as of September 30,
1997) by the Department of Social and Health Services of the State of
Washington. Some portion of such funds are received by such department from
the federal Medicaid program. Accordingly, the Park Place facility is subject
to laws applicable to state governmental contractors receiving federal funds.
Also, most 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
31
<PAGE>
of Justice and other federal agencies interpret these statutes liberally and
enforce them aggressively. Congress and state legislatures have proposed
legislation that would significantly expand the 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, (iii) as required under some state
licensure laws, or for the convenience of its residents, some of the Company's
senior and assisted living facilities maintain contracts with hospitals and
other health care providers, 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, and (iv) the contract between the Park Place facility
and the State of Washington Department of Social and Health Services for the
provision of services to eight residents is funded in part by the federal
Medicaid program. 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."
EMPLOYEES
As of September 30, 1997, the Company had approximately 850 employees, of
which 35 were 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 13,500 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.
32
<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............. 44 President and Chief Executive Officer, Director
Darryl W. Copeland, Jr...... 38 Executive Vice President, Director
Craig G. Walczyk............ 38 Vice President--Chief Financial Officer
Robert J. Rudnik............ 43 General Counsel and Secretary
Matthew F. Whitlock......... 33 Vice President--Acquisitions
Mark J. Iuppenlatz.......... 38 Vice President--Development
Stephan T. Beck............. 42 Vice President--Operations
Margaret B. Shontz.......... 38 Vice President--Human Resources
Sheryl A. Wolf.............. 35 Controller
Wayne D. Boberg............. 45 Director
Bruce L. Gewertz............ 48 Director
Darryl W. Hartley-Leonard... 52 Director
Daniel J. Hennessy.......... 39 Director
</TABLE>
Michael W. Reschke has served as Chairman of the Board of Directors of the
Company since May 1997. 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 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, and Prime Group Realty Trust, a publicly traded real estate
investment trust involved in office and industrial buildings and the successor
in interest to the former office and industrial divisions 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 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 has served as President and Chief Executive Officer and a
director of the Company since May 1997. From January 1991 to May 1997, 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. has served as Executive Vice President and a
director of the Company since May 1997. From March 1997 to May 1997, Mr.
Copeland was employed by 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 has served as Vice President--Chief Financial Officer of
the Company since May 1997. From November 1992 to May 1997, Mr. Walczyk was
employed by PGI, most recently, as Vice President, Director of Corporate
Accounting. Prior to joining PGI, Mr. Walczyk was employed by the accounting
firm of
33
<PAGE>
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.
Robert J. Rudnik has served as General Counsel and Secretary of the Company
since July 1997. Mr. Rudnik also serves as Executive Vice President, General
Counsel and Secretary of The Prime Group, Inc. and Prime Group Realty Trust, a
publicly traded real estate investment trust which owns, manages and operates
office and industrial properties and is the successor to the office and
industrial divisions of PGI. Mr. Rudnik has served in such capacity for The
Prime Group, Inc. since 1984. Mr. Rudnik is licensed to practice law in the
State of Illinois and is a member of the bar in the State of Florida.
Matthew F. Whitlock has served as Vice President--Acquisitions of the
Company since May 1997. From August 1996 to May 1997, 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 has served as Vice President--Development of the Company
since May 1997. From September 1996 to May 1997, 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 has served as Vice President--Operations of the Company
since May 1997. From January 1993 to May 1997, 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.
Margaret B. Shontz has served as Vice President--Human Resources of the
Company since May 1997. From February 1989 to May 1997, Ms. Shontz was
employed by PGI, most recently serving as Director of Human Resources of its
Senior Housing Division.
Sheryl A. Wolf has served as Controller of the Company since May 1997. From
September 1991 to May 1997, Ms. Wolf was employed by PGI, most recently
serving as Corporate Director of Finance of its Senior Housing Division.
Wayne D. Boberg has served as a director of the Company since May 1997. 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 has served as a director of the Company since May 1997.
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 has served as a director of the Company since May
1997. Mr. Hartley-Leonard is a founding partner of H-LK Partners, a hotel
development and management company, Chairman of the Board and Chief Executive
Officer of Metropolitan Hotel Corporation, a hotel company in the long term
stay/suite hotel business directed at the upscale market, Chairman of the
Board and Chief Executive Officer of Cobabaco Cigar Co., a nationwide cigar
distribution company, and Vice Chairman and a member of the board of
Production Group International, Inc., a global events entertainment,
exhibitions and business communication company.
34
<PAGE>
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
LaSalle Partners, the United States Committee for UNICEF and Evanston Hospital
in Chicago.
Daniel J. Hennessy has served as a director of the Company since May 1997.
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, 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
Executive Committee. The members of the Executive Committee consist of
Messrs. Reschke, Schulte and Copeland. The Executive Committee has been
granted certain authority to acquire and dispose of real property and the
power to authorize, on behalf of the Board of Directors, the execution of
certain contracts and agreements, including those related to certain
borrowings by the Company. The Executive Committee meets monthly (or more
frequently if necessary) and all actions by the committee are reported at the
next meeting 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 pays 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
has granted to each non-employee director certain options to purchase Common
Stock. See "--Stock Incentive Plan."
The Company has entered into indemnification agreements with each of the
Company's directors. The indemnification agreements 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.
35
<PAGE>
EXECUTIVE COMPENSATION
The Company was organized in September 1996 and 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 125,000
Robert J. Rudnik General Counsel and Secretary 100,000
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>
- ---------------------
(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 or
limited liability companies, 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.
Concurrent with the completion of the IPO, the Company granted 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); Margaret B.
Shontz (25,000); and Sheryl A. Wolf (25,000).
The Initial Grants vest, subject to certain conditions being met, at the
rate of 25% per year over the four years following the date of grant,
commencing on the first anniversary of their date of grant, and have a term of
10 years. The exercise price of the Options issued pursuant to the Initial
Grants is $11.50 per share, the initial public offering price of the Common
Stock. The exercise price for any of these Options 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.
36
<PAGE>
Concurrent with the completion of the IPO, the Company also granted an
aggregate of 20,000 Options to its non-employee directors that vest, subject
to certain conditions being met, at the rate of 33.3% per year over the three
years following the date of grant, commencing on the first anniversary of
their date of grant, and have a term of 10 years. The exercise price of these
Options is $11.50 per share, the initial public offering price of the Common
Stock. The exercise price for any of these Options 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.
On June 30, 1997, the Company granted an aggregate of 56,000 Options to
certain employees that vest, subject to certain conditions being met, at the
rate of 25% per year over the four years following the date of grant,
commencing on the first anniversary of their date of grant, and have a term of
10 years. The exercise price of these Options is $11.875 per share. The
exercise price for any of these Options 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 Compensation Committee may grant options under the Stock Incentive Plan
in substitution for outstanding options with higher exercise prices. In
addition, in the event of certain extraordinary events, the Compensation
Committee may make adjustments in the aggregate number and kind of shares
reserved for issuance, the number and kind of shares covered by outstanding
awards and the exercise prices specified therein as may be determined to be
appropriate.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Messrs. Reschke,
Schulte, Copeland, Whitlock and Iuppenlatz. These agreements provide that the
executive officers shall devote substantially all of their business time to
the operation of the Company, except 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 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 provides 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 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 provides
for a signing bonus of $150,000. The agreements with Messrs. Whitlock and
Iuppenlatz 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 entered into
certain agreements pursuant to which Mr. Copeland has the option to purchase
certain additional shares of Common Stock from The Prime Group, Inc. and has
agreed to purchase certain additional shares of Common Stock from The Prime
Group, Inc. See "Certain Transactions--Stock Option and Purchase Agreements."
37
<PAGE>
CERTAIN TRANSACTIONS
Formation Agreement. Upon the completion of the IPO, the Company and PGI
entered into the Formation Agreement, pursuant to which PGI transferred to the
Company all of the capital stock of BLC Property, Inc., 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 issued 1,703,043 shares of its Common Stock to PGI and assumed certain
indebtedness in the aggregate amount of $65.0 million. In addition, the
Company paid PGI approximately $8.4 million to reimburse PGI for earnest
monies previously paid by PGI in connection with the acquisition of the Edina
Park Plaza and Hawthorn Lakes 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 IPO. In
accordance with the Formation Agreement, Mark J. Schulte transferred 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 Heritage,
Devonshire and Hallmark facilities had been operated in the ordinary course
since December 31, 1996, no party made any representation or warranty as to
the assets, businesses or liabilities transferred or assumed pursuant to such
agreement, 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 were transferred on an "as is, where is" basis. In the Formation
Agreement, PGI covenanted that the partnerships owning the Heritage and the
Devonshire facilities had 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 IPO; however, any unrestricted
cash in excess of $800,000 then held by such partnerships was distributed to
PGI.
The Company indemnified 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 also indemnified PGI, as a controlling person, against any loss,
claim, damage or liability arising out of the IPO, except for losses, claims,
damages or liabilities arising from the inaccuracy of information supplied in
writing by PGI for inclusion in the prospectus related thereto. PGI similarly
indemnified the Company and its subsidiaries with respect to any inaccurate
representation or breach of warranty by PGI under the Formation Agreement.
Registration Rights Agreement. Upon completion of the IPO, the Company
granted 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. Upon completion of the IPO, PGI entered into a Voting
Agreement pursuant to which it agreed 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 IPO and the date PGI first owns less than 10% of the
outstanding Common Stock.
Non-Compete Agreement. Upon completion of the IPO, the Company, PGI and
Michael W. Reschke entered into a Non-Compete Agreement that will prevent PGI
and Mr. Reschke from developing, acquiring, owning, managing or operating
senior and assisted 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 IPO and (ii) one year from the date of a merger of the
Company or the sale of all or substantially all of the stock or assets of the
Company; however, PGI will be permitted to maintain its ownership interest in
the Island on Lake Travis facility. In addition, to the extent PGI or Mr.
Reschke were to acquire a group of properties that included facilities similar
to those operated by the Company, then the Company would have the right and
opportunity to purchase such similar facilities at a
38
<PAGE>
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.
Management Agreement. Upon completion of the IPO, the Company and PGI
entered into 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. Upon completion of the IPO, the Company and PGI
entered into 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, which included a base rental rate of
approximately $8,800 per month plus a pro rata share of real estate taxes and
operating expenses, was terminated effective September 30, 1997.
Stock Option and Purchase Agreements. Upon completion of the IPO, The Prime
Group, Inc. entered into a stock option agreement with Darryl W. Copeland, Jr.
pursuant to which Mr. Copeland received 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. Upon completion of the IPO,
Mr. Copeland also entered into an agreement with The Prime Group, Inc. to
purchase an additional 25,000 shares of Common Stock.
Office Lease. On September 25, 1997, the Company entered into a five year
lease, commencing October 1, 1997, for its corporate office with 77 West
Wacker Limited Partnership (the "Landlord"), a partnership which is owned by
Prime Group Realty Trust, the publicly-traded successor to PGI's office and
industrial divisions. The corporate office is located at 77 West Wacker Drive,
Suite 4800, Chicago, Illinois 60601. The office space is approximately 13,500
square feet, with base rent of $18.50 per square foot escalating at $0.75 per
square foot at each anniversary of the commencement date. On October 2, 1997,
in connection with the signing of the lease, the Company received a $404,000
cash payment from the Landlord.
Exchangeable Note Transaction. PGI has issued an exchangeable note having a
principal amount of $20 million and a five year term (the "Exchangeable Note")
to an unaffiliated third party (the "Noteholder"), the repayment of which is
secured by the pledge by PGI of 1,370,000 shares of its Common Stock. Pursuant
to the terms of the Exchangeable Note, the Noteholder will have the right,
commencing on November 15, 1998 (the "Initial Exchange Date"), to exchange a
portion of the outstanding principal amount of the Exchangeable Note, plus the
accrued interest thereon, for shares of Common Stock of the Company held by
PGI, at the exchange rate specified therein. On and after the Initial Exchange
Date, the Noteholder will be entitled to exchange up to $5 million of the
outstanding principal under the Exchangeable Note, plus accrued interest
thereon, for shares of Common Stock of the Company held by PGI. Thereafter,
the Noteholder will be entitled to exchange up to a further $5 million of the
outstanding principal amount under the Exchangeable Note, plus accrued
interest thereon, on each of January 15, 1999, March 15, 1999 and May 15,
1999. Subject to certain exceptions, the number of shares of Common Stock
subject to exchange for a given amount of principal and accrued interest to be
exchanged pursuant to the terms of the Exchangeable Note will be equal to (x)
such amount of principal and accrued interest divided by (y) the product of
(A) 88% multiplied by (B) the average of the closing bid prices for the Common
Stock on the Nasdaq National Market on the seven trading days immediately
preceding the date of exchange.
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. As of the date of this Prospectus, Mr. Boberg beneficially
owns 2,500 shares of Common Stock and has Options to acquire an additional
5,000 shares of Common Stock.
Transactions between the Company and its officers, directors, principal
stockholders and their affiliates 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 November 25, 1997, 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
OWNERSHIP
-----------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED(1) OFFERING OFFERING
<S> <C> <C> <C>
The Prime Group, Inc.(2)............... 4,203,043 58.6% 45.8%
Michael W. Reschke(3).................. 4,203,043 58.6 45.8
J.P. Morgan Investment Management
Inc.(4)............................... 600,000 8.4 6.5
Mark J. Schulte........................ 296,957 4.1 3.2
Darryl W. Copeland, Jr.(5)............. 12,000 * *
Wayne D. Boberg........................ 2,500 * *
Bruce L. Gewertz....................... -- -- --
Darryl W. Hartley-Leonard.............. 2,000 * *
Daniel J. Hennessy..................... 11,300 * *
Robert J. Rudnik....................... 2,000 * *
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)............... 4,533,750 63.2% 49.4%
</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 held by certain affiliates of The Prime
Group, Inc., 100,000 shares of Common Stock subject to an option to
purchase held by Darryl W. Copeland, Jr. pursuant to the stock option
agreement between The Prime Group, Inc. and Mr. Copeland, and 25,000
shares of Common Stock which Mr. Copeland has agreed to purchase from The
Prime Group, Inc. See "Certain Transactions--Stock Option and Purchase
Agreements." The address of The Prime Group, Inc. is 77 West Wacker Drive,
Chicago, Illinois 60601.
(3) Includes 4,203,043 shares of Common Stock held by The Prime Group, Inc.
and certain of its affiliates, including 100,000 shares of Common Stock
subject to an option to purchase held by Darryl W. Copeland, Jr. pursuant
to the stock option agreement between The Prime Group, Inc. and Mr.
Copeland and 25,000 shares which Mr. Copeland has agreed to purchase from
The Prime Group, Inc. See "Certain Transactions--Stock Option and Purchase
Agreements." Mr. Reschke is the Chairman, Chief Executive Officer and
President of The Prime Group, Inc.
(4) The address of J.P. Morgan Investment Management Inc. is 522 Fifth Avenue,
Ninth Floor, New York, New York 10036.
(5) Mr. Copeland entered into a stock option agreement with The Prime Group,
Inc. pursuant to which Mr. Copeland received an option to purchase 100,000
shares of Common Stock from The Prime Group, Inc. See "Certain
Transactions--Stock Option and Purchase Agreements." Mr. Copeland also
purchased 12,000 shares of Common Stock in the IPO and has agreed to
purchase an additional 25,000 shares of Common Stock from The Prime Group,
Inc.
40
<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 and 20,000,000 shares of Preferred Stock,
par value $0.01 per share (the "Preferred Stock"). Upon the completion of the
Offering, 9,175,000 shares of Common Stock (9,475,000 if the Underwriters'
over-allotment option is exercised in full) will be issued and outstanding,
and no shares of Preferred Stock are 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
41
<PAGE>
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
The Certificate and the By-laws 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
42
<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. PGI has waived its incidental registration rights in connection with the
Offering. 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.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
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 9,175,000 shares of
Common Stock outstanding, (9,475,000 shares if the Underwriters' over-
allotment option is exercised in full). Of those shares, 7,175,000 shares
(7,475,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction (except for any shares
owned by affiliates of the Company including 2,500,000 of the shares owned by
PGI) 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 and are
held by PGI and management of the Company.
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.
PGI has issued an exchangeable note having a principal amount of $20.0
million and a term of five years (the "Exchangeable Note") to an unaffiliated
third party (the "Noteholder"), the repayment of which is secured by the
pledge of 1,370,000 shares of the Common Stock of the Company held by PGI.
Pursuant to the terms of the Exchangeable Note, the Noteholder will have the
right, commencing on November 15, 1998, and thereafter on certain dates
through maturity, to exchange specified portions of the outstanding principal
amount of the Exchangeable Note, plus the accrued interest thereon, for shares
of the Common Stock of the Company held by PGI, at the exchange rates
specified therein. See "Certain Transactions--Exchangeable Note Transaction."
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 90 days from the date of this Prospectus, except (i) with the prior written
consent of FBR, and (ii) in the case of the Company, the grant of options to
purchase shares of Common Stock under the Company's Stock Incentive Plan.
Upon the expiration of such lock-up period, PGI may sell 2,500,000 of its
shares of Common Stock subject to the volume and other limitations of Rule 144
and may sell 1,703,043 of its shares commencing May 8, 1998, subject to the
volume and other limitations of Rule 144. However, PGI has the right to demand
registration of its shares for resale and 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 has acquired, such sales may have an adverse effect on the Company's
stock price and its ability to raise needed capital. See "Risk Factors--Shares
Eligible for Future Sale," "Principal Stockholders" and "Description of
Capital Stock--Registration Rights Agreement."
The Company intends to file a registration statement under the Securities
Act registering 830,000 shares of Common Stock reserved for issuance upon the
exercise of options granted under the Stock Incentive Plan. See "Management--
Stock Incentive Plan." Accordingly, shares to be 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 90 day lock-up
period described above.
44
<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. and Cowen & Company are acting as
representatives (the "Representatives"), have severally agreed to purchase
from the Company an aggregate of 2,000,000 shares of Common Stock. The number
of shares of Common Stock that each Underwriter has agreed to purchase is set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ......................... 975,000
Cowen & Company................................................. 525,000
Advest, Inc..................................................... 100,000
Equitable Securities Corporation................................ 100,000
McDonald & Company Securities, Inc.............................. 100,000
Raymond James & Associates, Inc................................. 100,000
Wheat, First Securities, Inc.................................... 100,000
---------
Total....................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the 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 Common Stock
covered by the over-allotment option described below) if any are taken.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain 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 $0.50
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.
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
300,000 additional shares of Common Stock at the 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, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
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 90 days from the date of this Prospectus, without the
prior written consent of FBR. See "Shares Eligible for Future Sale."
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
Stock Market may engage in passive market making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 103 of Regulation
M under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
during the qualifying period which is two business days before commencement of
sales in this offering. The passive market making transactions must comply
with applicable price and volume limits and be identified as such. In general,
a passive market maker may display its bid at a price not in excess of the
highest independent bid for the security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded. Net purchases by a passive market
maker on each day are generally limited to
45
<PAGE>
30.0% of the passive market maker's average daily trading volume in the Common
Stock during a prior period and must be discontinued when such limit is
reached. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail, and, if commenced,
may be discontinued at any time.
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 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.
The Underwriters do not intend to confirm sales of shares of Common Stock to
any accounts over which they exercise discretionary authority.
The Company will pay FBR a fee equal to 0.5% of the gross proceeds of the
Offering for financial advisory and related services rendered in connection
with the Offering.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Winston &
Strawn, Chicago, Illinois. In addition, certain legal matters will be passed
upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia. Wayne D.
Boberg, a partner of Winston & Strawn, is a director of the Company. As of the
date of this Prospectus, Mr. Boberg beneficially owns 2,500 shares of Common
Stock and has Options to acquire an additional 5,000 shares of Common Stock.
EXPERTS
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 31, 1995 and 1996, and for each of the three years
in the period ended December 31, 1996, the financial statements of 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, 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, the financial
statements of Gables at Farmington Associates as of September 30, 1997 and
December 31, 1996, and for the period from January 1, 1997 to September 30,
1997 and for the year ended December 31, 1996, the financial statements of
Classic at West Palm Beach Limited Partnership as of September 30, 1997 and
December 31, 1996, and for the period from January 1, 1997 to September 30,
1997 and for the year ended December 31, 1996, the financial statements of
Brendenwood MRC Limited Partnership as of September 30, 1997 and for the
period from January 1, 1997 to September 30, 1997, and the financial
statements of Lincoln Harbor Village, L.P. as of September 30, 1997 and
December 31, 1996, and for the period from January 1, 1997 to September 30,
1997 and for the year ended December 31, 1996, appearing in this Prospectus
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.
46
<PAGE>
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.
The Company is 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. The Registration Statement,
as well as such reports, 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 at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office located at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In addition, such
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 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.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BROOKDALE LIVING COMMUNITIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Pro Forma Consolidated Condensed Balance Sheet of the Company as of
September 30, 1997..................................................... F-5
Pro Forma Consolidated Condensed Statement of Operations of the Company
for the year ended December 31, 1996................................... F-6
Pro Forma Consolidated Condensed Statement of Operations of the Company
for the nine months ended September 30, 1997........................... F-7
Notes to Pro Forma Consolidated Condensed Financial Statements.......... F-8
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Consolidated Balance Sheet of the Company as of September 30, 1997, and
Combined Balance Sheet of Predecessor Properties (predecessor to the
Company) as of December 31, 1996....................................... F-14
Consolidated Statement of Operations of the Company for the period from
July 1, 1997 through September 30, 1997 and Combined Statements of
Operations of Predecessor Properties (predecessor to the Company) for
the period from July 1, 1996 through September 30, 1996................ F-15
Consolidated Statement of Operations of the Company for the period from
May 7, 1997 through September 30, 1997, Combined Statements of
Operations of Predecessor Properties (predecessor to the Company) for
the period from January 1, 1997 through May 6, 1997 and the nine month
period ended September 30, 1996 and Combined Statements of Operations
of the Company and Predecessor Properties from January 1, 1997 to
September 30, 1997..................................................... F-16
Consolidated Statement of Cash Flows of the Company for the period from
May 7, 1997 through September 30, 1997 and Combined Statements of Cash
Flows of Predecessor Properties (predecessor to the Company) for the
period from January 1, 1997 through May 6, 1997 and for the nine month
period ended September 30, 1996........................................ F-17
Notes to Consolidated and Combined Financial Statements of the Company.. F-18
ORIGINAL FACILITIES (THE DEVONSHIRE, THE HERITAGE AND THE HALLMARK
FACILITIES)
Report of Independent Auditors.......................................... F-22
Combined Balance Sheets as of December 31, 1995 and 1996................ F-23
Combined Statements of Operations for the years ended December 31, 1994,
1995 and 1996.......................................................... F-24
Combined Statements of Changes in Partners' Capital (Deficit) for the
years ended December 31, 1994, 1995 and 1996........................... F-25
Combined Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996.......................................................... F-26
Notes to Combined Financial Statements.................................. F-27
ACTIVELIFE FACILITIES (SPRINGS OF EAST MESA, EDINA PARK PLAZA AND HAWTHORN
LAKES FACILITIES)
Report of Independent Auditors.......................................... F-33
Combined Balance Sheets as of December 31, 1995 and 1996................ F-34
Combined Statements of Operations for the years ended December 31, 1994,
1995 and 1996.......................................................... F-35
Combined Statements of Changes in Partners' Deficit for the years ended
December 31, 1994, 1995 and 1996....................................... F-36
Combined Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996.......................................................... F-37
Notes to Combined Financial Statements.................................. F-38
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GABLES AT BRIGHTON ASSOCIATES
Report of Independent Auditors.......................................... F-42
Balance Sheet as of December 31, 1995................................... F-43
Statements of Income for the years ended December 31, 1995 and 1996..... F-44
Statements of Changes in Partners' Capital for the years ended December
31, 1995 and 1996...................................................... F-45
Statements of Cash Flows for the years ended December 31, 1995 and 1996. F-46
Notes to Financial Statements........................................... F-47
PARK PLACE FACILITIES (PARK PLACE PHASE I AND PARK PLACE PHASE II)
Report of Independent Auditors.......................................... F-48
Combined Balance Sheets as of December 31, 1995 and 1996................ F-49
Combined Statements of Operations for the years ended December 31, 1995
and 1996............................................................... F-50
Combined Statements of Changes in Partners' Capital/Owners' Equity for
the years ended December 31, 1995 and 1996............................. F-51
Combined Statements of Cash Flows for the years ended December 31, 1995
and 1996............................................................... F-52
Notes to Combined Financial Statements.................................. F-53
BLC PROPERTY, INC. AND SUBSIDIARIES
Report of Independent Auditors.......................................... F-56
Consolidated Balance Sheet as of December 31, 1996...................... F-57
Consolidated Statement of Operations for the period from December 12,
1996 (inception) to December 31, 1996.................................. F-58
Consolidated Statement of Stockholder's Equity for the period from
December 12, 1996 (inception) to December 31, 1996..................... F-59
Consolidated Statement of Cash Flows for the period from December 12,
1996 (inception) to December 31, 1996.................................. F-60
Notes to Consolidated Financial Statements.............................. F-61
GABLES AT FARMINGTON ASSOCIATES
Report of Independent Auditors.......................................... F-64
Balance Sheets as of September 30, 1997 and December 31, 1996........... F-65
Statements of Income for the period from January 1, 1997 to September
30, 1997 and for the year ended December 31, 1996...................... F-66
Statements of Partners' Capital for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-67
Statements of Cash Flows for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-68
Notes to Financial Statements........................................... F-69
THE CLASSIC AT WEST PALM BEACH LIMITED PARTNERSHIP
Report of Independent Auditors.......................................... F-70
Balance Sheets as of September 30, 1997 and December 31, 1996........... F-71
Statements of Operations for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-72
Statements of Partners' Deficit for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-73
Statements of Cash Flows for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-74
Notes to Financial Statements........................................... F-75
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LINCOLN HARBOR VILLAGE, L.P. (HARBOR VILLAGE)
Report of Independent Auditors.......................................... F-77
Balance Sheets as of September 30, 1997 and December 31, 1996........... F-78
Statements of Operations for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-79
Statements of Partners' Deficit for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-80
Statements of Cash Flows for the period from January 1, 1997 to
September 30, 1997 and for the year ended December 31, 1996............ F-81
Notes to Financial Statements........................................... F-82
BRENDENWOOD MRC LIMITED PARTNERSHIP (THE BRENDENWOOD RETIREMENT COMMUNITY)
Report of Independent Auditors.......................................... F-83
Balance Sheet as of September 30, 1997.................................. F-84
Statement of Income and Partners' deficit for the period from January 1,
1997 to September 30, 1997............................................. F-85
Statement of Cash Flows for the period from January 1, 1997 to September
30, 1997............................................................... F-86
Notes to Financial Statements........................................... F-87
</TABLE>
F-3
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited Pro Forma Consolidated Condensed Balance Sheet of the Company
is presented as if, at September 30, 1997, the Company had sold 2.0 million
shares of its common stock at a sale price of $16.6875 per share, with the
proceeds thereof to be used as described under "Use of Proceeds" and includes
the effects of the Acquisitions and Leases Prior to or at the IPO (as
defined). The unaudited Pro Forma Consolidated Condensed Statements of
Operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 are presented as if the above transactions occurred as of
January 1, 1996. The unaudited Pro Forma Consolidated 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 Offering have
been made.
The unaudited Pro Forma Consolidated Condensed Balance Sheet and Statements
of Operations of the Company are not necessarily indicative of what the actual
financial position or results of operations would have been assuming the
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-4
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIOR TO
OFFERING
BROOKDALE BROOKDALE
LIVING CONSOLIDATING LIVING OFFERING PRO
COMMUNITIES, PRO FORMA COMMUNITIES, PRO FORMA FORMA AS
INC. ADJUSTMENTS INC. ADJUSTMENTS ADJUSTED
------------ ------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash
Equivalents............ $ 4,402 (a)$(22,961) $(18,559) (a)$30,939 $ 12,380
Cash--Restricted........ 3,885 -- 3,885 -- 3,885
Accounts Receivable..... 639 -- 639 -- 639
Due From Affiliates and
Other.................. 133 -- 133 -- 133
-------- ----------- -------- ---------- --------
Total Current Assets... 9,059 (22,961) (13,902) 30,939 17,037
Property, Plant and
Equipment, Net......... 114,719 -- 114,719 -- 114,719
Property Under
Development............ 4,461 -- 4,461 -- 4,461
Letter of Credit
Deposit................ 11,702 -- 11,702 -- 11,702
Investments
Collateralizing Lease
Obligations............ -- (b) 22,961 22,961 -- 22,961
Deferred Costs, Net..... 2,709 -- 2,709 -- 2,709
Deferred Tax Asset...... 3,695 -- 3,695 -- 3,695
Other................... 2,968 -- 2,968 -- 2,968
-------- ----------- -------- ---------- --------
Total Assets........... $149,313 $ -- $149,313 $ 30,939 $180,252
======== =========== ======== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-
Term Debt.............. $ 280 $ -- $ 280 $ -- $ 280
Current Portion of
Deferred Gain on Sale
of Property............ 806 -- 806 -- 806
Prepaid Rent............ 127 -- 127 -- 127
Accrued Interest
Payable................ 463 -- 463 -- 463
Accrued Real Estate
Taxes.................. 1,110 -- 1,110 -- 1,110
Accounts Payable and
Accrued Expenses....... 1,930 -- 1,930 -- 1,930
Tenant Security
Deposits............... 3,458 -- 3,458 -- 3,458
Deferred Lease
Liability.............. 992 -- 992 -- 992
Due to Affiliates and
Other.................. 24 -- 24 -- 24
-------- ----------- -------- ---------- --------
Total Current
Liabilities........... 9,190 -- 9,190 -- 9,190
Long-Term Debt, Less
Current Portion........ 95,955 -- 95,955 -- 95,955
Deferred Gain on Sale of
Property, Less Current
Portion................ 17,124 -- 17,124 -- 17,124
-------- ----------- -------- ---------- --------
Total Liabilities...... 122,269 -- 122,269 -- 122,269
Commitments
Stockholders' Equity:
Preferred Stock, $0.01
par value, no shares
issued or outstanding.. -- -- -- -- --
Common Stock, $0.01 par
value, 9,175 shares
issued and outstanding. 72 -- 72 (c) 20 92
Additional Paid-in-
Capital................ 26,863 -- 26,863 (d) 30,919 57,782
Accumulated Earnings.... 109 -- 109 -- 109
-------- ----------- -------- ---------- --------
Total Stockholders'
Equity................ 27,044 -- 27,044 30,939 57,983
-------- ----------- -------- ---------- --------
Total Liabilities and
Stockholders' Equity.. $149,313 $ -- $149,313 $ 30,939 $180,252
======== =========== ======== ========== ========
</TABLE>
F-5
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST IPO LEASES
-----------------------------------------
ACQUISITIONS
AND LEASES CLASSIC AT BRENDENWOOD CONSOLIDATING
ORIGINAL PRIOR TO OR GABLES AT WEST PALM RETIREMENT HARBOR TOTAL POST PRO FORMA PRO FORMA
FACILITIES AT THE IPO FARMINGTON BEACH COMMUNITY VILLAGE IPO LEASES ADJUSTMENTS AS ADJUSTED(L)
---------- ------------ ---------- ---------- ----------- ------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Resident Fees.... $23,437 $17,746 $4,224 $6,595 $3,658 $ 3,821 $18,298 $ -- $59,481
Management
Services Income.. -- -- -- -- -- -- -- (a) 197 197
------- ------- ------ ------ ------ ------- ------- ------- -------
Total Revenue... 23,437 17,746 4,224 6,595 3,658 3,821 18,298 197 59,678
Facility
Operating
Expenses......... (12,806) (12,061) (2,406) (4,473) (2,210) (2,783) (11,872) (b) 3,249 (33,490)
Lease Expenses... -- (31) -- -- -- -- -- (c) (16,030) (16,061)
General &
Administrative
Expenses......... -- -- -- -- -- -- -- (d) (2,837) (2,837)
Depreciation &
Amortization..... (2,946) (1,808) (503) (675) (342) (663) (2,183) (e) 3,705 (3,232)
------- ------- ------ ------ ------ ------- ------- ------- -------
Income (Loss)
From Operations.. 7,685 3,846 1,315 1,447 1,106 375 4,243 (11,716) 4,058
Interest and
Financing Fees
Expense, Net..... (5,320) (3,464) (1,294) (1,842) (1,166) (1,536) (5,838) (f) 10,905 (3,717)
------- ------- ------ ------ ------ ------- ------- ------- -------
Income (Loss)
Before Minority
Interest, Income
Taxes and
Extraordinary
Item............. 2,365 382(g) 21 (395) (60) (1,161) (1,595) (811) 341
(Income) Loss
Allocated to
Minority
Interest......... (756) -- -- -- -- -- -- (h) 756 --
Pro Forma
(Provision)
Benefit For
Income Taxes..... (644) 1 -- -- -- -- -- (i) 829 186
------- ------- ------ ------ ------ ------- ------- ------- -------
Income (Loss)
Before
Extraordinary
Item............. 965 383 21 (395) (60) (1,161) (1,595) 774 527
Extraordinary
Item............. -- -- -- -- (875) -- (875) (j) 875 --
------- ------- ------ ------ ------ ------- ------- ------- -------
Pro Forma Net
Income (Loss).... $ 965 $ 383 $ 21 $ (395) $ (935) $(1,161) $(2,470) $ 1,649 $ 527
======= ======= ====== ====== ====== ======= ======= ======= =======
Pro Forma Net
Income Per Share. $ 0.48 $ 0.06
======= =======
Pro Forma Common
Shares
Outstanding (k).. 2,000 9,175
======= =======
</TABLE>
F-6
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST IPO LEASES
BROOKDALE LIVING ADJUSTMENT FOR -----------------------------------------
COMMUNITIES, INC. ACQUISITIONS CLASSIC AT BRENDENWOOD TOTAL CONSOLIDATING
AND PREDECESSOR AND LEASES GABLES AT WEST PALM RETIREMENT HARBOR POST IPO PRO FORMA
PROPERTIES MADE AT THE IPO FARMINGTON BEACH COMMUNITY VILLAGE LEASES ADJUSTMENTS
----------------- --------------- ---------- ---------- ----------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Resident Fees.... $ 28,204 $ 4,448 $ 3,419 $ 5,104 $ 2,871 $ 2,803 $14,197 $ --
Management
Services Income.. 82 -- -- -- -- -- -- (a) 76
-------- ------- ------- ------- ------- ------- ------- ------
Total Revenue... 28,286 4,448 3,419 5,104 2,871 2,803 14,197 76
Facility
Operating
Expenses......... (15,041) (2,973) (1,839) (3,382) (1,786) (1,915) (8,922)(b) 1,180
Lease Expenses... (7,152) -- -- -- -- -- -- (c) (4,887)
General &
Administrative
Expenses......... (1,137) -- -- -- -- -- -- (d) (946)
Depreciation &
Amortization..... (2,706) (510) (378) (506) (226) (506) (1,616)(e) 1,272
-------- ------- ------- ------- ------- ------- ------- ------
Income (Loss)
From Operations.. 2,250 965 1,202 1,216 859 382 3,659 (3,305)
Interest and
Financing Fees
Expense, Net..... (2,293) (1,086) (964) (1,404) (697) (1,140) (4,205)(f) 5,433
-------- ------- ------- ------- ------- ------- ------- ------
(Loss) Income
Before Minority
Interest and
Income Taxes..... (43) (121)(g) 238 (188) 162 (758) (546) 2,128
(Income) Loss
Allocated to
Minority
Interest......... (138) -- -- -- -- -- -- (h) 138
Pro Forma Benefit
(Provision) For
Income Taxes..... 222 -- -- -- -- -- -- (i) (547)
-------- ------- ------- ------- ------- ------- ------- ------
Pro Forma Net
Income (Loss).... $ 41 $ (121) $ 238 $ (188) $ 162 $ (758) $ (546) $1,719
======== ======= ======= ======= ======= ======= ======= ======
Pro Forma Net
Income Per Share. $ 0.01
========
Pro Forma Common
Shares
Outstanding (k).. 4,720
========
<CAPTION>
PRO FORMA
AS ADJUSTED(L)
--------------
<S> <C>
Revenue
Resident Fees.... $ 46,849
Management
Services Income.. 158
--------------
Total Revenue... 47,007
Facility
Operating
Expenses......... (25,756)
Lease Expenses... (12,039)
General &
Administrative
Expenses......... (2,083)
Depreciation &
Amortization..... (3,560)
--------------
Income (Loss)
From Operations.. 3,569
Interest and
Financing Fees
Expense, Net..... (2,151)
--------------
(Loss) Income
Before Minority
Interest and
Income Taxes..... 1,418
(Income) Loss
Allocated to
Minority
Interest......... --
Pro Forma Benefit
(Provision) For
Income Taxes..... (325)
--------------
Pro Forma Net
Income (Loss).... $ 1,093
==============
Pro Forma Net
Income Per Share. $ 0.12
==============
Pro Forma Common
Shares
Outstanding (k).. 9,175
==============
</TABLE>
F-7
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
BASIS OF PRESENTATION
The pro forma consolidated condensed financial statements of the Company
include the historical financial statements of the Company (for the period
from May 7, 1997 to September 30, 1997), the Original Facilities (for the
period from January 1, 1997 to May 6, 1997 and the year ended December 31,
1996), the IPO Properties (for the period from January 1, 1997 to May 6, 1997
and the year ended December 31, 1996) and Post IPO Leases (for the period from
January 1, 1997 to September 30, 1997 and the year ended December 31, 1996) as
described below and the pro forma effects of the consolidation and Offering:
<TABLE>
<CAPTION>
ORIGINAL ACQUISITIONS AND LEASES
FACILITIES PRIOR TO OR AT THE IPO(1) POST IPO LEASES(2)
---------- ------------------------- ------------------
<S> <C> <C>
The Devon- The Springs of East Mesa(3) The Gables at Farmington(5)
shire
The Heri- Edina Park Plaza The Classic at West Palm Beach(6)
tage
The Hall- Hawthorn Lakes The Brendenwood Retirement
mark(3) The Gables at Brighton(3) Community(6)
The Park Place(4) Harbor Village(7)
BLC Property, Inc.
</TABLE>
- ---------------------
(1) These properties are collectively referred to as the IPO Properties.
(2) These properties are collectively referred to as the Post IPO Leases.
(3) The Company has leased these properties from a third party since December
27, 1996.
(4) The Company has leased this property from a third party since May 7, 1997.
(5) The Company has leased this property from a third party since November 24,
1997.
(6) The Company intends to lease these properties from third parties during
December 1997.
(7) The Company intends to lease this property from a third party before
January 31, 1998.
The Company expects to use $20.0 million of the proceeds of the Offering to
repay borrowings under the $20.0 million revolving credit facility with
LaSalle National Bank (Credit Facility). As of December 18, 1997 the Company
had borrowed $20.0 million under the Credit Facility (See Note 7 of the Notes
to Consolidated and Combined Financial Statements of Brookdale Living
Communities, Inc.). In addition, the Company may use approximately $4.5
million to finance the purchase of investments collateralizing lease
obligations on Harbor Village. Since the borrowings under the Credit Facility
occurred after September 30, 1997 and will be of a short term nature, the pro
forma financial statements have not reflected the use of proceeds as repayment
of debt. The net proceeds not used to either repay indebtedness under the
Credit Facility or to fund investments collateralizing lease obligations are
estimated to be approximately $6.4 million (approximately $11.2 million if the
Underwriters' over-allotment option is exercised in full). Such amount 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" and "Business--Business and Growth Strategy.")
F-8
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
The following pro forma adjustments reflect the Offering and the
consolidation of the above activity:
(a) Cash and cash equivalents:
<TABLE>
<S> <C>
Consolidation Adjustment
Payments made for investments collateralizing lease obligations
on the Post IPO Leases (See Note b)............................ $(22,961)
========
Offering Adjustments
Gross proceeds from Offering (2,000 shares sold to the public at
$16.6875 per share)............................................ $ 33,375
Estimated cost of the Offering ($600), financial advisory fee
($167) and underwriters' fees and discounts ($1,669)........... (2,436)
--------
Net proceeds (See Note d)....................................... $ 30,939
========
(b) Investments collateralizing lease obligations:
Consolidation Adjustment
Payments made for investments collateralizing lease obligations
on the Post IPO Leases (See Note a)............................ $ 22,961
========
</TABLE>
(c) Common stock:
<TABLE>
<S> <C>
Offering Adjustment
Issuance of 2,000 shares of common stock, $0.01 par value (See
Note d)......................................................... $ 20
=======
(d) Additional paid-in capital:
Offering Adjustments
Net proceeds from the sale of 2,000 shares of common stock sold
to the public at $16.6875 per share (See Note a)................ $30,939
Less: Par value of common shares on 2,000 shares at $0.01 per
share (See Note c).............................................. (20)
-------
$30,919
=======
</TABLE>
F-9
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND FOR THE YEAR ENDED DECEMBER
31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
(a)Management services income:
Management services income for management services
performed by the Company......................... $ 76 $ 197
======= ========
(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 and the IPO Properties
and administrative fees paid by the Original
Facilities which will not be incurred by the
Company.......................................... 514 2,333
Elimination of historical management fees paid by
the Post IPO Leases.............................. 666 841
------- --------
$ 1,180 $ 3,249
======= ========
(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 IPO Properties (See Note
4 to the consolidated financial statements of BLC
Property, Inc.).................................. (546) (10,164)
Adjustment to reflect lease payments related to
the Post IPO Leases.............................. (4,341) (5,791)
------- --------
$(4,887) $(16,030)
======= ========
(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................................ $ (604) $ (1,812)
Directors' and officers' insurance and fees....... (53) (160)
Legal and accounting.............................. (70) (210)
Other............................................. (218) (655)
------- --------
$ (946) $ (2,837)
======= ========
The Company anticipates hiring new employees and
incurring 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 PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
(e)Depreciation and amortization:
Adjustments to historical depreciation expense
associated with (*):
Decrease in depreciation expense associated with
the change in depreciable lives of the Original
Facilities....................................... $ 67 $ 193
Additional depreciation associated with the
increase in basis resulting from the purchase of
the third party owners' interest in the Original
Facilities....................................... (138) (400)
Adjustment to depreciation expense associated with
the increase in the basis from the purchase and
the increase in depreciable lives of the IPO
Properties....................................... (133) (385)
Elimination of historical depreciation and
amortization expense of the Leases at IPO........ 78 2,404
Additional amortization expense associated with
the fees and costs for credit enhancement on tax
exempt bonds of the Original Facilities.......... (218) (290)
Elimination of historical depreciation and
amortization expense of the Post IPO Leases...... 1,616 2,183
------ -------
$1,272 $ 3,705
====== =======
* The Company has determined 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 and financing fees expense, net:
Elimination of interest expense incurred related
to the debt of the IPO Properties................ $ 140 $ 3,616
Elimination of interest expense incurred related
to the debt of the Post IPO Leases............... 4,205 5,838
Interest income on investments collateralizing
lease obligations................................ 1,088 1,451
------ -------
$5,433 $10,905
====== =======
</TABLE>
F-11
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C> <C> <C>
(g)Income (loss) before minority interest and
income taxes:
The income (loss) before minority interest
and income taxes presented in the historical
statements of the IPO Properties is before
gain on sale of property and represents
income (loss) from continuing operations.
The gains on sale of properties are not
included due to the non-recurring nature of
the transactions
(h)(Income) loss allocated to minority
interest:
Elimination of income allocated to minority
interest due to the acquisition of the third
party's interest............................ $ 138 $756
===== ====
(i)(Provision) benefit for income taxes:
The Original Facilities, the IPO Properties
and the Post IPO Leases were not taxable
entities. The realization of the deferred
gain on the sale of the Hallmark facility as
a reduction of lease expenses 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 from
income taxes at a 40% effective income tax
rate........................................ $(547) $829
===== ====
Provision on income before
permanent difference............ $(567) $(136)
Benefit related to permanent
difference...................... 242 322
----- -----
Pro forma (provision) benefit for
income taxes.................... $(325) $ 186
===== =====
(j)Extraordinary item
Elimination of extraordinary item related to
the early extinguishment of debt for
Brendenwood Retirement Community $ -- $875
===== ====
</TABLE>
F-12
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER DECEMBER 31,
30, 1997 1996
------------ ------------
<S> <C> <C>
(k)Pro forma Common Shares outstanding:
Pro Forma net income per share is based upon the
number of common shares issued consisting of
the 2,000 shares issued to PGI and management
in exchange for their interest in the Original
Facilities plus the issuance of all 5,175
shares in the IPO and the issuance of all the
2,000 shares in the Offering
Brookdale Living Communities, Inc. (Original
Facilities at December 31, 1996)............... 4,720 shares 2,000 shares
Pro forma common shares outstanding............. 9,175 shares 9,175 shares
(l)The Company is anticipating leasing the Classic
at West Palm Beach, the Brendenwood
Retirement Community and Harbor Village from
a third party. Although the Company expects
to consummate the leases within 60 days from
the closing of the Offering, there can be no
assurance that the conditions to closing such
transactions will be satisfied in a timely
manner, if at all. If such facilities are not
leased by the Company, pro forma as adjusted
total revenue, operating income and net loss
would be the following:
Revenue......................................... $ 36,229 $ 45,604
============ ============
Operating Income................................ $ 2,461 $ 2,926
============ ============
Net Loss........................................ $ (89) $ (842)
============ ============
</TABLE>
F-13
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
CONSOLIDATED BALANCE SHEET OF THE COMPANY AND COMBINED
BALANCE SHEET OF THE PREDECESSOR
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BROOKDALE LIVING PREDECESSOR
COMMUNITIES, INC. PROPERTIES
SEPTEMBER 30, 1997 DECEMBER 31, 1996
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................. $ 4,402 $ 4,230
Cash-restricted........................... 3,885 1,089
Accounts receivable....................... 639 165
Prepaid rent.............................. -- 1,251
Due from affiliates....................... 133 101
-------- --------
Total current assets.................... 9,059 6,836
Property, plant, and equipment............ 125,845 58,383
Accumulated depreciation.................. (11,126) (9,159)
-------- --------
Property, plant and equipment, net........ 114,719 49,224
Property under development................ 4,461 75
Letter of credit deposit.................. 11,702 --
Deferred costs, net....................... 2,709 1,714
Deferred tax asset........................ 3,695 --
Other..................................... 2,968 88
-------- --------
Total assets............................ $149,313 $ 57,937
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY AND
PARTNERS' DEFICIT
Current Liabilities:
Current portion of long-term debt......... $ 280 $ --
Current portion of deferred gain on sale
of property.............................. 806 806
Prepaid rent.............................. 127 616
Accrued interest payable.................. 463 182
Accrued real estate taxes................. 1,110 1,031
Accounts payable and accrued expenses..... 1,930 443
Tenant security deposits.................. 3,458 2,614
Due to affiliates......................... -- 811
Deferred lease liability.................. 992 --
Other..................................... 24 383
-------- --------
Total current liabilities............... 9,190 6,886
Long-term debt, less current portion...... 95,955 65,000
Deferred gain on sale of property, less
current portion.......................... 17,124 17,728
-------- --------
Total liabilities....................... 122,269 89,614
Minority Interest......................... -- (6,250)
Stockholders' equity and partners'
deficit:
Common stock, $.01 par value, 75,000
shares authorized, 7,175 shares issued
and outstanding at September 30, 1997.... 72 --
Additional paid-in-capital................ 26,863 --
Accumulated earnings...................... 109 --
Partners' deficit......................... -- (25,427)
-------- --------
Total stockholders' equity and partners'
deficit................................ 27,044 (25,427)
-------- --------
Total liabilities and stockholders'
equity and partners' deficit........... $149,313 $ 57,937
======== ========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-14
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY AND COMBINED
STATEMENT OF OPERATIONS OF THE PREDECESSOR
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
BROOKDALE LIVING PREDECESSOR
COMMUNITIES, INC. PROPERTIES
PERIOD FROM PERIOD FROM
JULY 1, 1997 TO JULY 1, 1996 TO
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
<S> <C> <C>
REVENUE
Resident fees............................ $11,191 $5,689
Management fees.......................... 50 --
------- ------
Total revenue.......................... 11,241 5,689
EXPENSES
Facility operating....................... 5,732 2,747
General and administrative............... 660 --
Leasing.................................. 2,567 --
Depreciation and amortization............ 1,170 949
Property management fee-affiliate........ -- 233
------- ------
Total operating expenses............... 10,129 3,929
------- ------
Income from operations................. 1,112 1,760
Financing fees........................... 45 --
Interest income.......................... (274) (58)
Interest expense......................... 1,158 1,175
------- ------
Income before minority interest and
deferred tax benefit.................. 183 643
Income allocated to minority interest.... -- (132)
Deferred tax benefit..................... 7 --
------- ------
Net income............................. $ 190 $ 511
======= ======
Net income per share................... $ 0.03 $ --
======= ======
Weighted average common shares
outstanding........................... 7,175 --
======= ======
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-15
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY AND COMBINED
STATEMENTS OF OPERATIONS OF THE PREDECESSOR AND COMBINED STATEMENTS OF
OPERATIONS OF BROOKDALE LIVING COMMUNITIES, INC. AND PREDECESSOR PROPERTIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
BROOKDALE LIVING
BROOKDALE LIVING PREDECESSOR COMMUNITIES, INC. AND PREDECESSOR
COMMUNITIES, INC. PROPERTIES PREDECESSOR PROPERTIES PROPERTIES
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
MAY 7, 1997 TO JANUARY 1, 1997 JANUARY 1, 1997 TO JANUARY 1, 1996 TO
SEPTEMBER 30, 1997 TO MAY 6, 1997 SEPTEMBER 30, 1997(A) SEPTEMBER 30, 1996
<S> <C> <C> <C> <C>
REVENUE
Resident fees........... $17,732 $10,472 $28,204 $16,827
Management fees......... 82 -- 82 --
------- ------- ------- -------
Total revenue......... 17,814 10,472 28,286 16,827
EXPENSES
Facility operating...... 9,222 5,589 14,811 8,651
General and
administrative......... 1,137 -- 1,137 --
Leasing................. 4,110 3,042 7,152 --
Depreciation and
amortization........... 1,848 858 2,706 3,013
Property management fee-
affiliate.............. -- 230 230 695
------- ------- ------- -------
Total operating
expenses............. 16,317 9,719 26,036 12,359
------- ------- ------- -------
Income from
operations........... 1,497 753 2,250 4,468
Financing fees.......... 58 -- 58 --
Interest income......... (400) (68) (468) (168)
Interest expense........ 1,873 830 2,703 3,539
------- ------- ------- -------
(Loss) income before
minority interest and
deferred tax benefit. (34) (9) (43) 1,097
Income allocated to
minority interest...... -- (138) (138) (87)
Deferred tax benefit.... 143 79 222 --
------- ------- ------- -------
Net income (loss)..... $ 109 $ (68) $ 41 $ 1,010
======= ======= ======= =======
Net income per share.. $ 0.02 $ -- $ 0.01 $ --
======= ======= ======= =======
Weighted average
common shares
outstanding.......... 7,051 -- 4,720 --
======= ======= ======= =======
</TABLE>
- ---------------------
(a) Pro forma weighted average shares and per share amounts.
See accompanying notes to consolidated and combined financial statements.
F-16
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND COMBINED
STATEMENTS OF CASH FLOWS OF THE PREDECESSOR
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BROOKDALE LIVING PREDECESSOR PREDECESSOR
COMMUNITIES, INC. PROPERTIES PROPERTIES PERIOD
PERIOD FROM PERIOD FROM FROM
MAY 7, 1997 JANUARY 1, 1997 JANUARY 1, 1996
TO TO TO
SEPTEMBER 30, 1997 MAY 6, 1997 SEPTEMBER 30, 1996
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ 109 $ (68) $1,010
Adjustments to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization.......... 1,848 858 3,013
Deferred gain on sale
of property........... (323) (281) --
Increase in accounts
receivable............ (413) (61) (10)
(Increase) decrease in
due from affiliate.... (133) 101 (22)
Decrease in prepaid
rent asset............ 396 855 --
Increase in deferred
tax asset............. (3,695) -- --
Decrease (increase) in
other assets.......... 2,348 (297) 36
(Decrease) increase in
prepaid rent
liability............. (1,810) 767 --
Increase in accrued
interest payable...... 94 111 175
(Decrease) increase in
accrued real estate
taxes................. (519) 54 (246)
Increase in accounts
payable and accrued
expenses.............. 881 606 123
(Decrease) increase in
tenant security
deposits.............. (15) 36 27
Increase (decrease) in
due to affiliate...... 32 (100) 210
Decrease in other
liabilities........... (16) (342) (119)
-------- ------- ------
Net cash (used in)
provided by
operating
activities.......... (1,216) 2,239 4,197
CASH FLOWS FROM
INVESTING ACTIVITIES:
Cash paid for
acquisition of
facilities............ (40,176) -- --
Cash paid for escrow
deposits.............. (1,198) -- --
Cash paid for property
under development..... (4,308) (2) (6)
Property, plant, and
equipment additions... (1,107) (149) (254)
-------- ------- ------
Cash used in
investing
activities.......... (46,789) (151) (260)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayment on
mortgage notes
payable............... (110) -- (220)
(Increase) decrease in
cash-restricted....... (579) (1,180) 510
Increase in letter of
credit deposit........ (702) -- --
Increase in deferred
lease liability....... 560 432 --
Increase in deferred
costs................. (69) (258) (625)
Net proceeds from
equity offering....... 51,392 -- --
Advances to general
partner............... -- -- (4,059)
Contributions form
partners.............. -- -- 38
Distributions to
predecessor partners.. (2,155) (1,242) (1,896)
-------- ------- ------
Net cash provided by
(used in) financing
activities.......... 48,337 (2,248) (6,252)
-------- ------- ------
Net increase
(decrease) in cash
and cash
equivalents......... 332 (160) (2,315)
Cash and cash
equivalents at
beginning of period.... 4,070 4,230 4,201
-------- ------- ------
Cash and cash
equivalents at end of
period................. $ 4,402 $ 4,070 $1,886
======== ======= ======
Supplemental Disclosure
of Cash Flow
Information:
Interest paid........... $ 1,766 $ 769 $1,692
======== ======= ======
Supplemental Schedule of
Noncash Investing and
Financing Activities:
In connection with
acquisitions, assets
acquired and
liabilities assumed
were as follows:
Fair value of assets
acquired and minority
interest assumed...... $ 81,028 $ -- $ --
Less: Consideration
given
Cash paid............ 41,096 -- --
Cash paid in
settlement of
liabilities assumed. 278 -- --
-------- ------- ------
Liabilities and minority
interest assumed....... $ 39,654 $ -- $ --
======== ======= ======
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-17
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Brookdale Living Communities, Inc. (the "Company") was incorporated in
Delaware on September 4, 1996. The Company was formed in order to create a
company focused on senior and assisted living, which would include such
property ownership interests and operations of The Prime Group, Inc. and
certain of its affiliates (collectively, "PGI"). In connection with an initial
public offering (the "IPO"), more fully described in the Registration
Statement and the Prospectus, in the form it became effective on May 1, 1997,
the Company sold 4,500,000 shares of its common stock to the public and PGI
contributed its senior and assisted living property ownership interests and
operations in exchange for 2,000,000 shares of common stock of the Company.
PGI purchased 2,500,000 of the 4,500,000 shares of common stock. Net of
underwriting discounts and offering expenses, the Company received
approximately $44.2 million in net proceeds from the IPO.
Upon consummation of the IPO, the Company had 6,500,000 shares of common
stock outstanding. Of these shares, the 4,500,000 shares sold in the IPO are
freely tradable without restriction or limitation, except for any shares
(including the 2,500,000 shares purchased by PGI) purchased by "affiliates" of
the Company. The remaining 2,000,000 shares are "restricted securities" and
are held by PGI and management of the Company. The Company used the proceeds
from the IPO primarily to pay the cash portion of the purchase price for the
Acquired Facilities (as defined below), to acquire the third party interests
in two properties in which PGI also had interests, to pay certain amounts to
or on behalf of PGI and various parties in connection with the Formation (as
defined in the Prospectus), to finance a portion of future acquisitions and
developments and for working capital and other general corporate purposes.
Upon consummation of the IPO, PGI contributed its interests in the
Predecessor Properties (described below) to the Company. In addition, the
Company acquired a third party's interest in The Devonshire and The Heritage
Facilities. The Company acquired the Edina Park Plaza and the Hawthorn Lakes
Facilities from an unaffiliated third party, and the Company entered into an
agreement to lease the Park Place Facilities ("Park Place") from an
unaffiliated third party (collectively, the "Acquired Facilities").
In connection with the IPO, the Company granted the Underwriters an option
to purchase up to 675,000 additional shares of common stock for the purpose of
covering over-allotments. The underwriters elected the over-allotment option
and, on June 3, 1997, the Company sold 675,000 shares in connection with the
over-allotment option and received approximately $7.2 million in net proceeds.
The combined financial statements of the properties owned by the Senior
Housing Division of The Prime Group, Inc. at December 31, 1996 and for the
period from January 1, 1997 through May 6, 1997 consist of five properties,
including three leased properties (collectively, the "Predecessor Properties"
as defined in the table below). As the Springs of East Mesa and The Gables at
Brighton Facilities were not included in the Predecessor Properties until
December 27, 1996, the periods prior to December 27, 1996 represent interests
in the three partnerships that owned, operated and managed The Devonshire, The
Heritage and The Hallmark Facilities (the "Original Facilities"). The
interests in the Predecessor Properties and the Acquired Facilities represent
the interests of the Company at September 30, 1997. The following tables set
forth the Predecessor Properties and the Acquired Facilities (collectively,
the "Properties").
Senior Housing Division of The Prime Group, Inc. (the "Predecessor
Properties"):
The Hallmark (2),(3)
The Heritage (3)
The Devonshire (3)
Springs of East Mesa (1), (2), (4)
The Gables at Brighton (1), (2)
F-18
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
Acquired Facilities:
Hawthorn Lakes (1), (4)
Edina Park Plaza (1), (4)
Park Plaza (1), (2)
- ---------------------
(1) Collectively referred to as the "New Facilities".
(2) Collectively referred to as the "Leased Facilities".
(3) Collectively referred to as the "Original Facilities".
(4) Collectively referred to as the "Activelife Facilities".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting
only of recurring accruals considered necessary for a fair presentation have
been included. Operating results for such interim periods are not necessarily
indicative of the results that may be expected for a full fiscal year. For
further information regarding significant accounting policies please refer to
the financial statements and footnotes thereto included in the Brookdale
Living Communities, Inc. Prospectus dated May 1, 1997. Significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated and combined financial statements in
accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect amounts reported in the
consolidated and combined financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current financial statement presentation.
3. ACQUISITIONS
In conjunction with the Offering, the Company purchased a third party's
interest in two of the Predecessor Properties (the Heritage and the Devonshire
Facilities), purchased two facilities (the Hawthorn Lakes and Edina Park Plaza
Facilities) from an unaffiliated third party and entered into an agreement to
lease a third facility (the Park Place Facilities). The total consideration
(including acquisition costs) for these acquisitions and earnest money
deposits on pending acquisitions was $81,028,000, consisting of $41,096,000 in
cash, $31,345,000 in long-term obligations and the assumption of liabilities
totaling $8,587,000.
4. DEVELOPMENT PROJECTS
On September 3, 1997, the Company purchased land in Austin, Texas for the
purpose of developing a Brookdale prototype senior and assisted living
facility. The Company acquired the land for a total consideration of
$2,889,000.
F-19
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
5. COMMITMENTS
On September 25, 1997, the Company entered into a five year lease
commitment, commencing October 1, 1997, for its corporate office with 77 West
Wacker Limited Partnership (the "Landlord"), an affiliate of PGI. The
corporate office is located at 77 West Wacker, Suite 4800, Chicago, Illinois
60601. The office space is 13,464 square feet, with base rent of $18.50 per
square foot escalating at $0.75 per square foot at each anniversary of the
commencement date. In conjunction with the signing of the lease, the Company
received a $404,000 cash payment from the Landlord on October 2, 1997.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128") effective for financial statements for both interim and annual
periods ending after December 15, 1997. FAS 128 establishes standards for
computing and presenting earnings per share and supersedes APB Opinion No. 15.
"Earnings Per Share." FAS 128 replaces primary earnings per share with basic
earnings per share and requires dual presentation of basic and diluted
earnings per share on the face of the income statement. The Company will adopt
the Standard in the fourth quarter of 1997 and does not expect the adoption of
FAS 128 to have a material impact.
In February 1997, the FASB issued Statement of Accounting Standards No. 129,
"Disclosure of Information About Capital Structure" ("FAS 129") effective for
financial statements for periods ending after December 15, 1997. FAS 129
requires additional disclosures regarding the Company's capital structure. The
Company will adopt the Standard in the fourth quarter of 1997 and does not
expect the adoption of FAS 129 to have a material impact.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). The statement
establishes standards for the reporting and display of comprehensive income
and its components. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distribution to
owners. FAS No. 130 will be effective for the Company's fiscal year ending
December 31, 1998. Adoption of FAS 130 is not expected to significantly impact
the Company's financial position or results of operations, including the
required comparative presentation for prior periods.
7. SUBSEQUENT EVENTS
On October 1, 1997, the Company entered into a purchase agreement to acquire
the Brendenwood Retirement Community property for $15.75 million in cash. The
closing of the purchase of this property is subject to the customary closing
contingencies and there can be no assurance that such closing contingencies
will be satisfied in a timely manner, if at all. The Brendenwood Retirement
Community is a 149-unit senior and assisted living community located in
Voorhees, New Jersey.
On October 6, 1997, the Company purchased land in Southfield, Michigan for
the purposes of developing a Brookdale prototype senior and assisted living
facility. The Company acquired the land for a total consideration of
approximately $1,775,000 in cash.
On October 11, 1997, the Company entered into a purchase agreement to
acquire land in Raleigh, North Carolina for approximately $2.1 million for the
purpose of developing a Brookdale prototype senior and assisted living
facility. The closing of this property is subject to customary closing
contingencies and there can be no assurance that such closing contingencies
will be satisfied in a timely manner, if at all.
F-20
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)--
(CONCLUDED)
On October 22, 1997, the Company obtained a $10.0 million interim credit
facility from LaSalle National Bank ("LaSalle") to be used for working capital
and acquisition needs. LaSalle has agreed to increase the amount of the credit
facility to $20.0 million. The loan is unsecured, bears interest at prime plus
one percent, and principal and accrued but unpaid interest is repayable in
April 1998 with accrued interest payable monthly. As of December 18, 1997, the
Company has drawn $20.0 million on the loan.
On November 24, 1997, The Gables at Farmington, a 173-unit facility located
in Farmington, Connecticut, was acquired by an unaffiliated third party for
$23.1 million and simultaneously net leased to the Company.
On December 4, 1997, the Company entered into a purchase agreement to
acquire the Harbor Village facility for $16.8 million in cash. The closing of
the purchase of this property is subject to the customary closing
contingencies and there can be no assurance that such closing contingencies
will be satisfied in a timely manner, if at all. Harbor Village is a 276-unit
senior and assisted living community located in Chicago, Illinois.
F-21
<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-22
<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-23
<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-24
<PAGE>
ORIGINAL FACILITIES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
THE THE
DEVONSHIRE 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-25
<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-26
<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.
F-27
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Partnerships adopted Statement No. 121 effective January 1, 1995 with no
impact on the accompanying combined financial statements.
Expenditures for ordinary maintenance and repairs are expensed to operations
as incurred. Significant renovations and improvements which improve and/or
extend the useful life of the asset are capitalized and depreciated over their
estimated useful life. Interest and other direct costs incurred during
construction periods are capitalized as a component of the building cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of assets, which are as follows:
<TABLE>
<S> <C>
Buildings..................... 40 years
Building improvements and
furniture fixtures........... 3-12 years
</TABLE>
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
F-28
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-29
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-30
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
redevelopment area for any given year shall not be considered a default in
payment, but all past due amounts shall be a continuing obligation payable
from future TIF revenues. Any unpaid amounts including interest, at maturity,
will be forgiven. As the collectibility of the bond principal and interest is
dependent upon sufficient revenues being generated in the redevelopment area,
revenue is recognized by The Heritage when principal and interest are
received. For the years ended December 31, 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
F-31
<PAGE>
ORIGINAL FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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-32
<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-33
<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 $316,671 at 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-34
<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-35
<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-36
<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-37
<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 Partnership Springs of East Mesa Mesa, Arizona
Edina Park Place Associates Limited Partnership Edina Park Plaza Edina, Minnesota
Hawthorn Lakes Associates Limited Partnership 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.
F-38
<PAGE>
ACTIVELIFE 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 and equipment.............. 5-10 years
</TABLE>
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.
F-39
<PAGE>
ACTIVELIFE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(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 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.
F-40
<PAGE>
ACTIVELIFE FACILITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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-41
<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-42
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
<S> <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-43
<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-44
<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-45
<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-46
<PAGE>
GABLES AT BRIGHTON ASSOCIATES
NOTES TO 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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
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
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
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-57
<PAGE>
BLC PROPERTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 12, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUE
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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Brookdale Living Communities, Inc.
We have audited the accompanying balance sheets of the Gables at Farmington
Associates as of September 30, 1997 and December 31, 1996 and the related
statements of income, partners' capital and cash flows for the period from
January 1, 1997 to September 30, 1997 and for the year ended December 31,
1996. These financial statements are the responsibility of the Gables at
Farmington'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 Farmington
Associates at September 30, 1997 and December 31, 1996, and the results of its
operations and its cash flows for the period from January 1, 1997 to September
30, 1997 and for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 27, 1997, except for the 2nd paragraph of Note 2,
as to which the date is November 24, 1997
F-64
<PAGE>
GABLES AT FARMINGTON ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1997 1996
--------------------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 283,320 $ 268,382
Restricted cash....................................... 371,173 373,173
Prepaid expenses and other............................ 102,423 61,043
----------- -----------
Total current assets.................................. 756,916 702,598
Real estate, at cost:
Land, building and improvements....................... 16,912,140 16,854,927
Furniture and equipment............................... 509,601 509,601
----------- -----------
17,421,741 17,364,528
Accumulated depreciation.............................. (3,961,461) (3,583,830)
----------- -----------
13,460,280 13,780,698
----------- -----------
Total assets.......................................... $14,217,196 $14,483,296
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses................. $ 63,916 $ 112,488
Mortgage note payable--affiliate...................... 11,550,000 11,550,000
Tenant security deposits.............................. 420,239 354,704
Due to affiliate...................................... 23,747 18,667
----------- -----------
Total current liabilities............................. 12,057,902 12,035,859
Partners' capital..................................... 2,159,294 2,447,437
----------- -----------
Total liabilities and partners' capital............... $14,217,196 $14,483,296
=========== ===========
</TABLE>
See notes to financial statements.
F-65
<PAGE>
GABLES AT FARMINGTON ASSOCIATES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 TO YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------------
<S> <C> <C>
REVENUE
Resident fees........................................ $3,418,687 $4,224,046
EXPENSES
Facility operating................................... 1,500,465 1,984,778
Interest expense--affiliate.......................... 963,937 1,293,778
Real estate taxes.................................... 156,827 202,641
Depreciation......................................... 377,631 503,508
Management fee--affiliate............................ 182,096 218,789
---------- ----------
Total expenses....................................... 3,180,956 4,203,494
---------- ----------
Net income........................................... $ 237,731 $ 20,552
========== ==========
</TABLE>
See notes to financial statements.
F-66
<PAGE>
GABLES AT FARMINGTON ASSOCIATES
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<S> <C>
PARTNERS' CAPITAL AT JANUARY 1, 1996................................ $2,873,087
Distributions....................................................... (446,202)
Net income.......................................................... 20,552
----------
PARTNERS' CAPITAL AT DECEMBER 31, 1996.............................. 2,447,437
Distributions....................................................... (525,874)
Net income.......................................................... 237,731
----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1997............................. $2,159,294
==========
</TABLE>
See notes to financial statements.
F-67
<PAGE>
GABLES AT FARMINGTON ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 TO YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 237,731 $ 20,552
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 377,631 503,508
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and
other assets.................................. (41,380) 6,631
Decrease in accounts payable and accrued
expenses...................................... (48,572) (48,937)
Increase in tenant security deposits........... 65,535 17,263
Increase in due to affiliate................... 5,080 3,928
--------- ---------
Net cash provided by operating activities.......... 596,025 502,945
INVESTING ACTIVITIES
Additions to real estate........................... (57,213) (53,485)
--------- ---------
Cash used in investing activities.................. (57,213) (53,485)
FINANCING ACTIVITIES
Distributions to partners.......................... (525,874) (446,202)
Decrease (increase) in restricted cash............. 2,000 (37,963)
--------- ---------
Net cash used in financing activities.............. (523,874) (484,165)
--------- ---------
Net increase (decrease) in cash.................... 14,938 (34,705)
Cash at beginning of period........................ 268,382 303,087
--------- ---------
Cash at end of period.............................. $ 283,320 $ 268,382
========= =========
</TABLE>
See notes to financial statements.
F-68
<PAGE>
GABLES AT FARMINGTON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Gables at Farmington Associates (the Partnership) is a general partnership
that owns, operates, and manages an assisted living facility known as The
Gables at Farmington (Property) located in Farmington, Connecticut.
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.
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..... 7-40 years
Furniture and fixtures........ 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. MORTGAGE NOTE PAYABLE--AFFILIATE
The Partnership has a mortgage note payable to one of the partners (the
"Lending Partner") in the amount of $11,550,000, collateralized by the
Property. The note bears interest of 11% per annum payable monthly with
principal due at maturity. The mortgage note payable originally matured on
January 2, 1996. The Lending Partner has not foreclosed on the mortgage note
payable and has left the terms intact.
On November 24, 1997, the Partnership sold the Property to an unaffiliated
third party and used the proceeds to repay the mortgage note payable.
During 1997 and 1996, the Partnership made interest payments of $963,937 and
$1,293,778, respectively.
3. 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 actual receipts of
all revenues received and 5% of cash flows, as defined. Amounts due to
affiliate are for amounts due for the above fees and are noninterest bearing
and payable upon demand.
F-69
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Brookdale Living Communities, Inc.
We have audited the accompanying balance sheets of The Classic at West Palm
Beach Limited Partnership as of September 30, 1997 and December 31, 1996 and
the related statements of operations, partners' deficit and cash flows for the
period from January 1, 1997 to September 30, 1997 and for the year ended
December 31, 1996. These financial statements are the responsibility of The
Classic at West Palm Beach Limited 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 Classic at West Palm
Beach Limited Partnership at September 30, 1997 and December 31, 1996, and the
results of its operations and its cash flows for the period from January 1,
1997 to September 30, 1997 and for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 23, 1997
F-70
<PAGE>
THE CLASSIC AT WEST PALM BEACH LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1997 31, 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 625,650 $ 606,383
Restricted cash...................................... 627,259 301,260
Prepaid expenses and other........................... 450,152 526,072
----------- -----------
Total current assets................................. 1,703,061 1,433,715
Real estate, at cost:
Land, building and improvements...................... 23,841,954 23,841,954
Furniture and equipment.............................. 938,402 907,321
----------- -----------
24,780,356 24,749,275
Accumulated depreciation............................. (4,474,062) (3,998,505)
----------- -----------
20,306,294 20,750,770
Deferred financing fees, net of accumulated
amortization of $310,100 in 1997 and $279,631
in 1996............................................. 1,310,201 1,340,670
----------- -----------
Total assets......................................... $23,319,556 $23,525,155
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Mortgage note payable................................ $ 104,713 $ 97,721
Accounts payable and accrued expenses................ 699,783 522,879
Tenant security deposits............................. 522,608 533,997
Due to affiliate..................................... 753,116 863,522
----------- -----------
Total current liabilities............................ 2,080,220 2,018,119
Mortgage note payable, less current maturities....... 22,036,275 22,115,707
Interest due to affiliates........................... 3,460,564 3,460,564
----------- -----------
Total liabilities.................................... 27,577,059 27,594,390
Partners' deficit.................................... (4,257,503) (4,069,235)
----------- -----------
Total liabilities and partners' deficit.............. $23,319,556 $23,525,155
=========== ===========
</TABLE>
See notes to financial statements.
F-71
<PAGE>
THE CLASSIC AT WEST PALM BEACH LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 TO YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
REVENUE
Resident fees....................................... $5,104,444 $6,594,686
EXPENSES
Facility operating.................................. 2,970,146 3,907,898
Interest expense.................................... 1,404,251 1,841,745
Real estate taxes................................... 207,000 301,917
Depreciation and amortization....................... 506,026 674,900
Management fee--affiliate........................... 205,289 263,255
---------- ----------
Total expenses...................................... 5,292,712 6,989,715
---------- ----------
Net loss............................................ $ (188,268) $ (395,029)
========== ==========
</TABLE>
See notes to financial statements.
F-72
<PAGE>
THE CLASSIC AT WEST PALM BEACH LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<S> <C>
PARTNERS' DEFICIT AT JANUARY 1, 1996.............................. $(3,674,206)
Net loss.......................................................... (395,029)
-----------
PARTNERS' DEFICIT AT DECEMBER 31, 1996............................ (4,069,235)
Net loss.......................................................... (188,268)
-----------
PARTNERS' DEFICIT AT SEPTEMBER 30, 1997........................... $(4,257,503)
===========
</TABLE>
See notes to financial statements.
F-73
<PAGE>
THE CLASSIC AT WEST PALM BEACH LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 TO YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(188,268) $(395,029)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 506,026 674,900
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and
other assets.................................. 75,920 (26,707)
Increase (decrease) in accounts payable and
accrued expenses.............................. 176,904 (115,673)
Increase (decrease) in tenant security deposit. (11,389) 43,726
Increase (decrease) in due to affiliate........ (110,406) 263,255
--------- ---------
Net cash provided by operating activities.......... 448,787 444,472
INVESTING ACTIVITIES
Additions to real estate........................... (31,081) (16,612)
--------- ---------
Cash used in investing activities.................. (31,081) (16,612)
FINANCING ACTIVITIES
Repayments of mortgage notes payable............... (72,440) (89,119)
Increase in restricted cash........................ (325,999) (59,008)
--------- ---------
Cash used in financing activities.................. (398,439) (148,127)
--------- ---------
Net increase in cash............................... 19,267 279,733
Cash at beginning of period........................ 606,383 326,650
--------- ---------
Cash at end of period.............................. $ 625,650 $ 606,383
========= =========
</TABLE>
See notes to financial statements.
F-74
<PAGE>
THE CLASSIC AT WEST PALM BEACH LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Classic at West Palm Beach Limited Partnership (the Partnership) is a
limited partnership that owns, operates, and manages an assisted living
facility known as The Classic at West Palm Beach (the Property) located in
West Palm Beach, Florida. The Partnership has entered into an agreement to
sell the Property to Brookdale Living Communities, Inc. for approximately
$28.0 million.
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.
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..... 5-40 years
Furniture and fixtures........ 5-7 years
</TABLE>
RESTRICTED CASH
Pursuant to the terms of the mortgage note payable, the Partnership is
required to maintain a replacement reserve account to fund capital
expenditures associated with fixed asset replacements. The Partnership is also
required to maintain a tax escrow account for real estate taxes and insurance
payments. At September 30, 1997 and December 31, 1996, the amount of the
replacement reserve was $294,941 and $254,179, respectively, and the amount of
the tax escrow was $332,318 and $47,081, respectively.
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. MORTGAGE NOTE PAYABLE
The Partnership has a mortgage note payable which requires principal and
interest payments at an interest rate of 9.25% per annum payable monthly. The
mortgage note payable matures on November 1, 2030.
The mortgage note payable is coinsured by the note holder and the Federal
Housing Administration of the United States Department of Housing and Urban
Development under Section (S)221(d)(4) and pursuant to Section (S)244 of the
National Housing Act.
F-75
<PAGE>
THE CLASSIC AT WEST PALM BEACH LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the Amended and Restated Agreement of Limited Partnership, the
general partner is required to pay to the Partnership, on a monthly basis, an
interest rebate in the amount of the Libor rate plus 2 1/2% less the interest
rate on the mortgage note. During 1997 and 1996, the Partnership received
rebates of $134,601 and $216,838, respectively. These amounts have been
recorded as a reduction of interest expense on the financial statements.
During 1997 and 1996, the Partnership made net interest payments of
$1,404,251 and $1,842,432, respectively.
3. INTEREST DUE TO AFFILIATES
Interest due to affiliates represents unpaid interest on previous advances
made to the Partnership which were forgiven and reclassified to partners
equity upon the formation of the Agreement. This amount is noninterest bearing
and will remain constant until paid.
4. 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 4% of gross collections.
Amounts due to affiliate are for amounts due for the above fees and are
noninterest bearing and payable upon demand.
In accordance with the Partnership Agreement dated November 15, 1993
(Agreement), the manager of the Property is to receive one half of the
management fee as the first priority under the Distribution of Net Cash Flow
and Extraordinary Receipts provision. The management fee has been accruing
since the inception of the Agreement. The initial management fee payments were
made in 1997 in the amount of $305,696.
F-76
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Brookdale Living Communities, Inc.
We have audited the accompanying balance sheets of Lincoln Harbor Village,
L.P. as of September 30, 1997 and December 31, 1996 and the related statements
of operations, partners' deficit and cash flows for the period from January 1,
1997 to September 30, 1997 and for the year ended December 31, 1996. These
financial statements are the responsibility of Lincoln Harbor Village, L.P.'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 Lincoln Harbor Village,
L.P. at September 30, 1997 and December 31, 1996, and the results of its
operations and its cash flows for the period from January 1, 1997 to September
30, 1997 and for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As more fully discussed in Note
3, the Partnership's operating property has a history of recurring operating
losses, and the Partnership is anticipating cash flow deficits for 1997. These
conditions raise substantial doubt about the Partnership's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability of assets or the
amounts of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Chicago, Illinois
November 24, 1997
F-77
<PAGE>
LINCOLN HARBOR VILLAGE, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1997 31, 1996
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 3,278 $ 13,659
Restricted cash...................................... 291,137 330,840
Prepaid expenses and other........................... 32,344 51,242
----------- -----------
Total current assets................................. 326,759 395,741
Real estate, at cost:
Land, building and improvements...................... 18,127,087 18,079,221
Furniture and equipment.............................. 1,600,119 1,536,688
----------- -----------
19,727,206 19,615,909
Accumulated depreciation............................. (3,929,884) (3,453,933)
----------- -----------
15,797,322 16,161,976
Deferred financing fees, net of accumulated
amortization of $296,731 in 1997 and $266,704
in 1996............................................. 103,630 133,657
----------- -----------
Total assets......................................... $16,227,711 $16,691,374
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Mortgage note payable................................ $ 151,065 $ 137,300
Accounts payable and accrued expenses................ 443,379 509,641
Tenant security deposits............................. 295,130 330,840
Accrued interest--affiliate.......................... 92,810 92,810
----------- -----------
Total current liabilities............................ 982,384 1,070,591
Mortgage note payable--affiliate..................... 15,550,628 15,666,088
----------- -----------
Total liabilities.................................... 16,533,012 16,736,679
Partners' deficit.................................... (305,301) (45,305)
----------- -----------
Total liabilities and partners' deficit.............. $16,227,711 $16,691,374
=========== ===========
</TABLE>
See notes to financial statements.
F-78
<PAGE>
LINCOLN HARBOR VILLAGE, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 TO YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
REVENUE
Resident fees....................................... $2,802,926 $ 3,820,695
EXPENSES
Facility operating.................................. 1,612,458 2,340,258
Interest expense.................................... 1,139,660 1,536,144
Real estate taxes................................... 157,362 236,096
Depreciation and amortization....................... 505,978 662,475
Management fee...................................... 145,737 206,546
---------- -----------
Total expenses...................................... 3,561,195 4,981,519
---------- -----------
Net loss............................................ $ (758,269) $(1,160,824)
========== ===========
</TABLE>
See notes to financial statements.
F-79
<PAGE>
LINCOLN HARBOR VILLAGE, L.P.
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<S> <C>
PARTNERS' CAPITAL AT JANUARY 1, 1996.............................. $ 495,115
Capital contributions............................................. 620,404
Net loss.......................................................... (1,160,824)
-----------
PARTNERS' DEFICIT AT DECEMBER 31, 1996............................ (45,305)
Capital contributions............................................. 498,273
Net loss.......................................................... (758,269)
-----------
PARTNERS' DEFICIT AT SEPTEMBER 30, 1997........................... $ (305,301)
===========
</TABLE>
See notes to financial statements.
F-80
<PAGE>
LINCOLN HARBOR VILLAGE, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 TO YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
-----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(758,269) $(1,160,824)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 505,978 662,475
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and
other assets.................................. 18,898 (27,541)
Increase (decrease) in accounts payable and
accrued expenses.............................. (66,262) 9,729
Increase in tenant security deposit............ (35,710) 45,338
Increase (decrease) in due to affiliate........ -- 37,767
--------- -----------
Net cash used in operating activities.............. (335,365) (433,056)
INVESTING ACTIVITIES
Additions to real estate........................... (111,297) (19,067)
--------- -----------
Cash used in investing activities.................. (111,297) (19,067)
FINANCING ACTIVITIES
Capital contributions.............................. 498,273 620,404
Repayments of mortgage notes payable............... (101,695) (124,706)
Increase in restricted cash........................ 39,703 (52,980)
--------- -----------
Net cash provided by financing activities.......... 436,281 442,718
--------- -----------
Net decrease in cash............................... (10,381) (9,405)
Cash at beginning of period........................ 13,659 23,064
--------- -----------
Cash at end of period.............................. $ 3,278 $ 13,659
========= ===========
</TABLE>
See notes to financial statements.
F-81
<PAGE>
LINCOLN HARBOR VILLAGE, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Lincoln Harbor Village L.P. (the Partnership) is a limited partnership
that owns and operates an assisted living facility known as The Harbor Village
(the Property) located in Chicago, Illinois. The Partnership has entered into
an agreement to sell the Property to Brookdale Living Communities, Inc. for
approximately $16.8 million.
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.
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.... 27-40 years
Furniture and fixtures....... 5-10 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. MORTGAGE NOTE PAYABLE--AFFILIATE
The Partnership has a mortgage note payable to one of the partners (the
"Lending Partner"), in the original amount of $16,200,000, collateralized by
the Property. The note bears interest of 9.625% per annum in monthly interest
only payments of $129,937 during the first 36 months of the note term, until
May 1993. Commencing in June 1993, monthly payments of principal and interest
in the amount of $137,698 are due until maturity on May 1, 2000, when the
entire unpaid balance of principal and interest is payable in full. During
1997 and 1996, the Partnership made interest payments of $1,137,790 and
$1,561,793, respectively.
3. ABILITY TO SUSTAIN OPERATIONS
The Property has incurred recurring operating losses. In addition, the
Partnership anticipates that the Property will not generate sufficient funds
to meet future operating expenses and debt service requirements. The general
partner and certain of its affiliates have provided funding necessary to
sustain operations through September 30, 1997. However, the Partnership's
ability to continue as a going concern and to meet its obligations as they
come due is ultimately dependent upon its ability to generate adequate cash
flow from operations, to obtain continued funding from affiliates of cash
deficits, or to obtain additional financing sources.
F-82
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Brookdale Living Communities, Inc.
We have audited the accompanying balance sheet of Brendenwood MRC Limited
Partnership as of September 30, 1997 and the related statements of income and
partners' deficit and cash flows period from January 1, 1997 to September 30,
1997. These financial statements are the responsibility of Brendenwood MRC
Limited Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brendenwood MRC Limited
Partnership at September 30, 1997 and the results of its operations and its
cash flows for the period from January 1, 1997 to September 30, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
November 24, 1997
F-83
<PAGE>
BRENDENWOOD MRC LIMITED PARTNERSHIP
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................. $ 435,319
Restricted cash................................................... 435,570
Prepaid expenses and other........................................ 84,153
-----------
Total current assets.............................................. 955,042
Real estate, at cost:
Land, building and improvements................................... 10,847,536
Furniture and equipment........................................... 1,022,084
-----------
11,869,620
Accumulated depreciation.......................................... (3,200,232)
-----------
8,669,388
Deferred financing fees, net of accumulated amortization of
$16,231.......................................................... 114,800
-----------
Total assets...................................................... $ 9,739,230
===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Mortgage note payable............................................. $ 63,674
Accounts payable and accrued expenses............................. 285,103
-----------
Total current liabilities......................................... 348,777
Mortgage note payable, less current maturities.................... 10,914,678
-----------
Total liabilities................................................. 11,263,455
Partners' deficit................................................. (1,524,225)
-----------
Total liabilities and partners' deficit........................... $ 9,739,230
===========
</TABLE>
See notes to financial statements.
F-84
<PAGE>
BRENDENWOOD MRC LIMITED PARTNERSHIP
STATEMENT OF INCOME AND PARTNERS' DEFICIT
PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 30, 1997
<TABLE>
<S> <C>
REVENUE
Resident fees..................................................... $ 2,870,762
EXPENSES
Facility operating................................................ 1,464,497
Interest expense.................................................. 697,432
Real estate taxes................................................. 187,398
Depreciation and amortization..................................... 226,151
Management fee.................................................... 133,025
-----------
Total expenses.................................................... 2,708,503
-----------
Net income........................................................ 162,259
Partners' deficit at January 1, 1997.............................. (1,686,484)
-----------
Partners' deficit at September 30, 1997........................... $(1,524,225)
===========
</TABLE>
See notes to financial statements.
F-85
<PAGE>
BRENDENWOOD MRC LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 30, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income........................................................... $162,259
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 226,151
Changes in operating assets and liabilities:
Decrease in prepaid expenses and other assets.................... 24,809
Decrease in accounts payable and accrued expenses................ (60,640)
--------
Net cash provided by operating activities............................ 352,579
INVESTING ACTIVITIES
Additions to real estate............................................. (62,239)
--------
Cash used in investing activities.................................... (62,239)
FINANCING ACTIVITIES
Repayments of mortgage notes payable................................. (47,249)
Increase in restricted cash.......................................... (21,790)
--------
Cash used in financing activities.................................... (69,039)
--------
Net increase in cash................................................. 221,301
Cash at beginning of period.......................................... 214,018
--------
Cash at end of period................................................ $435,319
========
</TABLE>
See notes to financial statements.
F-86
<PAGE>
BRENDENWOOD MRC LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Brendenwood MRC Limited Partnership (the Partnership) is a limited
partnership that owns, operates, and manages an assisted living facility known
as The Brendenwood Retirement Community (the Property) located in Voorhees,
New Jersey. The Partnership has entered into an agreement to sell the Property
to Brookdale Living Communities, Inc. for approximately $15.8 million.
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.
Depreciation was calculated using the straight-line method over the
estimated useful lives of assets, which were as follows:
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Building and improvements..... 5-40 years
Furniture and fixtures........ 5-7 years
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RESTRICTED CASH
Pursuant to the terms of the mortgage note payable, the Partnership is
required to maintain a replacement reserve account to fund capital
expenditures associated with fixed asset replacements. The Partnership is also
required to maintain a tax escrow account for real estate taxes and insurance
payments. At September 30, 1997, the amount of the replacement reserve was
$308,981, and the amount of the tax escrow was $126,589.
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. MORTGAGE NOTE PAYABLE
The Partnership has a mortgage note payable which requires principal and
interest payments at an interest rate of 8.45% per annum payable monthly. The
mortgage note payable matures February 2030. The Partnership made interest
payments of $697,432 during the period.
The mortgage note payable is coinsured by the note holder and the Federal
Housing Administration of the United States Department of Housing and Urban
Development under Section (S)221(d)(4) and pursuant to Section (S)244 of the
National Housing Act.
F-87
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[PHOTOS]
[The inside back cover page will contain color photographs and captions. The
photographs will consist of an outside view of certain of the Company's
facilities 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
facility to be built at the Austin, Texas development site. In addition, the
inside back cover page will contain several photographs of residents in various
settings, in each case without captions.]
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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 SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OF-
FERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary........................................................ 1
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Selected Financial Data................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 22
Management................................................................ 33
Certain Transactions...................................................... 38
Principal Stockholders.................................................... 40
Description of Capital Stock.............................................. 41
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 45
Legal Matters............................................................. 46
Experts................................................................... 46
Additional Information.................................................... 47
Index to Financial Statements............................................. F-1
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2,000,000 SHARES
[LOGO OF BROOKDALE LIVING COMMUNITIES, INC.]
COMMON STOCK
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PROSPECTUS
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FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
COWEN & COMPANY
DECEMBER 18, 1997
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