UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from --------------------- to -----------------------
Commission File Number 0-22253
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BROOKDALE LIVING COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4103821
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 North Wabash, Suite 1400, Chicago, IL 60611
(formerly 77 West Wacker Drive, Suite 4400, Chicago, IL 60601)
(Address of principal executive offices and zip code)
(312) 977-3700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
As of March 13, 2000, there were 11,574,749 shares of the Registrant's common
stock outstanding. The aggregate market value of the Registrant's shares held on
such date by non-affiliates of the Registrant, based on the closing price
($12.875 per share) of the Registrant's common stock on the Nasdaq National
Market on such date, was $149,024,893.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2000.
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BROOKDALE LIVING COMMUNITIES, INC.
Form 10-K
December 31, 1999
TABLE OF CONTENTS
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Part I Page
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Item 1. Business..............................................................................................1
Item 2. Properties............................................................................................9
Item 3. Legal Proceedings....................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................................................10
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................10
Item 6. Selected Financial Data..............................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........................................16
Item 8. Financial Statements and Supplementary Data..........................................................18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................................................36
Part III
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Item 10. Directors and Executive Officers of the Registrant...................................................37
Item 11. Executive Compensation...............................................................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................37
Item 13. Certain Relationships and Related Transactions.......................................................37
Part IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................37
Signatures......................................................................................................41
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PART I
ITEM 1. BUSINESS (dollars in thousands, except operating data)
The Company
Brookdale Living Communities, Inc. and its subsidiaries (collectively, the
"Company" or "Brookdale") provide senior independent and assisted living
services to the elderly through their facilities located in urban and suburban
areas of major metropolitan markets. As of December 31, 1999, the Company
operated 23 senior independent and assisted living facilities in 14 states
containing a total of 5,094 units which, as of December 31, 1999, were 95%
occupied (excluding the recently leased Berkshire of Castleton and Benchmark of
Hoffman Estates and third party developments). The Company owns 4 of such
facilities, leases 15 facilities and manages 4 facilities pursuant to management
contracts. With facilities that contain an average of approximately 219 units,
the Company believes it is able to achieve economies of scale within its
facilities and provide senior independent and assisted living services in a more
cost-effective manner. The Company plans to commence development of 3 to 4 new
facilities per year containing approximately 220 units each and plans to pursue
the acquisition in leasing of portfolios consisting of 2 or more facilities,
although the Company may acquire or lease individual facilities.
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 independent and
assisted living services. The residents in a Brookdale facility have the ability
to maintain their residency in such facility for an extended period of time due
to the range of service options available to such residents as their needs
change. An individual can move into a Brookdale facility while the individual is
able to live independently, requiring little or no assistance with the
activities of daily living. As the resident ages and requires more assistance
with the activities of daily living, the resident is able to receive an enhanced
level of services at the Brookdale facility and does not have to move to another
facility to receive such level of services. 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 activities of daily living. As of December 31, 1999,
the average age of Brookdale's residents was approximately 83 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 from facility to facility
depending upon the licensing requirements of the state in which the facility is
located.
The Company was incorporated in Delaware on September 4, 1996 by an
affiliate of The Prime Group, Inc. The Company was formed to continue and expand
the business and operations of the senior independent and assisted living
division of The Prime Group, Inc. and certain of its affiliates (collectively,
"PGI"), which, since 1985, had been involved in the development, construction,
marketing and operation of senior independent and assisted living facilities for
the elderly.
At the completion of the Company's initial public offering of its common
stock on May 7, 1997 (the "IPO"), the shares of the Company owned by such
affiliate were repurchased by the Company at a nominal price in accordance with
a subscription agreement between the Company and such affiliate. In connection
with the completion of the IPO, PGI and senior management of the Company
contributed their interests in the senior independent and assisted living
division of PGI to the Company in exchange for 2,000 shares of the Company's
common stock. PGI also purchased 2,500 shares of the 4,500 shares of the
Company's common stock sold in the IPO. Since the IPO, the Company has managed,
and continues to manage, The Island on Lake Travis facility, which continues to
be owned by PGI. The Company's principal executive offices are located at 330
North Wabash, Suite 1400, Chicago, Illinois 60611 (formerly at 77 West Wacker
Drive, Suite 4400, Chicago, Illinois 60601), and its telephone number is (312)
977-3700.
Cautionary Statements
This annual report on Form 10-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this report, 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 report 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 from time to time in the Company's
filings with the Securities and Exchange Commission. The forward-looking
statements included in this report are made only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update such
forward-looking statements to reflect subsequent events or circumstances.
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The Senior Independent and Assisted Living Industry
The senior independent and assisted living industry is a rapidly growing
component of the non-acute health care system for the elderly. The senior
independent and assisted 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 to, or cannot, live alone. It is estimated that 35% of the people over
age 85 require assistance with more than one activity of daily living, such as
bathing, eating, personal hygiene, grooming and dressing.
The rapid growth of the senior independent and assisted living industry is
supported by several significant trends, including the following:
Favorable Demographics. The primary consumers of senior independent 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 33% between the years 2000 and 2010. Brookdale believes that these
trends will contribute to continued strong demand for senior independent and
assisted living services.
Consumer Preference. The Company believes that senior independent and
assisted living facilities provide prospective residents and their families with
an attractive alternative to home care or skilled nursing facilities,
particularly those prospective residents who do not require the level of care or
institutional setting provided by skilled nursing facilities. Senior independent
and assisted living facilities allow residents, who typically furnish their own
units, 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.
Cost-Effective Alternative. The annual per resident cost for senior
independent 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 independent 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 which enables 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.
Increasing Awareness of Benefits of Congregate Living. The Company believes
that consumers and their adult children are becoming increasingly aware of the
benefits of living in senior independent or congregate living facilities which
provide assisted living services. For the potential resident who may not
necessarily require assistance with activities of daily living, senior
independent living facilities can provide significant benefits to improve
quality of life. By receiving proper nutrition and the enhanced physical,
mental, and social stimulation, which are provided in a senior independent or
congregate living facility, residents may realize an improved quality of living.
In facilities, such as the Company's facilities, which also provide assistance
with activities of daily living, residents and their adult children can take
comfort in knowing that such residents can age-in-place in a more secure and
structured environment than typically available in the home.
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:
Purchase and Lease Existing Senior Independent and Assisted Living
Facilities. The Company believes that significant opportunities exist to take
advantage of the fragmented senior independent and assisted living industry by
selectively purchasing or leasing existing facilities. The Company's acquisition
and leasing strategy has focused, and will continue to 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. Facilities which the Company expects to purchase or lease
will primarily consist of large facilities, similar to the Company's current
facilities that contain an average of approximately 219 units, located in urban
and suburban areas of major metropolitan markets. See "--Acquisitions, Leases
and Development."
Develop the Brookdale Prototype Facility in Targeted Markets. The Company
intends to continue to leverage its development expertise and construct its
prototype facility on 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 at least 3 to 4 facilities on behalf of third
parties in each of the next 5 years and anticipates that each development will
require approximately 20 to 24 months to complete. See "--Acquisitions, Leases
and Development."
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Provide Access to a Full Continuum of Senior Independent and Assisted
Living Services. The Company's strategy is to provide access to a full continuum
of senior independent and assisted living services that allows its residents to
age-in-place. These services are provided either by the Company or by outside
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
addition, the Company is presently developing an 82-bed skilled nursing facility
on the campus of The Devonshire facility located in Lisle, Illinois. The Company
does not currently intend to pursue the development of additional skilled
nursing facilities at its other facilities. See "--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. As of December 31, 1999, the Company's facilities, exclusive of the
recently leased Berkshire of Castleton and Benchmark of Hoffman Estates, and The
Willows, a 54-unit assisted living facility developed by the Company, were 95%
occupied. The Company believes that its marketing programs will improve the
occupancy rates of facilities that the Company purchases 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 certain 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 to ensure consistent low pricing,
implementing sophisticated budgeting and financial controls at each facility and
establishing standardized training and operations procedures. Although the
Company's business is not dependent on its national vendor contracts, such
contracts provide the Company with better pricing on required goods and services
due to high volume purchases from a few national vendors. There are, however,
several other vendors from whom the Company could purchase its required goods
and services if the national vendor contracts were to be terminated or were to
expire. The Company believes that the systematic implementation of its
management and operating policies will enable the Company to enhance the
financial performance of its existing and future facilities and will continue to
improve the profitability of its stabilized facilities.
Expand Facilities Where Economically Advantageous. The Company has found
that certain of its facilities with stabilized occupancies benefit from
additions and expansions offering increased capacity, as well as additional
levels of service for residents requiring higher levels of care. 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 82-bed skilled nursing facility under construction
on the campus of The Devonshire facility, on July 1, 1999 the Company opened The
Willows, a 54-unit assisted living facility adjacent to its Hawthorn Lakes
facility located in Vernon Hills, Illinois.
Services
The Company's senior independent 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 alone, 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 education
and wellness programs.
Supplemental Care Services
In addition to the basic care program, 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 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 room and activity areas.
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Depending on the particular facility and as dictated by state licensing
requirements, the Company also provides assistance with activities of daily
living such as dressing and bathing and medication administration or reminders.
The Company plans to expand its supplemental service offerings, to the extent
permitted by state licensing authorities, 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 licensing to provide
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 the licensing requirements of
particular states. However, the Company's general strategy is to provide
assistance with activities of daily living, subject to state licensing
limitations.
Certain services, such as physician care, infusion therapy, which includes
intravenous delivery of medication, physical and speech therapy and other more
intensive home health care services, are provided to many of Brookdale's
residents 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 to obtain consistent low pricing for
certain services such as food and energy, implementing strict budgeting and
financial controls at each facility and establishing standardized training and
operations procedures. The Company believes that successful senior independent
and assisted living operators must effectively combine the business disciplines
of hospitality, health care, marketing, finance and real estate expertise.
Brookdale has implemented intensive standards, policies and procedures and
systems, including detailed staff manuals, which the Company believes have
contributed to Brookdale's facility operating margins. The Company has
centralized accounting controls, finance and other operating functions at its
corporate headquarters so that, consistent with its operating philosophy,
facility-based personnel can 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 the facility's 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.
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 frequent training sessions for management and staff at
each site.
Quality Assurance
The Company maintains quality assurance programs at each of its facilities
through its corporate headquarter's 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, the Company has established at each facility a resident council, an
advisory committee elected by the residents, that meets monthly with the
Executive Director of the facility. Separate resident
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committees also exist or are being initiated 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, its facilities and its services among potential residents and their
family members and among referral sources, such as hospital discharge planners,
physicians, 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's properties 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.
Hospital and Health Care Network Affiliations
Another key element in the Company's operating strategy is to establish
affiliations between the Company's facilities and hospitals and health care
networks. Hospital and health care network affiliations provide for on-site
physician and nursing services, facilitate the provision of health care services
and wellness programs to the Company's residents and provide the Company with a
referral source. Such affiliations exist at various Brookdale facilities. As
examples, The Hallmark (located in Chicago, Illinois) and The Heritage (located
in Des Plaines, Illinois) facilities are affiliated with Saint Joseph Health
Centers and Hospital and Holy Family Hospital, respectively, pursuant to
agreements with the respective hospitals. The agreements establishing the
affiliations typically grant the hospital or health care network the right to
lease space at a Brookdale facility and provide that the hospital or health care
network will maintain centers in the facility to make services available to
facility residents. The hospital or health care network pays rent for its leased
space and is compensated for making the services they render available at the
facility. The annual amounts the hospital or health care network pay to the
Company approximates the annual amounts the Company pays to such hospital or
health care network. The Company intends to establish affiliations with
hospitals and health care networks if the Company believes such affiliations
would be beneficial to the residents of the facility and if the facility can
accommodate such affiliations.
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 focuses on the urban and suburban
areas of major metropolitan markets.
Acquisitions and Leases
The Company currently plans to pursue the acquisition in leasing of
portfolios consisting of 2 or more facilities, although the Company may acquire
or lease individual facilities. In some cases, the purchase contract for a
facility may be assigned to a third party which would acquire the facility and
in turn enter into an operating lease with a wholly-owned subsidiary of the
Company, with the subsidiary obtaining substantially all of the benefits and
risks of ownership. The Company utilizes an operating lease structure for its
acquisitions in order to minimize its overall cost of capital. The Company may
acquire facilities as a means of entry into new markets and may also attempt to
increase its market share in existing markets through selected acquisitions
based on its experience in and knowledge of existing markets. Acquisitions are
expected to consist primarily of large facilities that are similar to the
Company's current facilities, which average approximately 219 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.
Development
It is the Company's development strategy to commence the development and
construction of 3 to 4 facilities per year on behalf of third party owners. The
Company's flexible prototype facility contains approximately 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 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, lounges, billiards room,
multi-purpose room, arts and crafts room, exercise room, convenience store,
beauty/barber shop, mail room, common dining room and private dining room. The
Company anticipates that new developments will require 8 to 10 months for
pre-construction development, 12 to 14 months for construction and approximately
12 to 18 months after opening to achieve stabilized occupancy. The total
construction costs for the 220-unit prototype, including construction period
financing costs and operating deficits during the lease-up period, are estimated
to be approximately $35,000, or approximately $159 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 the foreseeable level of new
entrants in the market, estimated market demand and zoning prospects. Site
selection is based on established criteria relating to land cost and condition,
visibility, accessibility,
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immediate adjacencies, community perception and zoning prospects. Full market
feasibility studies, which include evaluations of all potential competitors,
extensive interviews with key municipal officials and health care providers, and
demographic studies are conducted for each site.
The table set forth below summarizes certain information related to the
Company's operating lease transactions, developments and third party
developments during 1999:
<TABLE>
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Operating Leases/Developments
-----------------------------
Property Location Units Date Leased/Opened
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River Bay Club Quincy, MA 284 January 19, 1999
The Willows Vernon Hills, IL 54 July 1, 1999
Berkshire of Castleton Indianapolis, IN 143 September 14, 1999
Benchmark of Hoffman Estates Hoffman Estates, IL 287 December 22, 1999
---
Total Units 768
===
Third Party Developments
------------------------
Opened/Projected
Development Location Units Completion Date
----------- -------- ----- ---------------
<S> <C> <C> <C>
The Heritage at Gaines Ranch Austin, TX 208 August, 1999
The Heritage, Southfield Southfield, MI 218 August, 1999
The Meadows of Glen Ellyn Glen Ellyn, IL 234 March, 2000
The Heritage at Raleigh Raleigh, NC 218 September, 2000
The Hallmark at Battery Park New York, NY 217 September, 2000
The Heritage at Mt. Lebanon Pittsburgh, PA 219 February, 2001
---
Total Units 1,314
=====
</TABLE>
Competition
The senior independent 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 independent and assisted living services. The
Company competes with such providers primarily on the basis of cost, quality of
care and the array of services provided. The Company competes 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 independent 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.
Governmental Regulation
Senior independent 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 many states, senior independent and
assisted living facilities also are subject to state or local building codes,
fire codes and food service licensing or certification requirements. Assisted
living facilities may be subject to periodic survey or inspection by
governmental authorities. To date, state regulation has not had a material
adverse effect on the Company's ability to offer services or conduct its
business. 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.
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 unit or 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 capital
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. As of December 31, 1999, the Company is
paid for services it provides to
6
<PAGE>
10 residents in the state of Washington by the Department of Social and Health
Services. Some portion of such funds are derived by such agency from the federal
Medicaid program. Also, all of the Company's residents are eligible for Medicare
benefits. Therefore, certain aspects of the Company's business are and will be
subject to federal and state laws and regulations which govern financial and
other arrangements between and among health care providers, suppliers and
vendors. These laws prohibit certain direct and indirect payments and
fee-splitting arrangements designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider or other entity or
person for medical products and services. These laws include, but are not
limited to, the federal "anti-kickback law" which prohibits, among other things,
the offer, payment, solicitation or receipt of any form of remuneration in
return for the referral of Medicare and Medicaid patients. The Office of the
Inspector General of the Department of Health and Human Services, the Department
of Justice and other federal agencies interpret these statutes liberally and
enforce them aggressively. 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 licensing, 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 the Medicare program and (iii) as required under some state
licensing laws, or for the convenience of its residents, some of the Company's
senior independent and assisted living facilities maintain affiliations 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. 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 delays, which could adversely affect the Company's business and growth
strategy and results of operations.
Environmental Matters
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous substances on its property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous substances. The costs of remediation or removal may be substantial,
and the presence of the hazardous substances, or the failure to promptly
remediate them, may adversely affect the owner's ability to sell the real estate
or to borrow using the real estate as collateral. In connection with its
ownership and operation of its facilities, the Company may be potentially liable
for the costs of removal or remediation of hazardous substances.
The Company has no knowledge, nor has the Company been notified by any
governmental authority, of any material noncompliance, liability or claim
relating to hazardous substances in connection with any properties in which the
Company now has or heretofore had an interest. However, the Company can give no
assurances can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of its facilities will not be affected by the condition of the
properties in the vicinity of its facilities (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
Employees
As of December 31, 1999, the Company had approximately 2,200 employees, of
which 103 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
independent 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, in addition to fire, flood,
and property insurance. The Company believes its insurance coverage is adequate
based on the nature of the risks, its historical experience and industry
standards.
7
<PAGE>
Executive Officers
The following table sets forth certain information concerning each of the
Company's executive officers:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Michael W. Reschke 44 Chairman of the Board, Director
Mark J. Schulte 46 President and Chief Executive Officer, Director
Robert J. Rudnik 45 Executive Vice President, General Counsel and Secretary, Director
R. Stanley Young 47 Executive Vice President, Chief Financial Officer and Treasurer
David J. Schaus 44 Senior Vice President - Sales and Marketing
Stephan T. Beck 44 Senior Vice President - Operations
Matthew F. Whitlock 35 Vice President - Acquisitions
Sheryl A. Wolf 37 Vice President - Controller
John H. Mertz, Jr. 41 Vice President - Project Finance
Katherine P. Erickson 39 Vice President - Marketing Services
</TABLE>
Michael W. Reschke has served as Chairman of the Board and as a Director 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 19 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 and a
Director of Prime Retail, Inc. (NYSE:PRT), a publicly traded real estate
investment trust involved in the ownership, acquisition, development and
management of factory outlet centers and the successor in interest to the former
retail division of PGI, and is Chairman of the Board and a Director of Prime
Group Realty Trust (NYSE:PGE), a publicly traded real estate investment trust
involved in the ownership, acquisition, development and management of 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 Horizon Group Properties, Inc. (NASDAQ:HPGI), a publicly traded
real estate investment trust involved in the ownership, acquisition,
redevelopment and management of factory outlet centers. 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 as
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 independent 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.
Robert J. Rudnik has served as Executive Vice President, General Counsel
and Secretary of the Company since July 1997 and as a Director of the Company
since December 1999. Mr. Rudnik also serves as Executive Vice President, General
Counsel and Secretary of PGI. Mr. Rudnik has served in such capacity for PGI
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.
R. Stanley Young has served as Executive Vice President, Chief Financial
Officer and Treasurer since December 1999. From August 1998 to December 1999,
Mr. Young was Senior Vice President-Finance and Treasurer of the Company. From
1977 to 1998, Mr. Young was with KPMG LLP, and was admitted to the partnership
in 1987. Mr. Young is a certified public accountant.
David J. Schaus has served as Senior Vice President - Sales and Marketing
of the Company since March 2000. From August, 1998 to March, 2000, Mr. Schaus
served as Senior Vice President - Human Services of the Company. From January
1997 to August 1998, Mr. Schaus was a principal in the firm of Workplace
Dynamics, Inc., a human resources consulting firm, and from August 1989 to
January 1997, Mr. Schaus served as Senior Vice President and Managing Director
of Dain Rauscher, a financial services broker-dealer. Prior to joining
Brookdale, Mr. Schaus had over 20 years of management experience.
Stephan T. Beck has served as Senior Vice President - Operations of the
Company since May 1999 and Vice President - Operations from May 1997 to May
1999. 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.
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.
8
<PAGE>
Sheryl A. Wolf has served as Vice President-Controller of the Company since
May 1999 and Controller from May 1997 to May 1999. 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.
John H. Mertz, Jr. has served as Vice President - Project Finance since
April 1999. From 1985 to 1995, and again from 1998 to March 1999, Mr. Mertz
served as Vice President in the Commercial Real Estate Services Group of Bank of
America (formerly Continental Bank). From 1995 to 1998, Mr. Mertz was an
independent futures trader at the Chicago Board of Trade.
Katherine P. Erickson has served as Vice President - Marketing Services of
the Company since March 1999. From 1995 to March 1999, Ms. Erickson was employed
by Alterra Healthcare Corporation as their Corporate Director of Marketing and
was later promoted to Vice President of Marketing. From 1988 to 1995, Ms.
Erickson was employed by PGI first working as a marketing counselor in its
Senior Housing division and later was promoted to Vice President of Marketing.
ITEM 2. PROPERTIES (dollars in thousands, except operating data)
Facilities
The following table sets forth certain information regarding the Company's
facilities:
<TABLE>
<CAPTION>
Year Occupancy Rate at Ownership
Facility Location Units Opened December 31, (1) Status(2)(3)
- -------- -------- ----- ------ ----------------------------- ------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
The Hallmark............................ Chicago, IL 341 1990 100% 99% 100% Leased
The Devonshire (4)...................... Lisle, IL 321 1990 100% 100% 100% Owned
The Classic at West Palm Beach.......... West Palm Beach, FL 301 1990 92% 95% 92% Leased
The Heritage............................ Des Plaines, IL 255 1993 97% 98% 100% Owned
Park Place.............................. Spokane, WA 208 1992 94% 95% 88% Leased
Edina Park Plaza........................ Edina, MN 209 1987 99% 94% 96% Owned
The Island on Lake Travis............... Lago Vista, TX 207 1988 98% 90% 91% Managed
Hawthorn Lakes (5)...................... Vernon Hills, IL 202 1987 94% 98% 100% Owned
The Springs of East Mesa................ Mesa, AZ 185 1986 96% 95% 100% Leased
The Gables at Farmington................ Farmington, CT 172 1984 80% 94% 99% Leased
The Kenwood............................. Minneapolis, MN 154 1987 100% 100% 100% Managed
Brendenwood............................. Voorhees, NJ 143 1987 100% 92% 88% Leased
The Gables at Brighton.................. Rochester, NY 103 1988 81% 78% 95% Leased
----
Total Units as of December 31, 1997 2,801
=====
Kenwood of Lake View
(formerly Harbor Village) (6)........ Chicago, IL 274 1954 87% 82% N/A Leased
The Atrium.............................. San Jose, CA 292 1987 100% 100% N/A Leased
Chatfield............................... West Hartford, CT 119 1989 88% 91% N/A Leased
Ponce de Leon........................... Santa Fe, NM 144 1985 95% 97% N/A Leased
Woodside Terrace........................ Redwood City, CA 270 1988 97% 96% N/A Leased
----
Total Units as of December 31, 1998 3,900
=====
The Willows (5)......................... Vernon Hills, IL 54 1999 41% N/A N/A Owned
River Bay Club.......................... Quincy, MA 284 1986 86% N/A N/A Leased
Berkshire of Castleton.................. Indianapolis, IN 143 1986 85% N/A N/A Leased
Benchmark of Hoffman Estates............ Hoffman Estates, IL 287 1987 92% N/A N/A Leased
The Heritage at Gaines Ranch (7)........ Austin, TX 208 1999 N/A N/A N/A Managed
The Heritage, Southfield (7)............ Southfield, MI 218 1999 N/A N/A N/A Managed
----
Total Units as of December 31, 1999 5,094
=====
(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) The operating lease terms vary from 1 to 5 years (with 5 to 11 one-year
extension options) to 23 years (with two 25-year extension options).
(4) Total units exclude the 82-bed skilled nursing facility under construction
at The Devonshire facility.
(5) The Willows is a 54-unit assisted living expansion at the Hawthorn Lakes
facility which opened in July 1999.
(6) This facility was operated as an apartment building until 1991, at which
point the prior owner purchased, substantially renovated and began
operating it as a senior independent and assisted living facility.
(7) These facilities were developed by the Company for third party owners and
first opened for occupancy in August, 1999.
</TABLE>
The following table sets forth certain information regarding facilities
under development by the Company for third parties:
9
<PAGE>
<TABLE>
<CAPTION>
Estimated Opened/
Location Units Status Opening Expected
-------- --------- ------ ----------------
<S> <C> <C> <C>
Glen Ellyn, IL 234 Under Construction March, 2000
Raleigh, NC 218 Under Construction September, 2000
New York (Battery Park City), NY 217 Under Construction September, 2000
Pittsburgh, PA 219 Under Construction February, 2001
Huntley, IL 274 In Development December, 2001
Columbus, OH 210 In Development December, 2001
Houston, TX 220 In Development December, 2001
Creve Coeur (St. Louis), MO 220 In Development December, 2001
-----
Total estimated units 1,812
=====
</TABLE>
Corporate Office Lease
On September 25, 1997, the Company entered into a 5-year lease (the "Office
Lease"), which commenced October 1, 1997, for its corporate office with 77 West
Wacker Limited Partnership (the "Landlord"), a partnership controlled by Prime
Group Realty Trust, the successor-in-interest to PGI's office and industrial
divisions. On March 17, 1998, the Company and the Landlord amended the Office
Lease, pursuant to which the Company and the Landlord agreed (i) to relocate the
Company's corporate office from the 48th floor to the 44th floor effective April
24, 1998, (ii) to increase the space leased by the Company to approximately
22,600 square feet and (iii) to extend the term of the Office Lease until April
30, 2005. The base rent under the amended Office Lease was $18.50 per square
foot, escalating $0.75 per square foot on each May 1 of the term commencing May
1, 1999. In consideration for the signing of the Office Lease and the amendment,
the Company received $404 and $452, respectively, of cash payments from the
Landlord for tenant improvements which are amortized over the term of the Office
Lease.
On September 30, 1999, the Office Lease was amended, and the Office Lease
was terminated effective February 29, 2000. Also on September 30, 1999, the
Company entered into a ten year operating lease for approximately 30,000 square
feet of new corporate office space in a building owned by a partnership
controlled by Prime Group Realty Trust. The operating lease provides for the
payment of approximately $2,100 to the Company to pay certain tenant improvement
costs and requires the payment of base rent at $16.50 per square foot,
escalating $0.75 per square foot on each March 1 of the term commencing March 1,
2000, plus operating expenses (as defined in the operating lease).
As of March 1, 2000, the Company's corporate office is located at 330 North
Wabash, Suite 1400, Chicago, Illinois 60611 (and was formerly located at 77 West
Wacker Drive, Suite 4400, Chicago, Illinois 60601).
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Price Range of Common Stock
The Company's common stock is listed and traded on the Nasdaq National
Market ("Nasdaq") under the symbol "BLCI." The following table sets forth the
high and low closing prices for the common stock, as reported by Nasdaq, for the
periods indicated:
<TABLE>
<CAPTION>
1999 1998
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter..................... $21.00 $14.63 $25.25 $16.50
Second Quarter ................... 17.38 13.75 29.25 22.63
Third Quarter..................... 14.50 12.25 25.63 17.44
Fourth Quarter.................... 14.13 11.38 21.59 13.25
</TABLE>
As of March 13, 2000, the closing price for the common stock, as reported
by Nasdaq was $12.875 per share. At such date, the Company had approximately
1,260 holders of record of common stock.
10
<PAGE>
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, terms of debt covenants and capital requirements of the Company
as well as other factors deemed to be relevant by the Company's Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected financial and operating data for the
Company. The selected financial data as of December 31, 1999 and 1998 and for
the years then ended December 31, 1999, 1998, and the period from May 7, 1997 to
December 31, 1997 and the period from January 1, 1997 to May 6, 1997 have been
derived from the consolidated financial statements of the Company and the
audited combined financial statements of The Heritage, The Hallmark, The
Devonshire, The Gables of Brighton, and The Springs of East Mesa facilities (the
"Predecessor Properties") included elsewhere in this Annual Report on Form 10-K
which should be read in conjunction with those financial statements and notes
thereto. The selected financial data as of December 31, 1997, 1996 and 1995 and
for the years ended December 31, 1996 and 1995, have been derived from the
consolidated financial statements of the Company, and the combined financial
statements of the Predecessor Properties not included in this Annual Report on
Form 10-K which should be read in conjunction with those financial statements
and notes thereto. The Company initiated operations on May 7, 1997 in connection
with the consummation of the IPO.
<TABLE>
<CAPTION>
Predecessor Properties Brookdale Living Communities, Inc.
------------------------------ ---------------------------------------
Years Ended Years Ended
December 31, December 31,
------------ January 1, to May 7, to ------------
1995(1) 1996(1) May 6, 1997(2) December 31, 1997 (2) 1998 1999
------- ------- -------------- -------------------- ---- ----
(in thousands, except per share and operating data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 21,848 $ 23,221 $ 10,473 $ 30,237 $ 77,701 $105,920
Facility operating expenses(3)......... (13,253) (12,805) (6,102) (15,892) (39,935) (52,923)
Lease expense.......................... - - (3,042) (6,942) (17,876) (25,516)
General and administrative
expenses(3) .......................... - - - (2,187) (4,878) (5,144)
Depreciation and amortization.......... (4,598) (3,527) (857) (2,967) (4,853) (5,928)
Write-off of deferred financing costs - - - - - (273)
-------- -------- -------- -------- -------- --------
Income from operations................. 3,997 6,889 472 2,249 10,159 16,136
Interest (expense) income, net......... (5,421) (4,524) (762) (2,326) 122 1,871
-------- -------- -------- -------- -------- --------
Income (loss) before minority interest,
(provision)/benefit for income taxes
and extraordinary item............... (1,424) 2,365 (290) (77) 10,281 18,007
Loss (income) allocated to
minority interest.................... 802 (756) (138) - - -
-------- -------- -------- -------- -------- --------
Income (loss) before (provision)/benefit
for income taxes and extraordinary
item................................. (622) 1,609 (428) (77) 10,281 18,007
(Provision)/benefit for income taxes and
extraordinary item................... - - (236) 558 (3,627) (6,571)
Extraordinary item (net of income tax
benefit of $191 and $24 for 1999 and
1997, respectively).................. 3,274 - - (36) - (311)
-------- -------- -------- -------- -------- --------
Net income (loss)...................... $ 2,652 $ 1,609 $ (664) $ 445 $ 6,654 $ 11,125
======== ======== ======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations
before extraordinary item............ - - - $ 0.07 $ 0.68 $ 1.00
Extraordinary item................... - - - (0.01) - (0.03)
-------- -------- -------- -------- -------- --------
Net income........................... - - - $ 0.06 $ 0.68 $ 0.97
======== ======== ======== ======== ======== ========
Diluted earnings per common
share:...............................
Income from continuing operatings
before extraordinary
item............................ - - $ 0.07 $ 0.67 $ 0.92
Extraordinary item................... - - - (0.01) - (0.02)
-------- -------- -------- -------- -------- --------
Net income........................... - - - $ 0.06 $ 0.67 $ 0.90
======== ======== ======== ======== ======== ========
Weighted average shares
outstanding:
Basic................................ - - - 7,208 9,751 11,411
Diluted.............................. - - - 7,351 9,978 14,970
Selected Operating and Other
Data:
Number of facilities (at end
of period)............................. 3 5 (9) 13 18 23
Total units operated (4)............... 916 1,204 (9) 2,801 3,900 5,094
Occupancy rate (4)(6).................. 98.1% 99.7% (9) 96.7% 94.9% 87.8%
Average monthly revenue per
unit (5)(6)............................ $ 2,015 $ 2,050 (9) $ 1,965 $ 2,046 $ 2,221
11
<PAGE>
continued
Predecessor Properties Brookdale Living Communities, Inc.
------------------------------ ---------------------------------------
Years Ended Years Ended
December 31, December 31,
------------ January 1, to May 7, to ------------
1995(1) 1996(1) May 6, 1997(2) December 31, 1997 (2) 1998 1999
------- ------- -------------- -------------------- ---- ----
(in thousands, except per share and operating data)
Balance Sheet Data:
Cash and cash equivalents........ $ 5,086 $ 4,230 $ 1,915 $ 13,292 $ 1,065 $ 638
Short-term investments........... - - - - - 12,505
Cash and investments-
restricted (7)................ 1,733 1,089 2,269 5,920 8,226 9,835
Investment certificates -
restricted.................... - - - - 15,951 35,637
Letter of credit deposits (7) ... - - - 12,138 13,919 -
Lease security deposits (8) ..... - - - 18,542 55,453 92,735
Total assets..................... 100,325 57,836 55,982 183,169 244,633 340,205
Total long-term debt............. 99,627 65,000 65,000 96,167 95,880 199,065
Total stockholders' equity and
predecessor capital (deficit). 3,597 (25,427) (28,685) 57,920 101,316 96,326
</TABLE>
(1) The historical financial and operating data for the years ended December
31, 1995 and 1996 represent combined historical financial data for the
Predecessor Properties.
(2) The financial and operating data for the year ended December 31, 1997
represent combined historical financial data for the Predecessor Properties
until May 6, 1997 and, thereafter, the operations of the Company.
(3) Prior to May 7, 1997, general and administrative expenses were allocated to
the then existing facilities; however, following such date, the Company
began reporting general and administrative expenses as a separate item.
(4) 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.
(5) Average monthly revenue per unit represents the average of the total
monthly revenues 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.
(6) For the year ended December 31, 1996, all the properties of the Predecessor
Properties have been included in the occupancy rate. However, the average
monthly revenue per unit excludes The Gables at Brighton and The Springs of
East Mesa which were leased for less than a full month in 1996.
(7) Cash and investments-restricted represents segregated amounts to be used
for the payment of real estate taxes and other operating activities and
deposits in accordance with governmental and debt agreement requirements.
Letter of credit deposits represent cash collateral securing the credit
enhancement issued to secure the $65,000 of tax-exempt bonds with respect
to the Devonshire and Heritage facilities, which deposits were released in
1999. The Company earns interest income on both cash and
investments-restricted and letter of credit deposit amounts. See Notes 3
and 7 to the Consolidated and Combined Financial Statements included
elsewhere in this Annual Report on Form 10-K.
(8) Lease security deposits represents investments collateralizing the
Company's lease obligations.
(9) All Selected Operating and Other Data for 1997 is as of and for the year
ended December 31, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (dollars in thousands, except per share and
operating data)
Overview
As of December 31, 1999 and 1998, the Company operated 23 and 18 senior
independent and assisted living facilities, respectively, containing a total of
5,094 units and 3,900 units, respectively. Four of such facilities are owned by
the Company, 15 facilities (12 facilities at December 31, 1998) facilities are
leased by the Company and 4 facilities (2 facilities at December 31, 1998, one
of which is owned by PGI) are managed by the Company pursuant to management
contracts. The Company's senior independent and assisted living facilities offer
residents a supportive, "home-like" setting as well as assistance with
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 senior independents 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 the Company's residents as well as their families
who are burdened with care decisions for their elderly relatives.
The Company derives its revenue from resident fees, development fees and
management fees. Resident fees typically are paid monthly by residents, their
families or other responsible parties. As of both December 31, 1999 and 1998,
over 99% of the Company's resident fee
12
<PAGE>
revenue was derived from private pay sources. Development fees are earned for
developing senior independent and assisted living facilities for third parties.
Management services income consists of management fees, which typically range
from 3.0% to 5.0% of a managed facility's total gross revenues. All such fees
are recognized as revenues when services are provided.
The Company classifies its operating expenses into the following
categories: (i) facility operating expenses, which includes labor, food,
marketing and other direct facility expenses, insurance 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
During 1999, growth in resident fees and facility operating expenses
resulted both from increases at facilities owned as of January 1, 1998 and from
leases of new facilities and additions to existing facilities.
For the year ended December 31, 1999, net income on a fully diluted basis
was $13,487, or $0.90 per diluted share, on total revenues of $105,920
(including $0.01 and $0.02 related to the write-off of deferred financing costs
for the replacement credit enhancement on the Devonshire and Heritage tax-exempt
bonds and an extraordinary loss on the refinancing of the Edina Park Plaza
facility, respectively). For the year ended December 31, 1998, net income on a
fully diluted basis was $6,654, or $0.67 per diluted share, on total revenues of
$77,701. The growth in earnings per share in 1999 is on a weighted average share
base of 14,970 shares as a result of the issuance of 2,000 shares of common
stock on November 18, 1998 and $100,000 of 5.5% convertible subordinated notes
with a conversion price of $18.25 on May 14, 1999, partially offset by the
repurchase of 1,266 shares of common stock as of December 31, 1999.
On a "same store" basis revenues, operating expenses and operating income
increased 5%, 3% and 19%, respectively, to $65,260, $54,221 and $11,039,
respectively. Weighted average rental rates per unit per month increased 5.7%,
to $2,328 in 1999 from $2,203 in 1998, respectively.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Revenue. Total revenue increased by $28,219, or 36.3%, to $105,920 for the
year ended December 31, 1999 when compared to the year ended December 31, 1998.
Of this increase, $27,153 was from increased resident fees, $934 was from
development fees earned from third parties, and $132 was from management fees.
Of the increased resident fees, $3,251 (an increase of 5.2%) was from the
eleven "same store" properties operated for the full year 1999 and 1998, $16,891
was from the five properties leased during 1998 and operated for the full year
1999, and $7,011 was from the three properties leased in 1999.
Operating Expenses. Total operating expenses increased by $22,242, or
32.9%, to $89,784 for the year ended December 31, 1999 when compared to the year
ended December 31, 1998. Facility operating expenses increased $12,988, or
32.5%; general and administrative expenses increased $266, or 5.5%; lease
expense increased $7,640, or 42.7%; depreciation and amortization and write-off
of deferred financing costs increased $1,348, or 27.8%.
Of the increased facility operating expenses, $796 was from the eleven
"same store" properties operated for the full year 1999 and 1998, $9,092 was
from the five facilities leased during 1998 and operated for the full year 1999,
and $3,100 was from the three facilities leased in 1999.
The increased lease expense was due to the five facilities leased during
1998 and operated for the full year 1999, and the three additional facilities
leased in 1999.
General and administrative expenses increased $266, or 5.5%, primarily due
to increased personnel in the corporate office.
Depreciation and amortization and write-off of deferred financing costs
increased $1,348, or 27.8%, primarily due to the partial year's depreciation of
The Willows facility placed in service on July 1, 1999, depreciation of
improvements at the leased facilities depreciated over the shorter of their
estimated useful life or applicable lease term, depreciation of additional
furniture, fixtures and equipment at the Company's corporate office and $273
write-off of deferred financing costs in connection with the replacement credit
enhancements on the Devonshire and Heritage facilities.
Interest income increased $4,885, or 114.3%, for the year ended December
31, 1999, when compared to the year ended December 31, 1998, due primarily to
proceeds from the issuance of $100,000 of 5.5% convertible subordinated notes
due 2009, increase of restricted deposits in connection with the leased
facilities and development activities, offset partially by the reduction in cash
investments collateralizing the Devonshire and Heritage facilities' letters of
credit which collateral was released in 1999.
Interest expense increased $3,136, or 75.5%, for the year ended December
31, 1999 when compared to December 31, 1998 primarily due to the issuance on May
14, 1999 of $100,000 of 5.5% convertible subordinated notes due 2009, issuance
of $6,000 of variable rate debt secured by The Willows facility, increased
mortgage interest for The Devonshire and The Heritage facilities' variable rate
tax-exempt bonds, partially offset by the reduced borrowings under the unsecured
lines of credit.
13
<PAGE>
Net Income. Net income of $11,125 for the year ended December 31, 1999
increased when compared to the year ended December 31, 1998 due to improved
operations for the eleven "same store" properties, a full year's operation of
the five facilities leased in 1998 and the operation of the three facilities
leased in 1999 partially offset by the costs associated with financing and
refinancing transactions.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
For the year ended December 31, 1997, results reflect operations of the
Predecessor Properties through May 7, 1997, and all of the Company's facilities
thereafter.
Revenue. Total revenue increased by $36,991, or 90.9%, to $77,701 for the
year ended December 31, 1998 when compared to the year ended December 31, 1997.
Of this increase, $31,207 was from increased resident fees, $5,655 was from
development fees earned from third parties, and $129 was from management fees.
Of the increased resident fees, $1,391 (an increase of 4.5%) was from the
five "same store" properties operated for the full year 1998 and 1997, $20,040
was from the six properties purchased or leased during 1997 and operated for the
full year 1998, and $9,876 was from the five properties leased in 1998.
Operating Expenses. Total operating expenses increased by $29,553, or
77.8%, to $67,542 for the year ended December 31, 1998 when compared to the year
ended December 31, 1997. Facility operating expenses increased $18,171, or
83.5%; general and administrative expense increased $2,691, or 123.1% (there was
no general and administrative expense prior to the IPO on May 7, 1997); lease
expense increased $7,892, or 79.0%; depreciation and amortization increased
$1,029, or 26.9%; and property management fees for the Predecessor Properties
decreased $230, or 100.0% as a result of the Predecessor Properties contracting
for outside management.
Of the increased facility operating expenses, ($136) was from the five
"same store" properties operated for the full year 1998 and 1997, $11,919 was
from the six facilities purchased or leased during 1997 and operated for the
full year 1998, and $6,388 was from the five facilities leased in 1998.
The increased lease expense was due to the four facilities leased during
1997 and operated for the full year 1998, and the five additional facilities
leased in 1998.
General and administrative expenses increased $2,691, or 123.1%, due to a
full year of operation subsequent to the formation of the Company on May 7,
1997. Increased general and administrative costs were partially offset by the
$230 decrease in property management fees for the Predecessor Properties prior
to the formation of the Company on May 7, 1997.
Depreciation and amortization increased $1,029 primarily due to full year's
depreciation of the Hawthorn Lakes and Edina Park Plaza facilities purchased on
May 7, 1997, and depreciation of additional furniture, fixtures and equipment at
the Company's corporate office.
Interest income increased $3,513, or 461.0%, for the year ended December
31, 1998 when compared to December 31, 1997, due primarily to the increase of
restricted deposits in connection with the leased facilities, cash investments
collateralizing the Devonshire and Heritage facilities' letters of credit and
investment certificates acquired by the Company in 1998.
Interest expense increased $303 for the year ended December 31, 1998 when
compared to December 31, 1997 primarily due to the full year of mortgage
interest in 1998 for the Hawthorn Lakes and Edina Park Plaza facilities which
was partially offset by the lower interest rates on The Devonshire and The
Heritage facilities' variable rate tax-exempt bonds.
Net Income. Net income of $6,654 for the year ended December 31, 1998
increased from the combined net loss of the Predecessor Properties and the
Company for the year ended December 31, 1997 due to improved operations for the
five "same store" properties, a full year's operation of the seven facilities
purchased or leased in 1997 and the operation of five facilities leased in 1998.
Liquidity and Capital Resources
Since the formation of the Company on May 7, 1997, the Company has financed
its growth from issuance of common stock, borrowings under lines of credit,
issuance of convertible subordinated notes, entering into operating leases with
third parties and cash generated from the operation of the facilities.
At December 31, 1999, the Company had cash and cash equivalents (which
excludes cash and investments-restricted of $9,835, investment
certificates-restricted of $35,637, and lease security deposits of $92,735) of
$638, short-term investments of $12,505 and $32,065 available under its $35,000
unsecured line of credit. The decrease in cash and cash equivalents from
December 31, 1998 was primarily due to the funding of lease security deposits in
connection with the leasing of three facilities in 1999, costs related to
development activities, improvements at owned and leased facilities, common
stock repurchases, general corporate purposes and the funding of $12,505 of
short-term investments, offset by the issuance of $100,000 of 5.5% convertible
subordinated notes due 2009, release of the cash investments collateralizing The
Devonshire and Heritage facilities' letters of credit, and cash generated from
property operations.
14
<PAGE>
Net cash provided by operating activities for the year ended December 31,
1999 increased to $15,494 from $10,289 for the year ended December 31, 1998. The
increase is primarily due to an additional three facilities leased in 1999, a
full year's operating results for the five facilities leased during 1998 and
improved operating results for the eleven facilities operated for the full year
1999 and 1998.
Net cash used in investing activities for the year ended December 31, 1999
increased to $97,218 from $66,780 for the year ended December 31, 1998 due to
increased development activity for third parties and net purchases of short-term
investments from the proceeds of the $100,000 of 5.5% convertible subordinated
notes which was partially offset by the decrease in cash paid for lease security
deposits and acquisitions. In 1999, the Company leased three facilities (five
facilities in 1998) and completed construction of the 54-unit assisted living
addition (The Willows) to the Hawthorn Lakes facility.
Net cash provided by financing activities for the year ended December 31,
1999 increased to $81,297 from $44,264 for the year ended December 31, 1998. The
increase was primarily due to the proceeds from the issuance of $100,000 of 5.5%
convertible subordinated notes and other debt financings and $13,919 from the
release of the letter of credit deposits securing $65,000 of tax-exempt bonds as
a result of the replacement credit enhancement offset by repayment of borrowings
under the unsecured lines of credit and other long-term debt, purchases of
treasury stock and reduction in proceeds from the issuance of common stock in
1998.
Company Indebtedness
As of December 31, 1999 and 1998, the Company's debt was $199,065 and
$95,880, respectively. The increase is primarily attributable to the issuance of
$100,000 of 5.5% convertible subordinated notes, with a conversion price of
$18.25, due May 2009. As of December 31, 1999 and 1998, the Company had $86,040
and $65,000, respectively, of variable rate long-term indebtedness of which
$80,040 and $65,000, respectively, was in the form of variable rate tax-exempt
bonds. The interest rates (exclusive of credit enhancement and other fees) on
the variable rate tax-exempt bonds were 5.5% and 4.1% at December 31, 1999 and
1998, respectively (the average interest rate was 3.4%, 3.5%, and 3.7% for the
years ended December 31, 1999, 1998 and 1997, respectively), and are subject to
interest rate caps. The tax-exempt bonds contain covenants requiring the
facilities to maintain a minimum number of units for income qualified residents.
The Company established a new line of credit in the amount of $35,000 on
August 1, 1999 and has an effective "shelf" registration statement pursuant to
which the Company may issue up to $200,000 of equity or debt securities. In
November 1998, the Company issued $33,000 of common stock leaving a balance of
$167,000 that the Company may issue in the future. In order to achieve its
growth plans, the Company will be required to obtain a substantial amount of
additional financing. The Company anticipates that it may use a combination of
additional equity and debt financing, lease transactions and cash generated from
operations to fund its acquisition and development activities.
Acquisition and Development Activities
The Company currently plans to commence development of 3 to 4 new
facilities per year containing approximately 220 units each and focus its future
acquisition/lease strategy to larger portfolio transactions. However, the
Company may acquire or lease individual facilities. The Company anticipates that
new developments will require 8 to 10 months for pre-construction development,
12 to 14 months for construction and approximately 12 to 18 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 $35,000, or approximately $159 per unit. At March 13, 2000, the
Company had 8 sites under development for third parties for senior independent
and assisted living facilities, 4 of which were under construction. The
Company's estimated capital expenditures related to sites under development
aggregate to approximately $14,000 to $17,000. Capital expenditures related to
the Company's existing facilities, including the 82-unit expansion at the
Devonshire facility currently under construction, are estimated to be
approximately $5,000 to $7,000 in 2000.
In 1998, the Company established a $100,000 credit facility with The
Capital Company of America LLC (successor-in-interest to Nomura Asset Capital
Corporation) ("Lender") pursuant to which the Lender agrees to provide financing
of up to an aggregate of $100,000 for projects, developed by the Company for
third parties. In 1998, an aggregate $51,000 of the credit facility was
committed to the Austin, Texas and Southfield, Michigan development projects
which opened August 1999. During 2000, the Company and the Lender commenced
discussions to amend the credit facility and the loans made thereunder. In
general, the amendment would provide for the funding of the Pittsburgh,
Pennsylvania development project being developed for a third party, no further
obligation of the Lender to fund under the $100,000 commitment, elimination of
the Lender's obligation to fund the permanent loans under the credit facility
and elimination of the Company's loan resizing obligation on the Austin, Texas
and Southfield, Michigan loans. There can be no assurance that the Company will
be able to execute the amendment or obtain the financing necessary for its
acquisition and development programs.
The Company's growth plan includes the acquisition or lease of existing
independent and assisted living facilities. The success of the Company's
acquisitions will be determined by numerous factors, including the Company's
ability to identify suitable acquisition candidates, competition for such
acquisitions, the purchase price, lease terms and conditions, the financial
performance of the facilities after acquisition and the ability of the Company
to integrate and operate acquired facilities effectively. Any failure to do so
may have a material adverse effect on the Company's business, financial
condition, revenues and earnings.
The Company's development programs are dependent on a variety of factors,
including the ability to identify and purchase suitable development sites, the
ability to obtain suitable third-party financing, the ability to locate suitable
contractors to construct the facilities, the ability to obtain required zoning
and permits, and the ability to complete and lease-up the facilities on schedule
and within budget.
15
<PAGE>
Some financing obtained in the future is expected to contain terms and
conditions and representations and warranties that are customary for such loans
and may 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. 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. A lack of funds
may require the Company to delay or eliminate all or some of its development
projects and acquisition plans and could therefore have a material adverse
effect on the Company's growth plans and its business plan, financial condition
and results of operations.
To date, the Company's ability to increase cash flow to meet rising costs
has not been adversely affected in any material way by existing, or proposed,
rent control ordinances. Rent control ordinances may not be applicable to the
Company's facilities due to the services provided for the monthly fees charged
to its residents. If the Company's facilities were subject to rent control
ordinances, an imposed limitation on the resident fees that the Company may
charge at such facility could impair the Company's ability to meet any rising
costs of operating the facility.
Competition
The long-term care industry is highly competitive and the independent and
assisted living segment is becoming increasingly competitive. The Company
competes with many other providers of long-term care alternatives, such as
not-for-profits, home health care agencies, facility-based service programs,
retirement communities, convalescent centers and other independent and assisted
living providers. In pursuing the Company's development and operations
strategies, the Company has experienced and expects to continue to experience
increased competition in its efforts to develop and acquire and lease
independent and assisted living facilities. Consequently, the Company can give
no assurance that it will not encounter increased competition that could limit
its ability to attract residents or expand its business, which could have a
material adverse effect on its revenues and earnings.
Impact of Inflation
Resident fees from senior independent and assisted living facilities owned
or leased by the Company and management fees from facilities managed by the
Company for third parties are its primary sources of revenue. These revenues are
affected by monthly resident fee rates and facility occupancy rates. The rates
charged for senior independent 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 allow
for adjustments in the monthly fees payable thereunder not less frequently than
every 12 or 13 months, 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 ability of the
Company to periodically adjust the monthly fee 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. At December 31, 1999, approximately $86,040 in principal amount of
the Company's indebtedness bore interest at tax-exempt floating rates. The
Company's exposure to rising interest rates is mitigated by using interest rate
caps on $80,040 of its floating rate debt. Inflation, and its impact on floating
interest rates, could affect the amount of interest payments due on such
indebtedness.
Year 2000
The Company implemented a program to assess, remediate and mitigate the
potential impact of the Year 2000 Issue throughout the Company. The Company's
program was structured to address its internal computer systems and
applications, network services operations, facilities operations and third-party
vendors and suppliers. As a result of the planning and implementation efforts,
the Company did not experience any disruption due to the Year 2000 Issue. During
2000, the Company is continuing to upgrade its accounting, human resources,
property management and marketing systems to meet its internal and external
needs. Through December 31, 1999, the Company had capitalized approximately
$4,288 upgrading such systems. The Company will continue to monitor its computer
systems and applications, network services operations, facilities operations and
third-party vendors and suppliers to ensure that any Year 2000 Issues are
addressed promptly.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its
borrowing and leasing activities. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall costs. To achieve its objectives, the Company
borrows and leases at fixed rates and may enter into swaps, caps and treasury
locks to mitigate its interest rate risk on a related financial instrument.
There is inherent risk from borrowings and leasing as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's future financing requirements. The Company does not enter into
financial instruments transactions for trading or other speculative purposes.
16
<PAGE>
Long-term debt and related contracts to limit interest rate risk at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Interest Rate Cap
-----------------------------------------------
Rate at Fixed Approximate Fair Value
Amount Dec. 31, 1999 Maturity Rate Maturity at Dec. 31, 1999
------ ------------- ------- ---- -------- ----------------------
Fixed rate debt
<S> <C> <C> <C> <C> <C> <C>
Convertible subordinated notes....... $ 100,000 5.5% 2009 - - $ -
Mortgage loan........................ 13,025 8.525% 2027 - - -
---------
113,025
---------
Variable rate debt:
LIBOR plus 1.625%.................. 6,000 7.726% 2002 - - -
Tax-exempt......................... 65,000 5.46% 2019-2025 6.35% 6/1/04 281
Tax-exempt......................... 15,040 5.45% 2029 6.58% 12/1/04 74
--------- ====== ========= ===== ======= -------
86,040 355
--------- -------
Total................................... $ 199,065 $ 355
========= =======
</TABLE>
If interest rates on the Company's variable rate debt, including tax-exempt
bonds, increased by 1 percentage point as of December 31, 1999, the annual
interest expense would increase by approximately $860.
Lease expense - The Company has entered into operating leases which have
fixed terms and are subject to renewal at the option of the Company. The Company
has an option to purchase the properties prior to or at the end of the lease.
The lease for four of the facilities requires the payment of additional rent of
10% of the excess of each year's revenue compared to 1998.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statement
The information required by this Item is set forth at the pages indicated
below.
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.....................................................................................19
Consolidated Balance Sheets of Brookdale Living Communities, Inc. as of December 31, 1999
and 1998...........................................................................................................20
Consolidated Statements of Operations of Brookdale Living Communities, Inc. for the years
ended December 31, 1999 and 1998 and for the period from May 7, 1997 through December 31,
1997 and Combined Statement of Operations of the Predecessor Properties (predecessor to
Brookdale Living Communities, Inc.) for the period from January 1, 1997 through May 6, 1997........................21
Consolidated Statements of Stockholders' Equity of Brookdale Living Communities, Inc. for
the years ended December 31, 1999 and 1998 and for the period from May 7, 1997 through
December 31, 1997..................................................................................................22
Combined Statement of Changes in Partners' Capital (Deficit) of Predecessor Properties
(predecessor to Brookdale Living Communities, Inc.) for the period from January 1, 1997
through May 6, 1997................................................................................................23
Consolidated Statements of Cash Flows of Brookdale Living Communities, Inc. for the years
ended December 31, 1999 and 1998 and for the period from May 7, 1997 through December 31,
1997 and Combined Statement of Cash Flows of Predecessor Properties (predecessor to
Brookdale Living Communities, Inc.) for the period from January 1, 1997 through May 6, 1997........................24
Notes to Consolidated and Combined Financial Statements of Brookdale Living Communities,
Inc. and the Predecessor Properties (predecessor to Brookdale Living Communities, Inc.)............................26
</TABLE>
Financial Statement Schedules Not Filed:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instruction or are inapplicable and, therefore, have been
omitted.
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Brookdale Living Communities, Inc.
We have audited the accompanying consolidated balance sheets of Brookdale
Living Communities, Inc., a Delaware corporation, and subsidiaries (the
"Company") as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998 and for the period from May 7, 1997 (date of
formation) through December 31, 1997. We have also audited the combined
statements of operations, changes in partners' capital (deficit) and cash flows
of the Predecessor Properties (predecessor to Brookdale Living Communities,
Inc.) (the "Predecessor") for the period from January 1, 1997 through May 6,
1997. These financial statements are the responsibility of the Company's and the
Predecessor's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 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 consolidated financial position of Brookdale
Living Communities, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the years
ended December 31, 1999 and 1998 and for the period from May 7, 1997 through
December 31, 1997, and the combined changes in partners' capital (deficit),
results of operations and cash flows of the Predecessor Properties, for the
period from January 1, 1997 through May 6, 1997, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
February 24, 2000, except for
Note 17 as to which the date
is March 13, 2000
19
<PAGE>
<TABLE>
<CAPTION>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")
CONSOLIDATED BALANCE SHEETS OF THE COMPANY
December 31, 1999 and 1998
(In Thousands, Except Par Value Amounts)
Assets 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 638 $ 1,065
Short-term investments.......................................................... 12,505 -
Accounts receivable............................................................. 1,188 379
Notes receivable................................................................ 5,147 3,486
Reimbursable development costs.................................................. 10,958 9,815
Prepaid expenses and other...................................................... 4,456 4,752
----------- -----------
Total current assets...................................................... 34,892 19,497
----------- -----------
Property, plant and equipment................................................... 139,323 115,801
Accumulated depreciation........................................................ (10,472) (5,689)
------------- ------------
Property, plant and equipment, net.............................................. 128,851 110,112
------------ -----------
Property under development...................................................... 13,401 11,221
Cash and investments - restricted............................................... 9,835 8,226
Investment certificates - restricted............................................ 35,637 15,951
Letter of credit deposits....................................................... - 13,919
Lease security deposits......................................................... 92,735 55,453
Other........................................................................... 24,854 10,254
------------ -----------
Total assets.............................................................. $ 340,205 $ 244,633
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt............................................... $ 118 $ 3,310
Unsecured line of credit........................................................ - 10,997
Current portion of deferred gain on sale of property............................ 805 806
Accrued interest payable........................................................ 413 968
Accrued real estate taxes....................................................... 1,957 1,485
Accounts payable and accrued expenses........................................... 10,294 7,749
Tenant refundable entrance fees and security deposits........................... 7,648 5,838
Other........................................................................... 574 629
------------ -----------
Total current liabilities................................................. 21,809 31,782
------------ -----------
Long-term debt, less current portion............................................ 198,947 92,570
Deferred lease liability........................................................ 2,885 2,849
Deferred gain on sale of property, less current portion......................... 15,311 16,116
Deferred income taxes........................................................... 4,927 -
------------ -----------
Total liabilities......................................................... 243,879 143,317
------------ -----------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 20,000 authorized, none issued................. - -
Common stock, $.01 par value, 75,000 shares authorized, 11,575, and 11,572
shares issued and outstanding at December 31, 1999 and 1998, respectively.... 116 116
Additional paid-in-capital...................................................... 94,134 94,101
Accumulated earnings............................................................ 18,224 7,099
Treasury stock, 1,266 common shares at December 31, 1999, at cost............... (16,148) -
------------- -----------
Total stockholders' equity................................................ 96,326 101,316
------------ -----------
Total liabilities and stockholders' equity................................ $ 340,205 $ 244,633
============ ===========
See accompanying notes to consolidated and combined financial statements.
20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY AND COMBINED
STATEMENT OF OPERATIONS OF THE PREDECESSOR
(In Thousands, Except Per Share Amounts)
Brookdale Living Communities, Inc. Predecessor Properties
--------------------------------------------------------- -------------------------
Period from Period from
May 7, 1997 January 1, 1997
Year Ended December 31, through through
1999 1998 December 31, 1997 May 6, 1997
---- ---- ----------------- -----------
<S> <C> <C> <C> <C>
Revenue
Resident fees................................ $ 98,938 $ 71,785 $ 30,105 $ 10,473
Development fees............................. 6,589 5,655 - -
Management fees.............................. 393 261 132 -
----------- ----------- ----------- ------------
Total revenue........................... 105,920 77,701 30,237 10,473
----------- ----------- ----------- ------------
Expenses
Facility operating........................... 52,923 39,935 15,892 5,872
General and administrative................... 5,144 4,878 2,187 -
Lease expense................................ 25,516 17,876 6,942 3,042
Depreciation and amortization................ 5,928 4,853 2,967 857
Write-off of deferred financing costs........ 273 - - -
Property management fees..................... - - - 230
----------- ----------- ----------- ------------
Total operating expenses................ 89,784 67,542 27,988 10,001
----------- ----------- ----------- ------------
Income from operations....................... 16,136 10,159 2,249 472
Interest income.............................. 9,160 4,275 694 68
Interest expense............................. (7,289) (4,153) (3,020) (830)
----------- ----------- ----------- ------------
Income (loss) before minority interest,
(provision)/benefit for income taxes
and extraordinary item.................... 18,007 10,281 (77) (290)
Minority interest............................ - - - (138)
(Provision)/benefit for income taxes......... (6,571) (3,627) 558 (236)
----------- ----------- ----------- ------------
Income (loss) from continuing operations
before extraordinary item................. 11,436 6,654 481 (664)
Extraordinary item (net of income
tax benefit of $191 and $24 for
1999 and 1997, respectively).............. (311) - (36) -
----------- ----------- ----------- ------------
Net income (loss)....................... $ 11,125 $ 6,654 $ 445 $ (664)
=========== =========== =========== ============
Basic earnings per common share:
Income from continuing operations
before extraordinary item............... $ 1.00 $ 0.68 $ 0.07
Extraordinary item........................ (0.03) - (0.01)
----------- ----------- -----------
Net income................................ $ 0.97 $ 0.68 $ 0.06
=========== =========== ===========
Diluted earnings per common share:
Income from continuing operations
before extraordinary item............... $ 0.92 $ 0.67 $ 0.07
Extraordinary item........................ (0.02) - (0.01)
----------- ----------- -----------
Net income................................ $ 0.90 $ 0.67 $ 0.06
=========== =========== ===========
Weighted average shares used for
computing basic earnings per share...... 11,411 9,751 7,208
=========== =========== ===========
Weighted average shares used for
computing diluted earnings per share.... 14,970 9,978 7,351
=========== =========== ===========
See accompanying notes to consolidated and combined financial statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY OF THE COMPANY
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
PERIOD FROM MAY 7, 1997 THROUGH DECEMBER 31, 1997
(In Thousands)
Common stock Total
------------------------ Additional Accumulated Treasury Stockholders'
Shares Amount Paid-In Capital Earnings Stock Equity
------ ------ --------------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at May 7, 1997................. - $ - $ - $ - $ - $ -
Reclassification of net deficit of
predecessor............................. - - (28,685) - - (28,685)
Deferred tax asset...................... - - 4,002 - - 4,002
Issuance of common stock, net........... 9,175 92 82,066 - - 82,158
Net income.............................. - - - 445 - 445
------- --------- ----------- ----------- --------- ---------
Balances at December 31, 1997........... 9,175 92 57,383 445 - 57,920
------- --------- ----------- ----------- --------- ---------
Issuance of common stock, net........... 2,397 24 36,234 - - 36,258
Tax benefit on stock options............ - - 484 - - 484
Net income.............................. - - - 6,654 - 6,654
------- --------- ----------- ----------- --------- ---------
Balances at December 31, 1998........... 11,572 116 94,101 7,099 - 101,316
------- --------- ----------- ----------- --------- ---------
Issuance of common stock................ 3 - 31 - - 31
Tax benefit on stock options............ - - 2 - - 2
Acquisition of 1,266 common shares...... - - - - (16,148) (16,148)
Net income.............................. - - - 11,125 - 11,125
------- --------- ----------- ----------- --------- ---------
Balances at December 31, 1999........... 11,575 $ 116 $ 94,134 $ 18,224 $ (16,148) $ 96,326
======= ========= =========== =========== ========== =========
See accompanying notes to consolidated and combined financial statements.
</TABLE>
22
<PAGE>
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
COMBINED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) OF THE PREDECESSOR
PERIOD FROM JANUARY 1, 1997 THROUGH MAY 6, 1997
(In Thousands)
Balance at January 1, 1997......................................... $ (25,427)
Contributions...................................................... 813
Distributions...................................................... (3,407)
Net loss........................................................... (664)
-----------
Balance at May 6, 1997............................................. $ (28,685)
===========
See accompanying notes to consolidated and combined financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND COMBINED
STATEMENT OF CASH FLOWS OF THE PREDECESSOR
(In Thousands)
Brookdale Living Communities, Inc. Predecessor Properties
---------------------------------- -----------------------
Year Ended Period from Period from
December 31, May 7, 1997 January 1, 1997
---------------------- through through
1999 1998 December 31, 1997 May 6, 1997
---- ---- ----------------- -----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................................. $ 11,125 $ 6,654 $ 445 $ (664)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................. 5,928 4,853 2,967 857
Write-off of deferred financing costs......... 273 - - -
Minority interest............................. - - - 138
Extraordinary item............................ 311 - 36 -
Increase in deferred lease liability.......... 36 1,038 1,379 419
Deferred gain on sale of property............. (805) (806) (525) (281)
Deferred income taxes......................... 6,189 2,628 (582) -
Changes in:
Accounts receivable......................... (809) (67) (218) (5)
Prepaid expenses and other assets........... (9,611) (7,719) (1,120) 597
Due from/to affiliates, net................. - - 53 (763)
Accrued interest payable.................... (555) 402 273 111
Accrued real estate taxes................... 172 24 199 54
Accounts payable and accrued expenses....... 2,599 4,671 1,786 377
Tenant refundable entrance fees and
security deposits......................... 257 (8) 374 35
Other liabilities........................... 384 (1,380) (2,101) 1,022
-------- -------- --------- --------
Net cash provided by operating
activities............................. 15,494 10,289 2,966 1,897
-------- -------- --------- --------
Cash Flows from Investing Activities:
Cash paid for lease security
deposits and acquisitions, net................ (36,234) (35,203) (47,705) -
Proceeds from sale of property
under development, net........................ 2,211 5,550 - -
Changes in cash and
investments-restricted........................ (1,088) (758) (2,614) (1,180)
Increase in investment
certificates-restricted....................... (19,686) (15,951) - -
Cash paid for property
under development............................. (18,284) (18,615) (8,350) (2)
Payments received on notes receivable........... 3,303 9,785 - -
Purchase of short-term investments.............. (55,000) - - -
Sales of short-term investments................. 42,495 - - -
Additions to property, plant and equipment and
reimbursable development costs................ (14,935) (11,588) (1,769) (149)
-------- -------- --------- --------
Net cash used in investing activities..... (97,218) (66,780) (60,438) (1,331)
-------- -------- --------- --------
Cash Flows from Financing Activities:
Repayment of long-term debt..................... (17,855) (286) (178) -
Proceeds from long-term debt.................... 121,040 - - -
Payment of deferred costs....................... (8,695) (923) (993) (287)
Proceeds from unsecured lines of credit......... 31,933 46,946 - -
Repayment of unsecured lines of credit.......... (42,930) (35,950) - -
Decrease (increase) in letter of credit
deposit....................................... 13,919 (1,781) (12,138) -
Proceeds from issuance of common stock, net..... 33 36,258 82,158 -
Purchase of treasury stock...................... (16,148) - - -
Net contributions, advances/distributions to
partners...................................... - - - (2,594)
-------- -------- --------- --------
Net cash provided by (used in)
financing activities.................... 81,297 44,264 68,849 (2,881)
-------- -------- --------- --------
Net (decrease) increase in cash and
cash equivalents........................ (427) (12,227) 11,377 (2,315)
Cash and cash equivalents at beginning
of period............................... 1,065 13,292 1,915 4,230
-------- -------- --------- --------
Cash and cash equivalents at end
of period............................... $ 638 $ 1,065 $ 13,292 $ 1,915
======== ======== ========= ========
See accompanying notes to consolidated and combined financial statements.
24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND
PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND COMBINED
STATEMENT OF CASH FLOWS OF THE PREDECESSOR (continued)
(In Thousands)
Brookdale Living Communities, Inc. Predecessor Properties
------------------------------------------ ------------------------
Period from Period from
Year Ended December 31, May 7, 1997 January 1, 1997
----------------------- through through
1999 1998 December 31, 1997 May 6, 1997
---- ---- ----------------- -----------
Supplemental Disclosure of Cash Flow Information:
<S> <C> <C> <C> <C>
Interest paid, net of amounts
capitalized............................. $ 7,844 $ 3,751 $ 2,747 $ 723
========= ========= ========= =======
Income taxes paid....................... $ 527 $ 661 $ - $ -
========= ========= ========= =======
Supplemental Schedule of Noncash Investing
and Financing Activities:
In connection with net lease transactions and
acquisitions, assets acquired and liabilities
assumed were as follows:
Fair value of assets acquired........... $ 35,994 $ 35,151 $ 87,260 $ -
Less cash paid.......................... 34,002 31,591 47,643 -
--------- --------- --------- ------
Net liabilities assumed................. $ 1,992 $ 3,560 $ 39,617 $ -
========= ========= ========= =======
Write-off of fully amortized and deferred
financing costs............................. $ 1,596 $ 16 $ - $ -
========= ========= ========= =======
Reclassification of property under
development to property, plant
and equipment.............................. $ 11,724 $ - $ - $ -
========= ========= ========= =======
Reclassification of reimbursable costs to
property, plant and equipment.............. $ 3,149 $ - $ - $ -
========= ========= ========= =======
Tax benefit in connection with exercise of
stock options............................... $ 2 $ 484 $ - $ -
========= ========= ========= =======
</TABLE>
The following assets and liabilities were contributed by the Predecessor to the
Company on May 7, 1997:
<TABLE>
<CAPTION>
<S> <C>
Cash..................................................................$ 1,915
Cash-restricted....................................................... 2,269
Accounts receivable................................................... 95
Prepaid rent.......................................................... 396
Due from affiliates, net.............................................. 53
Property, plant and equipment, net.................................... 48,808
Property under development............................................ 77
Deferred costs, net................................................... 1,710
Other assets.......................................................... 421
---------
Total assets..................................................... 55,744
Deferred gain on sale of property, current............................ 806
Prepaid rent.......................................................... 1,402
Accrued interest payable.............................................. 293
Accrued real estate taxes............................................. 1,085
Accounts payable and accrued expenses................................. 1,190
Income taxes payable.................................................. 236
Tenant refundable entrance fees and security deposits................. 2,649
Deferred lease liability.............................................. 432
Bonds payable......................................................... 65,000
Deferred gain on sale of property, noncurrent......................... 17,447
---------
Total liabilities................................................ 90,540
Minority interest..................................................... (6,111)
---------
Predecessor owners' deficit contributed...............................$ (28,685)
=========
See accompanying notes to consolidated and combined financial statements.
</TABLE>
25
<PAGE>
Brookdale Living Communities, Inc. AND SUBSIDIARIES (the "Company")
and Predecessor Properties (the "Predecessor" to the Company)
Notes to Consolidated and Combined Financial Statements
(In Thousands, Except Per Share Amounts and Square Feet)
1. Organization
Brookdale Living Communities, Inc. was incorporated in Delaware on September
4, 1996 and commenced operations upon completion of its initial public
offering (the "IPO") which closed on May 7, 1997. Brookdale Living
Communities, Inc. and its subsidiaries (collectively, "the Company") were
formed in order to create a company focused on senior independent and
assisted living, which would succeed to such property ownership interests
and operations of the senior independent and assisted living division of The
Prime Group, Inc. and certain of its affiliates (collectively, "PGI").
In connection with the IPO, which closed on May 7, 1997, the Company sold
4,500 shares of its common stock at $11.50 per share and received net
proceeds of $44,097. PGI contributed its senior independent and assisted
living property ownership interests and operations of the Predecessor
Properties as described below, in exchange for 1,703 shares of common stock
of the Company. Mark J. Schulte (President and Chief Executive Officer of
the Company) contributed his interests in PGI's senior independent and
assisted living division to the Company in exchange for 297 shares of common
stock of the Company. PGI also purchased 2,500 of the 4,500 shares of common
stock sold in the IPO. In connection with the IPO, the Company granted the
underwriters an option to purchase up to 675 additional shares of common
stock for the purpose of covering over-allotments. On June 3, 1997, the
underwriters exercised their over-allotment option, and the Company sold an
additional 675 shares at $11.50 per share. The Company received net proceeds
of approximately $7,210 from the sale of these additional shares. On
December 24, 1997, January 21, 1998 and November 18, 1998, the Company
completed follow-on public offerings of 2,000, 300 and 2,000 shares of its
common stock at $16.6875, $16.6875 and $16.50 per share, respectively.
In connection with the IPO, the Company acquired a third party's interest in
two of the Predecessor Properties, acquired two facilities from an
unaffiliated third party and entered into an agreement to lease another
facility from an unaffiliated third party.
The consolidated financial statements of the Company include the properties
owned or leased by the Company. The combined financial statements of the
Predecessor Properties include the properties owned or leased by the senior
independent and assisted living division of PGI, which consisted of five
properties as indicated in the table below (PGI owned or leased The
Heritage, The Devonshire and The Hallmark facilities during the period from
January 1, 1995 through May 6, 1997 and leased The Springs of East Mesa and
The Gables at Brighton facilities for the period from December 27, 1996
through May 6, 1997). The Company operates in the senior independent and
assisted living segment. Its properties, which are owned, leased, managed or
under development by the Company (collectively, the "Properties"), are
located throughout the United States as indicated below:
<TABLE>
<CAPTION>
Property Name Date Owned or Leased Location
------------- -------------------- --------
<S> <C> <C> <C>
Owned Facilities: The Heritage (1) May 7, 1997 Des Plaines, IL
---------------- The Devonshire (1) May 7, 1997 Lisle, IL
Hawthorn Lakes (6) May 7, 1997 Vernon Hills, IL
Edina Park Plaza May 7, 1997 Edina, MN
Leased Facilities: The Hallmark (1) May 7, 1997 Chicago, IL
----------------- The Springs of East Mesa (1) May 7, 1997 Mesa, AZ
The Gables at Brighton (1) May 7, 1997 Rochester, NY
Park Place May 7, 1997 Spokane, WA
The Gables at Farmington November 24, 1997 Farmington, CT
The Classic at West Palm Beach December 18, 1997 West Palm Beach, FL
Brendenwood December 22, 1997 Vorhees, NJ
Kenwood of Lake View
(formerly Harbor Village) March 6, 1998 Chicago, IL
The Atrium May 12, 1998 San Jose, CA
Chatfield July 2, 1998 West Hartford, CT
Ponce de Leon October 21, 1998 Sante Fe, NM
Woodside Terrace December 22, 1998 Redwood City, CA
River Bay Club January 19, 1999 Quincy, MA
Berkshire of Castleton September 14, 1999 Indianapolis, IN
Benchmark of Hoffman Estates December 22, 1999 Hoffman Estates, IL
Managed Facilities: The Island on Lake Travis (2) Lago Vista, TX
------------------ The Kenwood (3) Minneapolis, MN
The Heritage at Gaines Ranch (4) Austin, TX
The Heritage, Southfield (4) Southfield, MI
Development Projects Under Construction(5):
------------------------------------------
Glen Ellyn, IL
Raleigh, NC
New York (Battery Park City), NY
Pittsburgh, PA
</TABLE>
26
<PAGE>
(1) Collectively referred to as "the Predecessor Properties"
(2) Management services commenced May 7, 1997
(3) Management services commenced July 1, 1997
(4) The Company developed these projects for third party owners and
commenced management August 1, 1999
(5) The Company is developing these projects for third party owners
(6) The Company developed The Willows, a 54-unit assisted living facility
(adjacent to the Hawthorn Lakes facility) which opened on July 1,
1999.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated and combined financial statements include the accounts of
the Company and the Predecessor Properties.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Brookdale Living Communities, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation and combination.
Use of Estimates
The preparation of the consolidated and combined financial statements in
accordance with accounting principles generally accepted in the United
States 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.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
investments with an original maturity of three months or less to be cash
equivalents.
Resident Fee Revenue
Resident fee revenue is recorded when services are rendered and consists of
fees for basic housing, support services and fees associated with
additional services such as personalized health and assisted living care.
Resident leases are generally for a term of one year.
Development Fees
Development fees related to development activities provided for projects
owned by third parties are earned over the term of the development. Such
fees are recognized as revenue as the development services are provided to
the owner during the pre-construction and construction periods.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred. Renovations and improvements which
improve and/or extend the useful life of the asset are capitalized and
depreciated over the shorter of their estimated useful life or the term of
the operating lease.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of assets, which are as follows:
Buildings and improvements 40-45 years
Leasehold improvements 5-23 years
Furniture and equipment 3-12 years
Property Under Development
Development costs, including interest, fees and costs incurred in
developing new properties, are capitalized to property under development as
incurred. Upon completion of construction, development costs are amortized
over the useful lives of the respective properties on a straight-line
basis.
Deferred Costs
Bond credit enhancement costs are amortized on a straight-line basis over
the term of the letters of credit. Deferred financing costs are amortized
on a straight-line basis over the term of the long-term debt. Deferred
lease costs are amortized on a straight-line basis over the term of the
lease.
27
<PAGE>
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
Prior to May 7, 1997, certain PGI entities were partnerships and, as such,
were not taxable entities. The income or loss from the partnerships was
includable on the respective federal income tax returns of the partners.
Stock Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, in accounting for its fixed plan
stock options. As such, no compensation expense is recognized for the stock
option grants because the exercise price of the options equals the market
price of the underlying stock at the date of grant.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Investments and Hedging Activities". SFAS No. 133 provides
guidance for the recognition and measurement of derivatives and hedging
activities. Originally SFAS No. 133 was effective for fiscal years
beginning after June 15, 1999. However, in June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137
defers the effective date of SFAS No. 133 for one year. Adoption of SFAS
No. 133 is not anticipated to affect the consolidated results of
operations, financial position or cash flows of the Company.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current financial statement presentation.
3. Cash and Investments - Restricted and Investment Certificates-Restricted
Cash and investments-restricted consists of:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Life Care escrow deposits $ 3,167 $ 3,033
Tenant security deposits 3,436 2,346
Construction escrow deposit - 1,150
Real estate tax and insurance reserve 3,232 1,697
---------- --------
Total cash and investments-restricted $ 9,835 $ 8,226
========== =========
</TABLE>
Properties located in Illinois are required to make Life Care escrow
deposits either in cash or letters of credit under the Illinois Life Care
Facility Act, Section 7(b) in accordance with a schedule provided by the
Illinois Department of Public Health.
Investment certificates-restricted in connection with certain development
related activities consist of long-term investments which earn interest at
9% - 12% per annum.
4. Property, Plant and Equipment
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Land $ 13,535 $ 9,988
Buildings and improvements 108,540 99,262
Leasehold improvements 4,999 1,361
Furniture and equipment 12,249 5,190
----------- ----------
139,323 115,801
Less accumulated depreciation (10,472) (5,689)
----------- ----------
Net property, plant and equipment $ 128,851 $ 110,112
=========== ==========
</TABLE>
28
<PAGE>
During 1998, the Company was reimbursed for leasehold improvements of $187
and the related accumulated depreciation of $16 was written off.
5. Deferred Costs
Deferred costs, included in other long term assets in the accompanying
consolidated balance sheets, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Bond credit enhancement and deferred
financing costs $ 10,428 $ 3,631
Lease costs 133 179
--------- ---------
10,561 3,810
Less accumulated amortization (1,644) (1,511)
--------- ---------
Net deferred costs $ 8,917 $ 2,299
========= =========
</TABLE>
6. Credit Agreement
During 1998, the Company obtained an original $15,000 unsecured revolving
line of credit, which was increased to $29,000 and matured July 31, 1999
(repaid in May 1999). The Company established a new line of credit in the
amount of $35,000 on August 1, 1999 which matures October 31, 2000.
Borrowings under the original line of credit bore interest at prime plus
1/2% per annum through August 1, 1999 and borrowings under the new line of
credit bear interest at prime thereafter (8.50% and 8.25% at December 31,
1999 and 1998, respectively) and a fee of 1/4% on the original unused line
of credit through August 1, 1999 and 1/8% under the new line of credit
payable quarterly. At December 31, 1999 and 1998, the Company had $2,935
and $903, respectively, of outstanding letters of credit which reduces the
amount available under the lines of credit. Pursuant to the terms of the
agreement, the Company must maintain certain facility operating margins (as
defined).
On January 25, 1999, the Company entered into a $5,000 unsecured loan
agreement bearing interest at 12% payable interest only and maturing May
21, 1999 (original maturity was April 26, 1999). The loan was subordinated
to the Company's existing unsecured line of credit and prohibited the
Company from paying any dividends. This loan was repaid on May 14, 1999.
During 1997, the Company obtained an unsecured $20,000 interim credit
facility that bore interest at prime plus 1% for working capital and
acquisition needs. The credit facility was repaid and terminated on
December 24, 1997, which resulted in an extraordinary loss on
extinguishment of debt, net of a $24 income tax benefit, of $36.
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Mortgage note payable secured by the Hawthorn Lakes facility, bearing
interest at 8.525% payable principal and interest until
maturity December 1, 2027 $ 13,025 $ 13,133
5.5% convertible subordinated notes, due May 14, 2009
(a) 100,000 -
Mortgage note payable interest only at LIBOR plus 1.625%
(7.726% at December 31, 1999) until maturity on
April 18, 2002, secured by The Willows and a partial guaranty of the Company 6,000 -
Variable rate tax-exempt bonds (b):
Secured by the Devonshire facility payable interest only (5.42%
and 4.07% at December 31, 1999 and 1998,
respectively) until maturity December 15, 2025 (c) 33,000 33,000
Secured by The Heritage facility payable interest only
(5.50% and 4.20% at December 31, 1999 and 1998,
respectively) until maturity December 15, 2019 (c) 32,000 32,000
Secured by The Edina Park Plaza facility, payable interest
only (5.45% at December 31, 1999) until maturity
December 1, 2029 (d) 15,040 -
Mortgage note payable secured by the Edina Park Plaza
facility, bearing interest at 8.0% and refinanced December 1999 (d) - 14,747
Note payable bearing interest at 8.0% and repaid May,1999 - 3,000
---------- ----------
Total debt 199,065 95,880
Less current portion 118 3,310
---------- ----------
Total long-term debt $ 198,947 $ 92,570
========== ==========
</TABLE>
29
<PAGE>
(a) The 5.5% convertible subordinated notes are convertible into
5,479 shares of common stock, for a conversion price of $18.25
per share, until May 14, 2009.
(b) These tax-exempt Qualified Residential Rental Bonds (the "Bonds")
require a portion of the units at these facilities served by
tax-exempt bonds to be leased to qualified individuals based on
income levels specified by the U.S. Government. The interest rate
is adjusted weekly based upon the remarketing rate for these
bonds. The credit enhancement for the Bonds was provided by the
Federal Home Loan Mortgage Corporation. The annual interest rate
on the Bonds cannot exceed 15%. Under certain conditions, the
interest rate may be converted to a fixed rate at the request of
the Company.
(c) Beginning May 7, 1997, the Bonds were collateralized by letters
of credit in the stated amount of $66,715 which were issued by
two financial institutions with a stated termination date of May
18, 2000. The letters of credit were collateralized, in part, by
letter of credit deposits with the financial institutions at
December 31, 1998. The Company amortized letter of credit and
other credit enhancement fees of $1,458, $1,205 and $549 during
the years ended December 31, 1999 and 1998 and the period from
May 7, 1997 through December 31, 1997, respectively. Prior to May
7, 1997, the Bonds were collateralized by irrevocable letters of
credit issued by various financial institutions. The Predecessor
Properties amortized letter of credit and the credit enhancement
fees of $250 during the period from January 1, 1997 through May
6, 1997.
On May 27, 1999, the Company obtained replacement credit
enhancements to secure the payment of principal and interest on
the Bonds. In connection with the replacement of the credit
enhancements, the Company received the release of $14,464 that
was on deposit with the previous credit enhancement providers and
wrote-off $273 of previously deferred financing costs. The
Company is required to fund a principal reserve account based on
a 30-year amortization of the Bonds up to $4,000 and to maintain
an interest rate cap for the entire term. The Company has
purchased a $65,000 interest rate cap, with a strike price of
6.35% and a fair value of $281 at December 31, 1999, that expires
June 1, 2004. In addition, the Company has guaranteed the
reimbursement obligation, which is limited to $4,000 and
terminates when the amount in the principal reserve fund equals
or exceeds $4,000.
(d) On December 1, 1999, the $15,040 of variable rate tax-exempt
bonds were issued to refund the tax-exempt bonds issued with
respect to the Edina Park Plaza mortgage note payable. In
connection with the refunding the Company incurred a loss, net of
income tax benefit of $191, of $311 which is recorded as an
extraordinary item in the accompanying consolidated statement of
operations. The Company purchased a $15,040 interest rate cap
with a strike price of 6.58% and a fair value of $74 at December
31, 1999, that expires December 1, 2004.
The annual aggregate scheduled maturities of debt obligations for the five
years subsequent to December 31, 1999 are as follows:
Year ended December 31,
2000 $ 118
2001 128
2002 6,140
2003 152
2004 166
Thereafter 192,361
-----------
$ 199,065
===========
The Company and the Predecessor Properties incurred interest cost for the
years ended December 31, 1999 and 1998, the period from May 7, 1997 to
December 31, 1997, and the period from January 1, 1997 to May 6, 1997 of
$8,884, $5,711, $3,211, and $830 respectively, of which $1,595, $1,558 and
$191 was capitalized for the years ended December 31, 1999 and 1998 and for
the period from May 7, 1997 to December 31, 1997, respectively.
On December 27, 1996, The Hallmark facility was sold by PGI in a
sale-leaseback transaction and a portion of the sale proceeds was used to
repay a mortgage note secured by The Hallmark. In addition, The Hallmark
was required to pay a prepayment fee of $2,723, which was netted against
the deferred gain on sale of property. The deferred gain on sale of
property is being recognized over the life of the lease as a reduction of
the related lease expense.
8. Developments
During 1999, the Company sold certain of its rights and interests in
development sites in Columbus, Ohio; Houston, Texas; Huntley, Illinois (see
note 14); and Creve Coeur (St. Louis), Missouri for a price equal to the
Company's cost and, in connection with each of the sales, the Company
entered into development agreements with respect to such sites. During
1998, the Company sold certain of its rights and interests in development
sites in Austin, Texas; Southfield, Michigan; Glen Ellyn, Illinois;
Raleigh, North Carolina; Pittsburgh, Pennsylvania and Battery Park City,
New York. The aggregate sales price for these development sites was $4,380
and $18,821 for the years ended December 31, 1999 and 1998, respectively.
In connection with these sales a portion of the sales price was in the form
of a promissory note, of which $2,994 and $3,486 was outstanding at
December 31, 1999 and 1998, respectively. During 1999, the Company was
reimbursed for costs incurred in the development of the Pittsburgh,
Pennsylvania site for cash and a net increase of $1,970 on the promissory
note to $2,153 which was outstanding at December 31, 1999. The notes
receivable bear interest at 9 - 12% and are due
30
<PAGE>
through December 31, 2003. No gain or loss was recognized by the Company in
connection with these sales as the development sites were sold at cost.
At December 31, 1999 and 1998, the Company had reimbursable development
costs due from third parties of which $1,659 and $2,467, respectively, was
unbilled. Included in other long term assets at December 31, 1999 and 1998
in the accompanying balance sheets, are development fees of $12,217 and
$5,655, respectively, related to development activities provided for
projects owned by third parties.
The Company has entered into interest rate lock agreements on behalf of
third party owners of development projects with respect to interest rates
on floating rate construction debt. The agreements are designed to limit
the exposure to movements in floating interest rates on the development
construction project loans and the Company is to be reimbursed by the third
party for any payments made pursuant to the agreements. The notional amount
of the construction loans is $53,500 and the approximate fair value of such
hedging contracts is $3,271.
9. Stock Based Compensation Plan
The Company has granted stock options to various employees and directors
under its various stock incentive plans (the "Plans"). All options have
10-year terms and vest and become exercisable either immediately or over a
three to four year period at the date of grant. The prices of all options
granted were equal to the fair market value at the date of the grant. At
December 31, 1999, there were 278 additional shares available for grant
under the Plans.
In November 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants as if
the fair-value method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosures provisions of SFAS No. 123.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the following unaudited pro forma amounts:
Period from
May 7, 1997
Year Ended through
December 31, December 31, 1997
------------ -----------------
1999 1998
---- ----
Net income:
As reported $ 11,125 $ 6,654 $ 445
Pro forma $ 10,184 $ 5,181 $ 92
Basic EPS:
As reported $ 0.97 $ 0.68 $ 0.06
Pro forma $ 0.89 $ 0.53 $ 0.01
Diluted EPS:
As reported $ 0.90 $ 0.67 $ 0.06
Pro forma $ 0.84 $ 0.52 $ 0.01
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated fair value on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
Year Ended
December 31 Period from
Weight Average ----------- May 7, 1997 through
Assumptions 1999 1998 December 31, 1997
----------- ---- ---- -----------------
Risk-free interest rate 6.36% 5.5% 6.6%
Expected volatility 52.0% 55.5% 43.5%
Expected life (in years) 4 4 4
Dividend yield - - -
Fair value $6.75 $10.78 $4.89
31
<PAGE>
The table below summarizes the transactions in the Company's stock incentive
plans during 1999, 1998 and the period from May 7, 1997 through December 31,
1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- -------------------
Number Weighted-Average Number Weighted-Average Number Weighted-Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- -------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of period 901 $ 15.28 762 $ 11.60 - $ -
Granted 116 14.31 312 22.85 762 11.60
Exercised (3) 11.64 (97) 11.50 - -
Cancelled (112) 15.07 (76) 14.27 - -
----- ----- -----
Options outstanding at end of period 902 15.19 901 15.28 762 11.60
===== ===== =====
Exercisable at end of year 480 15.27 207 18.08 - -
===== ===== =====
</TABLE>
The following table summarizes information about certain options in the
Company's stock incentive plans outstanding as of December 31, 1999 in
accordance with SFAS No. 123:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Avg.
Number Remaining Weighted Avg. Number Weighted Avg.
Range of Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$11.50 476 7.35 years $ 11.50 296 $ 11.50
$11.88 - $21.42 230 8.67 years $ 15.77 50 $ 15.60
$23.48 196 8.39 years $ 23.48 134 $ 23.48
---- ----
$11.50 - $23.48 902 7.91 years $ 15.19 480 $ 15.27
==== ==== =========== ==== ==========
</TABLE>
10. Income Taxes
The (provision) benefit for income taxes (including income taxes on
extraordinary items in 1999 and 1997) is composed of the following:
<TABLE>
<CAPTION>
Year Ended Period from Period from
December 31, May 7, 1997 January 1, 1997
----------- through through
1999 1998 December 31, 1997 May 6, 1997
---- ---- ----------------- -------------
<S> <C> <C> <C> <C>
Federal:
Current $ (121) $ (894) $ - $ (195)
Deferred (5,211) (2,271) 509 -
------- -------- -------- --------
(5,332) (3,165) 509 (195)
------- -------- -------- --------
State:
Current (70) (105) - (41)
Deferred (978) (357) 73 -
------- -------- -------- --------
(1,048) (462) 73 (41)
------- -------- -------- --------
$(6,380) $ (3,627) $ 582 $ (236)
======= ======== ======== ========
</TABLE>
A reconciliation of the (provision) benefit for income taxes to the amount
computed at the U.S. federal statutory rate of 34% for 1999 and 1998 and
35% for 1997, is as follows:
<TABLE>
<CAPTION>
Year Ended Period from Period from
December 31, May 7, 1997 January 1, 1997
------------ through through
1999 1998 December 31, 1997 May 6, 1997
---- ---- ----------------- -------------
<S> <C> <C> <C> <C>
Computed "expected" tax (expense) benefit $(6,122) $ (3,495) $ 27 $ 150
State taxes, net of federal income tax (692) (305) 73 (41)
Non-taxable amortization of deferred gain on sale
of property 274 274 184 -
Income of non-taxable Predecessor Properties - - - (71)
Rental income taxable to the Predecessor - - 286 (242)
Deferred lease costs - - - (43)
Extraordinary item 171 - 21 -
Other, net (11) (101) (9) 11
-------- --------- ------ -------
$(6,380) $ (3,627) $ 582 $ (236)
======== ========= ====== =======
</TABLE>
32
<PAGE>
During 1999 and 1998, the Company received a tax benefit of $2 and $484,
respectively, in connection with the exercise by certain employees of stock
options. Such amount was credited to additional paid-in capital.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31,
-------------------------
1999 1998
---- ----
Deferred tax assets
Property, plant and equipment $ - $ 347
Deferred lease costs 1,004 659
Operating loss carryforward 2,764 286
AMT tax credit 129 366
Other 55 -
------------ ----------
Total gross deferred tax asset 3,952 1,658
------------ ----------
Deferred tax liabilities
Property, plant and equipment (8,670) -
Deferred revenue - (344)
Other (157) -
------------ ----------
Total gross deferred tax liability (8,827) (344)
------------ ----------
Net deferred tax (liability) asset $ (4,875) $ 1,314
============ ==========
At December 31, 1999 the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $6,497 and $12,814,
respectively, which are available to offset future taxable income, if any,
through 2012. Also through December 31, 1999 the Company provided for
alternative minimum tax of $129, which can be used to offset regular
federal tax, if any, and has no expiration date. The Company had current
tax receivables of $608 and $642 at December 31, 1999 and 1998,
respectively, included in prepaid expenses and other assets. In addition,
the Company had $95 of current tax payable in other liabilities for 1998.
The net deferred tax liability of $4,875 for 1999, per above, includes
current deferred tax assets of $52, which is included in prepaid expenses
and other assets.
11. 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 was eligible to receive
payments, in accordance with the terms of the Tax Incremental Financing
Bond ("Bond") issued to it. The Bond was scheduled to mature on December 1,
2007 and had interest at 10% per annum, with principal and interest payable
annually on each December 1. The Bond was 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 was subject to
mandatory redemption, in part, by the application of annual sinking fund
installments by the municipality on each December 1, at a redemption price
equal to the principal outstanding at the date redeemed. The Bond was
payable solely from real estate tax incremental revenues and certain sales
tax receipts generated in the TIF. Payments were to be made to the extent
of available TIF revenues. The insufficiency of TIF revenues generated in
the redevelopment area for any given year would not be considered a default
in payment, but all past due amounts would be a continuing obligation
payable from future TIF revenues. Any unpaid amounts including interest, at
maturity, would be forgiven. As the collectibility of the Bond principal
and interest was dependent upon sufficient TIF revenues being generated in
the redevelopment area, revenue was recognized by The Heritage when
principal and interest were received. For the period from May 7, 1997
through December 31, 1997 (final payment), The Heritage received payments
totaling $576.
12. Employee Benefit Plan
In August 1994, PGI established a 401(k) plan for all employees of the PGI
entities who meet minimum employment criteria. The plan provides that the
participants may defer up to 15% of their eligible compensation on a
pre-tax basis subject to certain maximum amounts. PGI contributed an
additional 25% of the employee's contribution to the plan, up to $500 per
employee per annum. On September 1, 1997, the Company established a 401(k)
plan for all employees of the Company's entities that meet minimum
employment criteria. The plan provides that the participants may defer up
to 15% of their eligible compensation on a pre-tax basis subject to certain
maximum amounts. The Company contributes an additional 25% of the
employee's contribution to the plan. Employees are always 100% vested in
their own contributions and vested in PGI's and the Company's contributions
over five years. The Company and the PGI entities made contributions to
such plans in the amount of $300, $176, $55, and $15 for the years ended
December 31, 1999 and 1998, the period from May 7, 1997 through December
31, 1997, and the period from January 1, 1997 through May 6, 1997,
respectively. Such amounts are included in facility operating and general
and administrative expense in the consolidated and combined statements of
operations.
33
<PAGE>
13. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the year ended December 31, 1999 and 1998 and for
the period from May 7, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
Year Ended
December 31, Period May 7, 1997
------------ through
1999 1998 December 31, 1997
---- ---- -----------------
Numerator:
<S> <C> <C> <C>
Income from continuing operations before extraordinary item $ 11,436 $ 6,654 $ 481
Extraordinary item (net of income tax benefit of $191 and $24 for
1999 and 1997, respectively) (311) - (36)
--------- --------- --------
Numerator for basic earnings per share 11,125 6,654 445
Interest expense on convertible subordinated notes, net of tax 2,362 - -
--------- --------- --------
Numerator for diluted earnings per share $ 13,487 $ 6,654 $ 445
========= ========= ========
Denominator:
Denominator for basic earnings per share - weighted-average shares 11,411 9,751 7,208
Effect of dilutive securities
Employee stock options 91 227 143
Warrants - - -
Convertible subordinated notes 3,468 - -
--------- --------- --------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions 14,970 9,978 7,351
========= ========= ========
Basic earnings per share $ 0.97 $ 0.68 $ 0.06
========= ========= ========
Diluted earnings per share $ 0.90 $ 0.67 $ 0.06
========= ========= ========
</TABLE>
Options to purchase 313, 297 and 11 shares of common stock at $22.40,
$22.96 and $16.66 weighted average exercise price per share were
outstanding during the years ended December 31, 1999 and 1998 and for the
period from May 7, 1997 through December 31, 1997, respectively, and
warrants to purchase 117 shares and 83 shares of common stock at $23.89 and
$25.25 weighted average per share were outstanding at December 31, 1999 and
1998, respectively, but were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the common shares and, therefore, the effect would be
anti-dilutive.
14. Related Party Transactions
Prior to the IPO, in connection with the management and administration of
The Heritage, The Devonshire and The Hallmark facilities, PGI was entitled
to fees for services provided. Such amounts incurred for the period from
January 1, 1997 through May 6, 1997 are summarized as follows:
Period from
January 1, 1997
through
May 6, 1997
--------------
Property management fee of 5% $230
====
Administration fee for providing services to The
Devonshire and The Heritage facilities $130
====
On May 7, 1997, the Company began providing management services for The
Island on Lake Travis facility, which is owned by PGI. The Company is
entitled to a fee based on 5% of revenue. The Company recognized $209, $210
and $132 in management fee revenue for the years ended December 31, 1999
and 1998 and for the period from May 7, 1997 through December 31, 1997,
respectively.
In connection with the development site in Huntley, Illinois, the third
party owner purchased the land from an affiliate of PGI for $1,958. The
Company's note receivable of $2,032 at December 31, 1999, from the third
party is also secured by the land.
On December 6, 1999, an officer and director of the Company resigned and
entered into a six-month consulting contract with the Company. In
connection with the resignation, the Company purchased and exercised the
officer's option to acquire 125 shares of stock of the Company from PGI and
certain of its affiliates in a treasury stock transaction for an aggregate
purchase price of $1,599, or $12.79 per share.
34
<PAGE>
14. Fair Value of Financial Instruments
Cash and cash equivalents, cash and investments-restricted and variable
rate and fixed rate debt are reflected in the accompanying consolidated
balance sheets at amounts considered by management to reasonably
approximate fair value. Management estimates the fair value of its
long-term fixed rate debt using a discounted cash flow analysis based upon
the Company's current borrowing rate for debt with similar maturities. See
also notes 7(c), 7(d) and 8.
15. Commitments and Contingencies
Leases
The Company entered into operating lease agreements ("Lease Agreements")
with various third parties for the Leased Facilities. The Lease Agreement
for The Hallmark, The Springs of East Mesa, The Gables at Brighton and The
Park Place facilities has an initial term of 23 years, with two options to
extend for 25 years each, and requires annual base rent payments ranging
from $10,185 to $11,204. The Lease Agreement for these four facilities also
requires additional rent each year beginning in 1999 based on 10% of the
excess of each year's revenue compared to 1998 revenue ($111 for the year
ended December 31, 1999). The Lease Agreements for the remaining facilities
have initial terms of one to five years with options to extend (as defined)
and the Company has the option to acquire the facilities prior to or at the
end of such lease terms. The Company has pledged lease security deposits of
$92,735 and $55,453 at December 31, 1999 and 1998, respectively, in
connection with certain leased facilities.
On September 25, 1997, the Company entered into a five year operating lease
for its corporate office with an affiliate of PGI (the "Landlord") which
was amended on March 17, 1998 and September 30, 1999. In connection with
the September 30, 1999 amendment the corporate office lease was terminated
effective February 29, 2000. Also on September 30, 1999, the Company
entered into a 10-year operating lease agreement for 30,000 square feet of
new office space in a building owned by a partnership controlled by Prime
Group Realty Trust an affiliate of PGI. The operating lease provides for a
payment of approximately $2,100 to the Company for tenant improvement costs
which commenced March 1, 2000, and requires the payment of rent at $16.50
per square foot, escalating $0.75 per square foot on each March of the term
commencing March 1, 2001, plus operating expenses (as defined in the
operating lease). In conjunction with the original lease and the amendment,
the Company received cash payments of $404 and $452, respectively, from the
Landlord, which have been deferred and are being amortized using the
straight-line method over the life of the respective office lease. Office
lease expense of $594, $300 and $193 for the years ended December 31, 1999
and 1998 and for the period from May 7, 1997 through December 31, 1997 is
included in general and administrative expense.
The aggregate amount of all future minimum operating lease payments,
including $6,097 of payments to be made to the Landlord for the office
lease as of December 31, 1999, are as follows:
Year ended December 31,
2000 $ 28,223
2001 28,336
2002 28,178
2003 20,606
2004 13,144
Thereafter 171,448
-----------
$ 289,935
============
Litigation
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.
Other
In 1998, the Company established a $100,000 credit facility with The
Capital Company of America LLC (successor-in-interest to Nomura Asset
Capital Corporation) ("Lender") pursuant to which the Lender agrees to
provide financing of up to an aggregate of $100,000 for projects, developed
by the Company for third parties. In 1998, an aggregate $51,000 of the
credit facility was committed to the Austin, Texas and Southfield, Michigan
development projects which opened August 1999. During 2000, the Company and
the Lender commenced discussions to amend the credit facility and the loans
made thereunder. In general, the amendment would provide for the funding of
the Pittsburgh, Pennsylvania development project being developed for a
third party, no further obligation of the Lender to fund under the $100,000
commitment, elimination of the Lender's obligation to fund the permanent
loans under the credit facility and elimination of the Company's loan
resizing obligation on the Austin, Texas and Southfield, Michigan loans.
There can be no assurance that the Company will be able to execute the
amendment. In connection with the aforementioned projects and certain other
developments, the Company has guarantees for construction loans aggregating
approximately $160,325 of which $93,522 and $18,982 was outstanding at
December 31, 1999 and 1998, respectively.
35
<PAGE>
16. Pro Forma (Unaudited)
The following unaudited pro forma financial information of the Company for
the years ended December 31, 1999, 1998 and 1997 are presented as if, at
January 1, 1997, the Company had sold and issued 11,575 shares of its
common stock, purchased 1,266 shares of treasury stock, purchased the Owned
Facilities and leased the Leased Facilities.
This unaudited pro forma financial information is not necessarily
indicative of what the actual results of operations of the Company would
have been assuming the IPO and follow-on public offerings had been
consummated at the beginning of each period presented, nor do they purport
to represent the results of operations of the Company for future periods.
Year ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Revenue $ 114,850 $ 107,220 $ 98,854
========== =========== ==========
Net income $ 12,872 $ 8,288 $ 4,690
========== =========== ==========
Basic earnings per share $ 1.25 $ 0.72 $ 0.41
========== =========== ==========
Diluted earnings per share $ 1.04 $ 0.72 $ 0.32
========== =========== ==========
Weighted diluted shares 15,879 16,015 15,931
========== =========== ==========
17. Subsequent Events
Through March 13, 2000, the Company purchased an additional 459 shares of
treasury stock at an aggregate cost of $6,207.
18. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1999 Quarter Ended 1998 Quarter Ended
--------------------------------------- -----------------------------------------
Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 25,517 $ 26,117 $ 26,652 $ 27,634 $ 16,898 $ 18,651 $ 20,482 $ 21,670
Operating expenses (20,238) (20,531) (21,160) (21,654) (13,730) (15,036) (16,785) (17,138)
Interest income (expense), net 419 155 661 636 (217) - 244 95
Depreciation and amortization (1,362) (1,320) (1,568) (1,678) (1,226) (1,205) (1,146) (1,276)
Write-off of deferred financing costs - (273) - - - - - -
-------- -------- -------- --------- -------- -------- --------- --------
Income before provision for
income taxes and extraordinary item 4,336 4,148 4,585 4,938 1,725 2,410 2,795 3,351
Provision for income taxes (1,579) (1,508) (1,675) (1,809) (614) (889) (982) (1,142)
-------- -------- -------- --------- -------- -------- --------- --------
Income from continuing operations
before extraordinary item 2,757 2,640 2,910 3,129 1,111 1,521 1,813 2,209
Extraordinary item (net of income tax
benefit of $191 in Q4 1999) - - - (311) - - - -
-------- -------- -------- --------- -------- -------- --------- --------
Net income $ 2,757 $ 2,640 $ 2,910 $ 2,818 $ 1,111 $ 1,521 $ 1,813 $ 2,209
======== ======== ========= ========= ======== ======== ========= ========
Basic earnings per common share:
Income from continuing operations
before extraordinary item $ 0.24 $ 0.23 $ 0.25 $ 0.29 $ 0.12 $ 0.16 $ 0.19 $ 0.21
Extraordinary item - - - (0.03) - - - -
-------- -------- -------- --------- -------- -------- --------- --------
Net income $ 0.24 $ 0.23 $ 0.25 $ 0.26 $ 0.12 $ 0.16 $ 0.19 $ 0.21
======== ======== ========= ========= ======== ======== ========= ========
Weighted average shares used for
computing basic earnings per
common share 11,572 11,572 11,555 10,951 9,408 9,487 9,569 10,529
======== ======== ========= ========= ======== ======== ========= ========
Diluted earnings per common share:
Income from continuing operations
before extraordinary item $ 0.24 $ 0.22 $ 0.23 $ 0.25 $ 0.12 $ 0.16 $ 0.19 $ 0.21
Extraordinary item - - - (0.02) - - - -
-------- -------- -------- --------- -------- -------- --------- --------
Net income $ 0.24 $ 0.22 $ 0.23 $ 0.23 $ 0.12 $ 0.16 $ 0.19 $ 0.21
======== ======== ========= ========= ======== ======== ========= ========
Weighted average shares used for
computing diluted earnings per
common share 11,720 14,499 17,099 16,471 9,646 9,793 9,771 10,672
======== ======== ========= ========= ======== ======== ========= ========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
the information contained under the headings "Election of Officers" and "Other
Information-Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's 2000 annual meeting proxy statement, which the Company
intends to file within 120 days of its fiscal year end. Certain information
regarding executive officers is contained in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the information contained under the headings "Compensation of Executive
Officers," "Compensation Committee Interlocks and Insider Participation" and
"Report of Compensation Committee" in the Company's 2000 annual meeting proxy
statement, which the Company intends to file within 120 days of its fiscal year
end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the information contained under the heading "Principal Security Holders of the
Company" in the Company's 2000 annual meeting proxy statement, which the Company
intends to file within 120 days of its fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the information contained under the heading "Other Information-Certain
Relationships and Related Transactions" in the Company's 2000 annual meeting
proxy statement, which the Company intends to file within 120 days of its fiscal
year end.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The financial statements filed as part of this report are set forth in
response to Item 8.
(a)(2) Financial Statement Schedules
(a)(3) Exhibits
Exhibit
Number Description
------- -----------
3.1 Restated Certificate Incorporation of the Company, as filed
with the Securities and Exchange Commission on June 16, 1997 as
Exhibit 3.1 to the Company's Form 10-Q for the period ended
March 31, 1997 (File No. 0-22253) and incorporated herein by
reference
3.2 Amended and Restated By-laws of the Company, as filed with the
securities and Exchange Commission on June 16, 1997 as Exhibit
3.2 to the Company's Form 10-Q for the period ended March 31,
1997 (File No. 0-22253) and incorporated herein by reference
4.1 Form of certificate representing Common Stock of the Company,
as filed with the Securities and Exchange Commission March 17,
1997 as Exhibit 10.14 to the Company's Registration Statement
on Form S-1 (Registration No. 333-12259) and incorporated
herein by reference.
10.1 Note Purchase Agreement, dated as of April 27, 1999, by and
between Brookdale Living Communities, Inc. and Health Partners,
as filed with the Securities and Exchange Commission on May 19,
1999 as Exhibit 10.1 to the Company's Form 8-K dated April 27,
1999 (File No. 0-22253) and incorporated herein by reference
37
<PAGE>
10.2 Indenture, dated as of May 14, 1999, by and between Brookdale
Living Communities, Inc. and State Street Bank and Trust
Company, as Trustee, as filed with the Securities and Exchange
Commission on May 19, 1999 as Exhibit 10.2 to the Company's
Form 8-K dated April 27, 1999 (File No. 0-22253) and
incorporated herein by reference
10.3 Supplemental Indenture, dated as of May 14, 1999, by and
between Brookdale Living Communities, Inc. and State Street
Bank and Trust Company, as Trustee, as filed with the
Securities and Exchange Commission on May 19, 1999 as Exhibit
10.3 to the Company's Form 8-K dated April 27, 1999 (File No.
0-22253) and incorporated herein by reference
10.4 Registration Rights Agreement, dated as of May 14, 1999, by and
between Brookdale Living Communities, Inc. and Health Partners,
as filed with the Securities and Exchange Commission on May 19,
1999 as Exhibit 10.4 to the Company's Form 8-K dated April 27,
1999 (File No. 0-22253) and incorporated herein by reference
10.5 Stockholders Agreement, dated as of May 14, 1999, by and among
Brookdale Living Communities, Inc. and the signatories listed
therein, as filed with the Securities and Exchange Commission
on May 19, 1999 as Exhibit 10.5 to the Company's Form 8-K dated
April 27, 1999 (File No. 0-22253) and incorporated herein by
reference
10.6 Limited Guaranty, dated as of May 27, 1999, by and between
Brookdale Living Communities, Inc. and Glaser Financial Group,
Inc., as filed with the Securities and Exchange Commission on
June 21, 1999 as Exhibit 10.1 to the Company's Form 8-K dated
May 27, 1999 (File No. 0-22253) and incorporated herein by
reference
10.7 Reimbursement and Security Agreement, dated as of May 1, 1999,
by and between Federal Home Loan Mortgage Corporation and The
Ponds of Pembroke Limited Partnership, as filed with the
Securities and Exchange Commission on June 21, 1999 as Exhibit
10.2 to the Company's Form 8-K dated May 27, 1999 (File No.
0-22253) and incorporated herein by reference
10.8 Reimbursement and Security Agreement, dated as of May 1, 1999,
by and between Federal Home Loan Mortgage Corporation and River
Oaks Partners, as filed with the Securities and Exchange
Commission on June 21, 1999 as Exhibit 10.3 to the Company's
Form 8-K dated May 27, 1999 (File No. 0-22253) and incorporated
herein by reference
10.9 Reimbursement and Security Agreement, dated as of May 1, 1999,
by and between Federal Home Loan Mortgage Corporation and The
Ponds of Pembroke Limited Partnership, as filed with the
Securities and Exchange Commission on June 21, 1999 as Exhibit
10.4 to the Company's Form 8-K dated May 27, 1999 (File No.
0-22253) and incorporated herein by reference
10.10 Brookdale Living Communities, Inc. Stock Incentive Plan, as
filed with the Securities and Exchange Commission on December
15, 1997 as Exhibit 10.14 to Amendment No. 4 to the Company's
Registration Statement on Form S-1 (Registration No. 333-41191)
and incorporated herein by reference
10.11 1998 Brookdale Living Communities, Inc. Stock Incentive Plan,
as filed with the Securities and Exchange Commission on August
16, 1999 as Exhibit No. 10.13 to the Company's Form 10-Q for
the period ended June 30, 1999 (File No. 0-22253) and
incorporated herein by reference
10.12 1999 Brookdale Living Communities, Inc. Stock Incentive Plan,
as filed with the Securities and Exchange Commission on August
16, 1999 as Exhibit No. 10.14 to the Company's Form 10-Q for
the period ended June 30, 1999 (File No. 0-22253) and
incorporated herein by reference
10.13 Building Loan Agreement, dated as of August 24, 1999, by and
among AH Battery Park Owner, LLC, Key Corporate Capital Inc.,
Fleet National Bank and European American Bank, as filed with
the Securities and Exchange Commission on November 15, 1999 as
Exhibit 10.1 to the Company's Form 10-Q for the period ended
September 30, 1999 (File No. 0-22253) and incorporated herein
by reference
10.14 Soft Cost Loan Agreement, dated as of August 24, 1999, by and
among AH Battery Park Owner, LLC, Key Corporate Capital Inc.,
Fleet National Bank and European American Bank, as filed with
the Securities and Exchange Commission on November 15, 1999 as
Exhibit 10.2 to the Company's Form 10-Q for the period ended
September 30, 1999 (File No. 0-22253) and incorporated herein
by reference
10.15 Payment Guaranty, dated as of August 24, 1999, issued by
Brookdale Living Communities, Inc. in favor of Key Corporate
Capital Inc., as filed with the Securities and Exchange
Commission on November 15, 1999 as Exhibit No. 10.3 to the
Company's Form 10-Q for the period ended September 30, 1999
(File No. 0-22253) and incorporated herein by reference
10.16 Completion Guaranty, dated as of August 24, 1999, issued by
Brookdale Living Communities, Inc. for the benefit of Key
Corporate Capital Inc., as filed with the Securities and
Exchange Commission on November 15, 1999 as Exhibit No. 10.4 to
the Company's Form 10-Q for the period ended September 30, 1999
(File No. 0-22253) and incorporated herein by reference
38
<PAGE>
10.17 Indemnity Agreement, dated as of August 24, 1999, issued by
Brookdale Living Communities, Inc. in favor of AH Battery Park
Owner, LLC, as filed with the Securities and Exchange
Commission on November 15, 1999 as Exhibit No. 10.5 to the
Company's Form 10-Q for the period ended September 30, 1999
(file No. 0-22253) and incorporated herein by reference
10.18 Property Option Agreement, dated as of August 24, 1999, by and
between AH Battery Park Owner, LLC and Brookdale Living
Communities of New York-BPC, Inc., as filed with the Securities
and Exchange Commission on November 15, 1999 as Exhibit No.
10.6 to the Company's Form 10-Q for the period ended September
30, 1999 (File No. 0-22252) and incorporated herein by
reference
10.19 Equity Option Agreement, dated as of August 24, 1999, by and
among AH Battery Park Member LLC, AH Battery Park Owner, LLC
and Brookdale Living Communities of New York-BPC, Inc, as filed
with the Securities and Exchange Commission on November 15,
1999 as Exhibit No. 10.7 to the Company's Form 10-Q for the
period ended September 30, 1999 (File No. 0-22253) and
incorporated herein by reference
10.20 Amended and Restated Development Agreement, dated as of August
24, 1999, by and between AH Battery Park Owner, LLC and
Brookdale Living Communities of New York-BPC, Inc., as filed
with the Securities and Exchange Commission on November 15,
1999 as Exhibit No. 10.8 to the Company's Form 10-Q for the
period ended September 30, 1999 (File No. 0-22253) and
incorporated herein by reference
10.21 Management Agreement, dated as of August 24, 1999, by and
between AH Battery Park Owner, LLC and Brookdale Living
Communities of New York-BPC, Inc., as filed with the Securities
and Exchange Commission on November 15, 1999 as Exhibit 10.9 to
the Company's Form 10-Q for the period ended September 30, 1999
(File No. 0-22253) and incorporated herein by reference
10.22 Loan Agreement, dated as of August 1, 1999 by and among
Brookdale Living Communities, Inc. and LaSalle Bank National
Association
12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 1, 1999, the Company filed a Current Report on Form 8-K dated
September 8, 1999 with the Securities and Exchange Commission announcing
pursuant to Item 5 of Form 8-K that the Company's Board of Directors had
authorized the repurchase of up to 2,000,000 shares of its Common Stock.
On October 1, 1999, the Company filed a Current Report on Form 8-K/A
dated July 2, 1998 with the Securities and Exchange Commission including
pursuant to Item 7 of Form 8-K/A the audited statements of the Chatfield
Limited Partnership, which was leased by the Company on July 2, 1998 and
the unaudited pro forma statements of the Company reflecting all
acquisitions and leases through the lease of Chatfield.
On December 8, 1999, the Company filed a Current Report on Form 8-K dated
December 7, 1999 with the Securities and Exchange Commission announcing
pursuant to Item 5 of Form 8-K that the Chief Financial Officer, had
resigned and that a successor had been named.
39
<PAGE>
(c) Exhibits
The list of exhibits filed with this report is set forth in response to
Item 14(a)(3). The required exhibits have been filed as indicated in the
Exhibit Index.
(d) Financial Statements and Schedules
Not applicable
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BROOKDALE LIVING COMMUNITIES, INC.
Registrant
Dated: March 30, 2000 /s/ Mark J. Schulte
-------------------------------------
Mark J. Schulte
President and Chief Executive Officer
Dated: March 30, 2000 /s/ R. Stanley Young
-------------------------------------
R. Stanley Young
Executive Vice President,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Michael W. Reschke March 30, 2000
-----------------------------------
Michael W. Reschke
Chairman of the Board, Director
/s/ Mark J. Schulte March 30, 2000
-----------------------------------
Mark J. Schulte
President and Chief Executive Officer, Director
(Principal Executive Officer)
/s/ Robert J. Rudnik March 30, 2000
-----------------------------------
Robert J. Rudnik
Executive Vice President and General Counsel,
Director
/s/ R. Stanley Young March 30, 2000
-----------------------------------
R. Stanley Young
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
/s/ Wayne D. Boberg March 30, 2000
-----------------------------------
Wayne D. Boberg, Director
/s/ Bruce L. Gewertz March 30, 2000
-----------------------------------
Bruce L. Gewertz, Director
/s/ Darryl W. Hartley-Leonard March 30, 2000
-----------------------------------
Darryl W. Hartley-Leonard, Director
/s/ Mark H. Tabak March 30, 2000
-----------------------------------
Mark H. Tabak, Director
/s/ Paul H. Warren March 30, 2000
-----------------------------------
Paul H. Warren, Director
41
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT, dated as of August 1, 1999 (this "Agreement"), is
entered into by and between BROOKDALE LIVING COMMUNITIES, INC., a Delaware
corporation (the "Borrower"), and LaSALLE BANK NATIONAL ASSOCIATION, a national
banking association (the "Bank"). In consideration of the covenants, agreements
and provisions set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I. DEFINITIONS; RULES OF CONSTRUCTION.
- -----------------------------------------------
1.01 Definitions. The following words and phrases, as used herein,
shall have the following respective meanings:
"Accounts" shall mean any and all accounts, contract rights, notes,
drafts, chattel paper, instruments, documents and general intangibles consisting
of rights to payment (all as defined in the UCC).
"Affiliate" shall mean any Person which, directly or indirectly, owns
or controls, on an aggregate basis, including all beneficial ownership and
ownership or control as a trustee, guardian or other fiduciary, any of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors (irrespective of whether, at the time, Stock of any other class or
classes of such corporation have or might have voting power by reason of the
happening of any contingency) of the Borrower, or which controls, is controlled
by or is under common control with the Borrower or any stockholders of the
Borrower. For purposes hereof, "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of management and
policies, whether through the ownership of voting securities, by contract or
otherwise.
"Authorized Borrower Representative" shall mean Mark J. Schulte,
Darryl W. Copeland, Jr., R. Stanley Young, Robert J. Rudnik or such other person
or persons approved by resolution of the Board of Directors of the Borrower or
by the Executive Committee of the Board of Directors of Borrower from time to
time, a certified copy of which resolution shall be delivered to the Bank.
"Bank" shall mean LaSalle Bank National Association, a national
banking association, with its principal place of business at 135 South LaSalle
Street, Chicago, Illinois 60603.
"Borrower" shall mean Brookdale Living Communities, Inc., a Delaware
corporation having its principal place of business at 77 West Wacker Drive,
Suite 4400, Chicago, Illinois 60601.
"Business Day" shall mean any calendar day, other than a Saturday,
Sunday or other day in which the Bank's downtown Chicago, Illinois office is
authorized to close for domestic business.
<PAGE>
"Capital Z Documents" shall mean the Indenture, the Supplemental
Indenture, the Note Purchase Agreement, the Registration Rights Agreement dated
as of May 14, 1999 between the Borrower and Health Partners, the Note (as
defined in the Note Purchase Agreement), and the Stockholders Agreement dated as
of May 14, 1999 between the Borrower, Health Partners and the other parties
thereto, including all exhibits and schedules attached to any of the foregoing,
as any of the foregoing are amended from time to time.
"Closing" shall have the meaning specified in Section 3.01.
"Debt" shall mean, with respect to the subject Person, all items of
Direct Debt and Guaranteed Debt.
"Debt Service Coverage Ratio" shall mean Net Operating Income divided
by Property Debt Service, tested by the Bank on a quarterly basis.
"Designated Senior Debt" shall have the meaning ascribed in the
Indenture.
"Direct Debt" shall mean with respect to the subject Person, without
duplication, all indebtedness, obligations and liabilities of such Person
whether matured or unmatured, liquidated or unliquidated, direct or indirect, or
joint or several which in accordance with GAAP are required to be classified
upon a balance sheet of such Person as liabilities of such Person, and in any
event shall include all (a) indebtedness, obligations or liabilities of such
Person for borrowed money, including all Obligations of such Person, (b)
indebtedness, obligations or liabilities of such Person evidenced by loan
agreements, credit agreements, notes, bonds, debentures or similar instruments
or which have been incurred in connection with the purchase or other acquisition
of property, both real and personal, or assets, (c) indebtedness, obligations or
liabilities secured by any lien on or payable out of the proceeds of or
production from, any property or assets owned by such Person, whether or not
such Person has assumed or become liable for the payment of such obligations,
(d) all indebtedness, obligations or liabilities incurred by such Person as the
lessee of property (real and personal), goods or services under leases that, in
accordance with GAAP, are or should be reflected on the lessee's balance sheet
as a capital lease, (e) reimbursement obligations of such Person with respect to
letters of credit issued for the account of such Person, (f) indebtedness,
obligations or liabilities under any interest rate and currency swaps, caps,
floors, collars, hedge agreements, forward contracts or similar arrangements or
agreements, (g) all Senior Debt that qualifies as the kind of indebtedness,
obligations or liabilities referred to in clauses (a) through (f) above, and (h)
all renewals, modifications, amendments to, extensions, replacements or
refinancings. of indebtedness, obligations or liabilities referred to in clauses
(a) through (h) above. Notwithstanding the foregoing, Direct Debt shall not
include any Guaranteed Debt. Whether a particular obligation is Direct Debt or
Guaranteed Debt shall be determined in accordance with GAAP with the Bank's
interpretation controlling, absent manifest error.
"Documents" shall mean this Agreement, the Note and any other
documents, instruments or certificates to be executed and delivered hereunder or
in connection herewith by or on behalf of the Borrower or any of its Affiliates.
- 2 -
<PAGE>
"Equipment" shall mean all equipment, machinery, fixtures and supplies
and any and all parts, accessories, attachments, fittings, special tools,
additions and accessories thereto and any renewals, substitutions or
replacements thereof.
"Employee Benefit Plan" shall mean any employee benefit plan (within
the meaning of Section 3(3) of ERISA) and any other profit sharing, deferred
compensation, bonus, stock option, stock ownership, stock purchase, employment,
consulting, incentive, vacation, sick leave, salary continuation, service ward,
severance pay, insurance, or other retirement, welfare or fringe benefit plan,
agreement or practice, that is (or within the last five years was) established,
maintained or contributed to by the Borrower or by any ERISA Affiliate of the
Borrower. For purposes of this definition, an ERISA Affiliate is any
corporation, trade or business that is considered a single employer, or
otherwise aggregated, with the Borrower under Section 414(b), (c), (m), (n), or
(o) of the Code or Section 4001(b)(1) of ERISA.
"Environmental Laws" shall mean any federal, state or local law,
statute, ordinance, order, decree, rule or regulation relating to releases,
discharges, emissions or disposals to air, water, land or groundwater, to the
withdrawal or use of groundwater, to the use, handling or disposal of
polychlorinated biphenyls, asbestos or urea formaldehyde, to the treatment,
storage, disposal or management of Hazardous Substances, to exposure to toxic,
hazardous or other controlled, prohibited or regulated substances and to the
transportation, storage, disposal, management or release of gaseous or other
liquid substances, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, 42 USC ss.9601 et seq., the Resource,
Conservation and Recovery Act of 1976, as amended by the Hazardous Solid Waste
Amendments of 1984, 42 USC ss.6901 et seq., the Toxic Substances Control Act, 15
USC ss.2601 et seq., the Occupational Safety and Health Act of 1970, 29 USC
ss.651 et seq., the Clean Air Act of 1966, as amended, 42 USC ss.7401 et seq.,
and the Federal Water Pollution Control Act, as amended by the Clean Water Act
of 1977, 33 USC ss.1251 et seq., the Illinois Environmental Protection Act, as
amended (415 ILCS 5/1 et seq.) and all rules, regulations and guidance documents
promulgated pursuant thereto or published thereunder.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, together with any successor statutes of similar import,
together with all regulations thereunder, in each case as amended from time to
time.
"Event of Default" shall have the meaning specified in Section 7.01.
"Financial Statements" shall mean any of the audited consolidated
financial statements of the Borrower for its most recently ended fiscal year,
the unaudited consolidated financial statements for the most recently ended
quarter of the Borrower that have been filed with a Governmental Authority, the
internally prepared monthly cash flow statements of the Borrower, and any other
information and data concerning the financial affairs of the Borrower (including
without limitation pro forma financial statements), copies of which have
previously been furnished to the Bank.
"GAAP" shall mean generally accepted accounting principles
consistently applied.
- 3 -
<PAGE>
"General Intangibles" shall mean all general intangibles, including
choses in action, designs, patents, trademarks, service marks, trade names, good
will, applications for registration, registrations, licenses, franchises,
customer lists, and all other intangible property of every nature (other than
Accounts).
"Governmental Authority" shall mean the United States of America, any
state, territory or district thereof, and any other political subdivision or
body politic created pursuant to any applicable Law, and any court, agency,
department, commission, board, bureau or instrumentality of any of the
foregoing.
"Guaranteed Debt" shall mean with respect to the subject Person, (a)
all indebtedness, obligations and liabilities (excluding Direct Debt) in effect
guaranteed, directly or indirectly, by such Person in any manner and for any
purpose whatsoever, including in connection with the acquisition, development,
or lease by or for the benefit of a Subsidiary or Affiliate of such Person of
any business, properties or assets (including without limitation the acquisition
of leasehold interests), or in connection with any loans or financing obtained
by or for the benefit of any Subsidiary or Affiliate of such Person, (b) all
indebtedness, obligations and liabilities in effect guaranteed by such Person,
directly or indirectly, through agreements or arrangements, contingent or
otherwise, including agreements to: (1) to purchase such indebtedness, or (2) to
purchase, sell or lease (as lessee or lessor) property (real and personal),
products, materials or supplies or to purchase or sell services, primarily for
the purpose of enabling the debtor to make payment of such indebtedness or to
assure the owner of the indebtedness against loss, or (3) to supply funds to or
in any other manner invest in any Person.
"Hazardous Substances" shall mean (i) any hazardous or toxic
substance, chemical or waste, or any pollutant or contaminant defined as such in
any now or hereafter existing Environmental Law, (ii) asbestos, (iii) radon,
(iv) petroleum, its derivative by-products and other hydrocarbons, (v)
polychlorinated biphenyls, (vi) explosives, (vii) radioactive materials and
(viii) any additional substances or materials which at any time are classified
or considered to be hazardous or toxic under any Environmental Laws.
"Indenture" shall mean the Indenture dated as of May 14, 1999 by and
between Borrower and State Street Bank and Trust Company, as Trustee, including
all exhibits and schedules attached thereto, as amended from time to time.
"Inventory" shall mean all inventory, goods, merchandise and other
personal property held for sale or lease, or furnished or to be furnished under
any contract of service, or held as raw materials, work in process or material
used or consumed, or to be used or consumed, in business (all as defined in the
UCC).
"Laws" shall mean any federal, state or local law, statute, ordinance,
order, decree, rule or regulation.
"LC Documents" shall have the meaning ascribed in Section 2.02 hereof.
- 4 -
<PAGE>
"LC Drawings" shall have the meaning ascribed in Section 2.02 hereof.
"LC Maturity Date" shall have the meaning ascribed in Section 2.02
hereof.
"Letter(s) of Credit" shall have the meaning ascribed in Section 2.02
hereof.
"Loan" shall mean the unsecured loan in the principal amount of up to
Thirty Five Million Dollars ($35,000,000.00) described in Article II of this
Agreement, including any modifications, amendments, extensions, renewals,
replacements or refinancings thereto or thereof.
"Loan Advance" shall have the meaning specified in Section 2.01(A).
"Loan Commitment" shall have the meaning specified in Section 2.01(A).
"Maturity Date" means October 31, 2000.
"Net Operating Income" shall mean, during each fiscal quarter of the
Borrower and each Subsidiary of the Borrower, all resident fees plus all
management fees generated from all facilities and properties owned, leased or
managed by the Borrower and any Subsidiaries of Borrower, less facility
operating expenses of all facilities and properties owned, leased or managed by
the Borrower and any Subsidiaries of Borrower, all as reflected on the 10-Q
filing and consolidated financial statements of the Borrower and its
Subsidiaries required to be delivered to the Bank pursuant to this Agreement.
"Note" shall mean the Note in form attached hereto as Exhibit A.
"Note Purchase Agreement" shall mean the Note Purchase Agreement dated
as of April 27, 1999 between the Borrower and Health Partners, including all
exhibits and schedules attached thereto, as amended from time to time.
"Obligations" shall mean all of Borrower's liabilities, obligations
and indebtedness to the Bank of any and every kind and nature, including the
Loan, Borrower's other liabilities and obligations to the Bank under this
Agreement, and Borrower's liabilities and obligations to the Bank under any
other agreement, document or instrument (including any guaranty to the Bank of
another Person's Obligations), whether heretofore, now or hereafter owing,
arising, due or payable by or from such Person to the Bank, howsoever evidenced,
created, incurred, acquired or owing, and whether joint, several, primary,
secondary, direct, contingent, fixed or otherwise.
"Ordinary Course of Business" shall mean, with respect to Borrower or
any Subsidiary, such debt, financing or other obligations incurred by the
Borrower or any Subsidiary in the normal operation and course of its business,
specifically excluding, however, any indebtedness, liabilities, guarantees or
obligations incurred in connection with the acquisition or development of real
estate, or which is prohibited under other provisions of this Agreement.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
- 5 -
<PAGE>
"Person" shall mean any individual, corporation, partnership,
association, limited liability company, limited liability partnership,
joint-stock company, trust, unincorporated association, joint venture, court,
Governmental Authority, or any other similar entity.
"Prime Rate" shall mean the rate of interest referred to by the Bank
from time to time as its prime rate, as fixed by the management of the Bank for
the guidance of its loan officers, whether or not such rate is otherwise
published, with each change in such prime rate to take effect on the same day as
the determination of each change by the Bank. Such rate is not necessarily the
most favorable rate offered by the Bank to its borrowers.
"Prior Loan" shall mean the loan from the Bank to the Borrower
pursuant to that certain Loan Agreement dated as of April 26, 1998, as amended
from time to time.
"Property Debt Service" shall mean the aggregate of all payments of
principal and interest under any notes, bonds or other instruments evidencing
indebtedness and all lease payments for all properties or facilities owned or
leased by the Borrower or any Subsidiary of the Borrower during each fiscal
quarter of the Borrower.
"Qualified Plan" shall have the meaning ascribed in Section 4.11(A)
hereof.
"Real Property" shall mean any improved or unimproved real property
now or hereafter owned or leased by Borrower.
"Reportable Event" shall mean any of the events described in Section
4043 of ERISA, other than any such event for which the thirty (30) day notice
requirement has been waived.
"Securities" shall mean the Securities described, defined and issued
pursuant to the Indenture, the Supplemental Indenture and the Capital Z
Documents, including the 5 1/2% Convertible Subordinated Notes due 2009 issued
pursuant to the Indenture and the Supplemental Indenture.
"Senior Debt" shall have the meaning ascribed in the Indenture.
"Stock" shall mean all shares, options, interests, participations or
other equivalents, howsoever designated, of or in a corporation, partnership,
limited liability company or similar entity, whether voting or nonvoting,
including common stock, warrants, preferred stock, convertible debentures or
notes, partnership interests and all agreements, instruments and documents
convertible, in whole or in part, into any one or more of the foregoing.
"Subsidiary" shall mean, with respect to any Person, any corporation,
partnership, limited liability company or similar entity of which fifty percent
(50%) or more of the outstanding Stock having ordinary voting power is at the
time, directly or indirectly, owned by such Person and/or one or more of such
Person's Subsidiaries (irrespective of whether, at the time, Stock of any other
class or classes of such entity shall have or might have voting power by reason
of the happening of any contingency).
- 6 -
<PAGE>
"Supplemental Documentation" means all agreements, instruments,
documents, financing statements, warehouse receipts, schedules of accounts
assigned, certificates of title and other written matter necessary or requested
by the Bank to create, evidence, enforce, or to consummate the transactions
contemplated in or by this Agreement and the other Documents.
"Supplemental Indenture" shall mean the Supplemental Indenture dated
as of May 14, 1999 by and between Borrower and State Street Bank and Trust
Company, as Trustee, including all exhibits and schedules attached thereto, as
amended from time to time.
"UCC" shall mean the Uniform Commercial Code as in effect in Illinois.
1.02 Rules of Construction. Whenever it is provided in this
Agreement that a party "may" perform an act or do anything, it shall be
construed that such party "may, but shall not be obligated to," so perform or so
do. The following words and phrases shall be construed as follows: (i) "at any
time" shall be construed as "at any time or from time to time;" (ii) "any" shall
be construed as "any and all;" (iii) "include" and "including" shall be
construed as "including but not limited to;" and (iv) "will" and "shall" shall
each be construed as mandatory. Except as otherwise specifically indicated
herein, all references to Article, Section and Sub-Section numbers and letters
shall refer to Articles, Sections and Sub-Sections of this Agreement; all
references to Exhibits and Schedules shall refer to the Exhibits and Schedules
attached to this Agreement. The words "hereby", "hereof", "hereto", "herein" and
"hereunder" and any similar terms shall refer to this Agreement as a whole and
not to any particular Article, Section or Sub-Section. The word "hereafter"
shall mean after the date this Agreement is executed and delivered by the
parties hereto, and the word "heretofore" shall mean before such date. Words of
the masculine, feminine or neuter gender shall mean and include the correlative
words of other genders, and words importing the singular number shall mean and
include the plural number and vice versa. The Article headings are inserted in
this Agreement for convenience only and are not intended to, and shall not be
construed to limit, enlarge or affect the scope or intent of this Agreement or
the meaning of any provision hereof. Any accounting terms used in this Agreement
which are not specifically defined shall have the meaning customarily given them
in accordance with GAAP; provided, however, that, in the event that changes in
generally accepted accounting principles shall be mandated by the Financial
Accounting Standards Board, or any similar accounting body of comparable
standing, or shall be recommended by the Borrower's certified public
accountants, to the extent that such changes would modify such accounting terms
or the interpretation or computation thereof, such changes shall be followed in
defining such accounting terms only from and after such date as the Borrower and
the Bank shall have amended this Agreement to the extent necessary to reflect
any such changes in the financial covenants and other terms and conditions of
this Agreement. All other terms contained in this Agreement shall, when the
context so indicates, have the meanings provided for by the UCC to the extent
the same are used or defined therein.
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ARTICLE II. THE LOAN.
--------
2.01 Loan Terms.
----------
(A) Subject to the terms and conditions of this Agreement, the Bank
will make an unsecured loan facility (the "Loan Commitment") available to the
Borrower, pursuant to which the Bank shall from time to time make credit
advances (each, a "Loan Advance") to the Borrower. The Borrower may repay and
reborrow under the Loan Commitment subject to the terms and conditions of this
Agreement. The aggregate amount of Loan Advances outstanding under the Loan
Commitment shall at no time exceed the sum of Thirty Five Million Dollars
($35,000,000.00) ("Maximum Revolving Loan Commitment"). The Loan Commitment
shall terminate on the Maturity Date at which time no further Loan Advances
shall be made by the Bank. Requests for Loan Advances under this Agreement may
be made by the Borrower at any time, and from time to time, prior to the
Maturity Date.
(B) Except for disbursements made in connection with Letters of
Credit, the proceeds of each Loan Advance shall be disbursed by deposit to the
Borrower's operating account pursuant to instructions provided by the Borrower,
unless other arrangements are agreed upon between the Bank and the Borrower. The
Loan shall be used by the Borrower solely for working capital or in connection
with the acquisition, leasing or development of Real Property, or for the
issuance of Letters of Credit by the Bank.
(C) Commencing on the first day of the first month following the
first disbursement of any portion of the Loan Commitment and on the first day of
each consecutive month thereafter until the Maturity Date, the Borrower shall
pay all interest that has accrued on the outstanding balance of the Loan. All
outstanding Loan Advances together with any accrued but unpaid interest thereon
and any other costs or amounts owed to the Bank hereunder, excluding the
aggregate stated amount of any Letters of Credit outstanding on the Maturity
Date, shall be due and paid in full on the Maturity Date. On the LC Maturity
Date, the aggregate amount of Loan Advances made as a result of LC Drawings
together with any accrued but unpaid interest and any other costs, fees or
amounts owed by the Borrower to the Bank arising under this Agreement shall be
paid in full. If any payment falls due on a day which is not a Business Day,
payment shall be made on the next Business Day, and interest shall accrue until
such later date.
(D) The Loan shall be evidenced by the Note.
(E) The Loan is a refinance and replacement of the Prior Loan. It
is expressly provided that the Loan constitutes and shall be Designated Senior
Debt and Senior Debt for purposes of and as defined in the Indenture. The Bank
shall have and be entitled to all rights and benefits of a holder of Designated
Senior Debt and Senior Debt under and pursuant to the Indenture.
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<PAGE>
2.02 Letters of Credit. Provided Borrower is otherwise in compliance
with all terms and conditions of the Loan Agreement and the Documents, the Bank
agrees to issue or renew from the Loan from time to time from the date of this
Agreement to and including August 31, 2000, standby letters of credit (a "Letter
of Credit" and, collectively, the "Letters of Credit") for the account of
Borrower to and for the benefit of municipalities and other units of government
and other entities in order to guarantee Borrower's completion of improvements
(including public improvements) and other obligations required by those entities
in connection with Borrower's development projects, or in order to satisfy other
requirements of such entities (such as the requirement to maintain life care
escrows for purposes of life care permits issued under the Illinois Life Care
Act), all subject to the conditions of this Agreement and which, when added to:
(a) the aggregate amount of all other Letters of Credit outstanding, issued or
approved by the Bank as of the proposed issuance date, and (b) the aggregate
amount of Loan Advances outstanding, excluding Loan Advances made as a result of
LC Drawings (as defined herein) as of the proposed issuance date, will not
exceed the Maximum Revolving Loan Commitment in effect as of the proposed
issuance date. The Letters of Credit shall also be subject to the following
conditions:
a. Application and Agreement. As a condition of the Bank's
obligation to issue a particular Letter of Credit, Borrower, through
the Authorized Borrower Representative, shall notify the Bank of the
particulars of the Letter of Credit not less than three (3) Business
Days in advance, and Borrower shall provide such borrowing resolutions
and information, and execute such applications, documents and
agreements as are required by the Bank, including without limitation,
the Bank's standard form of application and credit agreement. ("LC
Documents").
b. Reserve; Maximum Aggregate LC Amount. The stated amount of
each Letter of Credit issued by the Bank shall reduce the amount of
the Maximum Revolving Loan Commitment then in effect in accordance
with the terms of this Agreement on a dollar for dollar basis ("LC
Reserve"). The aggregate maximum amount of the LC Reserve and the
aggregate maximum stated amount of the Letters of Credit issued by the
Bank that are outstanding at any time shall not exceed Ten Million
Dollars ($10,000,000.00).
c. Expiry. The Bank shall not issue any Letter of Credit with
an expiry date later than December 15, 2000 (the "LC Maturity Date").
Upon written request by Borrower, the Bank shall execute and deliver
to any holders of Letters of Credit existing as of the date of this
such documents as are necessary to extend the expiry date of such
Letters of Credit to a date not later than the LC Maturity Date.
d. Fee. Borrower shall pay the Bank a fee in the amount of
one percent (1%) per annum of the stated amount of each Letter of
Credit issued by the Bank at the request of Borrower, fully earned and
payable quarterly in advance. If the Letter of Credit expires during
the quarter, the fee shall be pro-rated based upon the number of days
in the quarter that the Letter of Credit is outstanding. As a
condition to the issuance of each Letter of Credit, Borrower shall pay
the Bank the quarterly portion of the Letter of Credit fee stated in
the preceding sentence.
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<PAGE>
e. Payment. Each drawing under the Letter of Credit (an "LC
Drawing") shall constitute a Loan Advance under the Loan Agreement and
shall be payable in accordance with the terms and provisions of the
Loan Agreement with respect to other Loan Advances. Borrower's
obligation to pay all LC Drawings shall be absolute, irrevocable,
unconditional and without setoff under any and all circumstances
whatsoever, including, without limitation, any of the following,
whether or not with notice to, or the consent of, Borrower:
(i) Any lack of validity or enforceability of a Letter
of Credit, this Agreement, or any of the LC Documents;
(ii) The existence of any claim, set-off, defense or
other right which Borrower may have at any time against the
beneficiary of a Letter of Credit, the Bank or any other person
or entity, whether in connection with the transactions
contemplated herein or therein or any unrelated transaction;
(iii) Any statement or any other document presented under
a Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being
untrue or inaccurate in any respect whatsoever;
(iv) Payment by the Bank under a Letter of Credit against
presentation of a draft or certificate which does not comply
with the terms of the Letter of Credit, absent the gross
negligence or wilful misconduct of the Bank;
(v) Any failure, omission, delay or lack on the part of
the Bank or any party to any of the LC Documents to enforce,
assert or exercise any right, power or remedy conferred upon
the Bank or any such party under the LC Documents, or any other
acts or omissions on the part of the Bank or any such party;
(vi) The voluntary or involuntary liquidation,
dissolution, sale or other disposition of all or substantially
all the assets of Borrower, the receivership, insolvency,
bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or
readjustment or other similar proceedings affecting Borrower or
any of the assets of Borrower, or any allegation or contest of
the validity of this Agreement, the Letter of Credit or any of
the LC Documents, in any such proceeding; or
(vii) Any other event or action that would, in the absence
of this clause, result in the release or discharge by operation
of law of Borrower from the performance or observance of any
obligation, covenant or agreement contained in this Agreement,
the Letter of Credit or any of the LC Documents.
f. LC Documents. Each Letter of Credit shall be governed by
and subject to the LC Documents required to be executed by Borrower
for each such Letter of Credit. In the event of any conflict between
any of the terms of the LC Documents and any of the terms of this
Agreement, the terms of this Agreement shall control.
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<PAGE>
2.03 Interest Rate; Calculation. Except as provided in Section 2.04,
Loan Advances under the Loan Commitment shall bear interest per-annum at the
Prime Rate. Interest shall be calculated on the basis of a 360-day year
consisting of twelve (12) 30-day months, counting the actual number of days
elapsed, and shall be paid monthly in arrears.
2.04 Default Rate. Any Obligation of the Borrower hereunder or under
any of the other Documents which is not paid when due, whether at stated
maturity, by acceleration or otherwise, shall, without notice, bear interest
payable on demand at the interest rate then in effect with respect thereto plus
three percent (3%). In addition, after the occurrence of any other Event of
Default and delivery to the Borrower of the Bank's notice to charge post-default
interest, all Obligations of the Borrower hereunder shall bear interest at the
rate provided for in the immediately preceding sentence.
2.05 Excessive Rate. If, at any time, the interest rate and other
charges imposed hereunder shall be deemed by any competent Governmental
Authority to exceed the maximum rate of interest permitted by any applicable
Laws, for such time as the interest and such charges would be deemed excessive,
its application shall be suspended and there shall be charged instead the
maximum rate of interest and charges permissible under such Laws.
2.06 Prepayment. The Borrower may prepay the outstanding amounts of
the Loan from time to time in whole or in part on any Business Day without
penalty or premium. Borrower may reborrow any amounts prepaid, provided the
conditions set forth in Section 3.02 hereof are satisfied.
2.07 Application of Payments. All payments, which are not
prepayments, received from the Borrower for payment on the Loan shall be applied
by the Bank first to unpaid interest due and payable on the Loan, and second the
reduction of the principal outstanding on the Loan.
2.08 No Setoff. All payments received or due from the Borrower
hereunder shall be paid directly to the Bank without setoff or counterclaim in
immediately available funds. The Bank shall send the Borrower statements of all
amounts due hereunder, which statements shall be considered correct and
conclusively binding on the Borrower absent manifest error.
2.09 Bank Fees. The Borrower shall pay the Bank a fee (the "Unused
Commitment Fee") in the amount of one-eighth of one percent (1/8%) per annum of
the average unused Maximum Revolving Loan Commitment amount hereunder. The
Unused Commitment Fee shall accrue as of the date of this Agreement and shall be
payable quarterly in arrears, commencing on September 30, 1999, and continuing
on the last day of each December, March and June thereafter and at maturity.
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<PAGE>
ARTICLE III. CONDITIONS PRECEDENT
--------------------
The obligation of the Bank to make the Loan is subject to the
following conditions precedent:
3.01 Conditions Precedent to Initial Loan Advance. The Borrower
shall have delivered or caused to be delivered to the Bank on or before the date
of, but prior to, the disbursement of any Loan Advance pursuant to the Loan
Commitment (hereinafter called the "Closing"), the following:
(A) the Note, duly executed by the Borrower;
(B) a certificate of the secretary or an assistant secretary of the
Borrower, dated the date of the Closing, as to incumbency, and resolutions of
the Board of Directors of Borrower (or an authorized committee thereof)
approving the transaction contemplated hereby;
(C) a certificate, dated as of the most recent date practicable, of
the Secretary of State of Delaware and the Secretary of State of Illinois as to
the good standing of the Borrower;
(D) a Solvency and Business Purpose Affidavit, in form and
substance satisfactory to the Bank, duly executed by the Borrower;
(E) an opinion of counsel to the Borrower in form and substance
satisfactory to the Bank;
(F) such other documents, certificates or evidence as the Bank may
reasonably request to consummate the transactions contemplated hereby.
3.02 Condition Precedent to Subsequent Loan Advances. At the time of
the Closing, at the time of each subsequent request for and disbursement under
the Loan Commitment and on the last day of each fiscal quarter of the Borrower
after the date hereof, each of the following statements shall be true:
(A) The representations and warranties set forth in this Agreement
are true and correct in all material respects unless otherwise disclosed to and
approved by the Bank in writing, in its sole discretion, since the prior Loan
Advance.
(B) No Event of Default shall have occurred and be continuing, and
no event shall have occurred and be continuing that, with the giving of notice
or passage of time or both, would be an Event of Default.
(C) No material adverse change shall have occurred in the financial
condition of the Borrower since the date of this Agreement.
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<PAGE>
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
------------------------------
To induce the Bank to consummate the transactions contemplated hereby,
the Borrower represents and warrants to the Bank as follows:
4.01 The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, has the lawful
power and authority to own its properties and to carry on its business as now
conducted, and possesses all material permits necessary to operate the business
it conducts. Borrower is duly qualified to conduct business as a foreign
corporation and is in good standing in the State of Illinois and in each other
jurisdiction in which such qualification is required for the conduct of
Borrower's business. Each Subsidiary of Borrower is qualified to conduct
business and is in good standing in each jurisdiction in which such
qualification is required for the conduct of such Subsidiary's business.
4.02 The Borrower is empowered to perform all acts and things
undertaken and done pursuant to this Agreement and has taken all corporate or
other action necessary to authorize the execution, delivery and performance of
the Documents. The officers of Borrower executing the Documents have been duly
elected or appointed and have been fully authorized to execute such Documents at
the time executed. The Documents, when executed and delivered, will be the
legal, valid and binding obligations of the Borrower, enforceable against it in
accordance with their respective terms.
4.03 The Financial Statements furnished by or on behalf of the
Borrower to the Bank are complete and accurate, fairly present the financial
condition of the Borrower and its Subsidiaries at the respective dates thereof
and the results of operations for the respective periods covered thereby, and
(subject to normal year-end adjustments with respect to interim Financial
Statements) were prepared in accordance with GAAP. The Borrower does not have
any material liabilities or obligations (contingent or otherwise), liability for
taxes, or unusual forward or long-term commitments, except as disclosed in the
Financial Statements.
4.04 Since the date of Borrower's most recent Financial Statements
furnished to the Bank, there has been no material adverse change in the assets,
liabilities or condition, financial or otherwise, of Borrower or its
Subsidiaries, other than changes arising from transactions in the Borrower's
Ordinary Course of Business.
4.05 Other than as set forth in the Financial Statements, there are
no actions, suits or proceedings pending, or, to the best of the knowledge of
the Borrower, threatened against or affecting the Borrower or any of its
Subsidiaries at law or in equity or before or by any Governmental Authority or
any foreign equivalent thereof, which is reasonably likely to result in a
material adverse judgment against Borrower or liability to Borrower or any of
its Subsidiaries, or which are, in the aggregate, material in light of the
financial condition and assets of the Borrower or any of its Subsidiaries, as
determined by the Bank in its sole discretion. There are no actions, suits,
investigations or proceedings pending, or to the best of the knowledge of the
Borrower, threatened against the Borrower or any of its Subsidiaries or its
properties regarding Environmental Laws, the manufacture, storage or treatment
of Hazardous Substances or products liability.
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<PAGE>
4.06 The Borrower is not in violation of, and the execution and
delivery of the Documents and the performance by the Borrower of its obligations
under the Documents, do not and will not result in the Borrower being in
violation of or in conflict with, or constitute a default under any of, the
Borrower's Amended and Restated Certificate of Incorporation or Restated
By-Laws, any term or provision of any note, mortgage, indenture, contract,
agreement, instrument, judgment or Law applicable to the Borrower, and the
execution and delivery of the Documents and the performance by Borrower of its
obligations under the Documents do not and will not result in the creation or
imposition of any mortgage, lien, charge or encumbrance of any nature whatsoever
(other than those in favor of Bank) upon any of the assets of the Borrower or
any of its Subsidiaries pursuant to any such term or provision. Neither the
Borrower nor any of its Subsidiaries is in default, after the expiration of any
applicable grace or cure periods, in any respect in the performance or
fulfillment of any of its obligations, covenants or conditions contained in any
material agreement or instrument to which it is a party or by which any of its
properties may be bound, and the Borrower does not know of any dispute regarding
any such agreement or instrument.
4.07 Neither the Borrower nor any of its Subsidiaries have
outstanding any Debt or other obligation for borrowed money, or for the deferred
purchase price of property or services nor are the Borrower or any Subsidiary
obligated as guarantor, co-signer or otherwise on any Debt or other obligation
of any kind of any Person other than Borrower or its Subsidiaries, except (i)
Direct Debt to the extent shown on or reflected in the Financial Statements,
(ii) Senior Debt and Guaranteed Debt disclosed on Schedule 1 attached hereto and
made a part hereof, (iii) Debt evidenced by and incurred and issued pursuant to
the Capital Z Documents, and (iv) trade debt incurred in the Ordinary Course of
Business of Borrower or any Subsidiary. No Person is in default under any of
said Debt
4.08 All tax returns and reports of the Borrower and its
Subsidiaries required by law to be filed have been duly filed, and all taxes,
assessments, fees and other governmental charges (other than those presently
payable without penalty or interest) upon each or upon any of its properties or
assets, which are due and payable, have been paid. The charges, accruals and
reserves on the books of the Borrower and its Subsidiaries in respect of taxes
are considered adequate by the Borrower, and the Borrower does not know of any
assessment of a material nature against it or any of its Subsidiaries.
4.09 Except to the extent that failure to comply would not
materially or practically interfere with the conduct of the business of the
Borrower or its Subsidiaries, or affect in any way the Borrower's obligations
(or Bank's rights) under the Documents, the Borrower and its Subsidiaries have
complied with all applicable laws with respect to: (i) the conduct of their
business and (ii) the use, maintenance, and operation of the real and personal
properties owned or leased by them in the conduct of their business.
4.10 No authorization, consent, license or approval of, or filing or
registration with, or notification to, any Governmental Authority is required in
connection with the execution, delivery or performance of the Documents by the
Borrower.
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<PAGE>
4.11 With respect to each Employee Benefit Plan:
(A) each Employee Benefit Plan that is intended to qualify under
Section 401(a) of the Code and the assets of which are exempt from taxation
under Section 501 of the Code ("Qualified Plan") has received a favorable
determination letter as to such qualification and there has been no development
or circumstance since the date of such letter that creates a material risk of
the loss of such plan's qualified status;
(B) each Qualified Plan that is subject to the requirements of
Title IV of ERISA has met the minimum funding standards of Section 412 of the
Code and is not subject to any event or condition (including a reportable event
under Section 4043 of ERISA) that would be grounds for the termination of such
plan by the Pension Benefit Guaranty Corporation or would otherwise subject the
Borrower to any liability with respect to such plan (including liability for
Pension Benefit Guaranty Corporation premiums for periods prior to the Closing);
(C) no Employee Benefit Plan has engaged in a transaction
prohibited by or under Section 406 of ERISA, or which would subject the Borrower
or any of its Subsidiaries to any tax on prohibited transactions under Section
4975 of the Code;
(D) each Employee Benefit Plan is in full compliance in all
material respects (as determined by the Bank in its sole discretion) with the
reporting and disclosure requirements of ERISA and all other applicable laws;
(E) no Qualified Plan is a multi-employer plan within the meaning
of Section 3(37) of ERISA; and
(F) there are no obligations for future post-retirement health,
medical or death benefits under any Employee Benefit Plan except for death
benefits under a Qualified Plan.
4.12 The Borrower is solvent, no transaction under or contemplated
by this Agreement renders or will render the Borrower insolvent, the Borrower
retains sufficient capital for the business and transactions in which it engages
or intends to engage, no obligation incurred hereby is beyond the ability of the
Borrower to pay as such obligation matures, the Borrower is not contemplating
either the filing of a petition under any state or federal bankruptcy or
insolvency laws or the liquidating of all or a major portion of any of its
property, and Borrower has no knowledge of any person contemplating the filing
of any such petition against it.
4.13 There exists no actual or threatened termination, cancellation
or limitation of, or any modification or change in, the proposed business
relationship of Borrower or any of its Subsidiaries with any customer or group
of customers whose purchases individually or in the aggregate are material to
the current business of Borrower or any of its Subsidiaries, or in the proposed
business relationship of Borrower or any of its Subsidiaries with any material
supplier, and Borrower reasonably anticipates that all such customers and
suppliers will continue a business relationship with Borrower and its
Subsidiaries, as the case may be, on a basis no less favorable to the Borrower
than that heretofore conducted; and there exists no other condition or state of
facts or circumstances
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<PAGE>
which would materially adversely affect the current operation of the business of
Borrower after the consummation of the transactions contemplated by this
Agreement on a basis no less favorable to the Borrower than that in which it has
heretofore been conducted by Borrower.
4.14 Except for the strike by certain workers at the Brendenwood
facility which is being operated by a Subsidiary of Borrower, no strike, work
stoppage or other labor dispute relating to the Borrower or any of its
Subsidiaries is pending or, to the best knowledge of the Borrower or any of its
Subsidiaries, is threatened and no application for certification of a collective
bargaining agent is pending or, to the best knowledge of the Borrower, is
threatened. There are no unfair labor practice charges or grievances or similar
matters pending or in process or, to the best knowledge of the Borrower,
threatened by or on behalf of any employee of the Borrower or any of its
Subsidiaries, nor any complaints received by the Borrower, or any of its
Subsidiaries or, to the best knowledge of the Borrower, threatened or on file,
with any federal, state or local governmental agencies alleging employment
discrimination or other violations of laws pertaining to such employees, with
respect to which an adverse decision is reasonable likely which would have a
material adverse effect on the condition (financial or otherwise), properties,
assets, operations, results of operations, business or rights of the Company or
any of its Subsidiaries.
4.15 The Borrower's execution and delivery of this Agreement or any
other Document does not directly or indirectly violate or result in a violation
of Section 7 of the Securities and Exchange Act of 1934, as amended, or any
regulations issued pursuant thereto, including, without limitation, regulations
G, U, T and X of the Board of Governors of the Federal Reserve System, and
neither the Borrower nor any of its Subsidiaries owns any "margin stock," within
the meaning of said regulations, or is engaged in the business of extending
credit to others for such purpose, and no part of the proceeds of any borrowing
hereunder will be used to purchase or carry any "margin stock" or to extend
credit to others for the purpose of purchasing or carrying any "margin stock."
4.16 No representation or warranty by the Borrower contained herein
or in any certificate or other document furnished by or on behalf of the
Borrower or its Subsidiaries in connection with the transactions hereunder
contains any untrue statement of material fact or omits to state a material fact
necessary to make such representation or warranty not misleading in any material
respect, as determined by the Bank in its sole discretion, in light of the
circumstances under which it was made.
4.17 Except as indicated in the Financial Statements and, except for
purchase money financing or leasing arrangements used to acquire or lease office
equipment, furniture, furnishings, and similar items, the Borrower has not
encumbered, pledged, mortgaged, granted a security interest in, assigned, sold,
leased or otherwise disposed of a transfer, in whole or in part, any Real
Estate, Accounts, Inventory, Equipment, General Intangibles or other assets or
properties now owned or leased by Borrower or in which Borrower has an interest.
4.18 The Borrower and its Subsidiaries have reviewed the areas
within their business and operations which could be adversely affected by, and
have developed or are developing a program to address on a timely basis, the
"Year 2000 Problem" (that is, the risk that computer applications used by the
Borrower and its Subsidiaries may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date after
December 31, 1999), and have
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<PAGE>
made related appropriate inquiry of material suppliers and vendors. Based on
such review and program, the Borrower believes that the "Year 2000 Problem" will
not have a material adverse effect on the Borrower. From time to time, at the
request of the Bank, the Borrower and its Subsidiaries shall provide to the Bank
such updated information or documentation as is requested regarding the status
of their efforts to address the Year 2000 Problem.
4.19 The Borrower represents, warrants and covenants with and to the
Bank that, notwithstanding any provision of this Agreement, the Documents or the
Capital Z Documents to the contrary, the payment of the principal of (any
premium, if any) and interest on each and all of the Securities are subordinate
and subject in right of payment to the prior payment in full of the Loan and
that payment of the Loan by the Borrower to the Bank is superior to the right of
payment to the Holders (as defined in the Indenture) of the Securities.
4.21 Schedule 1 attached hereto and made a part hereof sets forth
all Senior Debt of the Borrower, as defined and described in the Indenture, and
all Guaranteed Debt, as of the date of this Agreement. The Borrower has not been
notified, nor is the Borrower aware, of any default or failure to perform in
connection with any Senior Debt, or of any circumstances which, given the
passage of time, would or could result in or become such a default. The Borrower
is not aware of any Payment Blockage Notice, as defined and describe in the
Indenture, having been issued.
4.22 Each representation and warranty made by the Borrower to Health
Partners in Sections 4.1 through 4.28, both inclusive, of the Note Purchase
Agreement was true and correct at the time made and, except for changes to
financial information set forth therein that would not otherwise give rise to
any Event of Default under the terms of this Agreement, is true and correct as
of the date of this Agreement.
4.23 All of the representations and warranties set forth in this
Article IV shall survive and continue to be true, complete and correct until all
Obligations of the Borrower hereunder are paid and satisfied in full and this
Agreement shall have been terminated.
ARTICLE V. NEGATIVE COVENANTS
------------------
The Borrower covenants that until all Obligations of Borrower
hereunder are paid and satisfied in full, and the Bank's obligation to make
advances hereunder has terminated, the Borrower will not, directly or
indirectly, without the prior consent in writing of the Bank:
5.01 dispose by sale, assignment, lease, sale leaseback or otherwise
any material portion, as determined by the Bank in its sole discretion, of its
properties or assets (other than obsolete or worn out property or equipment not
used or useful in its business), whether now owned or hereafter acquired and
including, without limitation, any notes, accounts receivable, equipment or
machinery;
5.02 transfer, directly or indirectly, any of its assets or pay out,
directly or indirectly, money or property or provide services or do any other
act, or fail to do any act, which would have the effect of materially and
adversely affecting its ability to perform its obligations hereunder;
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<PAGE>
5.03 own, hold, purchase from or acquire stock, bonds, debentures or
other securities of, or make any capital contribution to any new Subsidiary or
dissolve or liquidate any existing Subsidiary; provided, however, Borrower may
create and contribute capital to new Subsidiaries upon the conditions that (i)
Borrower owns 100% of all of the Stock of each such Subsidiary (except with
respect to such projects involving joint ventures with other parties, provided
the Borrower owns a majority of the Stock of such joint venture, and further
provided the Borrower notifies the Bank of such joint venture arrangement and
the Bank approves the same, which approval shall not be unreasonably withheld or
delayed), and (ii) such Subsidiary is formed for the sole purpose of owning,
operating, managing or developing real estate by such Subsidiary and does not
violate any other provision of this Agreement;
5.04 make any material change in its ownership or financial
structure, make any material change in its management (except on 15 days prior
notice to the Bank), change its name (except on 15 days prior notice to the
Bank), enter into any merger, consolidation, dissolution, liquidation,
reorganization or recapitalization, or reclassification of its stock except for
stock options granted to employees of Borrower pursuant to stock incentive plans
as previously disclosed to the Bank and issuing stock pursuant to such stock
options; provided, however, Borrower may purchase its common stock pursuant to
the stock repurchase program previously disclosed to and to the extent approved
by the Bank, and to hold such common stock as treasury stock or cancel such
common stock; further provided that no proceeds of the Loan may be directly used
to purchase such stock;
5.05 engage in business activities or operations substantially
different from and unrelated to its business activities on the date of this
Agreement;
5.06 directly or indirectly apply any part of the proceeds of the
Loan for any purpose other than as set forth herein;
5.07 directly or indirectly apply any part of the proceeds of the
Loan to the purchasing or carrying of any "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System, or any
regulations, interpretations or rulings thereunder;
5.08 create, incur, remain obligated on or assume any (i) Direct
Debt other than (a) the Loan, (b) Direct Debt disclosed on Schedule 1 attached
hereto or disclosed in the Financial Statements provided to the Bank on or
before the date hereof, (c) debt incurred in the Borrower's Ordinary Course of
Business, provided such debt is not borrowed from or owed to a bank, financial,
lending or similar institution (except for purchase money financing or leasing
arrangements used to acquire or lease office equipment, furniture, furnishings,
and similar items), and which is not prohibited by the other provisions of this
Agreement, or (ii) Guaranteed Debt, whether heretofore, now or hereafter
existing or incurred, except for (a) total Guaranteed Debt in connection with
which the Borrower's maximum obligations do and will not exceed Two Hundred
Million Dollars ($200,000,000.00) in the aggregate (inclusive of the Guaranteed
Debt disclosed on Schedule 1 attached hereto), as determined by the Bank in its
sole and reasonable discretion, provided the Borrower first gives reasonable
advance notice thereof to the Bank and delivers to the Bank copies of all
information and documentation in connection with the proposed Guaranteed Debt
and the Bank confirms, in its sole and reasonable discretion, that the requested
Guaranteed Debt is in fact
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<PAGE>
Guaranteed Debt, (b) environmental indemnities to lenders in connection with
real estate acquisition or development loans made to Subsidiaries of Borrower or
to entities which lease property to a Subsidiary of Borrower or who contract
with a Subsidiary of Borrower to develop or operate the property, upon the
condition that Borrower has procured from a qualified environmental professional
a Phase I and, if necessary, a Phase II environmental audit of each property for
which an environmental indemnity is delivered, which concludes that there is no
presence or likely presence of Hazardous Substances and that there has been no
release or substantial threat of a release of Hazardous Substances in connection
with such property with respect to which remedial action is recommended or
required, or (c) loan guaranties to lenders in connection with nonrecourse loans
made to Subsidiaries of Borrower in connection with real estate acquisitions and
developments by Subsidiaries of Borrower or to entities which lease property to
a Subsidiary of Borrower or who contract with a Subsidiary of Borrower to
develop or operate the property, upon the condition that such guaranties are
limited to the customary "carve-outs" to nonrecourse financing due to such
matters as fraud, misrepresentation, waste, misappropriation of funds and
similar conduct of Borrower or such Subsidiary;
5.09 encumber, pledge, mortgage or grant a security interest in, in
whole or in part, any Real Estate, Accounts, Inventory, Equipment, General
Intangibles or other assets or properties now or hereafter owned or leased by
Borrower or in which Borrower has an interest (except for purchase money
financing or leasing arrangements used to acquire or lease office equipment,
furniture, furnishings, and similar items); provided, however, Borrower may
pledge, on a non-recourse basis to Borrower, Borrower's partnership, membership
or ownership interest in a Subsidiary of Borrower in connection with Debt
incurred by such Subsidiaries to the extent not prohibited by other provisions
of this Agreement;
5.10 enter into, or be a party to, any transaction with any
Affiliate, except in the ordinary course of and pursuant to the reasonable
requirements of its business and upon fair and reasonable terms which are fully
disclosed in writing to the Bank and are no less favorable to such Person than
would be obtained in a comparable arm's length transaction with a person not an
Affiliate;
5.11 change its fiscal year;
5.12 furnish the Bank any certificate or other document that
contains any untrue statement of material fact or that will omit to state a
material fact necessary to make it not misleading in any material respect, as
determined by the Bank in its sole discretion, in light of the circumstances
under which it was furnished;
5.13 directly or indirectly redeem, prepay or purchase the
Securities, or any of them, in whole or in part, or make any payment of
principal, premium or other amount under or pursuant to the Securities, or any
of them, in whole or in part, except that, provided that no Event of Default has
occurred or exists under this Agreement or the Documents, Borrower may make
regularly scheduled payment of interest only pursuant to the terms set forth in
the Securities and the Indenture, subject to Article Thirteen of the Indenture;
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<PAGE>
5.14 incur, assume, take on or otherwise become obligated on any
Senior Debt in addition to the Senior Debt disclosed in Schedule 1, or modify,
amend or otherwise change the terms of any Senior Debt, except to the extent
specifically permitted under Section 5.08 hereof;
5.15 make any payment of principal, interest or premium (whether by
redemption, purchase, retirement, defeasance or otherwise) to the Trustee or any
Holder (as those terms are defined in the Indenture) with respect to the
Securities upon the occurrence and during the pendency of an Event of Default
under this Agreement or the Documents; or
5.16 cause, permit or be a party to any modification, amendment or
other change to the terms of any of the Capital Z Documents or of any other
term, provision, document or instrument involving or relating to the Securities.
ARTICLE VI. AFFIRMATIVE COVENANTS
---------------------
The Borrower covenants that until all Obligations of the Borrower are
paid and satisfied in full, and the Bank's obligation to make advances hereunder
has terminated, the Borrower will:
6.01 furnish and deliver to the Bank:
(A) as soon as practicable, and in any event within 120 days after
the end of each fiscal year: (i) a statement of cash flows of the Borrower for
such year, (ii) an income statement of the Borrower for such year, (iii) a
balance sheet of the Borrower as of the end of such year; all in reasonable
detail, including all footnotes, and audited by Ernst & Young LLP or other
certified public accountants selected by the Borrower and reasonably acceptable
to the Bank and certified by such accountants to have been prepared in
accordance with GAAP, except for any inconsistencies explained in such
certificate, and (iv) a copy of all Form 10-K and 8-K reports required to be
filed with any Governmental Authority;
(B) as soon as practicable, and in any event within 45 days after
the end of each quarter commencing with the quarter ending September 30, 1999,
(i) a statement of cash flows of the Borrower for such quarter and the portion
of the fiscal year then ended, (ii) an income statement of the Borrower for such
quarter and the portion of the fiscal year then ended, (iii) a balance sheet of
the Borrower as of the end of such quarter; all in reasonable detail and
certified by an Authorized Borrower Representative as complete and accurate in
all material respects, fairly presenting the financial condition of the Borrower
and prepared in accordance with GAAP, and (iv) a copy of all Form 10-Q or 8-K
reports required to be filed with any Governmental Authority, and
(C) promptly as received or generated by Borrower, a copy of all
development budgets for projects in which Borrower or any Subsidiary is
involved, and of all certificates and/or other evidence of compliance with any
covenants, obligations and other requirements required to be provided to any
Person or Governmental Authority in connection with any Debt of Borrower or any
Subsidiary of Borrower; and
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<PAGE>
(D) concurrent with year end and quarterly fiscal statements
required to be delivered hereunder, a certificate of an Authorized Borrower
Representative (a) calculating Borrower's compliance (or lack thereof) with the
financial covenants in Section 6.13 hereof, in reasonable detail, and (b)
stating that no Event of Default has occurred and is continuing or if an Event
of Default has occurred and is continuing setting forth a description of such
event and the steps being taken to remedy such event;
(E) with reasonable promptness (i) such other information
materially concerning the business, properties, conditions or operations,
financial or otherwise, of the Borrower, or compliance by the Borrower with any
of the covenants in the Documents, and (b) copies of all documents, instruments
or other agreements pertaining or relating to any Debt of the Borrower as the
Bank may from time to time reasonably request;
6.02 furnish and deliver to Bank:
(A) immediately after the occurrence thereof, notice of any Event
of Default or of any fact, condition or event that with the giving of notice or
passage of time or both, could become an Event of Default, or of the failure by
the Borrower to observe any of its respective undertakings hereunder;
(B) immediately after the occurrence thereof, notice of any default
under any Debt, or under any indenture, mortgage or other agreement relating
thereto for which the Borrower is liable, including any default or Payment
Blockage Notice pursuant to the Indenture or the Capital Z Documents, or of any
fact, condition or event that with the giving of notice or passage of time or
both, could become a default under any Debt, or under any indenture, mortgage or
other agreement relating thereto for which the Borrower is liable, including any
default or Payment Blockage Notice pursuant to the Indenture or the Capital Z
Documents;
(C) immediately after knowledge thereof, notice of any litigation
or proceeding in which the Borrower is a party if an adverse decision therein is
reasonably likely which would require the Borrower to pay more than $1,000,000
or deliver assets the value of which exceeds such sum (whether or not the claim
is considered to be covered by insurance);
(D) immediately after receipt of notice thereof, notice of the
institution of any other suit or proceeding involving the Borrower that would
reasonably likely materially and adversely affect the Borrower's business,
properties or conditions or operations, financial or otherwise, as determined by
the Bank in its sole discretion;
(E) immediately after the occurrence thereof, notice of any other
matter which has resulted in, or would reasonably likely result in, a materially
adverse change in the business, properties, or the conditions or operations,
financial or otherwise, of the Borrower, as determined by the Bank in its sole
discretion; and
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<PAGE>
(F) immediately upon their becoming available, Borrower shall
deliver or cause to be delivered to the Bank a copy of (i) all regular or
special reports or effective registration statements which Borrower, or any
Subsidiary of Borrower, shall file with the U.S. Securities and Exchange
Commission (or any successor thereto) or any securities exchange, (ii) all
reports, proxy statements, financial statements and other information
distributed by Borrower, or any Subsidiary of Borrower, to all of the
stockholders and bondholders of Borrower or to the financial community in
general, and (iii) any written reports submitted to Borrower, or any Subsidiary
of Borrower, by independent accountants in connection with any annual, interim
or special audit of the financial statements of Borrower, or any Subsidiary of
Borrower;
6.03 promptly pay and discharge when due all taxes, assessments and
other governmental charges imposed upon it, or upon its income, profits or
property, and all claims for labor, material or supplies which, if unpaid, might
by law become a lien or charge upon its property; provided, however, that it
shall not be required to pay any tax, assessment, charge or claim if so
permitted by law, so long as the validity thereof shall be contested in good
faith by appropriate proceedings and adequate reserves therefor in accordance
with GAAP shall be maintained on its books;
6.04 maintain its inventory, equipment, real estate and other
properties in good condition and repair (normal wear and tear excepted), pay and
discharge or cause to be paid and discharged when due, the costs of repairs to
or maintenance of the same, and pay or cause to be paid all rental or mortgage
payments due on the same except if it is in good faith contesting by appropriate
proceedings such amounts due and is maintaining adequate reserves for such
liability in accordance with GAAP;
6.05 maintain and comply with leases covering real property, if any,
used by it in accordance with the respective terms thereof so as to prevent any
default thereunder which may result in the exercise or enforcement of any
landlord's or other lien against it or its property; provided, however, that it
may contest any matters in connection with such leases in good faith and by
appropriate proceedings if it makes such payments as are required by law and
maintains adequate reserves on its books in accordance with GAAP in connection
therewith;
6.06 maintain its corporate existence, maintain all rights,
privileges, franchises, permits and approvals necessary or desirable for the
continuation of its business, and comply with the requirements of all material
agreements to which it is a party or by which any of its assets is bound, and
all applicable Laws, including Environmental Laws, and orders of any
Governmental Authority, noncompliance with which would materially adversely
affect its business, properties, condition, financial or otherwise, or ability
to repay its Obligations;
6.07 keep adequate records and books of the accounts and operations
of Borrower, in which complete entries will be made in accordance with its past
practices and consistent with sound business practice, reflecting all of its
financial transactions, and collect its accounts only in the Ordinary Course of
Business;
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<PAGE>
6.08 permit any of the Bank's representatives to examine and inspect
all properties and operations of Borrower, and all books of account, records,
reports and other papers and to make copies and extracts therefrom, and to
discuss the Borrower's affairs, finances and accounts with its officers and
employees or its independent public accountants (and by this provision the
Borrower authorizes said accountants to discuss the finances and affairs of the
Borrower), all at such reasonable times and as often as may be reasonably
requested and upon two (2) Business Days notice by the Bank, the costs and fees
for which Borrower shall pay up to a maximum of $3,000.00 provided no Event of
Default has occurred;
6.09 at its sole cost and expense, keep and maintain all of its
property and assets insured for the full insurable value thereof against loss or
damage by fire, theft, explosions, sprinklers and all other hazards and risks
(i) covered by extended coverage and/or (ii) ordinarily insured against by other
owners or users of properties in similar businesses. All such policies of
insurance shall be in form, with insurers and in such amounts as may be
reasonably satisfactory to the Bank;
6.10 pay when due all of its Debt except if (with respect to Debt
other than the Obligations hereunder) it is in good faith contesting by
appropriate proceedings such amounts due and has maintained adequate reserves
for such liability in accordance with GAAP;
6.11 at the Bank's request, execute and/or deliver to the Bank, at
any time or times hereafter, all Supplemental Documentation that the Bank may
request, in form and substance acceptable to the Bank, and pay the costs of any
recording or filing of the same;
6.12 maintain its principal banking relationship and accounts with
the Bank; and
6.13 at all times, maintain a minimum Debt Service Coverage Ratio of
1.20:1.0 to be tested and determined by the Bank, in its sole discretion, on a
quarterly basis based upon the financial and reporting requirements to be
complied with by Borrower pursuant to this Article VI.
ARTICLE VII. EVENTS OF DEFAULT
-----------------
7.01 The occurrence of any of the following events or acts shall
constitute an Event of Default ("Event of Default"):
(A) The Borrower defaults in the payment of any of its Obligations
or any part thereof when the same shall become due and payable, either by their
terms or as otherwise herein provided.
(B) Any Financial Statement, representation or warranty made by the
Borrower herein or delivered by the Borrower pursuant hereto or otherwise made
in writing by the Borrower in connection with this Agreement proves to have been
false in any material respect as of the date on which it was made or deemed
made, or the Borrower defaults in the performance of any of the covenants,
conditions or agreements contained in this Agreement.
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<PAGE>
(C) The Borrower fails to pay or perform under the terms of any
Debt (including any Debt of Borrower in connection with the Capital Z Documents,
the Securities or any other Senior Debt of Borrower) when due, or suffers to
exist any other event of default giving rise to any obligation under any
agreement binding the Borrower and such failure or event of default continues
beyond any applicable grace period, the effect of which is to cause the Debt or
such obligation to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment.
(D) The Borrower or any of its Subsidiaries files a petition under
any section or chapter of the United States Bankruptcy Code or any similar
federal or state law or regulation, the Borrower or any of its Subsidiaries
admits in writing its inability to pay debts as they mature, the Borrower or any
of its Subsidiaries makes an assignment for the benefit of one or more of its
creditors, the Borrower or any of its Subsidiaries makes an application for the
appointment of a receiver, trustee or custodian for any of its properties or
assets, or the Borrower or any of its Subsidiaries files any case or proceeding
for its reorganization, dissolution or liquidation or for relief from creditors;
provided that any of the foregoing with respect to a Subsidiary will constitute
an Event of Default only if it materially and adversely affects the ability of
Borrower to perform its Obligations hereunder.
(E) The Borrower or any of its Subsidiaries is enjoined, restrained
or in any way prevented by court order from conducting all or any material part
of its business affairs, a petition under any section or chapter of the United
States Bankruptcy Code or any similar federal or state law or regulation is
filed against the Borrower or any of its Subsidiaries, any case or proceeding is
filed against the Borrower or any of its Subsidiaries for its reorganization,
dissolution or liquidation or for creditor relief, or an application is made by
any Person other than the Borrower or any of its Subsidiaries for the
appointment of a receiver, trustee, or custodian for any of its properties or
assets, and such injunction, restraint, petition or application is not dismissed
or stayed within ninety (90) days after the entry or filing thereof; provided
that any of the foregoing with respect to a Subsidiary will constitute an Event
of Default only if it materially and adversely affects the ability of Borrower
to perform its Obligations hereunder.
(F) The Borrower or any of its Subsidiaries conceals or removes or
permits to be concealed or removed any part of its property with intent to
hinder, delay or defraud its creditors or any of them, or makes or suffers to be
made a transfer of any of its property that may be fraudulent under any federal
or state bankruptcy, fraudulent conveyance or similar law.
(G) The Borrower or any of its Subsidiaries permits any of its
properties or assets to be attached, seized, subjected to a writ or distress
warrant, or levied upon, or to come within the possession of any receiver,
trustee, custodian or assignee for the benefit of creditors; provided that any
of the foregoing with respect to a Subsidiary will constitute an Event of
Default only if it materially and adversely affects the ability of Borrower to
perform its Obligations hereunder.
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<PAGE>
(H) The Borrower or any of its Subsidiaries suffers a final
judgment for payment of money in excess of $1,000,000 which shall not be stayed
on appeal and does not discharge the same within a period of thirty (30) days;
provided that any of the foregoing with respect to a Subsidiary will constitute
an Event of Default only if it materially and adversely affects the ability of
Borrower to perform its Obligations hereunder, as determined by the Bank in its
sole discretion.
(I) A judgment creditor of the Borrower or any of its Subsidiaries
obtains possession of any of its properties or assets with an aggregate value in
excess of $1,000,000 by any means, including without limitation, levy,
distraint, replevin or self-help; provided that any of the foregoing with
respect to a Subsidiary will constitute an Event of Default only if it
materially and adversely affects the ability of Borrower to perform its
Obligations hereunder, as determined by the Bank in its sole discretion.
(J) Any authorization, consent, approval, license, exemption,
registration, qualification, designation, declaration, report filing or other
action or undertaking now or hereafter made by or with any Governmental
Authority in connection with the business or operations of Borrower or any of
its Subsidiaries, or with this Agreement or any other Document or any such
action or undertaking now or hereafter necessary to make its business and
operations or this Agreement or any other Document legal, valid, enforceable and
admissible in evidence is not obtained or shall have ceased to be in full force
and effect or shall have been revoked, modified or amended or shall have been
held to be illegal or invalid and, as a result thereof, the ability of the
Borrower to perform its Obligations hereunder is materially and adversely
affected, as determined by the Bank in its sole discretion.
(K) Any permit material to the business, operations or financial
condition of the Borrower or any of its Subsidiaries shall be terminated,
suspended or revoked and, as a result thereof, the ability of the Borrower to
perform its Obligations hereunder is materially and adversely affected, as
determined by the Bank in its sole discretion.
(L) There shall occur any uninsured damage to, or loss, theft, or
destruction of, any of the properties or assets of the Borrower in excess of
$1,000,000 and, as a result thereof, the ability of the Borrower to perform its
Obligations hereunder is materially and adversely affected, as determined by the
Bank in its sole discretion.
(M) A notice of lien or assessment is filed or recorded with
respect to all or any of the Borrower's or any Subsidiary of the Borrower's
assets by the United States, or any department, agency or instrumentality
thereof, or by any state, county, municipal or other governmental agency, or if
any taxes or debts owing at any times hereafter to any one of these becomes a
lien or encumbrance upon any such Person's assets and the same is not released
within thirty (30) days after the same becomes a lien or encumbrance and, as a
result, the ability of the Borrower to perform its obligations hereunder is or
could be materially and adversely affected, as determined by the Bank in its
sole discretion; provided that such Person shall have the right to contest by
appropriate proceedings any such lien, levy or assessment if such Person
provides the Bank with a bond or indemnity satisfactory to the Bank assuring the
payment of such lien, levy or assessment.
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<PAGE>
(N) Any of the following events if such event could have a material
adverse effect on the Borrower as reasonably determined by the Bank: (i) the
existence of a Reportable Event, (ii) the withdrawal of the Borrower or any of
its Subsidiaries, or any ERISA Affiliate from an Employee Benefit Plan during a
plan year in which it was a "substantial employer" as defined in Section
4001(a)(2) of ERISA, (iii) the occurrence of an obligation to provide affected
parties with a written notice of intent to terminate an Employee Benefit Plan in
a distress termination under Section 4041 of ERISA, (iv) the institution by PBGC
of proceedings to terminate any Employee Benefit Plan, (v) any event or
condition which would require the appointment of a trustee to administer an
Employee Benefit Plan, (vi) the withdrawal of the Borrower or any of its
Subsidiaries, or any ERISA Affiliate from a Multi-employer Plan, and (vii) any
event that would give rise to a Lien under Section 302(f) of ERISA.
(O) The occurrence of an "Event of Default," or similar default or
event of default, howsoever defined, under the Indenture, the Note Purchase
Agreement or any of the Capital Z Documents, or the issuance of a Payment
Blockage Notice referred to in the Indenture, that is not cured within
applicable cure periods, if any.
(P) The occurrence of a default or an Event of Default under any of
the other Documents which is not cured within the time, if any, specified
therefor in such other Document.
7.02 Upon the occurrence of any Event of Default, and at any and all
times while any Event of Default shall be continuing, the Bank shall have all
rights and remedies provided by this Agreement or any other Document and by
applicable law and, without limiting the generality of the foregoing, may, at
its option, declare the Loan Commitment to be terminated by giving written
notice thereof to the Borrower, and the Note, upon such declaration, shall
thereupon be and become forthwith, due and payable, without any presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived. The Bank reserves all rights and remedies of the holder of Designated
Senior Debt and Senior Debt pursuant to the Indenture and the Capital Z
Documents. The Bank shall further have the right, without notice to the
Borrower, to set off against and to appropriate and apply to such due and
payable amounts any debt owing to, and any other funds, accounts, deposits or
amounts held in any manner for the account of the Borrower by Lender.
ARTICLE VIII. MISCELLANEOUS
-------------
8.01 No failure or delay on the part of the Bank in exercising any
right, power or remedy hereunder or under any other Documents shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy hereunder or under any other Document. The
remedies herein provided and under any other Document are cumulative and not
exclusive of any remedies provided by law.
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<PAGE>
8.02 This Agreement and the other Documents constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and there are no promises expressed or implied unless contained herein
and therein. No amendment, modification, termination or waiver of any provision
of the Documents nor consent to any departure by the Borrower therefrom shall in
any event be effective unless the same shall be in writing and signed by the
Bank, and then such waiver or consent shall be effective only for the specific
purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in similar
or other circumstances.
8.03 The Borrower will pay any documentary, stamp or similar taxes
payable in respect of the Documents. The Borrower will, on demand, reimburse the
Bank for all expenses, including the reasonable fees and expenses of legal
counsel (including, without limitation, legal assistants) for the Bank, incurred
by the Bank in connection with any amendment or modification of the Documents,
the administration of the Loan and the enforcement of the Documents and the
collection or attempted collection of the Obligations.
8.04 (A) For the purposes of any action or proceeding involving the
Documents or any other agreement or document referred to therein, the Borrower
hereby expressly submits to the jurisdiction of all federal and state courts
located in the State of Illinois and consents that any order, process, notice of
motion or other application to or by any of said courts or a judge thereof may
be served within or without such court's jurisdiction by registered mail or by
personal service, provided a reasonable time for appearance is allowed. To the
extent permitted by applicable law, the Borrower hereby irrevocably waives any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or any other
Document brought in any federal or state court sitting in Cook County, State of
Illinois, and, to the extent permitted by law, hereby further irrevocably waives
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
(B) THE BORROWER AND THE BANK HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE (TO THE EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT EITHER
MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS
AGREEMENT, THE NOTE, ANY OTHER OF THE DOCUMENTS AND AGREES THAT ANY SUCH DISPUTE
SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
8.05 Any notices or consents required or permitted by this Agreement
shall be in writing and shall be delivered in person or sent by certified mail,
postage prepaid, return receipt requested, or delivered by, facsimile, telegram
or telex, or delivered by a nationally recognized overnight express delivery
service, addressed as follows, unless such address is changed by written notice
hereunder:
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<PAGE>
If to the Borrower: Brookdale Living Communities, Inc.
77 West Wacker Drive, Suite 4400
Chicago, Illinois 60601
Attn: Darryl W. Copeland, Jr.
Executive Vice President
FAX: (312) 977-3699
with a copy to: Brookdale Living Communities, Inc.
77 West Wacker Drive, Suite 4400
Chicago, Illinois 60601
Attn: Robert J. Rudnik
General Counsel
FAX: (312) 977-3769
If to the Bank: LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
Attn: David E. Heise
Assistant Vice President
Any such notice or communication shall be deemed to have been given either at
the time of personal delivery, or in the case of overnight express delivery, as
of the Business Day delivery was first attempted, or in the case of facsimile,
telegram or telex, upon receipt or in the case of certified mail, two (2)
Business Days after delivery to the United States Postal Service.
8.06 This Agreement may be executed in any number of counterparts
and by the different parties hereto in separate counterparts, each of which when
so executed and delivered shall be deemed to be an original and all of which
taken together shall constitute but one and the same instrument.
8.07 This Agreement shall become effective when it shall have been
executed and delivered by the Borrower and the Bank, and thereafter shall be
binding upon and inure to the benefit of the Borrower and the Bank and their
respective successors and assigns, except that the Borrower shall not have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the Bank.
8.08 This Agreement has been, and any other Documents will be,
delivered and accepted in and shall be deemed to be, contracts made under and
governed by the laws of the State of Illinois, and for all purposes shall be
construed in accordance with the laws of said State.
8.09 Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction; wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable Law.
- 28 -
<PAGE>
8.10 All covenants, agreements, representations and warranties made
by the Borrower herein and any and all certificates and instruments delivered by
the Borrower in connection herewith shall, notwithstanding any investigation by
the Bank, be deemed material and relied on by the Bank and shall survive the
execution and delivery to the Bank of this Agreement, the Note and any extension
or renewal thereof.
8.11 From time to time, the Borrower will execute and deliver to
Bank such additional documents and will provide such additional information as
the Bank may reasonably require to carry out the terms of this Agreement and be
informed of the Borrower's status and affairs.
8.12 All Exhibits attached to this Agreement shall be deemed
incorporated herein by this reference.
8.13 Whenever under the terms of this Agreement, the time for
performance of a covenant or condition falls upon a day other than a Business
Day, such time for performance shall be extended to the next Business Day.
Unless otherwise stated, all references herein to "days" shall mean calendar
days.
8.14 The Borrower hereby consents to the Bank's participation, sale,
assignment or transfer, at any time or times hereafter of this Agreement or the
Documents, or any portion hereof or thereof, without affecting the liability of
the Borrower hereunder; provided, however, the Bank shall at all times act as
sole agent on behalf of itself and any participant that acquires any interest in
this Agreement or the Documents and shall at all times service the Loan on
behalf of itself and any participant.
- 29 -
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWER:
BROOKDALE LIVING COMMUNITIES, INC.
By: /s/ Darryl W. Copeland, Jr.
--------------------------------------
Print Name: Darryl W. Copeland, Jr.
----------------------------
Title: Executive Vice President
----------------------------
ATTEST:
By: /s/ Robert J. Rudnik
------------------------------
Print Name: Robert J. Rudnik
--------------------
Title: Secretary
--------------------
BANK:
LaSALLE BANK NATIONAL ASSOCIATION
By: /s/ David E. Heise
--------------------------------------
Print Name: David E. Heise
----------------------------
Title: Assistant Vice President
----------------------------
- 30 -
<PAGE>
EXHIBIT A
NOTE
$35,000,000.00 Chicago, Illinois
August 1, 1999
FOR VALUE RECEIVED, BROOKDALE LIVING COMMUNITIES, INC., a Delaware
corporation (the "Maker"), with its principal place of business at 77 West
Wacker Drive, Suite 4400, Chicago, Illinois 60601, hereby promises to pay on the
Maturity Date to the order of LaSALLE BANK NATIONAL ASSOCIATION, a national
banking association (the "Bank"), at its office at 135 South LaSalle Street,
Chicago, Illinois 60603, or such other place as Bank may direct from time to
time, in lawful money of the United States and in available funds, the principal
amount of THIRTY FIVE MILLION DOLLARS ($35,000,000.00), or such lesser amount as
Bank advanced to Maker hereunder which is outstanding as of the Maturity Date,
as defined in that certain Loan Agreement dated the date hereof by and between
Maker and the Bank (the "Loan Agreement").
All advances under this Note shall bear interest in accordance with
and be governed by the terms and provisions of the Loan Agreement. All payments
received from the Maker hereunder shall be applied by the Bank in accordance
with the terms of the Loan Agreement.
The Maker may prepay the outstanding amounts of the Loan from time to
time in whole or in part on any business day without penalty or premium. The
Maker may reborrow any amounts prepaid, provided all conditions to the Bank's
obligation to fund subsequent amounts under the Loan Agreement have been
satisfied.
This Note is issued under the Loan Agreement, and this Note and the
Bank are entitled to all of the benefits, rights and remedies provided for by
the Loan Agreement or referred to therein, to which Loan Agreement reference is
made for a statement thereof. All capitalized terms used herein which are not
defined herein, but which are defined in the Loan Agreement, shall have the
meaning prescribed in the Loan Agreement.
All unpaid amounts owing on this Note or on any other Obligations
under the Loan Agreement or the other Documents immediately shall become due and
payable at the option of the Bank, without notice or demand except as provided
in the Loan Agreement, upon the occurrence of any Event of Default.
Upon the occurrence of any Event of Default, and at any and all times
while any Event of Default shall be continuing, the Maker hereby agrees that the
Bank shall have the right, without notice to the Maker, to set off against and
to appropriate and apply to such due and payable amounts any debt owing to, and
any other funds, accounts, deposits or amounts held in any manner for the
account of the Maker by Bank.
- 1 -
<PAGE>
No clause or provision contained in this Note or any documents related
hereto shall be construed or shall so operate (a) to raise the interest rate set
forth in this Note above the lawful maximum, if any, in effect from time to time
in the applicable jurisdiction for loans to borrowers of the type, in the
amount, for the purposes, and otherwise of the kind contemplated, or (b) to
require the payment or the doing of any act contrary to law, but if any clause
or provision contained shall otherwise so operate to invalidate this Note, in
whole or in part, then (i) such clauses or provisions shall be deemed modified
to the extent necessary to be in compliance with the law, or (ii) to the extent
not possible, shall be deemed void as though not contained and the remainder of
this Note and such document shall remain operative and in full force and effect.
All makers and any endorsers, guarantors, sureties, accommodation
parties and all other persons liable or to become liable for all or any part of
the indebtedness evidenced by this Note, jointly and severally waive, to the
extent permitted by law, except as otherwise provided in the Loan Agreement or
the other Loan Documents, diligence, presentment, protest and demand, and also
notice of protest, of demand, of nonpayment, of dishonor and of maturity and
also recourse or suretyship defenses generally; and they also jointly and
severally hereby consent to any and all renewals, extensions or modifications of
the terms of this Note, including time for payment, and further agree that any
such renewals, extension or modification of the terms of this Note or the
release or substitution of any security for the indebtedness under this Note or
any other indulgences shall not affect the liability of any of the parties for
the indebtedness evidenced by this Note. Any such renewals, extensions or
modifications may be made without notice to any of said parties.
The Maker shall be liable to the Bank for all costs and expenses
incurred in connection with collection, whether by suit or otherwise, of any
amount due under this Note, including, without limitation, reasonable attorneys'
fees, as more fully set forth in the Loan Agreement.
This Note shall be governed by and construed in accordance with the
laws of the State of Illinois.
BROOKDALE LIVING COMMUNITIES, INC.,
a Delaware corporation
By: /s/ Darryl W. Copeland, Jr.
----------------------------------------
Print Name: Darryl W. Copeland, Jr.
------------------------------
Title: Executive Vice President
------------------------------
- 2 -
<PAGE>
SCHEDULE 1
SCHEDULE OF SENIOR DEBT AND GUARANTEED DEBT
-------------------------------------------
<TABLE>
<CAPTION>
Amount Last
Lender/Purpose Amount Drawn at 6/30/99 Draw
- -------------- --------------------------------------------------
<S> <C> <C> <C>
Capital Corporation of America / Heritage at Austin construction loan (A) $ 24,250,000 $ 18,094,376 11-Jun
Capital Corporation of America / Heritage at Southfield construction loan (A) 26,625,000 21,808,151 14-Jun
Guaranty Federal / Meadows of Glen Ellyn construction loan (A) 31,125,000 8,256,314 23-Jun
Guaranty Federal / Heritage at Raleigh construction loan (A) 29,200,000 3,538,009 24-Jun
HRPT Lease Obligation (B)
Brookdale corporate guarantee of Devonshire/Heritage loans (C) 4,000,000
Letters of Credit (issued by LaSalle) for Battery Park and Glen Ellyn 5,370,000
Battery Park (D)
Notes
- -----
(A) Payment guaranties of construction loans. Brookdale Living Communities, Inc. has also issued completion guaranties in
connection with these loans.
(B) Guaranty of lease obligations under a Master Lease of four facilities by a subsidiary from Health and Retirement
Properties Trust.
(C) Guaranty of reimbursement obligations relating to credit enhancements on these bond issues. Maximum exposure of
$4,000,000. Guaranty terminates when the amount in the principal reserve fund reaches $4,000,000.
(D) The construction loan for the Battery Park facility is expected to close in August, 1999. In connection with the
closing, Brookdale Living Communities, Inc. will issue a Payment Guaranty, a Completion Guaranty and an Operating
Deficit Guaranty. The Construction Loan will be for approximately $49,500,000.
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY")
AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY)
STATEMENTS REGARDING COMPUTATION OF RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(In Thousands, Except Ratios)
Predecessor Historical Brookdale Living Communities, Inc.
_____________________________________ __________________________________________
Year ended December 31, January May 7 Year ended December 31,
----------------------- to to -----------------------
1995 1996 May 6, 1997 Dec. 31, 1997 1998 1999
---- ---- ----------- ------------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income (loss) before minority
interest, (provision)/benefit
for income taxes and
extraordinary item ........... $ (1,424) $ 2,365 $ (290) $ (77) $ 10,281 $ 18,007
Interest cost................. 5,626 4,740 3,872 10,153 23,139 33,030
Interest cost (capitalized)... - - - (191) (1,558) (1,595)
Amortization of debt expense.. 878 581 225 846 1,292 1,458
Preferred stock dividends..... - - - - - -
-------- ------- -------- --------- ---------- ----------
Earnings...................... $ 5,080 $ 7,686 $ 3,807 $ 10,731 $ 33,154 $ 50,900
======== ======= ======== ========= ========== ==========
FIXED CHARGES
Interest cost................. $ 5,626 $ 4,740 $ 3,872 $ 10,153 $ 23,139 $ 33,030
Amortization of debt expense.. 878 581 225 846 1,292 1,458
Preferred stock dividends..... - - - - - -
-------- ------- -------- --------- ---------- ----------
Total fixed charges........... $ 6,504 $ 5,321 $ 4,097 $ 10,999 $ 24,431 $ 34,488
======== ======= ======== ========= ========== ==========
Ratio of earnings to combined
fixed charges and preferred
stock dividends .............. - 1.44 - - 1.36 1.48
======== ======= ======== ========= ========== ==========
Excess (deficit) of earnings to
combined fixed charges and
preferred stock dividends...... $ (1,424) $ 2,365 $ (290) $ (268) $ 8,723 $ 16,412
======== ======= ======== ========= ========== ==========
</TABLE>
EXHIBIT 21
Brookdale Living Communities, Inc.
List of Subsidiaries
Direct or Indirect
Subsidiaries Ownership
- ------------ ------------------
BLC Acquisitions, Inc. 100%
BLC of Indiana-OL, LP 100%
BLC of New York Holdings, Inc. 100%
BLC of Texas-II L.P. 100%
BLC of Texas-SL, L.P. 100%
BLC Property, Inc. 100%
Brookdale Holdings, Inc. 100%
Brookdale Living Communities of Arizona, Inc. 100%
Brookdale Living Communities of California, Inc. 100%
Brookdale Living Communities of California-RC, Inc. 100%
Brookdale Living Communities of Connecticut, Inc. 100%
Brookdale Living Communities of Connecticut-WH, Inc. 100%
Brookdale Living Communities of Delaware, Inc. 100%
Brookdale Living Communities of Florida, Inc. 100%
Brookdale Living Communities of Illinois II, Inc. 100%
Brookdale Living Communities of Illinois, Inc. 100%
Brookdale Living Communities of Illinois-DNC, LLC 100%
Brookdale Living Communities of Illinois-GE, Inc. 100%
Brookdale Living Communities of Illinois-HLAL, LLC 100%
Brookdale Living Communities of Illinois-Hoffman Estates, LLC 100%
Brookdale Living Communities of Illinois-Huntley, LLC 100%
Brookdale Living Communities of Illinois-H.V., Inc. 100%
Brookdale Living Communities of Indiana-OL, Inc. 100%
Brookdale Living Communities of Massachusetts-RB, Inc. 100%
Brookdale Living Communities of Michigan, Inc. 100%
Brookdale Living Communities of Minnesota II, Inc. 100%
Brookdale Living Communities of Minnesota, Inc. 100%
Brookdale Living Communities of Missouri-CC, LLC 100%
Brookdale Living Communities of New Jersey, Inc. 100%
Brookdale Living Communities of New Mexico-SF, Inc. 100%
Brookdale Living Communities of New York, Inc. 100%
Brookdale Living Communities of New York-BPC, Inc. 100%
Brookdale Living Communities of New York-CPW, Inc. 100%
Brookdale Living Communities of North Carolina, Inc. 100%
Brookdale Living Communities of Ohio-SP, LLC 100%
Brookdale Living Communities of Pennsylvania-ML, Inc. 100%
Brookdale Living Communities of Texas II, Inc. 100%
Brookdale Living Communities of Texas, Inc. 100%
Brookdale Living Communities of Texas-SL, Inc. 100%
Brookdale Living Communities of Washington, Inc. 100%
Devonshire Nursing Home, Inc. 100%
Madison Senior Care, Inc. 100%
River Oaks Partners 100%
The Ponds of Pembroke, L.P. 100%
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
indicated below of Brookdale Living Communities, Inc. of our report on the
consolidated financial statements indicated below.
Registration Statements
- -----------------------
Form S-8 No. 333-51493
Form S-3 No. 333-53969
Form S-3 No. 333-65843
Form S-8 No. 333-86013
<TABLE>
<CAPTION>
Financial Statements Date of Auditor's Report
-------------------- ------------------------
<S> <C>
Consolidated Financial Statements of Brookdale Living February 24, 2000,
Communities, Inc. as of December 31, 1999 and 1998 and except for Note 17 as
for the years ended December 31, 1999 and 1998 and for the to which the date is
period from May 7, 1997 through December 31, 1997 and the March 13, 2000.
combined statements of operations, changes in partners'
capital (deficit) and cash flows of Predecessor Properties
for the period from January 1, 1997 through May 6, 1997
included in the Annual Report (Form 10-K) of Brookdale
Living Communities, Inc. for the year ended December
31, 1999 dated March 30, 2000.
/s/Ernst & Young LLP
</TABLE>
Chicago, Illinois
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 638
<SECURITIES> 0
<RECEIVABLES> 6,335
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,892
<PP&E> 139,323
<DEPRECIATION> 10,472
<TOTAL-ASSETS> 340,205
<CURRENT-LIABILITIES> 21,809
<BONDS> 198,947
0
0
<COMMON> 116
<OTHER-SE> 96,210
<TOTAL-LIABILITY-AND-EQUITY> 340,205
<SALES> 98,938
<TOTAL-REVENUES> 105,920
<CGS> 52,923
<TOTAL-COSTS> 89,784
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,289
<INCOME-PRETAX> 18,007
<INCOME-TAX> (6,571)
<INCOME-CONTINUING> 11,436
<DISCONTINUED> 0
<EXTRAORDINARY> (311)
<CHANGES> 0
<NET-INCOME> 11,125
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.90
</TABLE>
