UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the Quarterly Period ended June 30, 2000.
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.
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(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)
330 North Wabash Avenue, Suite 1400
Chicago, IL 60611
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(Address of principal (Zip Code)
executive offices)
(312) 977-3700
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, or former
fiscal year, if changed since last report)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 11, 2000, 9,926,549 shares (not including 1,724,800 shares held in
the Company's treasury) of the registrant's Common Stock, $0.01 par value per
share, were outstanding.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
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PART I: FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED). 3
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations for the three months and six months ended June
30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 17
PART II: OTHER INFORMATION 19
ITEM 1. LEGAL PROCEEDINGS. 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 19
ITEM 5. OTHER INFORMATION. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURES 22
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
The information furnished in the accompanying unaudited consolidated
balance sheets, statements of operations, and statements of cash flows reflects
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the aforementioned financial statements for the interim period.
Brookdale Living Communities, Inc. was incorporated on September 4,
1996 and commenced operations upon the completion of its initial public offering
on May 7, 1997. The consolidated financial statements of Brookdale Living
Communities, Inc. and its subsidiaries (the "Company") represent the results of
operations of 24 facilities the Company operated during the six months period
ended June 30, 2000.
The aforementioned financial statements should be read in conjunction
with the notes to the consolidated financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements for the year ended December 31, 1999 included
in the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 30, 2000.
3
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
June 30, 2000 December 31, 1999
------------- -----------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 788 $ 638
Short-term investments................................................. - 12,505
Accounts receivable.................................................... 1,022 1,188
Notes receivable....................................................... 5,546 5,147
Reimbursable development costs......................................... 24,454 10,958
Prepaid expenses and other............................................. 5,249 4,456
------------- -------------
Total current assets............................................. 37,059 34,892
------------- -------------
Property, plant and equipment.......................................... 144,272 139,323
Accumulated depreciation............................................... (12,754) (10,472)
------------- -------------
Property, plant and equipment, net............................... 131,518 128,851
------------- -------------
Property under development............................................. 27,259 13,401
Cash and investments - restricted...................................... 9,229 9,835
Investment certificates - restricted................................... 38,876 35,637
Lease security deposits................................................ 93,101 92,735
Other, net............................................................. 28,361 24,854
------------- -------------
Total assets..................................................... $ 365,403 $ 340,205
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current portion of long-term debt...................................... $ 123 $ 118
Current portion of deferred gain on sale of property................... 806 805
Unsecured line of credit............................................... 16,000 -
Accrued interest payable............................................... 547 413
Accounts payable and accrued expenses.................................. 17,266 12,251
Tenant refundable entrance fees and security deposits.................. 7,463 7,648
Other.................................................................. 605 574
------------- -------------
Total current liabilities........................................ 42,810 21,809
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Long-term debt, less current portion................................... 102,322 98,947
Convertible subordinated notes......................................... 100,000 100,000
Deferred lease liability............................................... 2,584 2,885
Deferred gain on sale of property, less current portion................ 14,908 15,311
Deferred income taxes.................................................. 7,357 4,927
------------- -------------
Total liabilities................................................ 269,981 243,879
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STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 20,000 shares authorized, none
issued............................................................. - -
Common stock, $.01 par value, 75,000 shares authorized, 11,651 and
11,575 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively.................................... 116 116
Additional paid-in-capital............................................. 95,056 94,134
Accumulated earnings................................................... 22,605 18,224
Treasury stock, 1,725 and 1,266 common shares, respectively, at cost... (22,355) (16,148)
------------- -------------
Total stockholders' equity....................................... 95,422 96,326
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Total liabilities and stockholders' equity....................... $ 365,403 $ 340,205
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
----------------------------- -------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Resident fees............................................. $ 27,291 $ 24,410 $ 54,726 $ 48,188
Development fees.......................................... 1,638 1,635 3,284 3,301
Management fees........................................... 184 72 391 145
----------- --------- --------- ---------
Total revenue...................................... 29,113 26,117 58,401 51,634
----------- --------- --------- ---------
EXPENSES
Facility operating........................................ 15,832 12,896 30,722 25,688
General and administrative................................ 1,954 1,277 3,449 2,435
Lease expense............................................. 6,970 6,358 13,782 12,646
Depreciation and amortization............................. 1,824 1,320 3,513 2,682
Merger costs.............................................. 684 - 684 -
Write-off of deferred financing costs..................... - 273 - 273
----------- --------- --------- ---------
Total operating expenses........................... 27,264 22,124 52,150 43,724
----------- --------- --------- ---------
Income from operations............................. 1,849 3,993 6,251 7,910
Interest income........................................... 2,602 1,943 5,287 3,489
Interest expense.......................................... (2,468) (1,788) (4,685) (2,915)
----------- --------- --------- ---------
Income before income tax expense................... 1,983 4,148 6,853 8,484
Income tax expense........................................ (690) (1,508) (2,472) (3,087)
----------- --------- --------- ---------
Net income......................................... $ 1,293 $ 2,640 $ 4,381 $ 5,397
=========== ========= ========= =========
Basic earnings per common share........................... $ 0.13 $ 0.23 $ 0.44 $ 0.47
=========== ========= ========= =========
Weighted average shares used for computing
basic earnings per common share....................... 9,887 11,572 9,935 11,572
=========== ========= ========= =========
Diluted earnings per common share......................... $ 0.13 $ 0.22 $ 0.41 $ 0.45
=========== ========= ========= =========
Weighted average shares used for computing
diluted earnings per common share..................... 9,921 14,499 15,452 13,120
=========== ========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
5
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months ended June 30,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................. $ 4,381 $ 5,397
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................................ 3,513 2,682
Write-off of deferred financing costs................................ - 273
Deferred income taxes................................................ 2,430 2,787
Change in deferred lease liability................................... (301) 227
Deferred gain on sale of property.................................... (403) (402)
Changes in:
Accounts receivable............................................... 166 (387)
Prepaid expenses and other........................................ (4,451) (6,213)
Accrued interest payable.......................................... 134 (595)
Accounts payable and accrued expenses and other................... 5,046 2,579
Tenant refundable entrance fees and security deposits............. (185) 128
------------- --------------
Net cash provided by operating activities..................... 10,330 6,476
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CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in lease security deposits and acquisitions.................. (366) (11,295)
Decrease (increase) in cash and investments - restricted................ 606 (579)
(Increase) in investment certificates - restricted...................... (3,239) (4,851)
Proceeds from sale of property under development, net................... - 300
Property under development, net of related payables .................... (13,858) (8,048)
(Increase) decrease in notes receivable................................. (399) 1,903
Purchases of short-term investments..................................... (19,002) (55,000)
Sales of short-term investments......................................... 31,507 -
Additions to property, plant and equipment and
reimbursable development costs, net of related
accounts payable..................................................... (19,008) (4,976)
------------- --------------
Net cash (used in) investing activities....................... (23,759) (82,546)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt............................................. (58) (3,151)
Proceeds from long-term debt............................................ 3,438 -
Proceeds from unsecured lines of credit................................. 29,000 31,933
Repayment of unsecured lines of credit.................................. (13,000) (42,930)
Proceeds from issuance of convertible subordinated notes, net of costs.. - 94,294
Increase in letter of credit deposits, net.............................. - 13,919
Payment of financing costs.............................................. (516) (1,500)
Proceeds from issuance of common stock.................................. 922 -
Purchases of treasury stock............................................. (6,207) -
------------- --------------
Net cash provided by financing activities..................... 13,579 92,565
------------- --------------
Net increase in cash and cash equivalents..................... 150 16,495
Cash and cash equivalents at beginning of period.............. 638 1,065
------------- --------------
Cash and cash equivalents at end of period.................... $ 788 $ 17,560
============= ==============
See accompanying notes to consolidated financial statements.
</TABLE>
6
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months ended June 30,
----------------------------------
2000 1999
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Supplemental Disclosure of Cash Flow Information:
Interest paid, net of amounts capitalized............................. $ 4,609 $ 3,510
============= =============
Income taxes paid..................................................... $ 90 $ 486
============= =============
Supplemental Schedule of Noncash Investing
and Financing Activities:
In connection with property acquisitions and net lease transactions,
assets acquired and liabilities assumed were as follows:
Fair value of assets acquired.................................... $ - $ 11,404
Less - cash consideration paid................................... - 10,911
------------- ---------------
Liabilities assumed.............................................. $ - $ 493
============= ===============
See accompanying notes to consolidated financial statements.
</TABLE>
7
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, UNITS AND SQUARE FOOT AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
Brookdale Living Communities, Inc. was incorporated in Delaware on
September 4, 1996 and commenced operations upon the completion of the initial
public offering of its common stock on May 7, 1997.
The consolidated financial statements of Brookdale Living Communities, Inc.
and its subsidiaries (the "Company") include the properties owned or leased by
the Company. The Company operates in the senior independent and assisted living
segment. The properties owned, leased or managed by the Company or under
construction as of June 30, 2000 are located throughout the United States as
indicated on the following table:
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Property Name Date Owned or Leased Location
------------- -------------------- --------
Owned Facilities:
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The Heritage of Des Plaines May 7, 1997 Des Plaines, IL
The Devonshire May 7, 1997 Lisle, IL
Hawthorn Lakes (1) May 7, 1997 Vernon Hills, IL
Edina Park Plaza May 7, 1997 Edina, MN
Leased Facilities:
------------------
The Hallmark May 7, 1997 Chicago, IL
The Springs of East Mesa May 7, 1997 Mesa, AZ
The Gables at Brighton May 7, 1997 Rochester, NY
The 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
The Brendenwood Retirement Community December 22, 1997 Voorhees, NJ
Kenwood of Lake View (formerly Harbor Village) March 6, 1998 Chicago, IL
The Atrium of San Jose May 12, 1998 San Jose, CA
Chatfield July 2, 1998 West Hartford, CT
Ponce de Leon October 21, 1998 Santa Fe, NM
Woodside Terrace December 22, 1998 Redwood City, CA
River Bay Club January 19, 1999 Quincy, MA
Berkshire of Castleton (formerly Oakleaf Village) September 14, 1999 Indianapolis, IN
Devonshire (formerly Benchmark) of Hoffman Estates December 22, 1999 Hoffman Estates, IL
Managed Facilities:
-------------------
The Island on Lake Travis Lago Vista, TX
The Kenwood Minneapolis, MN
Heritage at Gaines Ranch (2) Austin, TX
Heritage at Southfield (2) Southfield, MI
The Meadows of Glen Ellyn (2) Glen Ellyn, IL
Development Projects Under Construction (3):
--------------------------------------------
Raleigh, North Carolina
New York (Battery Park City), New York
Pittsburgh (Mount Lebanon), Pennsylvania
Columbus, Ohio
Creve Coeur (St. Louis), Missouri
(1) The Willows, a 54-unit assisted living addition to the Hawthorn Lakes facility, commenced operations in July 1999.
(2) These projects were developed by the Company and are being managed by the Company for third party owners.
(3) The Company is developing these projects for third party owners.
</TABLE>
8
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for such interim periods are not necessarily
indicative of the results that may be expected for a full fiscal year. For
further information regarding significant accounting policies, please refer to
the financial statements and footnotes thereto for the period ended December 31,
1999 included in the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission (the "SEC") on March 30, 2000.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Brookdale Living Communities, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Development Fees
Development fees related to development activities for projects owned by
third parties are earned over the term of the development. Such fees are
recognized as revenues as the development services are provided to the owner
during the pre-construction and construction periods.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current financial statement presentation.
3. RECENT DEVELOPMENTS
On May 18, 2000, The Prime Group, Inc. ("Prime"), certain of its affiliates
and Michael W. Reschke, the former Chairman of the Board of the Company and the
principal shareholder of Prime, sold 4,004 shares of the Company's common stock,
representing approximately 40.3% of the Company's outstanding shares, in a
privately negotiated transaction to an affiliate of Fortress Registered
Investment Trust ("Fortress"), for an aggregate purchase price of $60,065, or
$15 per share. In connection with and pursuant to the terms of the sale, Mr.
Reschke resigned from the Company's board of directors, (the "Company Board")
and from his executive office of the Company, and two of Fortress' designees
were elected to the Company Board to fill the vacancy created by Mr. Reschke's
resignation and to fill the then existing vacancy on the Company Board.
The transaction was approved by the Committee of Independent Directors of
the Company Board (the "Independent Committee") based on, among other things,
the execution of a standstill agreement by Fortress. The standstill agreement
provides that Fortress may not acquire during the term of the standstill
agreement additional Company common stock or engage in other activity designed
to acquire control of the Company, except in the context of a cash tender offer
for all of the Company's shares at a price not less than $15 per share, which
could not occur without the Company Board's consent prior to July 5, 2000. The
standstill agreement terminates on May 14, 2002, but may terminate earlier if
Fortress acquires a majority of the Company's common stock pursuant to a cash
tender offer for all of the Company's shares at a price not less than $15 per
share, which tender offer could not be commenced prior to July 5, 2000 without
the Company Board's consent. (See Note 7)
On April 24, 2000, the Company obtained a $9,000 construction loan, of
which $3,438 was drawn at June 30, 2000, secured by the 82-unit skilled nursing
addition to The Devonshire facility located in Lisle, Illinois. The loan bears
interest at the prime rate minus one-half percent, payable in monthly
installments of interest only, and matures on March 31, 2003. Brookdale Living
Communities, Inc. has a guaranteed reimbursement obligation under the loan until
the skilled nursing facility meets certain performance requirements.
On June 23, 2000, the Company sold certain development rights to a site in
Alexandria, Virginia to an unaffiliated third party. The sales price was $614,
of which $215 was received in cash and $399 was received by the delivery of a
promissory note bearing interest at 12%. The Company will develop the site
pursuant to a development agreement with such unaffiliated third party.
9
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
On September 8, 1999, the Company Board authorized the Company to purchase
up to 2,000 shares of its common stock. Total shares repurchased by the Company
as of June 30, 2000 were 1,725 shares, of which 1,600 shares were repurchased
pursuant to the Company Board authorized program.
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 being hedged is $53,500, and the approximate fair value of
such hedging contracts was $739 at June 30, 2000.
In connection with the replacement credit enhancements obtained to secure
the payment of principal and interest on the $65,000 of tax-exempt bonds secured
by The Devonshire and The Heritage of Des Plaines and the $15,040 of tax exempt
bonds secured by Edina Park Plaza, the Company purchased $65,000 and $15,040 of
interest rate caps, with a strike price of 6.35% and 6.58%, a fair value of $96
and $25 at June 30, 2000 and an expiration date of June 1, 2004 and December 1,
2004, respectively. The Company's reimbursement obligations are non-recourse
obligations secured by mortgages on the facilities; provided, however, Brookdale
Living Communities, Inc. has a guaranteed reimbursement obligation for The
Devonshire and The Heritage of Des Plaines facilities which is limited to
$4,000.
4. INCOME TAXES
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income tax expense principally
as a result of non-taxable amortization of the deferred gain on sale of a
property and state income taxes.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per common share $ 1,293 $ 2,640 $ 4,381 $ 5,397
Interest expense on convertible
subordinated notes, net of tax - 480 1,883 480
----------- --------- --------- ---------
Numerator for diluted earnings per share $ 1,293 $ 3,120 $ 6,264 $ 5,877
=========== ========= ========= =========
Denominator:
Denominator for basic earnings per common share -
weighted-average shares 9,887 11,572 9,935 11,572
Effect of dilutive securities:
Employee stock options 34 97 38 125
Warrants - - - -
Convertible subordinated notes - 2,830 5,479 1,423
----------- --------- --------- ---------
Denominator for diluted earnings per common
share-adjusted weighted-average shares
and assumed conversions 9,921 14,499 15,452 13,120
=========== ========= ========= =========
Basic earnings per common share $ 0.13 $ 0.23 $ 0.44 $ 0.47
=========== ========= ========= =========
Diluted earnings per common share $ 0.13 $ 0.22 $ 0.41 $ 0.45
=========== ========= ========= =========
</TABLE>
Common shares issuable upon the conversion of the convertible subordinated
notes have been excluded from the computation for the three months ended June
30, 2000, because the effect of their inclusion would be anti-dilutive.
6. PRO FORMA INFORMATION
The following unaudited pro forma condensed and consolidated statements of
operations are not necessarily indicative of what the actual results of
operations of the Company would have been assuming the Company had leased all of
the Leased Facilities, issued 11,651 shares, purchased 1,725 shares of treasury
stock and issued $100,000 of 5.5% convertible subordinated notes at the
beginning of each period presented, nor do they purport to represent the results
of operations of the Company for future periods.
10
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIAIRES
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
------------------------- --------------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue $ 58,401 $ 56,591 $ 29,113 $ 28,748
Net income 4,381 5,522 1,293 2,582
Basic earnings per share 0.44 0.56 0.13 0.26
Diluted earnings per share 0.34 0.41 0.13 0.19
</TABLE>
The pro forma information does not include interest income on available
cash from the proceeds of the 5.5% convertible subordinated notes. Also, common
shares issuable upon the conversion of the convertible subordinated notes have
been excluded from the computation for the three months ended June 30, 2000,
because the effect of their inclusion would be anti-dilutive.
7. SUBSEQUENT EVENTS
On July 26, 2000, the Company signed a definitive agreement with an
affiliate of Senior Housing Properties Trust to purchase four facilities that
the Company currently leases and operates pursuant to a master lease agreement
for $123,000. The facilities consist of The Hallmark, located in Chicago,
Illinois, The Springs of East Mesa, located in Mesa, Arizona, The Gables of
Brighton, located in Brighton, New York, and Park Place, located in Spokane,
Washington. On July 31, 2000, the Company made a $12,300 earnest money escrow
deposit, creditable against the purchase price. The purchase must be completed
by October 31, 2000.
On July 26, 2000, the Company, Fortress, Fortress Brookdale Acquisition
LLC, a Delaware limited liability company ("Purchaser"), owned by Fortress,
Health Partners, a Bermuda exempted partnership ("Health Partners") and certain
of their respective affiliates, and FBZ Acquisition Corp., a Delaware
Corporation and wholly-owned subsidiary of Purchaser, (Acquisition Sub"), signed
a definitive merger agreement, which provides that Purchaser will commence a
cash tender offer for all of the Company's outstanding shares of common stock
not already owned by Purchaser for a net purchase price of $15.25 per share.
Health Partners also agreed to contribute to Purchaser its $100,000 5.5%
convertible subordinated note due 2009 issued by the Company, which is
convertible into 5,479 shares of the Company's common stock.
The all-cash transaction, which is structured as a $15.25 per share cash
tender offer followed by a second-step merger of the Company with Acquisition
Sub, is valued at approximately $91,000, excluding shares already owned by
Purchaser. The tender offer commenced on August 1, 2000 and will conclude on
September 5, 2000, unless extended. The Company has approximately 9,927 shares
of common stock outstanding, including approximately 4,004 shares owned by
Purchaser. The Company Board, acting upon the unanimous recommendation of the
Independent Committee, has recommended that the stockholders of the Company
(other than Purchaser and its affiliates) tender their shares pursuant to the
tender offer. The Independent Committee and the Company Board received an
opinion from Merrill Lynch, Pierce, Fenner & Smith Incorporated, the Independent
Committee's financial advisor, to the effect that the $15.25 per share price in
the tender offer and the merger is fair to the stockholders of the Company
(other than Purchaser and its affiliates) from a financial point of view.
The tender offer and merger will be subject to certain customary
conditions; however, the tender offer is not subject to a financing condition or
a condition that any minimum number of shares be tendered. In addition, the
waiting period under the Hart-Scott-Rodino Act was satisfied in connection with
Purchaser's initial purchase of the Company's common stock in May 2000.
Purchaser will be paid an expense reimbursement payment of $750 in the
event that the Independent Committee receives a higher offer from a third party
and accepts that offer pursuant to the exercise of its fiduciary duties. Other
than the expense reimbursement payment, no other "break-up" or "commitment" fee
would be payable in such event.
For more information concerning the tender offer and the merger, refer to
the Company's Solicitation/Recommendation Statement on Schedule 14D-9 and
Purchaser's Tender Offer Statement on Schedule TO, in each case, as amended and
initially filed with the SEC on August 1, 2000.
In 1998, the Company established a $100,000 credit facility with The
Capital Company of America LLC (the successor-in-interest to Nomura Asset
Capital Corporation) (the "Lender") pursuant to which the Lender agreed 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, both of which opened in August 1999. On August 4, 2000, the Company
and the Lender amended the credit facility and the loans made thereunder. In
general, the amendment provides a $26,000 construction loan to fund the
Pittsburgh (Mount Lebanon), Pennsylvania development project being developed by
the Company for a third party, no further obligation of the Lender to fund under
the credit facility, 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.
11
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
On August 9, 2000, the Company agreed to increase its line of credit with
LaSalle Bank National Association from $35,000 to $45,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS AND SHARE AMOUNTS IN THOUSANDS).
The following discussion is based on and should be read in conjunction with
the Consolidated Financial Statements of the Company as of June 30, 2000 and
December 31, 1999 and for the six months and three months ended June 30, 2000
and 1999, including the related notes, and other information appearing elsewhere
in this Form 10-Q. Historical results and any apparent percentage relationships
with respect thereto are not necessarily indicative of future operations.
CAUTIONARY STATEMENTS
This quarterly report on Form 10-Q 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:
- general economic conditions in the markets in which the Company
operates;
- competitive pressures within the industry or the markets in which the
Company operates;
- the successful completion of the acquisition of facilities by the
Company, the successful completion of development activities, the
successful integration of newly acquired, leased or developed
facilities with the operations of the Company's existing facilities,
fluctuations in operating results or occupancy levels in the markets
in which the Company competes, or unanticipated changes in expenses or
capital expenditures;
- the effect of future legislation or regulatory changes on the
Company's operations; and
- other factors described from time to time in the Company's filings
with the Securities and Exchange Commission (the "SEC"), including
this Form 10-Q and the Company's 1999 Annual Report on Form 10-K.
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.
OVERVIEW
The Company provides independent and assisted living services to seniors
through its owned, leased or managed facilities. As of June 30, 2000, the
Company operated 24 senior independent and assisted living facilities containing
a total of approximately 5,328 units. Four facilities are owned by the Company,
15 facilities are leased by the Company and 5 facilities 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 residents to age-in-place and
thereby maintain their stay 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 revenues from resident fees, development fees and
management fees. Resident fees consist of charges for leasing units, providing
basic care services and, in certain instances, providing supplemental care
services to residents. Basic care services generally include meals, housekeeping
services within the resident units, social and recreational activities,
scheduled transportation to medical centers and shopping, security, emergency
call response, and access to on-site medical education and wellness programs. In
addition to basic care services, the Company offers custom tailored supplemental
care services for residents who desire or need such services. Optional
supplemental care services include check-in services and escort and companion
services, and, 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, bathing, eating and medication administration or
reminders. The Company may expand its supplemental service offerings, as
permitted by applicable state licensing requirements, in order to capture
incremental revenue and enable its residents to remain in its facilities longer.
Resident fees typically are paid monthly by residents, their families or other
responsible parties. As of June 30, 2000, over 99% of the Company's revenue was
derived from private pay sources.
The Company derives additional revenue from development fees associated
with developing senior independent and assisted living facilities for
unaffiliated third parties and management fees for managing senior independent
and assisted living facilities
12
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
pursuant to management contracts. Management fees typically range from 3.0% to
5.0% of a managed facility's total gross revenues. Fees are recognized as
revenues when services are rendered.
The Company classifies its operating expenses into the following
categories: (i) facility operating expenses, which include facility personnel
payroll and related costs, food, marketing, other direct facility expenses and
real estate taxes; (ii) general and administrative expenses, which primarily
include corporate and other overhead costs; (iii) lease expenses; and (iv)
depreciation and amortization.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999
For the six months ended June 30, 2000, results reflect the operations of
the Company's 24 facilities. For the six months ended June 30, 1999, results
reflect the operations of 19 facilities.
Revenue. Total revenue increased by $6,767, or 13.1%, to $58,401 for the
six months ended June 30, 2000, when compared to the six months ended June 30,
1999. Resident fees increased by $6,538, or 13.6%, to $54,726. Of the increase
in total revenue, approximately $1,727 (or a "same store" increase of 3.8%)
reflects an increase in resident fees at the properties that have been operated
during both periods, which resulted primarily from increases in monthly charges
under residency agreements. Approximately $4,811 of such increase reflects
revenue from facilities first leased and managed after June 30, 1999. The
remaining $229 of the total revenue increase reflects increased revenue from
management fees associated with projects being managed by the Company for
third party owners.
Operating Expenses. Total operating expenses increased by $8,426, or 19.3%,
to $52,150 for the six months ended June 30, 2000, when compared to the six
months ended June 30, 1999. Facility operating expenses increased by $5,034, or
19.6%, to $30,722 primarily due to the expenses associated with the facilities
first leased after June 30, 1999.
General and administrative expenses increased by $1,014, or 41.6%, for the
six months ended June 30, 2000, when compared to six months ended June 30, 1999,
primarily due to increased personnel costs in the corporate office and increased
costs associated with the Company's branding and marketing efforts.
Lease expense increased by $1,136, or 9.0%, to $13,782 for the six months
ended June 30, 2000, when compared to the six months ended June 30, 1999,
primarily due to the lease expense associated with the facilities first leased
after June 30, 1999. Depreciation and amortization increased by $831, or 31.0%,
to $3,513 for the six months ended June 30, 2000, when compared to the six
months ended June 30, 1999. This increase primarily reflects the depreciation of
additional furniture, fixtures and equipment at the corporate office and
improvements at the facilities.
During the six months ended June 30, 1999, the Company wrote-off $273 of
deferred financing costs in connection with the replacement credit enhancement
for the $65,000 of tax-exempt bonds secured by The Devonshire and The Heritage
of Des Plaines facilities.
During the six months ended June 30, 2000, the Company incurred $684 of
professional fees in connection with the acquisition by an affiliate of Fortress
Registered Investment Trust ("Fortress") of the Company's common stock owned by
The Prime Group, Inc. ("Prime"), certain of its affiliates and Michael W.
Reschke, the former Chairman of the Board of the Company and the principal
shareholder of Prime, in May 2000.
Interest income increased by $1,798, or 51.5%, to $5,287 for the six months
ended June 30, 2000, when compared to the six months ended June 30, 1999, due to
the investment of the net proceeds from the issuance of $100,000 of 5.5%
convertible subordinated notes due 2009 in May 1999 and an increase in various
deposits and restricted investments.
Interest expense increased $1,770, or 60.7%, to $4,685 for the six months
ended June 30, 2000, when compared to the six months ended June 30, 1999, due to
increased borrowings under the line of credit and the issuance of $100,000 of
5.5% convertible subordinated notes due 2009 in May 1999.
Net Income. For the six months ended June 30, 2000, the Company generated
net income of approximately $4,381, as compared to a net income of $5,397 for
the six months ended June 30, 1999, due to the changes in revenue and expenses
described above.
13
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999
For the three months ended June 30, 2000, results reflect the operations of
the Company's 24 facilities. For the three months ended June 30, 1999, results
reflect the operations of 19 facilities.
Revenue. Total revenue increased by $2,996, or 11.5%, to $29,113 for the
three months ended June 30, 2000, when compared to the three months ended June
30, 1999. Resident fees increased by $2,881, or 11.8%, to $27,291. Of the
increase in total revenue, $580 (or a "same store" increase of 2.4%) reflects an
increase in resident fees at the facilities that have been operated during both
periods, which resulted primarily from increases in monthly charges under
residency agreements. Approximately $2,300 of such increase reflects revenue
from facilities first leased after June 30, 1999. The remaining $116 of the
total revenue increase reflects increased revenue from development fees and
management fees for facilities being developed and managed by the Company for
third-party owners.
Operating Expenses. Total operating expenses increased by $5,140, or 23.2%,
to $27,264 for the three months ended June 30, 2000, when compared to the three
months ended June 30, 1999. Facility operating expenses increased by $2,936, or
22.8%, to $15,832, primarily due to the expenses associated with the facilities
first leased after June 30, 1999.
General and administrative expense increased by $677, or 53.0%, to $1,954
for the three months ended June 30, 2000, when compared to the three months
ended June 30, 1999, due to increased personnel costs at the corporate office
and increased costs associated with the Company's branding and marketing
efforts.
Lease expense increased by $612, or 9.6%, to $6,970 for the three months
ended June 30, 2000, when compared to the three months ended June 30, 1999,
primarily due to the lease expense associated with the facilities first leased
after June 30, 1999. Depreciation and amortization increased by $504, or 38.2%,
to $1,824 for the three months ended June 30, 2000, when compared to the three
months ended June 30, 1999. This increase primarily reflects the depreciation of
additional furniture, fixtures and equipment at the corporate office and
improvements at the facilities.
During the three months ended June 30, 1999, the Company wrote-off $273 of
deferred financing costs in connection with the replacement credit enhancement
for the $65,000 of tax exempt bonds secured by The Devonshire and The Heritage
of Des Plaines facilities.
During the three months ended June 30, 2000, the Company incurred $684 of
professional fees in connection with the acquisition by an affiliate of Fortress
of the Company's common stock owned by Prime, certain of its affiliates and
Michael W. Reschke, the former Chairman of the Board of the Company and the
principal shareholder of Prime, in May 2000.
Interest income increased by $659, or 33.9%, to $2,602 for the three months
ended June 30, 2000, when compared to the three months ended June 30, 1999, due
to the investment of the net proceeds from the issuance of $100,000 of 5.5%
convertible subordinated notes due 2009 in May 1999 and an increase in lease
security deposits and investment certificates-restricted.
Interest expense increased by $680, or 38.0%, to $2,468 for the three
months ended June 30, 2000, when compared to the three months ended June 30,
1999, due to the issuance of $100,000 of 5.5% convertible subordinated notes due
2009 and higher interest expense, partially offset by a decrease in borrowings
under the line of credit.
Net Income. For the three months ended June 30, 2000, the Company generated
net income of $1,293, as compared to a net income of $2,640 for the three months
ended June 30, 1999, due to the changes in revenue and expenses described above.
LIQUIDITY AND CAPITAL RESOURCES
Since the commencement of operations by 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 June 30, 2000, the Company had $788 in cash and cash equivalents.
Cash and cash equivalents (which does not include cash and investments -
restricted of $9,229, investment certificates - restricted of $38,876 and lease
security deposits of $93,101) increased by $150 to $788 at June 30, 2000, as
compared to December 31, 1999, primarily due to cash generated from operating
activities, increases in lease security deposits, investment certificates -
restricted, and the line of credit, offset by an increase in property under
development, reimbursable development costs and purchase of treasury stock.
14
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
Net cash provided by operating activities for the six months ended June 30,
2000 totaled $10,330 as a result of increased facility operations before
depreciation and amortization and the commencement of the lease of the Berkshire
of Castleton and Devonshire of Hoffman Estates facilities first leased on
September 14, 1999 and December 22, 1999, respectively.
Net cash used in investing activities totaled $23,759 for the six months
ended June 30, 2000. Investing activities included increased lease security
deposits of $366, investment certificates - restricted of $3,239, notes
receivable of $399, cash received from cash and investments - restricted of
$606, and the net sale of short term investments of $12,505, offset by cash paid
for property under development of $13,858 and an increase in additions to
property, plant and equipment and reimbursable development costs of $19,008.
Net cash provided by financing activities was $13,579 for the six months
ended June 30, 2000. Financing activities included proceeds from long-term debt
of $3,438, net proceeds from an unsecured line of credit of $16,000 and proceeds
from the issuance of common stock of $922, offset by payments of $6,207 to
purchase 459 shares of treasury stock and other net uses of $574.
COMPANY INDEBTEDNESS
As of June 30, 2000 and December 31, 1999, the Company's debt was $218,445
and $199,065, respectively. The increase is primarily attributable to borrowings
under the line of credit and proceeds from long-term debt offset by principal
payments on a mortgage note. As of June 30, 2000 and December 31, 1999, the
Company had $89,478 and $86,040, respectively, of variable rate long-term
indebtedness, of which $80,040 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 4.8% and 5.5% at June 30, 2000 and
December 31, 1999, respectively (the average interest rate was 4.1% and 3.4%,
for the period ended June 30, 2000 and the year ended December 31, 1999,
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, which it agreed to increase to $45,000 on August 9, 2000, and
has an effective "shelf" registration statement that originally provided the
Company the ability to 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 under the shelf registration
statement. 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 on behalf of third party owners 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 June 30, 2000, the Company had 8 sites under development for
third parties for senior independent and assisted living facilities, 5 of which
were under construction. The Company's estimated capital expenditures related to
sites under development at June 30, 2000 are approximately $11,000 to $13,000.
Capital expenditures related to the Company's existing facilities currently
under construction are estimated to be approximately $5,000 to $6,000 for the
remainder of 2000.
In 1998, the Company established a $100,000 credit facility with The
Capital Company of America LLC (the successor-in-interest to Nomura Asset
Capital Corporation) (the "Lender") pursuant to which the Lender agreed 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, both of which opened in August 1999. On August 4, 2000, the Company
and the Lender amended the credit facility and the loans made thereunder. In
general, the amendment provides a $26,000 construction loan for the funding of
the Pittsburgh (Mount Lebanon), Pennsylvania development project being developed
by the Company for a third party, no further obligation of the Lender to fund
under the credit facility, 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.
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, the ability to obtain
suitable third-party financing, 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. The failure of the Company to adequately
address any of these factors may have a material adverse effect on the Company's
business, financial condition, revenues and earnings.
15
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
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.
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 programs
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 ability of the Company to meet its growth and business plans and
on the Company's financial condition and result 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 any 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-profit organizations, 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, acquire or 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, management fees from facilities managed by the Company
for third parties and development fees from facilities developed by the Company
for third parties are the Company's 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 residency 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, demand or other factors. Any such increase would
be subject to market and competitive conditions. The Company believes, however,
that the ability to adjust the monthly fees payable under the residency
agreements on an annual basis serves to reduce the risk to the Company of the
adverse effect of inflation. In addition, employee compensation expense is a
principal cost element of facility operations and is also dependent upon local
market conditions. There can be no assurance that resident fees will increase or
that costs will not increase due to inflation or other causes. In addition, at
June 30, 2000, approximately $89,478 in principal amount of the Company's
indebtedness bore interest at a floating rate. 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 June 30, 2000, the Company had capitalized approximately $5,296
of cost incurred in 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.
16
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
OTHER MATTERS
On July 26, 2000, the Company signed a definitive agreement with an
affiliate of Senior Housing Properties Trust to purchase four facilities that
the Company currently leases and operates pursuant to a master lease agreement
for $123,000. The facilities consist of The Hallmark, located in Chicago,
Illinois, The Springs of East Mesa, located in Mesa, Arizona, The Gables of
Brighton, located in Brighton, New York, and Park Place, located in Spokane,
Washington. On July 31, 2000, the Company made a $12,300 earnest money escrow
deposit, creditable against the purchase price. The purchase must be completed
by October 31, 2000.
On July 26, 2000, the Company, Fortress, Fortress Brookdale Acquisition
LLC, a Delaware limited liability company ("Purchaser"), owned by Fortress,
Health Partners, a Bermuda exempted partnership ("Health Partners"), and certain
of their respective affiliates, and FBZ Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Purchaser ("Acquisition Sub"), signed
a definitive merger agreement, which provides that Purchaser will commence a
cash tender offer for all of the Company's outstanding shares of common stock
not already owned by Purchaser for a net purchase price of $15.25 per share.
Health Partners also agreed to contribute to Purchaser its $100,000 5.5%
convertible subordinated note due 2009 issued by the Company, which is
convertible into 5,479 shares of the Company's common stock.
The all-cash transaction, which is structured as a $15.25 per share cash
tender offer followed by a second-step merger of the Company with Acquisition
Sub, is valued at approximately $91,000, excluding shares already owned by
Purchaser. The tender offer commenced on August 1, 2000 and will conclude on
September 5, 2000, unless extended. The Company has approximately 9,927 shares
of common stock outstanding, including approximately 4,004 shares owned by
Purchaser. The Company's board of directors (the "Company Board"), acting upon
the unanimous recommendation of the of Independent Committee, has recommended
that the stockholders of the Company (other than Purchaser and its affiliates)
tender their shares pursuant to the tender offer. The Independent Committee and
the Company Board received an opinion from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, the Independent Committee's financial advisor, to the effect that
the $15.25 per share price in the tender offer and the merger is fair to the
stockholders of the Company (other than Purchaser and its affiliates) from a
financial point of view.
The tender offer and merger will be subject to certain customary
conditions; however, the tender offer is not subject to a financing condition or
a condition that any minimum number of shares be tendered. In addition, the
waiting period under the Hart-Scott-Rodino Act was satisfied in connection with
Purchaser's initial purchase of the Company's common stock in May 2000.
Purchaser will be paid an expense reimbursement payment of $750 in the
event that the Independent Committee receives a higher offer from a third party
and accepts that offer pursuant to the exercise of its fiduciary duties. Other
than the expense reimbursement payment, no other "break-up" or "commitment" fee
would be payable in such event.
For more information concerning the tender offer and the merger, refer to
the Company's Solicitation/Recommendation Statement on Schedule 14D-9 and
Purchaser's Tender Offer Statement on Schedule TO, in each case, as amended and
initially filed with the SEC on August 1, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its
borrowing and leasing activities. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall costs. To achieve its objectives, the Company
borrows and leases at fixed rates and may enter into swaps, caps and treasury
locks to mitigate its interest rate risk on a related financial instrument.
There is inherent risk from borrowings and leasing as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's future financing requirements. The Company does not enter into
financial instrument transactions for trading or other speculative purposes.
The Company's long-term debt and related contracts to limit interest rate
risk at June 30, 2000 are as follows:
17
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Interest Rate Cap
------------------------------------------
Rate at Fixed Approximate Fair Value
Amount June 30, 2000 Maturity Rate Maturity at June 30, 2000
------ ------------- -------- ---- -------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate debt:
Convertible subordinated notes..$ 100,000 5.5% 2009 - - -
Mortgage loan................... 12,967 8.525% 2027 - - -
---------
112,967
---------
Variable rate debt:
Prime less .5%.................. 3,438 9.00% 2003 - - -
LIBOR plus 1.625%............... 6,000 8.274% 2002 - - -
Tax-exempt...................... 65,000 4.79% 2019-2025 6.35% 6/1/04 $ 96
Tax-exempt...................... 15,040 4.80% 2029 6.58% 12/1/04 25
--------- ======= ====== ======= ======== ---------
89,478
---------
Total.......................... $ 202,445 $ 121
========= =========
</TABLE>
If interest rates on the Company's variable rate debt, including tax-exempt
bonds, increased by 1 percentage point as of June 30, 2000, the annual interest
expense would increase by approximately $895.
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 amount by which the revenue generated from the facilities during the
applicable year exceeds the revenues generated from the facilities during 1998.
On July 26, 2000, the Company signed a definitive agreement to purchase the four
facilities that is currently leases and operates for $123,000.
18
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings.
No material developments with respect to legal proceedings
occurred during the period covered by this quarterly report.
ITEM 2. Changes in Securities and Use of Proceeds.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
On May 18, 2000, the Company held its 2000 annual meeting of
stockholders at 35 West Wacker Drive, Chicago, Illinois. The
annual meeting was called for the following purposes:
(1) to elect two directors for terms of three years each;
(2) to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors;
(3) to approve the First Amendment to the Company's 1999
Stock Incentive Plan to increase the number of shares
available for issuance under the plan by an aggregate
of 200,000 shares to 400,000 shares; and
(4) to transact such other business as may properly come
before the annual meeting.
The following table sets forth the names of the directors
elected at the annual meeting for new three year-terms and
the number of votes cast for and withheld for each director:
Withheld
Authority to
Directors For Vote
--------- --- ------------
Mark J. Schulte 8,635,240 92,001
Wayne D. Boberg 8,401,440 325,801
The names of each of the other directors whose terms of
offices continued after the annual meeting are as follows:
Bruce L. Gewertz, Darryl W. Hartley-Leonard, Robert J.
Rudnik, Mark H. Tabak and Paul H. Warren.
Michael W. Reschke resigned as a director effective as of
May 18, 2000. William B. Doniger and Wesley R. Edens were
appointed directors effective as of May 18, 2000.
The appointment of Ernst & Young LLP as the Company's
independent auditors was ratified at the annual meeting. The
vote tabulation was as follows: 8,709,890 votes were cast
for the ratification of Ernst & Young LLP as the Company's
independent auditors, 5,700 votes were cast against such
approval and 11,651 votes were abstentions.
The First Amendment to the Company's 1999 Stock Incentive
Plan was also approved at the annual meeting. The vote
tabulation was as follows: 6,712,471 votes were cast for the
approval of the First Amendment to the Company's 1999 Stock
Incentive Plan, 2,012,370 votes were cast against such
approval and 2,400 votes were abstentions.
ITEM 5. Other Information.
None
19
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
ITEM 6. Exhibits and Reports on Form 8-K.
(A) EXHIBITS:
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation of the Company, as
filed with the SEC 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 SEC 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 SEC on 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 Stock Purchase Agreement, dated as of April 20, 2000, by and
among the Company, Fortress, Prime, Prime Group II, L.P.,
Prime Group VI, L.P., PGLP, Inc. and Michael W. Reschke, as
filed with the SEC on April 21, 2000 as Exhibit 99.2 to the
Company's Form 8-K dated April 20, 2000 (File No. 0-22253)
and incorporated herein by reference.
10.2 Standstill Agreement, dated as of April 20, 2000, by and
between the Company and Fortress, as filed with the SEC on
April 21, 2000 as Exhibit 99.3 to the Company's Form 8-K
dated April 20, 2000 (File No. 0-22253) and incorporated
herein by reference.
10.3 Amendment No. 1 to Stockholders Agreement, dated as of May
17, 2000, by and among the Company, Prime, Prime Group II,
L.P., Prime Group VI, L.P., Health Partners and Purchaser.
10.4 Assignment of Registration Rights, dated May 17, 2000.
10.5 First Amendment to Brookdale Living Communities, Inc. 1999
Stock Incentive Plan.
12.1 Statements regarding Computation of Ratio of Earnings to
Fixed Charges.
27.1 Financial Data Schedule.
20
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
(B) REPORTS ON FORM 8-K:
On April 21, 2000, the Company filed a Current Report on Form 8-K dated
April 20, 2000 with the SEC announcing pursuant to Item 5 of Form 8-K the
agreement entered into among Fortress, Prime, certain of its affiliates and
Michael W. Reschke, the former Chairman of the Board of the Company and the
principal shareholder of Prime, pursuant to which Fortress agreed to purchase
from Prime, certain of its affiliates and Mr. Reschke up to 4,004,350 shares of
the Company's common stock.
On May 19, 2000, the Company filed a Current Report on Form 8-K dated May
18, 2000 with the SEC announcing pursuant to Item 5 of Form 8-K the completion
of the sale by Prime, certain of its affiliates and Mr. Reschke of 4,004,350
shares of the Company's common stock to purchaser for an aggregate purchase
price of $60,065,250, or $15 per share, Mr. Reschke's resignation as Chairman of
the Board of the Company and the election of two Fortress designees to the
Company Board.
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: August 14, 2000 /s/ Mark J. Schulte
---------------- ----------------------------------
Mark J. Schulte
President and
Chief Executive Officer
Date: August 14, 2000 /s/ R. Stanley Young
---------------- ----------------------------------
R. Stanley Young
Executive Vice President,
Chief Financial Officer and Treasurer
22
