<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-6095
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ASSISTED LIVING CONCEPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 93-1148702
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
9955 S.E. WASHINGTON
SUITE 201
PORTLAND, OREGON 97216
(503) 252-6233
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN GORDON
CHIEF FINANCIAL OFFICER
9955 S.E. WASHINGTON
SUITE 201
PORTLAND, OREGON 97216
(503) 252-6233
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
GARY OLSON, ESQ. RICHARD S. FORMAN, ESQ.
SCOTT C. LEWIS, ESQ. GLENN D. SMITH, ESQ.
LATHAM & WATKINS STROOCK & STROOCK & LAVAN
633 WEST FIFTH STREET--SUITE 4000 2029 CENTURY PARK EAST--SUITE 1800
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90067
(213) 485-1234 (310) 556-5800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share....... 2,271,250(1) $21.38 $48,559,325 $16,745(2)
</TABLE>
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(1) Includes 296,250 shares of Common Stock subject to an over-allotment
option granted to the several Underwriters.
(2) A registration fee of $15,261 previously has been paid with respect to the
shares.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(C), MAY DETERMINE.
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<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION IN FORM S 1 PROSPECTUS CAPTION
-------------------------------- ------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover of Prospectus......... Facing Page; Cross-Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of Prospec-
tus......................... Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk
Factors..................... Prospectus Summary; Risk Factors;
Selected Financial Data
4. Use of Proceeds............. Use of Proceeds
5. Determination of Offering
Price....................... Risk Factors; Underwriting
6. Dilution.................... Dilution
7. Selling Security Holders.... Principal and Selling Stockholders
and Management Ownership
8. Plan of Distribution........ Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to
be Registered............... Description of Capital Stock
10. Interests of Named Experts
and Counsel................. Legal Matters; Experts
11. Information with Respect to
the Registrant.............. Prospectus Summary; Risk Factors;
Capitalization; Price Range of
Common Stock; Dividend Policy;
Selected Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Business; Management;
Description of Capital Stock; Legal
Matters; Experts; Available
Information
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................. *
</TABLE>
- --------
* Omitted from Prospectus because item is inapplicable or answer is in the
negative.
<PAGE>
PROSPECTUS
1,975,000 SHARES
[LOGO OF ASSISTED LIVING CONCEPTS INCORPORATED]
COMMON STOCK
Of the 1,975,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock"), of Assisted Living Concepts, Inc. (the "Company") offered
hereby, 1,800,000 shares are being sold by the Company and 175,000 shares are
being sold by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. See "Principal and Selling Stockholders
and Management Ownership." The Company's Common Stock is listed on the
American Stock Exchange ("ASE") under the Symbol "ALF." On July 2, 1996, the
last reported sale price on the ASE of the Common Stock was $19.38 per share.
See "Price Range of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO THE
THE PUBLIC COMMISSIONS(1) THE COMPANY(2) SELLING STOCKHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...... $19.00 $1.00 $18.00 $18.00
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Total(3)....... $37,525,000 $1,975,000 $32,400,000 $3,150,000
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
(2) Before deducting expenses payable by the Company and the Selling
Stockholders estimated at $300,000 and $6,000, respectively.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days hereof, to purchase up to an aggregate of 296,250 additional
shares of Common Stock at the price to the public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
the Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $43,153,750, $2,271,250 and $37,732,500, respectively. See
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about July 9, 1996.
---------------
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.
THE DATE OF THIS PROSPECTUS IS JULY 3, 1996
<PAGE>
[MAP HERE]
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FOR THE UNITED KINGDOM PURCHASERS: THE SHARES MAY NOT BE OFFERED OR SOLD TO
PERSONS IN THE UNITED KINGDOM EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES
INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS
PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR BUSINESS, OR OTHERWISE IN
CIRCUMSTANCES WHICH WILL NOT RESULT IN AN OFFER TO THE PUBLIC IN THE UNITED
KINGDOM WITHIN THE MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS
1995, AND THIS PROSPECTUS MAY NOT BE PASSED ON TO ANY PERSON IN THE UNITED
KINGDOM WHO DOES NOT FALL WITHIN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT
OF 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1995 OR WHO IS NOT A
PERSON TO WHOM THE PROSPECTUS MAY OTHERWISE LAWFULLY BE ISSUED OR PASSED ON.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus. Prospective investors should carefully consider
the information set forth under "Risk Factors". Unless otherwise indicated, the
information contained in this Prospectus assumes that the Underwriters' over-
allotment option will not be exercised. Except for the historical information
contained herein, the matters discussed in this Prospectus, such as the number
of residences to be opened in 1996, 1997 and 1998 are by their nature forward
looking and involve risks and uncertainties. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as those discussed elsewhere
in the Prospectus.
THE COMPANY
Assisted Living Concepts, Inc. (the "Company") develops, owns, leases and
operates assisted living residences, an increasingly popular form of housing
for senior citizens who, although generally ambulatory, need help with the
activities of daily living. In addition to housing, the Company provides
personal care and support services, and makes available routine nursing
services (as permitted by applicable government regulations) designed to meet
the needs of its residents. The Company believes that this combination of
housing, personal care and support services provides a cost-efficient
alternative and affords an independent lifestyle for individuals who do not
require the broader array of medical services that nursing facilities are
required by law to provide.
The Company was founded in July 1994 by Dr. Keren B. Wilson, the Company's
Chief Executive Officer and President, to develop, own, lease and operate
assisted living residences. The Company completed its initial public offering
in November, 1994 and immediately began operating five assisted living
residences containing an aggregate of 137 units. As of June 17, 1996, the
Company owned or leased a total of 43 assisted living residences containing an
aggregate of 1,486 units. For the three months ended March 31, 1996, the
Company's nine Stabilized Residences (those residences that had been operating
for nine months prior to the beginning of the period or had achieved 95%
occupancy within the first nine months of operations), had an average occupancy
rate of approximately 99% and an average monthly rent of approximately $1,682
per unit. The Company's total residences had an average occupancy rate of
approximately 78% and an average monthly rent of approximately $1,595 per unit
for the same period. The Company had revenues of $2.8 million, approximately
78% of which were derived from private pay sources, and a net loss of $187,000
for the three months ended March 31, 1996.
Currently, all of the Company's residences are located in small communities
in Oregon, Washington and Texas. Of the 43 residences that had certificates of
occupancy as of June 17, 1996, 14 residences (490 units) were owned and 29
residences (996 units) were leased. The Company is currently developing and, to
a lesser extent, seeking to acquire additional assisted living residences in
similar communities in Oregon, New Jersey, Texas, Washington, Ohio, Idaho and
other states with regulatory and reimbursement climates which it believes are
favorable. As of June 17, 1996, the Company had commenced construction on 20
residences (approximately 746 units), had agreed to lease upon completion one
residence (30 units) that was being developed by an outside developer and had
entered into a management agreement to operate one residence (45 units) upon
its completion. In addition, the Company has entered into land purchase option
agreements for the development of 41 residences. The Company generally does not
acquire sites for development until it has completed its feasibility analysis
and appropriate zoning has been obtained. Capital expenditures for 1996, which
relate primarily to the development of new residences, are estimated to total
approximately $72 to $88 million, of which approximately $20 million had been
spent through March 31, 1996.
The Company intends to add approximately 50 to 60 residences per year in each
of 1996, 1997 and 1998. The principal elements of the Company's operating and
growth strategy are to: (i) develop additional residences thereby increasing
its market penetration in both existing and targeted markets, (ii) service
higher acuity residents
2
<PAGE>
and, (iii) pursue joint venture opportunities in ancillary services and
residence development. The Company anticipates that a majority of its resident
revenues will continue to come from private pay sources. However, the Company
believes that locating residences in states with favorable regulatory and
reimbursement climates should provide the Company with a stable source of
residents eligible for Medicaid reimbursement to the extent that private pay
residents are not available and, in addition, provide the Company's private pay
residents with alternative sources of income if and when their private funds
are depleted and they become Medicaid eligible.
THE OFFERING
Common Stock offered by:
1,800,000 shares
The Company...........................
The Selling Stockholders................... 175,000 shares
Common Stock to be Outstanding after the 4,813,334 shares
Offering (1)...............................
Use of Proceeds.............................
To finance the development and
construction of additional
AMEX Common Stock Symbol.................... assisted living residences
ALF
- --------
(1) Does not include 586,666 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plan under which options to purchase
424,699 have been granted at a weighted average exercise price of $11.67
per share. See "Management--Stock Option Plan." Also does not include
1,333,333 shares, issuable upon conversion of the Company's 7% Convertible
Subordinated Debentures due 2005.
3
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial data should be read in conjunction with the financial
statements of the Predecessor and the Company, including the notes thereto, and
the information in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------------------------- ----------------------------------------
3 MONTHS
YEAR ENDED 11 MONTHS ENDED
DECEMBER 31, ENDED MONTH ENDED YEAR ENDED MARCH 31,
--------------------- NOVEMBER 30, DECEMBER 31, DECEMBER 31, --------------
1991 1992 1993 1994 1994(1) 1995 1995 1996
----- ------ ------ ------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 999 $1,377 $1,884 $1,841 $ 212 $4,067 $ 682 $2,750
Operating expenses:
Residence operating
expenses.............. 712 908 1,090 1,127 125 2,779 449 1,936
Management fees........ 50 69 92 93 -- -- -- --
Corporate overhead..... -- -- -- -- 152 1,252 231 215
Building rentals....... -- -- -- -- 42 798 146 560
Depreciation and
amortization.......... 65 93 132 105 13 296 39 217
----- ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 827 1,070 1,314 1,325 332 5,125 865 2,928
----- ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. 172 307 570 516 (120) (1,058) (183) (178)
Interest (income)....... (5) (13) (11) (12) (64) (579) (180) (22)
Interest expense (2).... 228 260 320 297 8 96 24 31
----- ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ (51) $ 60 $ 261 $ 231 $ (64) $ (575) $ (27) $ (187)
===== ====== ====== ====== ------ ------ ------ ------
Net loss per share...... $(0.02) $(0.19) $(0.01) $(0.06)
====== ====== ====== ======
Weighted average common
shares outstanding..... 3,000 3,000 3,000 3,005
UNAUDITED PRO FORMA DATA (3):
Net income (loss)....... $ (51) $ 60 $ 261 $ 231
Pro forma provision for
income taxes .......... -- -- 67 85
----- ------ ------ ------
Pro forma net income
(loss)................. $ (51) $ 60 $ 194 $ 146
===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, AT DECEMBER 31, MARCH 31, 1996
-------------------- NOVEMBER 30, --------------- -----------------------
1991 1992 1993 1994 1994(1) 1995 ACTUAL AS ADJUSTED(4)
------ ------ ------ ------------ ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 88 $ 109 $ 351 $ 299 $13,122 $(5,167) $(6,391) $25,709
Total assets............ 3,156 3,965 4,110 5,699 17,903 53,546 57,394 89,494
Long-term debt,
excluding current
portion................ 3,052 3,703 3,700 5,266 1,101 24,553 30,350 30,350
Partners' and
shareholders' equity... 45 105 263 197 16,219 15,644 15,503 47,603
</TABLE>
- --------
(1) The Company commenced operating the five initial residences on December 1,
1994.
(2) Includes corporate interest expense of $525,000 and $378,000 for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively; and is net of $11,000, $577,000 and $447,000 of capitalized
interest for the one month ended December 31, 1994, the year ended December
31, 1995 and the three months ended March 31, 1996, respectively.
(3) The Predecessor was exempt from U.S. federal and state income taxes as a
result of its partnership and subchapter S status. The financial data
reflects the income tax expenses that would have been recorded had the
Predecessor not been exempt from paying such income taxes. The pro forma
financial data includes the effect of the Company adopting SFAS 109.
(4) Gives effect to the receipt of an estimated $32.1 million of net proceeds
from the sale of 1,800,000 shares of Common Stock offered by the Company
hereby at the offering price of $19.00 per share.
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing any of the Common Stock offered hereby.
LIMITED OPERATING HISTORY; ANTICIPATED OPERATING LOSSES
The Company has a limited operating history. The Company incurred a loss of
$64,000 for the first full month of operations ended December 31, 1994, a loss
of $575,000 for the fiscal year ended December 31, 1995 and a loss of $187,000
for the three months ended March 31, 1996. The Company anticipates that it
will incur losses during 1996 as the costs associated with opening new
residences and expanding the corporate infrastructure necessary to manage the
Company's future operations and to develop new assisted living residences will
only be partially offset by operating profits from existing or newly developed
residences. There can be no assurance that losses will not continue after
1996. The Company anticipates that each residence will have an operating loss
(prior to depreciation, rent or interest, if any) of $10,000 during the first
three to four months of operation. To the extent the Company sells a residence
and leases it back or otherwise finances it within four months of the
commencement of operations, the aggregate loss may increase by up to an
additional $40,000. The Company currently plans to open 50 to 60 residences in
1996, of which 10 were opened during the first quarter of 1996. The Company
estimates that the losses to be incurred during 1996 due to opening residences
could range from $1.5 million to $3.0 million. The success of the Company's
future operations is directly tied to the expansion of its operational base.
There can be no assurance that the Company will not experience unforeseen
expenses, difficulties, complications and delays in connection with the
expansion of its operational base which could have a material adverse effect
on the Company's financial condition and results of operations.
NO ASSURANCE AS TO ABILITY TO DEVELOP OR ACQUIRE ADDITIONAL ASSISTED LIVING
RESIDENCES
The Company's prospects for growth are directly affected by its ability to
develop and, to a lesser extent, acquire additional assisted living
residences. While the Company currently plans to open approximately 50 to 60
residences per year in each of 1996, 1997 and 1998, there can be no assurance
that such residences will be completed during this time frame, or, that they
will be successful once completed. The success of the Company's growth
strategy will depend upon, among other factors, the Company's ability to
obtain government licenses and approvals, the Company's ability to obtain
financing and the competitive environment for development and acquisitions.
The nature of such licenses and approvals and the timing and likelihood of
obtaining them vary widely from state to state, depending upon the residence,
or its operation, and the type of services to be provided. The successful
development of additional assisted living facilities will involve a number of
risks, including the possibility that the Company may be unable to locate
suitable sites at acceptable prices or may be unable to obtain, or may
experience delays in obtaining, necessary zoning, land use, building,
occupancy, and other required governmental permits and authorizations. The
Company is dependent upon these permits and authorizations to construct and
operate its residences and any delay or inability to obtain such permits could
adversely affect the results of operations. The Company may also incur
construction costs that exceed original estimates, may not complete
construction projects on schedule and may experience competition in the search
for suitable development sites. The Company relies on third-party general
contractors to construct its new assisted living facilities. There can be no
assurance that the Company will not experience difficulties in working with
general contractors and subcontractors, which could result in increased
construction costs and delays. Further, facility development is subject to a
number of contingencies over which the Company will have little control and
that may adversely affect project cost and completion time, including
shortages of, or the inability to obtain, labor or materials, the inability of
the general contractor or subcontractors to perform under their contracts,
strikes, adverse weather conditions and changes in applicable laws or
regulations or in the method of applying such laws and regulations.
Accordingly, if the Company is unable to achieve its development plans, its
business, financial condition and results of operations could be adversely
affected. There can be no assurance that the Company will be successful in
developing or acquiring any particular residence, that the Company's rapid
expansion will not adversely affect its operations or that any residence
developed or acquired by the Company
5
<PAGE>
will be successful. The various risks associated with the Company's
development or acquisition of assisted living residences and uncertainties
regarding the profitability of such operations could have a material adverse
effect on the Company's financial condition and results of operations.
NEED FOR ADDITIONAL FINANCING TO FUND FUTURE DEVELOPMENT AND ACQUISITIONS
To achieve its growth objectives, the Company will need to obtain sufficient
financial resources to fund its development, construction and acquisition
activities. The estimated cost to complete and fund start-up losses for the
new facilities that will be developed by December 31, 1998 is between $320
million and $350 million; accordingly, the Company's future growth will depend
on its ability to obtain additional financing on acceptable terms. The Company
will, from time to time, seek additional funding through public and/or private
financing sources, including equity and/or debt financing. If additional funds
are raised by issuing equity securities, the Company's stockholders may
experience dilution. There can be no assurance that adequate funding will be
available as needed or on terms acceptable to the Company. A lack of available
funds may require the Company to delay or eliminate all or some of its
development projects and acquisition plans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
The Company's aggregate annual fixed debt and lease payment obligations
currently total approximately $5.0 million. These fixed payment obligations
will significantly increase as the Company pursues its development plan.
Failure to meet these obligations may result in the Company being in default
of its financing agreements and, as a consequence, the Company may lose its
ability to operate any individual residence or other residences which may be
cross-defaulted. There can be no assurance that the Company will generate
sufficient cash flow to meet its current or future obligations. The Company
has not historically covered its fixed charges with earnings. In addition, the
Company anticipates that future development of residences may be financed with
construction loans and, therefore, there is a risk that, upon completion of
construction, permanent financing for newly developed residences may not be
available or may be available only on terms that are unfavorable or
unacceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
GEOGRAPHIC CONCENTRATION; DEPENDENCE ON STATE MEDICAID WAIVER PROGRAMS
As of June 17, 1996, approximately two-thirds of the Company's properties
are located in the State of Texas and approximately one-fourth are located in
the State of Oregon; therefore, the Company is dependent on the economies of
Texas and Oregon and, to a certain extent, on the continued funding of state
Medicaid waiver programs. The Company has operated residences in Oregon since
December 1994. In addition, the Company began operating residences in Texas
and Washington in July 1995 and December 1995, respectively. During the year
ended 1995 and the three months ended March 31, 1996, direct payments received
from state Medicaid agencies accounted for approximately 21% and 14%
respectively of the Company's revenue while the tenant-paid portion of
Medicaid residents accounted for approximately 10% and 8% of the Company's
revenue during these periods. The Company expects that state Medicaid
reimbursement programs will constitute a significant source of revenue for the
Company. The Company intends to continue developing and operating assisted
living residences in states other than Texas, Washington and Oregon, including
Idaho, New Jersey and Ohio. Adverse changes in general economic factors
affecting these states' respective health care industries or in these states'
laws and regulatory environment, including Medicaid reimbursement rates, could
have a material adverse effect on the Company's financial condition and
results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including the
liquidity of the market for the Common Stock, variations in the Company's
operating results, new statutes or regulations or changes in the
interpretation of existing statutes or regulations affecting the health care
industry generally or assisted living residence businesses in particular. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated
6
<PAGE>
to the operating performance of particular companies. These market
fluctuations also may adversely affect the market price of the Common Stock.
CONFLICTS OF INTEREST
Dr. Wilson holds interests in each of the entities from which the Company
purchased two of the initial residences known as Aspen Court and Hillside
House. Dr. Wilson received approximately $169,000 from the Company's purchase
of Aspen Court and approximately $65,000 (jointly with her husband) from the
Company's purchase of Hillside House.
Dr. Wilson also held, and her husband currently holds, an interest in
Assisted Living Facilities, Inc. ("ALF"), the entity which leases four
residences to the Company (the "ALF Leases"). The payment terms of the ALF
Leases were based on the residences' historical operating results. The
aggregate annual lease payments, when expressed as a percentage of the
independent appraisal values of such leased properties, reflected an average
blended lease rate of approximately 10.8% for such properties, which the
Company believes is typical for leases in the health care industry. The
"blended lease rate" is the amount of annual rent divided by the appraised
value of the property. Dr. Wilson sold her interest in ALF in the first half
of 1995. As a 25% shareholder in ALF, Dr. Wilson's husband may receive
dividends, which may be generated as a result of payments under the ALF
Leases. Payments made with respect to the ALF Leases were $37,000 for the one
month ended December 31, 1994, $734,000 for the year ended December 31, 1995
and $196,000 for the three months ended March 31, 1996.
Prior to April 18, 1996, Dr. Wilson owned all of the outstanding stock of
Concepts in Community Living, Inc. ("CCL"). On such date, Dr. Wilson
transferred her interest in CCL to her husband. CCL provides services to
several of the developers that have contracted with the Company to build and
develop assisted living facilities. CCL has performed feasibility studies and
pre-development consulting services for the developers on the Company's
behalf. For the year ended December 31, 1995, CCL performed these services on
36 sites collecting fees of $605,000. The direct costs incurred by CCL in
performing these services, exclusive of the compensation paid to Dr. Wilson's
husband, were approximately $452,000.
The Chairman and President of LTC Properties, Inc. ("LTC"), Andre C.
Dimitriadis and William McBride III, respectively, are members of the Board of
Directors and shareholders of the Company. Messrs. Dimitriadis and McBride
(Chairman of the Board of Directors of the Company) own 274,600 (1.7%) and
135,000 (0.7%) shares, respectively, in LTC. Since January 1, 1995, the
Company sold to LTC, through sale and leaseback transactions, 10 residences in
Texas with a combined total of 334 units for a total purchase price of
$18,100,000. Annual rental payments to LTC with respect to such residences are
approximately $1,847,700 ($63,300 in rent was paid in 1995). In addition, the
Company sold to LTC, through sale and leaseback transactions, five residences
in Washington with a combined total of 188 units for a total purchase price of
$11,280,000. Annual rental payments to LTC with respect to such residences are
approximately $948,000. The sales prices for the residences which the Company
has sold to date to LTC approximate cost. See "Certain Transactions" and
"Principal Stockholders and Management Ownership".
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends, and will continue to depend, upon the services of Dr.
Wilson, its Chief Executive Officer and President and Stephen Gordon, its
Chief Administrative Officer and Chief Financial Officer. The Company has
entered into an employment agreement with Dr. Wilson and has obtained a
$500,000 key employee insurance policy covering her life. The Company is also
dependent upon its ability to attract and retain management personnel who will
be responsible for the day-to-day operations of each residence. The loss of
the services of any or all of such officers or the Company's inability to
attract additional management personnel in the future could have a material
adverse effect on the Company's financial condition or results of operations.
7
<PAGE>
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
A portion of the Company's revenues will be dependent upon reimbursement
from third-party payors, including state Medicaid programs and private
insurers. 27%, 29%, 21% and 14% of the Company's total revenues were received
under Medicaid programs for the years ended December 31, 1993, 1994, 1995, and
the three months ended March 31, 1996, respectively. Furthermore, there can be
no assurance that the Company's proportionate percentage of revenue received
from Medicaid programs will not increase. The revenues and profitability of
the Company will be affected by the continuing efforts of governmental and
private third-party payors to contain or reduce the costs of health care by
attempting to lower reimbursement rates, increasing case management review of
services and negotiating reduced contract pricing. In an attempt to reduce the
federal and certain state budget deficits, there have been, and management
expects that there will continue to be, a number of proposals to limit
Medicaid reimbursement in general. Adoption of any such proposals at either
the federal or the state level could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
GOVERNMENT REGULATION
Health care is an area of extensive and frequent regulatory change. Changes
in the laws or new interpretations of existing laws can have a significant
effect on methods of doing business, costs of doing business and amounts of
reimbursement from governmental and other payors. The Company is and will
continue to be subject to varying degrees of regulation and licensing by
health or social service agencies and other regulatory authorities in the
various states and localities in which it operates or intends to operate. As a
provider of services under the Medicaid program in the United States, the
Company is subject to Medicaid fraud and abuse law, violations of which may
result in civil and criminal penalties and exclusions from participation in
the Medicaid program. The Company at all times attempts to comply with all
applicable fraud and abuse laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not have a material adverse effect on the Company's operations or financial
condition.
The success of the Company will be dependent in part upon its ability to
satisfy the applicable regulations and requirements and to procure and
maintain required licenses. The Company's operations could also be adversely
affected by, among other things, regulatory developments such as mandatory
increases in the scope and quality of care to be afforded residents and
revisions in licensing and certification standards. Currently, no federal
rules explicitly define or regulate assisted living. In addition, federal and
state laws currently exist restricting health care providers from referring
patients to affiliated entities. The Company believes that its operations do
not presently violate these referral laws. However, there can be no assurance
that federal, state or local laws or regulatory procedures which might
adversely affect the Company's business, financial condition, results of
operations or prospects will not be expanded or imposed.
STAFFING AND LABOR COSTS
The Company will compete with other providers of long-term care with respect
to attracting and retaining qualified personnel. The Company will also be
dependent upon the available labor pool of suitable wage employees. A shortage
of nurses and/or trained personnel may require the Company to enhance its wage
and benefits package in order to compete. No assurance can be given that the
Company's labor costs will not increase, or that, if they do increase, they
can be matched by corresponding increases in revenues.
COMPETITION
The long-term care industry is highly competitive and the Company expects
that the assisted living business, in particular, will become more competitive
in the future. The Company will be competing with numerous other companies
providing similar long-term care alternatives, such as home health agencies,
life care at home, community-based service programs, retirement communities
and convalescent centers. The Company expects that as assisted living receives
increased attention and the number of states which include assisted living in
their Medicaid waiver programs increases, competition will grow from new
market entrants, including publicly and
8
<PAGE>
privately held companies focusing primarily on assisted living. Nursing
facilities that provide long-term care services are also a source of
competition to the Company. Moreover, in the implementation of the Company's
expansion program, the Company expects to face competition for development and
acquisitions of assisted living residences. Some of the Company's present and
potential competitors are significantly larger and have, or may obtain,
greater financial resources than those of the Company. 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.
DIFFICULTIES OF MANAGING RAPID GROWTH
The Company expects that the number of residences which it owns, leases or
otherwise operates will increase substantially as it pursues its growth
strategy. This rapid growth will place significant demands on the Company's
management resources. The Company's ability to manage its growth effectively
will require it to continue to expand its operational, financial and
management information systems and to continue to attract, train, motivate,
manage and retain key employees. If the Company is unable to manage its growth
effectively, its business, financial condition and results of operations could
be adversely affected.
LIABILITY AND INSURANCE
The provision of health care services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have become
subject to an increasing number of lawsuits alleging malpractice or related
legal theories, many of which involve large claims and significant defense
costs. The Company currently maintains liability insurance intended to cover
such claims and the Company believes that its insurance is in keeping with
industry standards. There can be no assurance, however, that claims in excess
of the Company's insurance coverage or claims not covered by the Company's
insurance coverage (e.g., claims for punitive damages) will not arise. A
successful claim against the Company not covered by, or in excess of, the
Company's insurance coverage could have a material adverse effect upon the
Company's financial condition and results of operations. Claims against the
Company, regardless of their merit or eventual outcome, may also have a
material adverse effect upon the Company's ability to attract residents or
expand its business and would require management to devote time to matters
unrelated to the operation of the Company's business. In addition, the
Company's insurance policies must be renewed annually. There can be no
assurance that the Company will be able to obtain liability insurance coverage
in the future or that, if such coverage is available, it will be available on
acceptable terms.
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing
materials, that could be located on, in or under such property. Such laws and
regulations often impose liability whether or not the owner or operator knew
of, or was responsible for, the presence of the hazardous or toxic substances.
The costs of any required remediation or removal of these substances could be
substantial and the liability of an owner or operator as to any property is
generally not limited under such laws and regulations and could exceed the
property's value and the aggregate assets of the owner or operator. The
presence of these substances or failure to remediate such substances properly
may also adversely affect the owner's ability to sell or rent the property, or
to borrow using the property as collateral. Under these laws and regulations,
an owner, operator or an entity that arranges for the disposal of hazardous or
toxic substances, such as asbestos-containing materials, at a disposal site
may also be liable for the costs of any required remediation or removal of the
hazardous or toxic substances at the disposal site. In connection with the
ownership or operation of its properties, the Company could be liable for
these costs, as well as certain other costs, including governmental fines and
injuries to persons or properties. As a result, the presence, with or without
the Company's knowledge, of hazardous or toxic substances at any property held
or operated by the Company, or acquired or operated by the Company in the
future, could have an adverse effect
9
<PAGE>
on the Company's business, financial condition and results of operations.
Environmental audits performed on the Company's properties have not revealed
any significant environmental liability that management believes would have a
material adverse effect on the Company's business, financial condition or
results of operations. No assurance can be given that existing environmental
audits with respect to any of the Company's properties reveal all
environmental liabilities.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
after this Offering or the perception that such sales could occur could
adversely affect the market price of the Common Stock and the Company's
ability to raise capital in the future in the equity markets. Upon completion
of the Offering, the Company will have outstanding 4,813,334 shares of Common
Stock, assuming no exercise of the Underwriters' over-allotment option. Of
these shares, 3,988,334 will be freely tradeable without restriction or
limitation under the Securities Act, except for any shares purchased by
"affiliates," as that term is defined under the rules and regulations of the
Securities Act, of the Company. The remaining 825,000 outstanding shares of
Common Stock are "restricted securities" within the meaning of Rule 144 under
the Securities Act. The holders of 785,000 shares of these restricted
securities have agreed not to sell or otherwise dispose of such shares,
without the prior written consent of NatWest Securities Limited, until 180
days after the date of this Prospectus. After such date, all such shares may
be sold subject to the limitations of Rule 144. See "Shares Eligible For
Future Sale." Furthermore, the Company has registered approximately 586,666
shares of Common Stock reserved for issuance pursuant to the Company's Stock
Option Plan, under which options to purchase 424,699 shares have been granted
as of the date of this Prospectus. See "Management--Stock Option Plan." In
addition, the $20 million outstanding principal amount of the Company's 7%
Convertible Subordinated Debentures due 2005 (the "7% Debentures") are
convertible at any time prior to maturity into 1,333,333 shares of Common
Stock at a conversion price of $15.00 per share, subject to adjustment in
certain circumstances. The 7% Debentures and the shares issuable upon
conversion thereof are freely tradeable.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock.
The Company expects to retain any earnings to finance the operations and
expansion of the Company's business. Certain Trust Deed Notes, payable to the
State of Oregon Housing and Community Service Department restrict the payment
of cash dividends in certain circumstances and it is anticipated that the
terms of future debt financings may do so as well. Therefore, the payment of
any cash dividends on the Common Stock is unlikely in the foreseeable future.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net tangible book value per share of approximately
$9.09, at the offering price of $19.00 per share. See "Dilution."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,800,000 shares being
offered by the Company hereby are estimated to be approximately $32.1 million,
after deducting the estimated underwriting discounts and commissions and
estimated expenses of the Offering payable by the Company ($37.4 million
assuming the over-allotment option is exercised in full). The Company will not
receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders and Management
Ownership." The Company intends to use the net proceeds to it from the
Offering to finance the development and construction of assisted living
residences, including completion of the 20 residences currently under
construction and the development of 41 sites subject to land purchase option
agreements. Pending their use, the net proceeds from the Offering will be
invested in investment-grade, short-term, interest-bearing securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Business--Development."
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the ASE under the symbol ALF. The following
table sets forth the high and low closing sales prices of the Common Stock, as
reported by the ASE, for the periods indicated:
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1994:
4th Quarter(1)............................................... $ 9.38 $ 8.00
Fiscal Year Ended December 31, 1995:
1st Quarter.................................................. 9.25 7.50
2nd Quarter.................................................. 11.88 8.00
3rd Quarter.................................................. 16.50 10.00
4th Quarter.................................................. 15.88 12.38
Fiscal Year Ended December 31, 1996:
1st Quarter.................................................. 19.75 13.25
2nd Quarter.................................................. 22.25 17.75
3rd Quarter(2)............................................... 20.13 19.38
</TABLE>
- --------
(1) Commencing November 22, 1994, the first day of trading of the Common Stock
(2) Through July 2, 1996
On July 2, 1996, the closing sale price of the Common Stock, as reported by
ASE, was $19.38 per share. As of such date, the Company had approximately 25
holders of record of its Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock.
The Company expects to retain any earnings to finance the operations and
expansion of the Company's business. Certain Trust Deed Notes, payable to the
State of Oregon Housing and Community Service Department restrict the payment
of cash dividends in certain circumstances and it is anticipated that the
terms of future debt financings may do so as well. Therefore, the payment of
any cash dividends on the Common Stock is unlikely in the foreseeable future.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to reflect the Offering. This table should be read in
conjunction with the financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Mortgages payable, excluding current portion.............. $10,350 $10,350
7% Convertible Subordinated Debentures due 2005........... 20,000 20,000
------- -------
Total long-term debt, excluding current portion.......... 30,350 30,350
------- -------
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding................. -- --
Common Stock, $.01 par value; 40,000,000 shares
authorized; 3,004,734 shares issued and outstanding,
4,804,734 as adjusted shares issued and outstanding(1).. 30 48
Additional paid-in-capital............................... 16,538 48,620
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions............................................ (239) (239)
Accumulated deficit...................................... (826) (826)
------- -------
Total shareholders' equity.............................. 15,503 47,603
------- -------
Total capitalization.................................... $45,853 $77,953
======= =======
</TABLE>
- --------
(1) Assumes no exercise of the Underwriters' over-allotment option. Does not
include 595,266 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plan, under which options to purchase 424,699
shares have been granted at a weighted average exercise price of $11.67
per share. Also does not include the 1,333,333 shares of Common Stock
issuable at $15.00 per share upon conversion of the Company's 7%
Convertible Subordinated Debentures due 2005.
DILUTION
The Company's tangible book value at March 31, 1996 was approximately $15.5
million, or $5.16 per share. Tangible book value per share at March 31, 1996
is equal to the Company's total tangible assets less its total liabilities,
divided by the total number of outstanding shares of Common Stock at that
date. After giving effect to the sale of the 1,800,000 shares of Common Stock
offered by the Company hereby at the offering price of $19.00 per share, the
pro forma net tangible book value of the Common Stock at March 31, 1996 would
have been approximately $47.6 million, or $9.91 per share. This represents an
immediate increase in pro forma net tangible book value of $4.75 per share to
existing stockholders and immediate dilution of $9.09 per share to purchasers
of Common Stock in the Offering. The following table illustrates this dilution
on a per share basis:
<TABLE>
<S> <C> <C>
Offering price(1)................................................. $19.00
Net tangible book value prior to the Offering................... $5.16
Increase attributable to new investors.......................... 4.75
-----
Pro forma net tangible book value after the Offering.............. 9.91
------
Dilution to new investors in the Offering......................... $ 9.09
======
</TABLE>
- --------
(1) Before deducting underwriting discounts and commissions and offering
expenses to be paid by the Company.
12
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents selected consolidated historical condensed
financial data for the Company and the Predecessor as of the dates and for the
periods indicated. The selected financial data for the year ended December 31,
1991 were derived from the unaudited consolidated historical financial
statements of the Predecessor. The Predecessor consists of Assisted Living
Facilities, Inc., an S-corporation; Madras Elder Care, a partnership; and
Lincoln City Partners, a partnership, which, prior to December 1, 1994,
collectively owned the five residences operated by the Company in December
1994. The selected financial data for the one month period ended December 31,
1994, the year ended December 31, 1995, and the three-month periods ended
March 31, 1995 and 1996, are derived from the financial statements of the
Company. The financial statements of the Company for the month ended December
31, 1994 and the financial statements of the Predecessor for the years ended
December 31, 1992 and 1993 and the eleven months ended November 30, 1994 have
been audited by Price Waterhouse LLP, independent accountants. The financial
statements of the Company for the year ended December 31, 1995 have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
The selected financial data for the three-month periods ended March 31, 1995
and 1996 were derived from unaudited financial statements of the Company. The
unaudited financial statements include all adjustments, consisting of only
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. The selected historical financial data below should be read in
conjunction with the financial statements of the Predecessor and the Company,
including the notes thereto, and the information in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
---------------------------------- ----------------------------------------
11 MONTHS 3 MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
---------------------------------------------------------------------------
1991 1992 1993 1994(1) 1994(2) 1995 1995 1996
---- ------ ------ ------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $999 $1,377 $1,884 $1,841 $ 212 $4,067 $ 682 $2,750
Operating expenses:
Residence operating expenses................. 712 908 1,090 1,127 125 2,779 449 1,936
Management fees.............................. 50 69 92 93 -- -- -- --
Corporate overhead........................... -- -- -- -- 152 1,252 231 215
Building rentals............................. -- -- -- -- 42 798 146 560
Depreciation and amortization................ 65 93 132 105 13 296 39 217
---- ------ ------ ------ ------ ------ ------ ------
Total operating expenses..................... 827 1,070 1,314 1,325 332 5,125 865 2,928
---- ------ ------ ------ ------ ------ ------ ------
Operating income (loss)...................... 172 307 570 516 (120) (1,058) (183) (178)
Interest (income)............................ (5) (13) (11) (12) (64) (579) (180) (22)
Interest expense(3).......................... 228 260 320 297 8 96 24 31
---- ------ ------ ------ ------ ------ ------ ------
Net income (loss)............................. $(51) $ 60 $ 261 $ 231 $ (64) $ (575) $ (27) $ (187)
==== ====== ====== ====== ====== ====== ====== ======
Net loss per share............................ $(0.02) $(0.19) $(0.01) $(0.06)
====== ====== ====== ======
Weighted average common shares outstanding.... 3,000 3,000 3,000 3,005
UNAUDITED PRO FORMA DATA(4):
Net income (loss)............................. $(51) $ 60 $ 261 $ 231
Pro forma provision for income taxes.......... -- -- 67 85
---- ------ ------ ------
Pro forma net income (loss)................... $(51) $ 60 $ 194 $ 146
==== ====== ====== ======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, AT DECEMBER 31, MARCH 31, 1996
-------------------- NOVEMBER 30, --------------- -----------------------
1991 1992 1993 1994 1994(1) 1995 ACTUAL AS ADJUSTED(5)
------ ------ ------ ------------ ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 88 $ 109 $ 351 $ 299 $13,122 $(5,167) $(6,391) $25,709
Total assets............ 3,156 3,965 4,110 5,699 17,903 53,546 57,394 89,494
Long-term debt,
excluding current
portion................ 3,052 3,703 3,700 5,266 1,101 24,553 30,350 30,350
Partners' and
shareholders' equity... 45 105 263 197 16,219 15,644 15,503 47,603
</TABLE>
- --------
(1) Includes only one month of operations for Hillside House which opened in
October 1994.
(2) The Company commenced operating the five initial residences on December 1,
1994.
(3) Includes corporate interest expense of $525,000 and $378,000 for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively; and is net of $11,000, $577,000 and $447,000 of capitalized
interest for the one month ended December 31, 1994, the year ended
December 31, 1995 and the three months ended March 31, 1996, respectively.
(4) The Predecessor was exempt from U.S. federal and state income taxes as a
result of its partnership and subchapter S status. The financial data
reflects the income tax expenses that would have been recorded had the
Predecessor not been exempt from paying such income taxes. The pro forma
financial data includes the effect of the Company adopting SFAS 109.
(5) Gives effect to the receipt of an estimated $32.1 million of net proceeds
from the Offering.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Revenues consists of rentals of units in assisted living residences and fees
associated with the provision of services to residents pursuant to contracts
with the residents. Operating expenses include (i) residence operating
expenses, such as staff payroll, food, property taxes, utilities, insurance
and other direct residence operating expenses, (ii) with respect to the
Predecessor, costs incurred under management agreements whereby a management
fee equal to 5% of revenue was charged by CCL for residence management and
administrative support, (iii) general and administrative expenses consisting
of corporate and support functions such as legal, accounting and other
administrative expenses, (iv) building rentals, and (v) depreciation and
amortization.
PREDECESSOR
The historical financial statements for the years ended December 31, 1991,
1992 and 1993 and the eleven months ended November 30, 1994 represent the
combined historical results of operations and financial condition of the
Predecessor. The Predecessor consists of the entities which, prior to December
1, 1994, owned and operated certain residences now operated by the Company.
THE COMPANY
At the closing of the Company's initial public offering in November, 1994,
the Company began operating five assisted living residences located in Oregon.
As of June 17, 1996, the Company owned or leased a total of 43 assisted living
residences containing an aggregate of 1,486 units. Of these residences, 14
residences (490 units) were owned and 29 residences (996 units) were leased.
The Company is currently developing and, to a lesser extent, seeking to
acquire additional assisted living residences in small communities in Oregon,
New Jersey, Texas, Washington, Ohio, Idaho and other states with regulatory
and reimbursement climates which it believes are favorable. As of June 17,
1996, the Company had commenced construction on 20 residences (approximately
746 units), had agreed to lease upon completion one residence (30 units) that
was being developed by an outside developer and had entered into a management
agreement to operate one residence (45 units) upon its completion. In
addition, the Company had entered into land purchase option agreements for the
development of 41 residences. The Company generally does not acquire sites for
development until it has completed its feasibility analysis and appropriate
zoning has been obtained.
Results of operations for the three months ended March 31, 1995 and March
31, 1996, include the financial results of six and 26 residences, respectively
as well as the Company's historical corporate overhead. The historical results
are not necessarily indicative of the Company's future financial performance
as the Company intends to significantly expand its operating base of
residences in 1996, 1997 and 1998. The Company anticipates that each residence
will have an operating loss (prior to depreciation, rent or interest, if any)
of $10,000 during the first three to four months of operation. To the extent
the Company sells a residence and leases it back or otherwise finances it
within four months of the commencement of operations, the aggregate loss may
increase by up to an additional $40,000. Based on the Company's development
schedule, the number of residences planned to open in 1996 ranges from 50 to
60, of which 10 were opened in the first quarter. The Company estimates that
the losses to be incurred during 1996 due to the opening of new residences
will range from $1.5 million to $3.0 million.
The estimated cost to complete construction and fund start up losses for the
new facilities that are currently planned to be developed by December 31, 1998
is between $320 million and $350 million. The Company anticipates that it will
use a combination of construction lines of credit, sale and leaseback
transactions, equity and debt financing and cash generated from operations to
fund this development activity. Since 1994, the total capitalized cost to
develop, construct and open a new residence, including land acquisition and
construction costs has ranged from approximately $1.5 million to $2.6 million.
These costs vary considerably based on a variety of site-specific factors. See
"Liquidity and Capital Resources" and "Risk Factors--Need for Additional
Financing."
15
<PAGE>
The Company derives its revenue from resident fees for the delivery of
assisted living services. Resident fees typically are paid monthly by
residents, their families, state Medicaid agencies or other responsible
parties. During the twelve months ended December 31, 1995 and for the three
months ended March 31, 1996, approximately 69% and 79%, respectively of the
Company's revenue was derived from private pay sources. During these same
periods 21% and 14% were derived from state Medicaid agencies and the tenant-
paid portion of Medicaid residents accounted for an additional approximate 10%
and 8% of the Company's revenue. Resident fees include revenue derived from a
multi-tiered rate structure which varies based on the level of care required.
Resident fees are recognized as revenues when services are provided.
RESULTS OF OPERATIONS
The following table sets forth, for periods presented, the number of total
residences and units operated, average occupancy rates and the sources of
revenue for the Company and the Predecessor. The portion of revenues received
from state Medicaid agencies are labeled as "Medicaid State Portion" while the
portion of the Company's revenues that a Medicaid-eligible resident must pay
out of his or her own resources is labeled "Medicaid Resident Portion".
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Residences operated
(End of Period)........ 4 5 5 19 6 26
Units operated (End of
Period)................ 104 137 137 595 174 817
Average occupancy rate.. 94.8% 96.4% 97.0% 82.3% 93.8% 78.0%
Source of revenue:
Medicaid State
Portion............... 27.0% 29.0% 27.0% 21.4% 26.7% 14.0%
Medicaid Resident
Portion............... 12.0% 13.0% 11.9% 9.6% 11.8% 7.5%
Private................ 61.0% 58.0% 61.1% 69.0% 61.5% 78.5%
----- ----- ----- ----- ----- -----
Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units operated, average
occupancy rates and the sources of revenue for the Company and the
Predecessor. Stabilized Residences are defined as those residences which were
operating for nine months prior to the beginning of the period or have
achieved a 95% occupancy rate within the first nine months of operations.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Residences operated
(End of Period)........ 4 4 4 5 4 9
Units operated (End of
Period)................ 104 104 104 137 104 264
Average occupancy rate.. 94.8% 99.2% 100% 99.1% 99.4% 98.5%
Source of revenue:
Medicaid State
Portion............... 27.0% 28.9% 28.4% 23.9% 26.4% 17.3%
Medicaid Resident
Portion............... 12.0% 13.2% 12.1% 11.3% 11.9% 10.0%
Private................ 61.0% 57.9% 59.5% 64.8% 61.7% 72.7%
----- ----- ----- ----- ----- -----
Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
16
<PAGE>
The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units operated, average
occupancy rates and the sources of revenue for the Company and the
Predecessor. Start-up Residences are defined as those residences which were
operating for less than nine months prior to the beginning of the period and
had not achieved a 95% occupancy rate.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Residences operated
(End of Period)........ -- 1 1 14 2 17
Units operated (End of
Period)................ -- 33 33 458 70 553
Average occupancy rate.. -- 87.5% 87.5% 77.3% 85.5% 68.2%
Source of revenue:
Medicaid State
Portion............... -- 36.4% 21.3% 16.4% 27.8% 11.0%
Medicaid Resident
Portion............... -- -- % 10.6% 6.3% 11.7% 5.2%
Private................ -- 63.6% 68.1% 77.3% 60.5% 83.8%
--- ----- ----- ----- ----- -----
Total................... -- 100.0% 100.0% 100.0% 100.0% 100.0%
=== ===== ===== ===== ===== =====
</TABLE>
The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,884 $1,819 $165 $2,699 $502 $1,308
Residence operating
expenses............... 1,090 1,073 96 1,667 309 732
------ ------ ---- ------ ---- ------
Residence operating
income................ 794 746 69 1,032 193 576
Management fees......... 92 90 -- -- -- --
Building rentals........ -- -- 42 500 125 274
Depreciation and
amortization........... 132 100 4 116 12 46
------ ------ ---- ------ ---- ------
Total other operating
expenses.............. 224 190 46 616 137 320
------ ------ ---- ------ ---- ------
Operating income....... 570 556 23 416 56 256
Interest expense........ 309 285 7 147 24 76
------ ------ ---- ------ ---- ------
Pre-tax income.......... $ 261 $ 271 $ 16 $ 269 $ 32 $ 180
====== ====== ==== ====== ==== ======
</TABLE>
The following table sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- ---------------------------------------------------
ELEVEN MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ -- $ 22 $47 $1,368 $180 $1,442
Residence operating
expenses............... -- 54 29 1,112 140 1,204
--- ---- --- ------ ---- ------
Residence operating
income (loss)......... -- (32) 18 256 40 238
Management fees......... -- 3 -- -- -- --
Building rentals........ -- -- -- 298 21 286
Depreciation and
amortization........... -- 5 9 180 27 138
--- ---- --- ------ ---- ------
Total other operating
expenses............... -- 8 9 478 48 424
--- ---- --- ------ ---- ------
Operating income
(loss)................. -- (40) 9 (222) (8) (186)
Interest expense........ -- 23 1 4 -- 24
--- ---- --- ------ ---- ------
Pre-tax income (loss)... -- $(63) $ 8 $ (226) $ (8) $ (210)
=== ==== === ====== ==== ======
</TABLE>
17
<PAGE>
The following table sets forth, for the periods presented, the results of
operations for the five residences which were operating for both periods in
their entirety (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues................................................ $ 658 $ 712
Residence operating expenses............................ 401 408
--------- ---------
Residence operating income.............................. 257 304
Building rentals........................................ 125 125
Depreciation and amortization........................... 29 28
--------- ---------
Total other operating expenses.......................... 154 153
--------- ---------
Operating income........................................ 103 151
Interest expense........................................ 23 48
--------- ---------
Pre-tax income.......................................... $ 80 $ 103
========= =========
</TABLE>
THE COMPANY
Three months ended March 31, 1996 compared to three months ended March 31,
1995
Revenues. For the three months ended March 31, 1996, revenues were
$2,750,000 compared to $682,000 in the three months ended March 31, 1995, an
increase of $2,068,000 or 303%. The Company had opened or had received
certificates of occupancy on 35 residences as of March 31, 1996, of which 26
had operating results for the quarterly period compared to six operating
residences in the corresponding 1995 period. The Company had five residences
which had operated for the entire quarter for both March 31, 1995 and March
31, 1996. For these residences, revenue increased by $54,000 or 8.2% from
$658,000 in the first quarter of 1995 to $712,000 in the first quarter of
1996. This increase was primarily attributable to increases in rental rates as
a result of changes in the level of resident care. The average occupancy rate
for these residences for these periods was approximately 99% while the average
occupancy rate for all residences was approximately 78%. The remaining
$2,014,000 of increased revenue was derived from the 21 residences which began
operating subsequent to January 1, 1995.
Residence Operating Expenses. Residence operating expenses were $1,936,000
in the three months ended March 31, 1996 compared to $449,000 in the
corresponding 1995 period, an increase of $1,487,000, or 331%. For the five
residences that operated for the entire first quarter of 1995 and 1996,
residence operating expenses were $408,000, an increase of $7,000, or 1.8%
from the $401,000 of residence operating expenses in the first quarter of
1995. Expenses were relatively flat for these five residences because the
residences operated at 99% occupancy for each of the periods. The remaining
$1,480,000 of the increase was due to the 21 new residences which began
operating subsequent to January 1, 1995.
Corporate Overhead. Corporate overhead expenses were $215,000 in the three
months ended March 31, 1996 compared to $231,000 in the corresponding 1995
period, a decrease of $16,000, or 6.9%. Corporate overhead does not include
costs incurred at the corporate level that are directly related to new
residences that are being developed, as these costs are capitalized to the
specific projects under development.
Building Rentals. Building rentals increased to $560,000 in the three months
ended March 31, 1996 from $146,000 during the corresponding 1995 period. The
increase was the result of additional sale and leaseback transactions
completed by the Company from March of 1995 through March of 1996. The Company
had 18 operating leases at March 31, 1996 compared to four at March 31, 1995.
Building rentals for the five residences which operated for the entire first
quarter of 1995 and 1996 were unchanged.
Depreciation and Amortization. Depreciation and amortization expense was
$217,000 in the three month period ended March 31, 1996 compared to $39,000 in
the corresponding 1995 period, an increase of $178,000
18
<PAGE>
or 456%. This increase in depreciation and amortization expense was related to
the 21 new residences that opened subsequent to January 1, 1995. Depreciation
and amortization expense for the five residences which operated for the entire
first quarter of 1995 and 1996 was flat.
Interest (Income) Expense--Net. Interest (income) expense--net was $9,000 in
the three months ended March 31, 1996 compared to ($156,000) in the
corresponding 1995 period, a change of $165,000. Interest income decreased
$158,000 due to the Company's utilization of cash arising from the initial
public offering for development activities. Interest expense increased $7,000
due to the additional loans with the State of Oregon and the interest on the
$20 million convertible subordinated debentures. The increase was due to
$375,000 of interest and amortization related to the convertible subordinated
debentures which were issued in August, 1995 and an additional $79,000 of
interest on State of Oregon loans which were made in March 1995 and the first
quarter of 1996. This was offset by capitalized interest of $447,000.
Net Loss. The net loss during the first quarter of 1996 was $187,000
compared to $27,000 during the corresponding period in 1995. These losses have
resulted primarily from initial operating losses of residences which commenced
operations and have not yet achieved stabilized occupancy and an increase in
corporate overhead, including additional staffing, necessary to accommodate
the Company's expansion plan.
Year ended December 31, 1995 compared to one month ended December 31, 1994
(Company) and the eleven months ended November 30, 1994 (Predecessor)
The Company incurred a net loss of $575,000 or $0.19 per share, on revenue
of $4,067,000 for the year ended December 31, 1995. The loss resulted
primarily from an increase in corporate overhead, including additional
staffing necessary to accommodate the Company's expansion plan to develop
additional residences in 1996 and initial operating losses of residences which
commenced operations during the year. For the one month ended December 31,
1994, the Company incurred a net loss $64,000, or $(.02) per share, on
revenues of $212,000.
Revenues. Revenues were $4,067,000 for the year ended December 31, 1995
compared to $212,000 for the one month ended December 31, 1994 and $1,841,000
for the eleven months ended November 30, 1994 for a combined total of
$2,053,000, in 1994 which represents an increase of 98%. The increase is the
direct result of the additional fourteen residences which commenced operations
during 1995. The monthly average revenue per unit for the five Stabilized
Residences at December 31, 1995 was $1,631, compared to $1,592 for the month
ended December 31, 1994. The increase was due to a combination of increased
service care levels and approved rate increases. The average monthly rate for
all residences for the year ended December 31, 1995 was $1,588, which reflects
the effects of the additional 14 residences opened by the Company during 1995.
The payments from the state portion of Medicaid programs comprised
approximately 21% of the Company's revenue for the year ended December 31,
1995 compared to 27% for the month ended December 31, 1994 and 29% for the
eleven months ended November 30, 1994.
Residence Operating Expense. Residence operating expenses were $2,779,000
for the year ended December 31, 1995 compared to $125,000 for the one month
ended December 31, 1994 and $1,127,000 for the eleven months ended November
30, 1994 for a combined total of $1,252,000 in 1994 which represents an
increase of 122%. The increase is due to the increase in revenues as discussed
above along with the start-up costs relating to the fourteen additional
residences which commenced operations during 1995. At December 31, 1995 the
Company had certificates of occupancy on 25 residences, of which 19 were
licensed and had operating results compared to the five licensed residences at
December 31, 1994.
Corporate Overhead. Corporate overhead expenses for the year ended December
31, 1995 was $1,252,000 compared to the one month ended December 31, 1994 of
$152,000. This increase was a result of the increased number of residences
operated by the Company and the establishment of the corporate office.
Building Rentals. Building rentals were $798,000 for the year ended December
31, 1995 compared to $42,000 for the month ended December 31, 1994. The
increase was due to the increased number of sale and
19
<PAGE>
leaseback transactions completed by the Company during 1995. The expense for
1995 represents rental on nine residences while the expense for 1994
represents rental on three residences.
Depreciation and Amortization. Deprecation and amortization for the year
ended December 31, 1995 was $296,000, compared to the depreciation for the one
month ended December 31, 1994 of $13,000 and eleven months ended November 30,
1994 of $105,000 for a combined total of $118,000 in 1994 which represents an
increase of 151%. This increase is the result of an additional 16 facilities
that were developed by the Company in 1995 and were still owned as of December
31, 1995. In addition, two residences which were leased in October of 1995
incurred two months and one month of depreciation, respectively, during 1995.
Interest (Income) Expense--Net. Interest expense for the year ended December
31, 1995 was $96,000 which represents interest on the loans on two initial
buildings purchased from the Predecessor. Interest income of $579,000 was
earned on the investment of cash from the proceeds of the initial public
offering in 1994 and the Company's private placement of convertible debentures
in August of 1995.
Net Income (Loss). The Company incurred a net loss of $575,000 or $0.19 per
share for the year ended December 31, 1995. The loss resulted primarily from
an increase in corporate overhead, including additional staffing necessary to
accommodate the Company's expansion plan to develop additional residences in
1996 and operating losses of residences which commenced operations during the
year.
PREDECESSOR
Eleven Months Ended November 30, 1994 Compared to Year Ended December 31,
1993
Operating results for the period January 1, 1994 to November 30, 1994
reflect eleven months of operations while the 1993 period represents a full
year of operations.
Revenues. For the eleven months ended November 30, 1994, the Predecessor had
revenues of $1,841,000 from the operations of five residences in Oregon,
including Hillside House which commenced operations on October 15, 1994.
Average occupancy in 1994 was 96%, compared to 95% in 1993. Hillside House
reported revenues of $69,000 for the period ended November 30, 1994. Revenues
from other residences increased approximately 3% in 1994 compared to 1993 due
to occupancy rate and reimbursement rate increases, which were partially
offset by a decrease in service levels in the 1994 period. The service needs
of tenants may change depending on the level of services required and the
current case mix.
Residence Operating Expenses. Residence operating expenses (which exclude
building rentals, depreciation and amortization, interest on long-term debt
and corporate costs) were $1,127,000, or 61% of revenue in the eleven months
ended November 30, 1994, compared to 58% in 1993. This increase in expenses
resulted in operating margins of 39% and 42% for the 1994 period and 1993,
respectively. The 1994 decrease in operating margin is primarily due to the
impact of the October 1994 opening of Hillside House, which expectedly
experienced lower initial operating revenues with relatively fixed operating
costs.
Management Fees. Management fees constituted 5% of revenues in the eleven
months ended November 30, 1994 and the year ended December 31, 1993 because
the fees were contractually fixed as a percentage of revenue pursuant to
management agreements.
Depreciation and Amortization. Depreciation and amortization expense was
$105,000 or 5.7% of revenues, in the eleven months ended November 30, 1994,
compared to $132,000 or 7.0% of revenues, in 1993. The Predecessor incurred
$32,000 of amortization expense in 1993 relating to capitalized loan fees and
start-up costs in connection with financing and start-up of buildings. The
Predecessor had no amortization expense in 1994, accounting for the relative
decrease in depreciation and amortization expense.
Interest (Income) Expense--Net. Interest (income) expense-net was $285,000
in the eleven months ended November 30, 1994 compared to $309,000 in 1993, a
decrease of $24,000. Interest income was relatively
20
<PAGE>
constant at $12,000 in the 1994 period compared to $11,000 in 1993. The
additional month in 1993 compared to the 1994 period accounts for the decrease
in net expense.
Net Income (Loss); Pro Forma Provision for Income Taxes; Pro Forma Net
Income (Loss). Income before income taxes was $231,000 in 1994 compared to
$261,000 in 1993. On a pro forma basis, the effective combined federal and
state tax rate would have been 36.8% in 1994 compared to 25.6% in 1993. Pro
forma net income would have been $146,000 in 1994 compared to $194,000 in
1993. The decrease in pro forma net income is due to 1994 reflecting eleven
months of operations compared to a full year in 1993. In addition, the
Predecessor utilized net operating loss carryforwards from previous years,
thereby reducing federal taxes by $27,000 in 1993.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Revenues. Revenues increased to $1,884,000 in 1993 from $1,377,000 in 1992,
an increase of $507,000 or 36.8%. The increase was primarily due to the
inclusion of a full year of operations in 1993 for Huffman House, which
commenced operations in October 1992. Huffman House operations increased
revenue by $401,000 in 1993. The remaining increase of $106,000 was due to
rental and service increases at Aspen Court, Juniper House and Rackleff House.
Residence Operating Expenses. Residence operating expenses increased to
$1,090,000 in 1993 from $908,000 in 1992, an increase of $182,000 or 20%. The
first full year of operations at Huffman House accounted for $160,000 of this
increase. As a percentage of revenues, residence operating expenses were 57.9%
in 1993 compared to 65.9% in 1992. The relative decrease is primarily due to
Huffman House which commenced operations in 1992. Residence operating expenses
were disproportionately high compared to lower start-up revenues in 1993. In
1993, Huffman House reached stabilized occupancy.
Management Fees. Management fees constituted 5% of revenues in each of the
years ended December 31, 1993 and 1992 because the fees were contractually
fixed as a percentage of revenue pursuant to management agreements.
Depreciation and Amortization. Depreciation and amortization increased to
$132,000 in 1993 from $93,000 in 1992, an increase of $39,000, or 41.9%. A
full year of depreciation with respect to Huffman House in 1993 accounted for
substantially all of the increase.
Interest (Income) Expense--Net. Interest (income) expense-net increased to
$309,000 in 1993 from $247,000 in 1992, an increase of $62,000 or 25.1%.
Interest associated with long-term debt on Huffman House increased interest
expense by $69,000 partially offset by lower interest costs due to a reduction
in long-term debt at the other operating properties.
Net Income (Loss); Pro Forma Provision for Income Taxes: Pro Forma Net
Income (Loss). As a result of the above, income before income taxes increased
to $261,000 in 1993 from $60,000 in 1992, an increase of $201,000 or 335.0%.
On a pro forma basis, the effective combined federal and state tax rate would
have been 25.6% in 1993. Due to net operating loss, the Company would have had
no tax provision in 1992. Pro forma net income would have increased to
$194,000 in 1993 from $60,000 in 1992, an increase of $134,000 or 223.3%. The
increase in pro forma net income is due to improved occupancy rates at the
operating properties and the additional profitability of Huffman House which
completed its first full year of operations in 1993.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had negative working capital of approximately
$6.4 million. The Company had accrued $1.9 million in connection with the
acquisition of a residence for which the Company had received a Certificate of
Occupancy, but had not completed closing documentation as of March 31, 1996.
Subsequent to March 31, 1996, the Company purchased this property and
immediately sold it to LTC in a sale and leaseback transaction which
approximated cost. In addition, the Company had received draw requests of
21
<PAGE>
approximately $5.3 million for the March development activity, which was not
due until April 18, 1996. Between March 31, 1996 and April 15, 1996, the
Company completed the sale and leaseback of two residences in Texas for $4.6
million which approximated cost.
Net cash used for operating activities was approximately $2.9 million during
the three month period ended March 31, 1996. The primary use of cash was $1.8
million to reduce accounts payable and accrued expenses, $0.7 million for pre-
opening costs on residences and $0.2 million related to the posting of
deposits for leaseback transactions.
Net cash used in investing activities totaled $6.2 million during the three
month period ended March 31, 1996. The primary use of cash was $20.5 million
related to the development of new assisted living residences in Oregon,
Washington and Texas. This was offset by proceeds of $14.4 million related to
the sale and leaseback of six residences in Texas. Net cash provided by
financing activities totaled $5.9 million during the three month period ended
March 31, 1996 which was primarily related to the proceeds on three separate
residence loans in Oregon.
The Company intends to utilize additional financing to develop additional
residences in 1996. The Company intends to seek additional long-term financing
through the Oregon Housing and Community Services Department (the "OHCS") and,
to the extent available, additional low-cost bond financing, and sale and
leaseback transactions in Washington, Texas and New Jersey. As of June 17,
1996, the Company had started construction or had purchased land for
development on 20 parcels of land in Idaho, Ohio, Oregon, Washington and Texas
for a total of 746 units. Three of these residences opened in the second
quarter, and the Company expects 16 to open in the third quarter, and one to
open in the fourth quarter. In addition, the Company has entered into
agreements to lease one residence in Oregon (30 units) which is currently
under development. The Company has also entered into a management agreement to
operate one residence in Oregon (45 units) upon its completion. The Company
anticipates that these two residences will open in the third quarter. In
addition, the Company has also entered into agreements pursuant to which, it
may purchase, subject to completion of due diligence and various other
conditions, 41 undeveloped sites. The Company has made initial deposits
relating to these sites and has completed or is in the process of completing
its demographic analysis and initial architectural plans for purposes of
building assisted living residences and anticipates that 18 of these
residences will open in the fourth quarter.
Capital expenditures for 1996, which relate primarily to the development of
new residences, are estimated to total approximately $72 million to $88
million, of which approximately $20 million had been spent through March 31,
1996. Subsequent to March 31, 1996, the Company completed the sale and
leaseback of eight residences in Texas for $16.4 million. In addition, the
Company has agreed in principle, subject to written confirmation, to sell an
additional 24 residences to two REITs (one of which is LTC). The Company
expects these sales to generate approximately $62 million in proceeds.
Moreover, the Company anticipates being able to continue to utilize the State
of Oregon tax-exempt bond program for its Oregon residences under development.
The Company currently has an outstanding commitment from the Oregon tax-exempt
bond program to provide approximately $1 million of financing for one
residence and it has three applications under review which, if approved, will
generate approximately $6.6 million in proceeds.
The estimated cost to construct and fund start-up costs for the new
facilities which the Company anticipates developing by December 31, 1998 is
between $320 million and $350 million which substantially exceeds the funds
currently available to the Company. Substantial additional financing will be
required to complete the Company's growth plans. There can be no assurance
that such financing will be available on acceptable terms. See "Risk Factors--
Need for Additional Financing."
As of March 31, 1996, the Company had invested excess cash balances in
short-term certificates of deposit and U.S. Treasury securities. The Company
intends to satisfy future capital requirements for its development activities
by various means, including financing obtained from sale/leaseback
transactions, construction
22
<PAGE>
financing, long-term state bond financing, debt or equity offerings, such as
this Offering, and, to the extent available, cash generated from operations.
INFLATION
Management believes that the Company's operations have not been materially
adversely affected by inflation. The Company expects salary and wage increases
for its skilled staff will continue to be higher than average salary and wage
increases, as is common in the health care industry. The Company expects that
it will be able to offset the effects of inflation on salaries and other
operating expenses by increases in rental and service rates, subject to
applicable restrictions with respect to services that are provided to
residents eligible for Medicaid reimbursement.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed the requirements of the Financial Accounting
Standard Board's Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"),
and does not anticipate the expected undiscounted future cash flows generated
by operating its long-lived assets to be less than the assets carrying
amounts, therefore the Company does not anticipate any impact upon
implementation of SFAS No. 121 in 1996.
The Company has determined not to implement FASB issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and will continue to comply with APB Opinion
25, "Accounting for Stock Issued to Employees", in accounting for stock-based
compensation issued to employees. The Company will record any stock-based
compensation to non-employees in accordance with SFAS No. 123. The Company
will adopt the new fair value accounting rules to disclose pro forma net
income and earnings per share under the new method. The Company will comply
with the disclosure requirements beginning January 1, 1996.
23
<PAGE>
BUSINESS
OVERVIEW
The Company develops, owns, leases and operates assisted living residences,
an increasingly popular form of housing for senior citizens who, although
generally ambulatory, need help with the activities of daily living. In
addition to housing, the Company provides personal care and support services,
and makes available routine nursing services (as permitted by applicable
government regulations) designed to meet the needs of its residents. The
Company believes that this combination of housing, personal care and support
services provides a cost-efficient alternative and provides an independent
lifestyle for individuals who do not require the broader array of medical
services that nursing facilities are required by law to provide.
The Company was founded in July 1994 by Dr. Keren B. Wilson, the Company's
Chief Executive Officer and President, to develop, own, lease and operate
assisted living residences. The Company completed its initial public offering
in November, 1994 and immediately began operating five assisted living
residences containing an aggregate of 137 units. As of June 17, 1996, the
Company owned or leased a total of 43 assisted living residences containing an
aggregate of 1,486 units. For the three months ended March 31, 1996, the
Company's nine stabilized residences which are defined as those residences
that had been operating for nine months prior to the beginning of the period
or had achieved 95% occupancy within the first nine months of operations, had
average occupancies of approximately 99%. The average monthly rental for the
nine Stabilized Residences for the three months ended March 31, 1996 was
approximately $1,682 per unit. The Company's total residences had average
occupancies of approximately 78% and an average monthly rental of $1,595 per
unit for the same period. The Company had revenues of $2.8 million and a net
loss of $187,000 for the three months ended March 31, 1996. The Company
anticipates that a majority of its revenues will continue to come from private
pay sources. However, the Company believes that locating residences in states
with favorable regulatory and reimbursement climates should provide a stable
source of residents eligible for Medicaid reimbursement to the extent that
private pay residents are not available and, in addition, provide the
Company's private pay residents with alternative sources of income when their
private funds are depleted and they become Medicaid eligible.
Currently, all of the Company's operating residences are located in small
communities in Oregon, Washington and Texas. The Company had 43 residences
opened as of June 17, 1996. Of the 43 residences opened by the Company, 14 of
the residences were owned and 29 of the residences were leased. The Company is
currently developing and, to a lesser extent, seeking to acquire additional
assisted living residences in small communities in Oregon, New Jersey, Texas,
Washington, Ohio, Idaho and other states with regulatory and reimbursement
climates that the Company believes are favorable. As of June 17, 1996, the
Company had commenced construction on 20 residences (approximately 746 units),
had agreed to lease upon completion one residence (30 units) that was being
developed by an outside developer and had entered into a management agreement
to operate one residence (45 units). In addition, the Company had entered into
land purchase option agreements for the development of 41 residences. The
Company generally does not acquire sites for development until it has
completed its feasibility analysis and appropriate zoning has been obtained.
Capital expenditures for 1996, which relate primarily to the development of
new residences, are estimated to total approximately $72 to $88 million, of
which approximately $20 million had been spent through March 31, 1996.
INDUSTRY
The long-term care industry encompasses a continuum of accommodations and
health care services that are provided primarily to the elderly. For those
among the elderly requiring limited services, home-based care in the elderly
person's home or in a retirement center offers a viable option for assistance
on an "as required" basis. Services provided by congregate and retirement
centers are often limited to meals, housekeeping and laundry. As an elderly
person's needs for assistance increase, care in an assisted living residence,
where assistance with personal care (such as dressing and bathing), support
services (such as housekeeping and laundry), and routine nursing services
(such as assistance with taking medication and health monitoring), are
available, is often
24
<PAGE>
preferable to home-based care. For those elderly people in need of specialized
support, rehabilitative, nutritional, respiratory, and other skilled
treatments, care in a nursing facility may be required. Generally, assisted
living residents have higher acuity levels than residents of congregate and
retirement living centers but lower acuity levels than patients in skilled
nursing facilities.
Assisted living is designed to enhance both the physical and psychological
well-being of the frail elderly by promoting their independence in a home-like
setting. The services and supervision provided are intended to optimize the
residents' abilities and foster their autonomy. Residents are typically
individuals who do not require the 24-hour skilled medical care provided in
nursing care facilities, but who are unable, for various reasons, to live
alone. The Company believes that the assisted living industry is among the
most rapidly expanding sectors of the senior care marketplace. The Company
believes that the following factors should continue to positively affect the
assisted living industry:
Limited Supply of Nursing Facility Beds. The majority of states have adopted
certificate of need ("CON") or similar statutes that generally require a state
agency to determine that a need exists prior to the addition of new beds, or
the addition of new services which may be reimbursable, either in whole or in
part, by one or more government funded programs. Additionally, the Company
believes that high construction costs, limitations on government reimbursement
for the full cost of construction and start-up expenses further restrain the
growth in the supply of such facilities and beds.
Aging Population. According to the U.S. Bureau of Census, the number of
individuals in the United States 85 years and older is expected to increase by
approximately 43% during the 1990s, from 3.0 million in 1990 to an estimated
4.3 million in 2000, as compared to total U.S. population growth of
approximately 11% during the same period. It is further estimated that
approximately 57% of the population of seniors over age 85 currently need
assistance with activities of daily living and more than one-half of all
seniors are likely to develop Alzheimer's disease or other cognitive disorders
by age 85.
Lower Average Cost. The Company believes that the average annual cost to
residents of receiving assisted living care in the Company's residences is
approximately 60 to 80 percent of the cost of receiving similar care in a
skilled nursing facility. According to the Marion Merrell Dow Inc. Managed
Care Digest Series, Institutional Digest 1995, the average annual cost per
person in 1994 in the United States for private, nursing home care was
approximately $36,000. During the three months ended March 31, 1996, the
Company's nine Stabilized Residences annualized revenue per resident was
approximately $20,100.
Cost Containment Pressures. Responding to rising health care costs,
governmental and private payor sources have adopted cost containment measures
that have encouraged reduced lengths of stay in hospitals. The result of this
trend is an increase in the number of seniors requiring acute care who are
more likely to receive care in a skilled nursing facility as opposed to an
acute-care hospital. This, in turn, has caused nursing facility operators to
focus on improving occupancy and increasing services to residents requiring
these higher levels of care. As the level of care for nursing facility
residents rises and the supply of nursing facility space is filled by
residents having more acute needs, the Company believes that demand for
assisted living residences will increase.
Favorable Regulatory and Reimbursement Climate. In recent years, certain
states have adopted laws or regulations permitting individuals with higher
acuity levels to remain in assisted living communities, rather than requiring
that those individuals be transferred to a skilled nursing facility. These
changes have generally been prompted by the cost-containment pressures
discussed above and a desire to reduce the demand for expensive skilled
nursing services for the elderly. Ohio, Oregon, New Jersey, Texas and
Washington are among the states that have adopted such regulations for the
operation of assisted living residences. Each of these states, for example,
allows assisted living facilities to provide certain skilled nursing services
and permits occupancy by residents who may otherwise qualify for placement in
a nursing facility.
25
<PAGE>
In addition, in 1981, the federal government approved a Medicaid waiver
program, which permits states to develop programs relating to the health care
and housing needs of the low-income elderly eligible for nursing home
placement (the "Medicaid Waiver Program"). Medicaid waivers permit states to
apply a portion of Medicaid funding for skilled nursing facility care to other
forms of care, such as assisted living. Without a Medicaid Waiver Program,
states can only use federal Medicaid funds for long-term care in skilled
nursing facilities. Medicaid funds for assisted living services are currently
available in twenty states. Medicaid Waiver Programs to fund assisted living
services are being considered for implementation in additional states. The
implementation of these favorable laws and regulations and the Medicaid Waiver
Program have created a regulatory climate in these states that encourages the
development of assisted living facilities.
Consumer Acceptance. The Company believes assisted living is increasingly
the preferred alternative of seniors and their families. Assisted living
residents generally have greater independence, and assisted living services
typically allow residents to "age in place" in a residential setting. The
Company believes these factors result in a higher quality of life than would
be experienced in a more institutional or clinical settings, such as a skilled
nursing facility.
Increasing Affluence of the Elderly. According to the United States Bureau
of the Census, the median net worth of householders age 75 and older has
increased from $61,491 in 1988 to $76,541 in 1992. Accordingly, the Company
believes that the number of seniors who are able to afford high-quality
residential environments, such as those offered by the Company, has increased
in recent years.
STRATEGY
The Company intends to expand its position as a provider of assisted living
services through continued development and expansion opportunities. The
Company generally locates its residences in well-established residential
neighborhoods in smaller rural and suburban communities, where the population
typically ranges from 10,000 to 40,000 with a higher than average percentage
of middle aged or elderly individuals. The principal elements of the Company's
strategy for achieving this objective are as follows:
Expand Market Penetration. The Company intends to continue to grow primarily
through the development of additional residences and to increase its market
penetration in both existing and targeted markets. The Company targets smaller
rural and suburban communities with an appropriate concentration of seniors.
The Company also focuses on states with favorable regulatory environments and
Medicaid reimbursement programs. In its targeted markets, the Company seeks to
develop clusters of residences to enable the Company to realize operating
efficiencies and economies of scale within a region.
Service Higher Acuity Residents. The Company offers, directly and through
ancillary services, higher levels of care to its residents than is typical in
other assisted living residences. In addition, the Company will endeavor to
make available third party providers to complement the Company's range of
services in order to meet the varied needs of its residents. By providing
access to both a more intensive and broader spectrum of care, the Company
believes it will be more capable of providing residents the opportunity to
"age in place", and thereby eliminate the need for its residents to be
transferred to a higher acuity environment such as a skilled nursing facility.
Pursue Joint Venture Opportunities. Where appropriate, the Company seeks to
facilitate entry into new markets by entering into joint venture
relationships. Assisted living residence joint ventures will generally consist
of the Company providing strategic, operational and management services in
exchange for an ownership interest. The Company believes that the
implementation of these assisted living joint ventures will enable it to
establish a presence in certain markets on an expedited basis while limiting
its commitment of additional resources. The Company may also pursue joint
ventures with other community-based providers, such as home health agencies.
The Company believes that such joint ventures will allow it to offer
additional services and generate additional resident referrals.
26
<PAGE>
PROPERTIES
The following chart sets forth, as of June 17, 1996, the location, ownership
status, number of units, the licensure date and the occupancy at May 31, 1996
for the Company's residences.
<TABLE>
<CAPTION>
OCCUPANCY AT
RESIDENCE LOCATION OWNERSHIP UNITS LICENSURE DATE MAY 31, 1996
- --------- -------- --------- ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
OREGON
Rackleff House Canby Leased(1) 25 December 1990 96%
Aspen Court Madras Owned 27 March 1991 100%
Juniper House Pendleton Leased(1) 26 April 1991 100%
Huffman House Newberg Leased(1) 26 October 1992 96%
Hillside House Lincoln City Owned 33 October 1994 100%
Brookside House Redmond Leased(1) 37 March 1995 95%
Davenport House Silverton Owned 30 July 1995 100%
Carriage House Prineville Owned 30 October 1995 83%
Parkhurst House Hood River Owned 30 October 1995 83%
Awbrey House Bend Owned 46 November 1995 78%
Adams House Myrtle Creek Leased(1) 34 March 1996 41%
-----
SUBTOTAL 344
=====
TEXAS
Oakwood House Marshall Leased(1) 30 July 1995 90%
Alpine House Longview Leased(1) 30 September 1995 97%
Preston House Sherman Leased(1) 30 October 1995 90%
Cedarview House Gun Barrel City Leased(1) 30 October 1995 97%
Winkler House Carthage Leased(1) 30 October 1995 73%
Lakeland House Athens Leased(1) 30 November 1995 90%
Harrison House Greenville Leased(1) 30 November 1995 83%
Angelina House Jacksonville Leased(1) 39 December 1995 82%
Wheeler House Gainesville Leased(1) 30 January 1996 53%
Hickory House Levelland Leased(1) 30 January 1996 73%
Hopkins House Sulphur Springs Leased(1) 30 January 1996 73%
Katy House Denison Leased(1) 30 January 1996 60%
Wren House Cleburne Leased(1) 36 January 1996 90%
Hoyt House Sweetwater Leased(1) 30 March 1996 53%
Sabine House Orange Leased(1) 36 March 1996 33%
Potter House Amarillo Leased(1) 50 March 1996 86%
Lucas House Beaumont Leased(1) 50 April 1996 42%
Neches House Lufkin Leased(1) 39 May 1996 28%
Rose House Port Arthur Leased(1) 50 May 1996 34%
Marcy House Big Spring Owned 38 June 1996 N/A
Austin House Nacogdoches Owned 30 June 1996 N/A
Millican House Bryan Owned 30 June 1996 N/A
Mackenzie House Lubbock Owned(2) 50 June 1996 N/A
Lakewell House Mineral Wells Owned 30 June 1996 N/A
Bradfield House Mesquite Owned(2) 50 June 1996 N/A
Santa Fe House Plainview Owned 36 (3) N/A
Connor House Canyon Owned 30 (3) N/A
-----
SUBTOTAL 954
=====
WASHINGTON
Chenoweth House Kennewick Leased(1) 36 December 1995 97%
Orchard House Grandview Leased(1) 36 February 1996 56%
Pioneer House Walla Walla Leased(1) 36 February 1996 94%
Mountainview House Camas Leased(1) 36 March 1996 36%
Lexington House Vancouver Leased(1) 44 June 1996 N/A
-----
SUBTOTAL 188
-----
TOTAL 1,486
=====
</TABLE>
27
<PAGE>
- --------
(1) The initial lease terms range from ten to twenty years. The Company is
responsible for all costs including repairs to the residence, property
taxes, and other direct operating costs of the residences. Building rent
is recorded on a straight-line basis for those residences which have a
specified rent increase. Building rent is recorded as incurred for those
residences which have annual increases based on an increase in the
consumer price index.
(2) The Company has entered into an agreement to sell to and lease back the
residence from a REIT.
(3) Certificates of occupancy have been received and licensure is pending.
The Company also leases approximately 3,500 square feet of office space in
Portland, Oregon which houses its corporate and northwest regional
headquarters. Due to the recent construction of its owned and leased
residences, the Company believes that these residences are suitable and
adequate for the conduct of its business and operations.
28
<PAGE>
DEVELOPMENT
The Company is developing additional residences in Oregon, New Jersey,
Texas, Washington, Ohio, Idaho and other states. As of June 17, 1996, the
Company had commenced construction on 20 residences, had agreed to lease upon
completion one residence which was being developed by an outside developer,
and had entered into a management agreement to operate one residence upon its
completion. The following sets forth the location, number of units and
expected commencement of operations for these residences:
<TABLE>
<CAPTION>
EXPECTED COMMENCEMENT
LOCATION UNITS OF OPERATIONS(1)
-------- ----- ---------------------
<S> <C> <C>
IDAHO
Hayden 39 Q 3 1996
---
OHIO
Bellefontaine 35 Q 3 1996
Bucyrus 35 Q 3 1996
Defiance 39 Q 3 1996
---
109
---
OREGON
Brookings 36 Q 3 1996
Newport(2) 36 Q 3 1996
Astoria 28 Q 3 1996
Grants Pass(3) 45 Q 3 1996
Sutherlin(4) 30 Q 3 1996
Klamath Falls 35 Q 3 1996
Estacada 30 Q 3 1996
Talent 36 Q 4 1996
---
SUBTOTAL 276
---
TEXAS
Conroe 38 Q 2 1996
Pampa 36 Q 2 1996
Abilene 38 Q 3 1996
College Station 39 Q 3 1996
Henderson 30 Q 3 1996
Midland 50 Q 3 1996
Rowlett 36 Q 3 1996
Wichita Falls 50 Q 3 1996
---
SUBTOTAL 317
---
WASHINGTON
Kelso 40 Q 2 1996
Battle Ground 40 Q 3 1996
---
SUBTOTAL 80
---
TOTAL 821
===
</TABLE>
- --------
(1) The quarter in which the residence expects to receive its certificate of
occupancy. The Company anticipates that the residence will receive its
licensure within 1 to 2 months of receiving its certificate of occupancy.
See "Risk Factors--No Assurance as to Ability to Develop or Acquire
additional Living Residences."
(2) The Company has control of this site through a 31 year land lease with two
consecutive 30-year extensions.
(3) The Company has agreed to operate this residence under a management
agreement upon completion.
(4) The Company has agreed to lease this residence from an outside developer
upon completion.
29
<PAGE>
The Company has also entered into land purchase option agreements in
connection with the acquisition of 41 sites which it may develop into
additional residences. The Company has made initial deposits relating to these
sites and has completed or is in the process of completing its demographic
analysis and initial architectural plans for purposes of building assisted
living residences and anticipates that 18 of these residences will open in the
fourth quarter.
The Company generally locates its residences in well-established residential
neighborhoods in smaller rural and suburban communities, where the population
typically ranges from 10,000 to 40,000 with a higher than average percentage
of middle aged or elderly individuals. To provide the appropriate level of
personal care efficiently and economically, and to ensure that residents are
not intimidated by residence size, the Company develops residences ranging in
size from 30 to 50 residential units and containing approximately 16,000 to
32,000 total square feet, with each unit comprising an average of 320 square
feet of private living space.
The Company either retains outside developers to construct residences, or
acquires newly-constructed residences from developers under "turn-key"
agreements. The Company approves all aspects of development including, among
other things, site selection, plans and specifications, the proposed
construction budget and selection of the architect and general contractor. The
Company estimates the average construction time for a typical residence to be
approximately five to nine months, depending upon the number of units. The
Company estimates that, once developed, it takes approximately nine months
after licensure for each residence to achieve a stabilized occupancy level of
95% or higher. The Company anticipates that each residence will have an
operating loss (prior to depreciation, rent or interest, if any) of $10,000
during the first three to four months of operation. To the extent the Company
sells a residence and leases it back or otherwise finances it within four
months of the commencement of operations, the aggregate loss may increase by
up to an additional $40,000.
SERVICES
The Company's residences offer residents a supportive, "home-like" setting
and assistance with activities of daily living. Residents are individuals who,
for a variety of reasons, cannot live alone but do not typically need the 24-
hour skilled medical care provided in nursing facilities. Services provided to
these residents are designed to respond to their individual needs and to
improve their quality of life. This individualized assistance is available 24
hours a day, to meet both anticipated and unanticipated needs. General
services in the Company's residences include the provision of three meals per
day, laundry, housekeeping and maintenance. Available support services include
personal care and routine nursing care, social and recreational services,
transportation and other special services needed by the resident. Personal
care includes services such as bathing, dressing, personal hygiene, grooming,
as well as eating and ambulating assistance. Routine nursing services, which
are made available and are provided according to the residents individual need
and state regulatory requirements, include assistance with taking medication,
skin care and injections. Organized activities are available for social
interaction and entertainment. Special services available include banking,
grocery shopping and pet care. The Company also arranges access to additional
services beyond its provision of basic housing and related services, including
physical therapy, pharmacy services and the sale or lease of durable medical
equipment.
Although a typical package of basic services provided to a resident includes
meals, housekeeping, laundry and personal care, the Company does not have a
standard service package for all residents. Instead, it is able to accommodate
the changing needs of its residents through the use of individual service
contracts and flexible staffing patterns. The Company's multi-tiered rate
structure for the services it provides is based upon the acuity of, or level
of services needed by, each resident. Supplemental and specialized health care
services for those residents requiring 24-hour supervision or more extensive
assistance with activities of daily living are provided by third-party
providers who are reimbursed directly by the resident or a third-party payor
(such as Medicaid or long term care insurance). The Company assesses the level
of need of each resident regularly.
30
<PAGE>
OPERATIONS
The day-to-day operations of each residence are managed by an on-site
program director who is responsible for the overall operation of the
residence, including quality of care, marketing, social services and financial
performance. The program director is assisted by professional and non-
professional personnel, some of whom may be independent providers or part-time
personnel, including nurses, personal service assistants, maintenance and
kitchen personnel. The Company's facilities do not have any doctors on staff.
The nursing hours vary depending on the residents' needs. The Company consults
with outside providers, such as registered nurses, pharmacists, and
dietitians, for purposes of medication review, menu planning and responding to
any special dietary needs of its residents. Personal care, dietary services,
housekeeping and laundry services are performed primarily by personal service
assistants who are full-time employees of the Company. Maintenance services
are performed by part-time employees, while landscaping services are typically
performed by third-party contractors.
The Company manages its residences, which includes the development of
operating standards and the provision of recruiting, training and accounting
services. The Company utilizes regional offices that include a team leader who
typically oversees four to six residences and works under the supervision of a
regional manager. The team leader is responsible for monitoring and
supervising all aspects of operations in the region, including reviewing and
monitoring compliance with corporate policies and procedures, and acting as a
liaison between the residences and corporate headquarters. The regional office
team leaders oversee the day-to-day operations of the residences. Financial
oversight, including all disbursements, are managed at the corporate office.
Presently, the residence personnel are supported by a corporate staff based
at the Company's headquarters. Corporate personnel work with the program
directors to establish residence goals and strategies, quality assurance
oversight, development of Company policies and procedures, development and
implementation of new programs, cash management and treasury functions and
human resource management.
COMPETITION
The long-term care industry generally is highly competitive and the Company
expects that the assisted living business in particular will become more
competitive in the future. The Company competes with numerous other companies
providing similar long-term care alternatives, such as home health agencies,
life care at home, community-based service programs, retirement communities
and convalescent centers. The Company expects that, as assisted living
receives increased attention and the number of states which include assisted
living in their Medicaid programs increases, competition will grow from new
market entrants, including publicly and privately held companies focusing
primarily on assisted living. Nursing facilities that provide long-term care
services are also a potential source of competition for the Company. Providers
of assisted living residences compete for residents primarily on the basis of
quality of care, price, reputation, physical appearance of the facilities,
services offered, family preferences, physician referrals, and location. Some
of the Company's competitors operate on a not-for-profit basis or as
charitable organizations. Some of the Company's competitors are significantly
larger than the Company and have, or may obtain, greater resources than those
of the Company. The Company believes that there is moderate competition for
less expensive segments of the private market and for Medicaid patients in
small communities. The Company's major competitors are other long-term care
facilities within the same geographic area as its residences because
management's experience indicates that senior citizens who move into living
communities frequently choose communities near their homes.
FUNDING FOR ASSISTED LIVING CARE
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individuals
health insurance program or long-term care insurance policy, the individual
may receive reimbursement for costs of care under an "alternative care
benefit." Government payments for assisted living have been limited. Some
state and local governments offer subsidies for rent or services for low
income elders. Others may provide subsidies in the form of additional payments
for those who receive Supplemental Security Income (SSI). Medicaid provides
coverage for certain financially or medically
31
<PAGE>
needy persons, regardless of age, and is funded jointly by federal, state and
local governments. Medicaid reimbursement varies from state to state. Although
a majority of the Company's revenues come from private payors, the cost
structure of the residences has historically been, and is expected to continue
to be, sufficiently low so that the residences are able to operate profitably
if all of their revenues are derived through Medicaid reimbursements.
In 1981, the federal government approved a Medicaid waiver program called
Home and Community Based Care which was designed to permit states to develop
programs specific to the healthcare and housing needs of the low-income
elderly eligible for nursing home placement (a "Medicaid Waiver Program"). In
1986, Oregon became the first state to use federal funding for licensed
assisted living services through a Medicaid Waiver Program authorized by the
Health Care Financing Administration ("HCFA"). Under a Medicaid Waiver
Program, states apply to HCFA for a waiver to use Medicaid funds to support
community-based options for the low-income elderly who need long-term care.
These waivers permit states to reallocate a portion of Medicaid funding for
nursing facility care to other forms of care such as assisted living. In 1994,
the federal government implemented new regulations which empowered states to
further expand their Medicaid Waiver Programs and eliminated restrictions on
the amount of Medicaid funding states could allocate to community-based care,
such as assisted living. A limited number of states including Oregon, New
Jersey, Texas, Washington, Ohio and other states currently have, or will have,
operating Medicaid Waiver Programs that allow them to pay for assisted living
care. Without a Medicaid Waiver Program, states can only use federal Medicaid
funds for long-term care in nursing facilities.
During the year ended December 31, 1995 and the three months ended March 31,
1996, direct payments received from state Medicaid agencies accounted for
approximately 21% and 14% respectively of the Company's revenue while the
tenant-paid portion of Medicaid residents accounted for approximately 10% and
8% of the Company's revenue during these periods. The Company expects that
state Medicaid reimbursement programs will constitute a significant source of
revenue of the Company
GOVERNMENT REGULATION
The Company's assisted living residences are subject to certain state
regulations and licensing requirements. In order to qualify as a state
licensed facility, the Company's residences must comply with regulations which
address, among other things, staffing, physical design, required services and
resident characteristics. The Company has obtained licenses in Oregon,
Washington, and Texas, and expects that it will obtain licenses in other
states as required. The Company's residences are also subject to various local
building codes and other ordinances, including fire safety codes. These
requirements vary from state to state and are monitored to varying degrees by
state agencies.
The Company believes that its residences are in substantial compliance with
all applicable regulatory requirements. However, in the ordinary course of
business, a residence can be cited for a deficiency. In such cases, the
appropriate corrective action is taken. No material actions are currently
pending on any of the Company's residences nor have any of them been cited for
material non-compliance with regulatory requirements.
As a provider of services under the Medicaid program in the United States,
the Company is subject to Medicaid fraud and abuse law, which prohibits any
bribe, kickback, rebate or remuneration of any kind in return for the referral
of Medicaid patients, or to induce the purchasing, leasing, ordering or
arranging of any goods or services to be paid for by Medicaid. Violations of
these laws may result in civil and criminal penalties and exclusions from
participation in the Medicaid program. The Inspector General of the Department
of Health and Human Services issued "safe harbor" regulations specifying
certain business practices which are exempt from sanctions under the fraud and
abuse law. Several states in which the Company operates or intends to operate
have laws that prohibit certain direct or indirect payments or fee-splitting
arrangements between health care providers if such arrangements are designed
to induce or encourage the referral of patients to a particular provider. The
Company at all times attempts to comply with all applicable fraud and abuse
laws. There can be no assurance that administrative or judicial interpretation
of existing laws or regulations or enactments of new
32
<PAGE>
laws or regulations will not have a material adverse effect on the Company's
results of operations or financial condition.
Currently, assisted living residences are not regulated as such by the
federal government. State standards required of assisted living providers are
less in comparison with those required of other licensed health care
operators. For instance, the states initially targeted for
development/expansion by the Company do not set staffing ratios. Current
Medicaid regulations provide for comparatively flexible state control over the
licensure and regulation of assisted living residences. There can be no
assurance that federal regulations governing the operation of assisted living
residences will not be implemented in the future or that existing state
regulations will not be expanded.
EMPLOYEES
As of March 31, 1996, the Company had approximately 705 employees, of which
257 were full-time employees and 448 were part-time employees. None of the
Company's employees are represented by any labor union. The Company believes
that its labor relations are good.
33
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and certain other key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS
Keren Brown Wilson...... 47 Chief Executive Officer, President and Director
Stephen Gordon.......... 46 Chief Financial Officer and Chief Administrative Officer
William McBride
III(1)(2).............. 36 Chairman of the Board of Directors
Andre C.
Dimitriadis(1)(2)...... 55 Director
Richard C. Ladd(2)...... 57 Director
Bradley G. Razook(1).... 40 Director
CERTAIN KEY EMPLOYEES
Connie J. Baldwin....... 51 Director of Operations
Rhonda S. Marsh......... 29 Controller
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
The Board of Directors currently consists of five persons. Directors are
elected for one-year terms expiring at the next annual meeting of shareholders
and will hold office until their successors are duly elected and qualified.
Dr. Keren Brown Wilson is a co-founder of the Company and became the Chief
Executive Officer and President and a director of the Company upon its
formation in July 1994. Dr. Wilson has 20 years of experience in aging service
delivery systems and has, for the past eleven years, focused primarily on
assisted living. From 1988 to September 1994, Dr. Wilson was the President and
sole director of Concepts in Community Living, a corporation which specializes
in the development and management of assisted living residences. From 1992 to
August 1994, Dr. Wilson was also President of Sterling Management Company, a
company which provides management services to private (non-Medicaid) assisted
living facilities in the state of Kansas. From 1986 to 1988, Dr. Wilson was a
Senior Vice President at Milestone, Inc., an assisted living development and
management company. Prior to 1986, Dr. Wilson was an owner and management
agent for Park Place Living Center in Portland, Oregon, and the Director of
Research and Education for the Oregon Association of Homes for the Aging in
Portland, Oregon. Since 1983, Dr. Wilson has also been an Associate Professor
at the Institute for Aging at Portland State University. In these capacities,
Dr. Wilson was responsible for designing, developing and managing the state of
Oregon's first assisted living residence along with the states first Medicaid-
eligible assisted living residence.
Stephen Gordon is the Chief Administrative Officer and Chief Financial
Officer and has over twenty years of financial services industry experience.
From April 1990 to July 1995, Mr. Gordon was the manager of Housing Finance
for the Oregon Housing and Community Services Department. In this capacity,
Mr. Gordon was instrumental in the development of over 5,000 units of
affordable housing for the state. Under the state's elderly and disabled
program, Mr. Gordon was responsible for the funding of over 1,000 units of
assisted living housing for the elderly. Mr. Gordon has a Bachelor of Science
from the University of California, Los Angeles.
William McBride III is a co-founder of the Company and has been a director
since its formation. Mr. McBride is President and Chief Operating Officer of
LTC Properties, Inc. (LTC), a health care real estate investment trust
specializing in the long-term care industry, which was co-founded by Mr.
McBride in 1992. Prior to founding LTC, Mr. McBride was employed from April
1988 to July 1992 by Beverly Enterprises, Inc., an owner/operator of long-term
care facilities, retirement living facilities and pharmacies where he served
as Vice President, Controller and Chief Accounting Officer. From 1982 to 1988,
Mr. McBride was employed by the
34
<PAGE>
public accounting firm of Ernst & Young. Mr. McBride serves as a member of the
board of directors of LTC and Malan Realty Investors, Inc.
Andre C. Dimitriadis is a co-founder of the Company and has been a director
since its formation. Mr. Dimitriadis is Chairman and Chief Executive Officer
of LTC, which he co-founded with Mr. McBride in 1992. Prior to founding LTC,
Mr. Dimitriadis was employed from October 1989 to May 1992 by Beverly
Enterprises, Inc., where he served as Executive Vice President and Chief
Financial Officer. From 1985 to 1989, Mr. Dimitriadis was employed by American
Medical International, Inc., an owner/operator of hospitals, where he served
as Executive Vice President Finance, Chief Financial Officer and Director. Mr.
Dimitriadis serves as a member of the board of directors of LTC, Magellan
Health Services, Inc. and Health Management, Inc.
Richard C. Ladd has been a director of the Company since September 1994.
Since September 1994, Mr. Ladd has been the President of Ladd and Associates,
a health and human services consultation firm. From June 1992 to September
1994, Mr. Ladd served as the Texas Commissioner of Health and Human Services
where he oversaw the development and implementation of a 22,000-bed Medicaid
Waiver Program to be used for assisted living and other community-based
service programs. From November 1981 to June 1992, Mr. Ladd served as
Administrator of the Oregon Senior and Disabled Services Division. Mr. Ladd
currently serves on the U.S. Advisory Panel on Quality of Care in Board and
Care Facilities and is an adjunct member of the faculty at the Lyndon Baines
Johnson School of Public Affairs at the University of Texas. He is also a
member of numerous professional and honorary organizations, including the
National Academy of State Health Policy, as a member of its Executive
Committee.
Bradley G. Razook has been a director of the Company since August 1994. Mr.
Razook is an Executive Vice President of National Westminster Bank PLC, New
York Branch ("NatWest Markets") which he joined in 1990. From 1985 to 1990,
Mr. Razook was a First Vice President and counsel at Drexel Burnham Lambert,
Inc., an investment banking firm. See "Underwriting."
Connie J. Baldwin has over twenty years of experience in designing and
implementing services to the elderly and joined the Company in February of
1995 as Director of Operations. From December 1993 to January 1995, Ms.
Baldwin was Executive Director for the Center for Developing Older Adult
Resources, a non-profit entity in Phoenix, Arizona. From September 1990 to
December 1993, she was the Health Care Administrator for Managed Care Systems,
a division of the state of Arizona's Long-Term Care Medicaid Program. In
addition, Ms. Baldwin has held the position of Manager of Home and Community
Based Care in the State of Oregon with the Senior and Disabled Services
Department and was instrumental in the development of the State's assisted
living rules.
Rhonda S. Marsh joined the Company as Controller in November 1995. From
March 1995 to October 1995, Ms. Marsh was Compliance Controller and Acting
Accounting Manager for Integrated Measurement Systems, Inc. From November 1992
to March 1995 Ms. Marsh worked at KPMG Peat Marwick LLP, an international
accounting firm. From 1989 to October 1992, she was the Corporate Controller
of Evergreen International Aviation, Inc.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of Messrs.
McBride, Dimitriadis and Razook. The Compensation Committee reviews and
approves the compensation of the Company's executive officers and determines
the general compensation policy for the Company. The Compensation Committee
also is responsible for the administration of the Company's 1994 Stock Option
Plan and is authorized to determine the options to be granted under the plan
and the terms and provisions of such options.
Mr. McBride and Mr. Dimitriadis are the President and Chairman,
respectively, of LTC. The Company has completed certain sale-leaseback
transactions, and has agreed to enter into certain additional sale-leaseback
transactions with LTC. Mr. Razook is a managing director of NatWest Markets,
an investment banking firm that
35
<PAGE>
has provided investment banking services to the Company in the past, and may
do so in the future. See "Certain Transactions" and "Underwriting."
COMPENSATION OF DIRECTORS
Each Director receives a fee of $12,000 per year for services as a director
plus $500 for attendance in person at each meeting of the Board of Directors
or of any committee meeting held on a day on which the Board of Directors does
not meet. In addition, the Company reimburses the directors for travel
expenses incurred in connection with their duties as directors of the Company.
During 1995, the Company granted the directors non-qualified options to
purchase a total of 70,000 shares of Common Stock at $13.00 per share, subject
to shareholder approval of an amendment to the Company's 1994 Stock Option
Plan increasing the number of shares covered by the plan from 300,000 to
600,000. Dr. Wilson, Mr. McBride and each of the non-employee directors
received options to purchase 40,000, 7,500 and 7,500 shares of Common Stock,
respectively. Such options vest ratably on each of November 27, 1996, 1997 and
1998 or such director's earlier death or disability, and are exercisable
within seven years from the date of vesting.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
during the fiscal year ended December 31, 1995 to the Company's Chief
Executive Officer (the "Named Executive Officer"). No other executive officer
of the Company received total compensation of $100,000 or more in fiscal 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
AWARDS
------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATIONS
------------------ ---- -------- ----- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Keren B. Wilson.... 1995 $100,000 -- -- 40,000 --
1994 33,333 -- -- 60,000 --
</TABLE>
STOCK OPTION GRANTS
The following table provides information on stock options granted during
1995 to the Named Executive Officer.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AS ASSUMED
ANNUAL RATE OF
STOCK PRICE
APPRECIATION
FOR OPTION TERM (2)
---------------------
INDIVIDUAL GRANTS
--------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE DATES 5% ($) 10% ($)
---- ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Keren B. Wilson......... 13,333 8.7% $13.00 11/27/2003 82,759 198,222
13,333 8.7% 13.00 11/27/2004 95,564 235,378
13,333 8.7% 13.00 11/27/2005 109,008 276,249
</TABLE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
- --------
(1) These options become exercisable in three equal portions of 13,333 on
November 27, 1996, 1997 and 1998, and expire in each case on the seventh
anniversary of the date the option becomes exercisable.
(2) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated by
the rules of the Commission and do not represent the Company's estimate or
projection of future Common Stock prices.
36
<PAGE>
STOCK OPTION HOLDINGS
The following table provides information with respect to the Named Executive
Officer concerning unexercised stock options held as of December 31, 1995. No
stock options were exercised by the Named Executive Officer during 1995.
FISCAL YEAR-END STOCK OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Keren B. Wilson............. 20,000 80,000 $77,500 $162,500
</TABLE>
- --------
(1) The exercise price of Dr. Wilson's options to purchase Common Stock is
$9.25 per share for 60,000 shares and $13.00 per share for 40,000 shares.
The closing trading price on the American Stock Exchange for the Common
Stock on December 31, 1995 was $13.125.
EMPLOYMENT AGREEMENTS
Dr. Wilson has entered into an employment agreement (the "Employment
Agreement") providing for service to the Company as Chief Executive Officer.
During the term of her employment by the Company, Dr. Wilson as agreed to
devote substantially all of her time to the business of the Company and not
engage in any business of the type conducted by the Company without the
approval of the Board of Directors.
Dr. Wilson's Employment Agreement expires on August 31, 1997, such date to
be automatically extended until the earlier of (i) her death or disability,
(ii) termination by the Company "for cause," (iii) her voluntary resignation
"for good reason" or otherwise or (iv) the third anniversary of the Company's
notice to Dr. Wilson of termination other than "for cause." In the event Dr.
Wilson is terminated not for cause or voluntarily terminates her employment
"for good reason," she shall receive her base salary for three years from the
date of the notice of termination and retain all her Company stock options,
whether or not vested.
Under the Employment Agreement, termination for cause includes termination
for material disloyalty, failure to perform one's duties as an officer,
willful violation of a board directive and felony conviction, and resignation
for good reason is defined as resignation due to (i) a diminution in the
duties or compensation of such executive officer which is not part of an
overall diminution for all executive officers of the Company or (ii) the
Company's material breach of the Employment Agreement or the Stock Option
Plan.
Furthermore, the Employment Agreement provides that, for a period of three
years after any termination of employment, Dr. Wilson may not (i) solicit any
Company employees for employment, or (ii) commence any business, directly or
indirectly, which is in competition with all or any portion of the Company's
business in any state in which the Company operates or is in the process of
developing more than three assisted living residences; provided, however, that
in the event that Dr. Wilson's employment terminates after the first three
years of her employment, Dr. Wilson may compete with the Company in Oregon.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation, as amended, and the Bylaws of the Company
provide for indemnification of the officers, employees and agents of the
Company pursuant to the Nevada General Corporation Law (the "NGCL"). The NGCL
permits the indemnification of any officer, director, employee or agent of the
Company against expenses and liabilities in any action arising out of such
person's activities on behalf of the Company, if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interest of the Company or in a manner he had not reasonable cause to
believe was unlawful. Insofar as indemnification
37
<PAGE>
for liabilities arising under the Securities Act may be permitted to
directors, officers or controlling persons of the Company pursuant to the
foregoing provisions of otherwise, the Company has been advised that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable.
The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company.
STOCK OPTION PLAN
The Committee administers the Company's 1994 Stock Option Plan, as amended
(the "Plan"), which provides for grants of incentive and non-qualified stock
options to the Company's executive officers, as well as its directors and
other key employees. Under the Plan, options are granted to provide incentives
to participants to promote long-term performance of the Company and
specifically, to retain and motivate senior management in achieving a
sustained increase in shareholder value. Currently, the Plan has no pre-set
formula or criteria for determining the number of options that may be granted.
The Committee reviews and evaluates the overall compensation package of the
executive officers and determines the awards based on the overall performance
of the Company and the individual performance of the executive officers. The
Company currently has reserved 586,666 shares of Common Stock for issuance
under the Plan.
38
<PAGE>
CERTAIN TRANSACTIONS
Dr. Wilson holds interests in each of the entities from which the Company
purchased two of the initial properties known as Aspen Court and Hillside
House. Because of Dr. Wilson's conflict of interest, she did not participate
in any of the negotiations related to such transactions and the Company has
received independent appraisals for such properties, whose purchase prices
(excluding closing costs) exceed their appraised values by $509,000. These
appraisals, however, only reflect the value of the real property and do not
include the intangible value of the existing and future operations and
resident base. Dr. Wilson received approximately $169,000 from the Company's
purchase of Aspen Court and approximately $65,000 (jointly with her husband)
from the Company's purchase of Hillside House.
Dr. Wilson also held, and her husband currently holds, an interest in ALF,
the entity which leases four of the initial properties to the Company. The
payment terms of the ALF Leases were based on the residences' historical
operating results. The aggregate annual lease payments, when expressed as a
percentage of the independent appraisal values of such leased properties,
reflects an average blended lease rate of approximately 10.8% for such
properties, which the Company believes is typical for leases in the health
care industry. Dr. Wilson sold her interest in ALF in the first half of 1995.
As a 25% shareholder in ALF, Dr. Wilson's husband may receive dividends, which
may be generated as a result of payments under the ALF Leases. The "blended
lease rate" is the amount of annual rent divided by the appraised value of the
property. Payments made with respect to the ALF Leases were $37,000 for the
one month ended December 31, 1994, $734,000 for the year ended December 31,
1995 and $196,000 for the three months ended March 31, 1996.
Prior to April 18, 1996, Dr. Wilson owned all of the outstanding stock of
Concepts in Community Living, Inc. ("CCL"). On such date, Dr. Wilson
transferred her interest in CCL to her husband. CCL provides services to
several of the developers that have contracted with the Company to build and
develop assisted living facilities. CCL has performed feasibility studies and
pre-development consulting services for the developers on the Company's
behalf. For the year ended December 31, 1995, CCL performed these services on
36 sites collecting fees of $605,000. The direct costs incurred by CCL in
performing these services, exclusive of the compensation paid to Dr. Wilson's
husband, was approximately $452,000. No fees were paid to CCL during 1994 or
the three months ended March 31, 1996.
The Chairman and President of LTC Properties, Inc. ("LTC"), Andre C.
Dimitriadis and William McBride III, respectively, are members of the Board of
Directors and shareholders of the Company. Messrs. Dimitriadis and McBride
(Chairman of the Board of Directors of the Company) own 274,600 (1.7%) and
135,000 (0.7%) shares, respectively, in LTC. Since January 1, 1995, the
Company sold to LTC, through sale and leaseback transactions, 10 residences in
Texas with a combined total of 344 units for a total purchase price of
$18,100,000. Annual rental payments to LTC with respect to such residences are
approximately $1,847,700 ($63,300 in rent was paid in 1995). In addition, the
Company sold to LTC through sale and leaseback transactions, five residences
in Washington with a combined total of 188 units for a total purchase price of
$11,280,000. Annual rental payments to LTC with respect to such residences are
approximately $948,000. The sales prices for the residences the Company has
sold to LTC to date approximate cost.
Bradley Razook, a director of the Company, is an Executive Vice President of
NatWest Markets, an investment banking firm. NatWest acted as placement agent
with respect to the original placement of the Debentures. NatWest Markets is
an affiliate of NatWest Securities Limited, which acted as one of the
underwriters in the Company's initial public offering. NatWest Markets and its
affiliates may provide additional investment banking services to the Company
in the future. See "Underwriting."
39
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth information as of March 28, 1996 with respect
to the beneficial ownership of the Common Stock by (i) each person who is
known by the Company to own beneficially more than 5% of its Shares, (ii) each
director of the Company, (iii) the Chief Executive Officer and (iv) the
Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (2)(3) NUMBER OF OFFERING (2)(3)
------------------------ SHARES ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT BEING OFFERED NUMBER PERCENT
---------------------------------------- ----------- ---------- ------------- ---------- ----------
<C> <S> <C> <C> <C> <C>
Keren B. Wilson................................. 500,000 16.5% 25,000 475,000 9.8%
Andre C. Dimitriadis............................ 198,667 6.6% 75,000 123,667 2.6%
William McBride III............................. 212,000 7.0% 50,000 162,000 3.4%
Richard C. Ladd................................. 6,667 * -- 6,667 *
Stephen Gordon.................................. -- -- -- -- --
Bradley G. Razook (4)........................... 13,667 * -- 13,667 *
175 Water Street, 20th Floor
New York, NY 10038
Palisade Capital Management (5)................. 543,997 18.1% -- 543,997 11.3%
One Bridge Plaza, Suite 695
Fort Lee, NJ 07024
The TCW Group, Inc. (6)......................... 227,266 7.5% -- 227,266 4.7%
865 South Figueroa St.
Los Angeles, CA 90017
Columbia Management Co., Inc. (7)............... 231,100 7.7% -- 231,100 4.8%
1300 Southwest 6th Avenue
Portland, Oregon 97206
Waddell and Reed Investment Management Co. (8).. 474,532 15.7% -- 474,532 9.9%
6300 Lamar Road
Kansas City, Missouri 66201-9217
James J. & Diane A. Pieczynski.................. 96,000 3.2% 25,000 71,000 1.5%
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
All directors and executive officers as a group
(6 persons).................................... 931,001 30.9% 150,000 781,001 15.8%
</TABLE>
- --------
*Less than 1%.
(1) Except as otherwise noted, the address of the Company's directors and
officers is c/o Assisted Living Concepts, Inc., 9955 S.E. Washington,
Suite 201, Portland, Oregon, 97216.
(2) Includes options to purchase 20,000 shares of Common Stock granted to Dr.
Wilson, 20,000 to Mr. McBride and options to purchase 6,667 shares of
Common Stock granted to Messrs. Dimitriadis, Ladd and Razook pursuant to
the Company's 1994 Stock Option Plan which are exercisable within 60 days.
(3) Percentage ownership is based on 3,013,334 shares of Common Stock
outstanding before this Offering and 4,813,334 shares of Common Stock
outstanding after this Offering.
(4) Includes 7,000 shares owned by Mr. Razook's son.
(5) As of February 14, 1996, based on the Form 13G received by the Company.
Includes approximately 300,000 shares issuable upon conversion of
Debentures.
(6) As of February 12, 1996, based on the Form 13G received by the Company.
Includes approximately 114,666 shares issuable upon conversion of
Debentures.
(7) As of February 9, 1996, based on the Form 13G received by the Company.
(8) As of April 10, 1996, based on the Form 13G received by the Company.
Includes approximately 133,333 shares issuable upon conversion of
Debentures.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the capital stock of the Company,
the NGCL and the provisions contained in the Company's Articles of
Incorporation and Bylaws. Copies of the Articles of Incorporation and Bylaws
have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The description which follows is qualified in its
entirety by reference to the full text of the Articles of Incorporation and
Bylaws.
The Company's Articles of Incorporation authorize 40,000,000 shares of
Common Stock, par value $0.01 per share, and 1,000,000 shares of preferred
stock, par value $0.01 per share. As of July 2, 1996, the Company had
3,013,334 shares of Common Stock issued and outstanding and no outstanding
shares of preferred stock.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by shareholders, and a majority vote is
required for all action to be taken by shareholders. Cumulative voting of
shares is prohibited. Accordingly, the holders of a majority of the voting
power of the shares voting for the election of directors can elect all of the
directors if they choose to do so. The Common Stock bears no preemptive
rights, and is not subject to redemption, sinking fund or conversion
provisions. The shares of Common Stock offered hereby will be, when issued and
paid for, fully paid and non-assessable.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Company's Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation rights of any preferred
stock that may be issued (and subject to any dividend restriction contained in
any credit facility which the Company may enter into in the future) and
distributed pro rata in accordance with the number of shares of Common Stock
held by each shareholder. See "Risk Factors--Dividend Policy."
The Common Stock is listed on the American Stock Exchange.
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further shareholder
action, to issue the authorized shares of preferred stock from time to time
and to divide any or all shares of the authorized preferred stock into series
and, subject to limitations prescribed by law, to fix and determine the number
of shares in and designations, preferences and relative, participating,
optional or, unless in conflict with the Company's Articles of Incorporation,
other special rights, and qualifications, limitations or restrictions thereon,
of any series so established, including voting powers, if any, dividend
rights, liquidation preferences, redemption rights and conversion privileges.
As of the date of this Prospectus, the Board of Directors has not issued any
shares of preferred stock or authorized any series of preferred stock and
there are no plans, agreements or understandings for the issuance of any
shares of preferred stock or rights to purchase such shares.
The issuance of shares of preferred stock by action of the Company's Board
of Directors could adversely affect the voting power, dividend rights and
other rights of holders of the Common Stock.
Issuance of a series of shares of preferred stock also could, depending on
the terms of such series, either impede or facilitate the completion of a
merger, tender offer or other takeover attempt. Although the Company's Board
of Directors is required to make a determination as to the best interests of
the shareholders of the Company when issuing shares of preferred stock, the
Company's Board of Directors could act in a manner that would discourage an
acquisition attempt or other transaction that some or a majority, of the
shareholders might believe to be in the best interests of the Company or in
which shareholders might receive a premium for their stock over the then
prevailing market price. Although there are currently no plans to issue shares
of preferred stock or rights to purchase such shares, management believes that
the availability of the preferred stock will provide the
41
<PAGE>
Company with increased flexibility in structuring possible future financings
and acquisitions and in meeting other corporate needs that might arise. The
authorized shares of preferred stock are available for issuance without
further action by the Company's shareholders, unless such action is required
by applicable law or the rules of any stock exchange on which the Common Stock
may then be listed.
RESTRICTIONS ON BUSINESS COMBINATIONS AND CORPORATE CONTROL
The NGCL contains provisions restricting the ability of a corporation to
engage in business combinations with an "interested shareholder." Under the
NGCL, except under certain circumstances, business combinations are not
permitted for a period of three years following the date such shareholder
became an interested shareholder. The NGCL defines an "interested
shareholder," generally, as a person who beneficially owns 10% or more of the
outstanding shares of a corporation's voting stock.
In addition, the NGCL generally disallows the exercise of voting rights with
respect to "control shares" of an "issuing corporation" (as defined in the
NGCL). "Control shares" are the voting shares of an issuing corporation
acquired in connection with the acquisition of a "controlling interest."
"Controlling interest" is defined in terms of threshold levels of voting share
ownership, which, when crossed, trigger application of the voting bar with
respect to the newly acquired shares. The NGCL also permits directors to
resist a change or potential change in control of the corporation if the
directors determine that such a change is opposed to or not in the best
interest of the corporation.
LIMITATIONS ON DIRECTORS LIABILITY
The Articles of Incorporation limit the liability of directors and officers
to the Company or its shareholders to the fullest extent permitted by the
NGCL. The inclusion of this provision in the Articles of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
shareholders.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's 7% Convertible Subordinated Debentures due 2005 are
convertible into Common Stock at any time prior to maturity, unless previously
redeemed, into 1,333,333 shares at a price of $15.00 per share, subject to
adjustment in certain cases. The 7% Debentures and the shares issuable upon
conversion thereof are freely tradeable. The Company has also registered
approximately 586,666 shares of Common Stock reserved for issuance pursuant to
the Company's Stock Option Plan, under which options to purchase 424,699
shares have been granted as of the date of this Prospectus.
As of July 2, 1996, the Company had outstanding 3,013,334 shares of Common
Stock. Upon completion of the Offering and assuming no exercise of the
Underwriters' over-allotment option, the Company will have outstanding
4,813,334 shares of Common Stock. Of these shares, approximately 3,988,334
shares of Common Stock will be freely transferable and tradable without
restriction or further registration under the Securities Act except for any
shares purchased by any affiliates of the Company, which will be subject to
the resale limitations of Rule 144. The remaining 825,000 outstanding shares
of Common Stock are "restricted securities" within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). The Restricted
Shares were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act and may not be sold
in a public distribution except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption, including that
provided by Rule 144. The holders of 785,000 Restricted Shares have agreed not
to sell or otherwise dispose of such shares, without the prior written consent
of NatWest Securities Limited, until 180 days after the date of this
Prospectus.
42
<PAGE>
In general, under Rule 144 as currently in effect, affiliates of the Company
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of one percent of the number of shares of
Common Stock then outstanding or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through one
or more intermediaries, controls, or is controlled by, or is under common
control with, such issuer. Persons holding shares of Common Stock which are
restricted shares within the meaning of Rule 144 of the Securities Act, who
have beneficially owned their shares for at least three years and who are not
deemed "affiliates" of the Company are entitled to sell their shares under
Rule 144 without regard to the volume limitations.
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of Shares set forth opposite their respective
names:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
NatWest Securities Limited.................................... 658,334
Dean Witter Reynolds Inc...................................... 658,333
Smith Barney Inc.............................................. 658,333
---------
Total..................................................... 1,975,000
=========
</TABLE>
The Underwriters are committed to purchase all of the Shares, if any Shares
are purchased.
The Underwriters propose to offer the Shares directly to the public at the
public offering price set forth on the cover page of this Prospectus
Supplement and to certain securities dealers at such price less a concession
not in excess of $0.55 per Share. The Underwriters may allow, and such
selected dealers may reallow a concession not in excess of $0.10 per share to
certain brokers and dealers.
The Company has granted the Underwriters an option for 30 days after the
date of this Prospectus Supplement to purchase at the public offering price,
less the underwriting discount, as set forth on the cover page of this
Prospectus, up to 296,250 additional Shares. If the Underwriters exercise
their option to purchase any of the additional Shares, each of the three
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of Shares
to be purchased by each of them as shown in the above table bears to the
1,975,000 Shares offered hereby. The Underwriters may exercise such option
only to cover over-allotments in connection with the sale of the Shares.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1933, as
amended, or will contribute to payments the Underwriters may be required to
make in respect thereof.
The Company and its executive officers have agreed that, until 180 days
after the date of this Prospectus, they will not without the consent of
NatWest Securities Limited ("NatWest"), offer, sell, offer to sell, distribute
43
<PAGE>
or otherwise dispose of the United States any Common Stock or any securities
or interests convertible into, or exercisable or exchangeable for, Common
Stock, other than (a) the Shares, (b) Common Stock issuable upon the
conversion of the Company's outstanding stock options or (c) grants to
employees for compensation purposes.
NatWest, a United Kingdom broker-dealer and a member of the Securities and
Futures Authority Limited, has agreed that, as part of the distribution of the
Common Stock offered hereby and subject to certain exceptions, it will not
offer or sell any common stock within the United States, its territories or
possessions or to persons who are citizens thereof or residents therein. The
Underwriting Agreement does not limit the sale of the Shares outside of the
United States.
NatWest Securities Limited acted as the underwriter for the Company's
initial public offering. Bradley Razook, a director of the Company, is an
Executive Vice President of NatWest Markets, which is an affiliate of NatWest
Securities Limited. NatWest Markets acted as Placement Agent in connection
with the issuance and sale by the Company of its 7% Debentures. As of June 17,
1996, an affiliate of NatWest Markets held approximately $3.3 million of the
7% Debentures. NatWest Markets and its affiliates may in the future provide
investment banking and/or other advisory services to the Company.
NatWest has further represented and agreed that (a) it has not offered or
sold and will not offer or sell in the United Kingdom by means of any
document, any Common Stock except to persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their business or otherwise in circumstances
which will not result in an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995; (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom; and (c) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issues of the
Common Stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 or is a person to whom such document may otherwise lawfully be issued or
passed on.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Latham &
Watkins, Los Angeles, California. Certain legal matters relating to the
validity of the shares of Common Stock offered hereby will be passed upon for
the Company by Schreck, Jones, Bernhard, Woloson & Godfrey, Las Vegas, Nevada
as to certain matters of Nevada law. Certain legal matters will be passed upon
for the Underwriters by Stroock & Stroock & Lavan, New York, New York.
EXPERTS
The financial statements of Assisted Living Concepts Group as of November
30,1994 and the eleven months then ended and as of December 31, 1993 and the
year then ended and the financial statements of Assisted Living Concepts, Inc.
for the one month ended December 31, 1994 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP,
independent accountants given on the authority of said firm as experts in
auditing and accounting.
The financial statements of the Company as of and for the year ended
December 31, 1995 have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, in reliance upon the authority
of said firm as experts in accounting and auditing.
44
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company may be inspected
and copied at the public reference facilities of the Commission located at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the New
York Regional Office of the Commission, Seven World Trade Center, Suite 1300,
New York, New York 10048, and at the Chicago Regional Office of the
Commission, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621.
Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such reports and other information may also be
inspected at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the registration of the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, certain
portions of which have been omitted as permitted by the rules and regulations
of the Commission. Statements contained in this Prospectus or in any document
incorporated by reference herein as to the contents of any contract or other
documents referred to herein or therein are not necessarily complete and, in
each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement or such other documents, which may be
obtained from the Commission as indicated above upon payment of the fees
prescribed by the Commission. Each such statements is qualified in its
entirety by such reference.
45
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-------
1.FINANCIAL STATEMENTS:
<S> <C>
Reports of Independent Auditors...................................... F-2-F-4
Balance Sheets of Assisted Living Concepts, Inc. as of December 31,
1994 and December 31, 1995.......................................... F-5
Statements of Operations of Assisted Living Concepts, Group
(Predecessor) for the year ended December 31, 1993, and the eleven
months ended November 30, 1994 and Assisted Living Concepts, Inc.
for the one month period ended December 31, 1994 and year ended
December 31, 1995................................................... F-6
Statements of Shareholders' Equity of Assisted Living Concepts, Inc.
for the period July 19, 1994 to December 31, 1995................... F-7
Statements of Changes in Partners' and Shareholders' Equity.......... F-8
Statements of Cash Flows of Assisted Living Concepts, Group
(Predecessor) for the year ended December 31, 1993 and eleven months
ended November 30, 1994, and Assisted Living Concepts, Inc., for the
one month ended December 31, 1994 and year ended December 31,
1995................................................................ F-9
Notes to Financial Statements........................................ F-10
Unaudited Condensed Balance Sheets of Assisted Living Concepts, Inc.
and subsidiary as of March 31, 1996................................. F-22
Condensed Statements of Operations of Assisted Living Concepts,
Inc................................................................. F-23
Condensed Statements of Cash Flows of Assisted Living Concepts,
Inc................................................................. F-24
Notes to Unaudited Financial Statements.............................. F-25
</TABLE>
2.FINANCIAL STATEMENTS SCHEDULES:
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.
We have audited the accompanying balance sheet of Assisted Living Concepts,
Inc. as of December 31, 1995, and the related statements of operations,
changes in shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1995 financial statements referred to above present
fairly, in all material respects, the financial position of Assisted Living
Concepts, Inc. as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 29, 1996
(Except for Note 10, as to which the
date is March 28, 1996.)
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.
In our opinion, the accompanying balance sheet and related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Assisted Living Concepts, Inc.
(the "Company" (formerly Assisted Living Concepts Group)) at December 31,
1994, and the results of its operations and its cash flows for the month ended
December 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the financial statements
of Assisted Living Concepts, Inc., for any period subsequent to December 31,
1994.
PRICE WATERHOUSE LLP
Portland, Oregon
March 17, 1995
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.
In our opinion, the accompanying combined balance sheet and related combined
statements of operations, of partners' and shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Assisted Living Concepts Group (the "Predecessor"), which is comprised of
Assisted Living Facilities, Inc., a subchapter S corporation, Madras Elder
Care (dba Aspen Court), a general partnership, and Lincoln City Partners, a
general partnership, at November 30, 1994 and December 31, 1993, and the
results of their operations and their cash flows for the eleven month period
ended November 30, 1994 and for the year ended December 31, 1993, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Predecessor's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. We have not audited the combined financial statements
of Assisted Living Concepts Group for any period subsequent to November 30,
1994.
PRICE WATERHOUSE LLP
Portland, Oregon
March 17, 1995
F-4
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1)................. $13,343 $ 7,335
Accounts receivable................................ 58 136
Other current assets (Note 5)...................... 304 558
------- -------
Total current assets............................. 13,705 8,029
------- -------
Property and equipment (Note 1, 2, 4 and 6).......... 3,254 28,446
Less accumulated depreciation...................... 8 163
------- -------
Property and equipment--net........................ 3,246 28,283
------- -------
Construction in process (Note 4)..................... 280 13,075
Goodwill (Note 1 and 2).............................. 408 393
Other assets (Note 5)................................ 264 3,766
------- -------
Total assets..................................... $17,903 $53,546
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 177 $ 8,248
Accrued expenses................................... 356 4,706
Other current liabilities.......................... 38 195
Current portion of long-term debt (Note 6)......... 12 47
------- -------
Total current liabilities........................ 583 13,196
Deferred gain........................................ 153
Long-term debt (Note 6).............................. 1,101 4,553
Convertible subordinated debentures.................. 20,000
------- -------
Total liabilities................................ 1,684 37,902
------- -------
Commitments
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding...........
Common Stock, $.01 par value; 40,000,000 shares au-
thorized; 3,000,000 shares issued and outstanding... 30 30
Additional paid-in capital......................... 16,492 16,492
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions (Note 2)............................. (239) (239)
Accumulated deficit................................ (64) (639)
------- -------
Total shareholders' equity....................... 16,219 15,644
------- -------
Total liabilities and shareholders' equity....... $17,903 $53,546
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- -------------------------
ELEVEN MONTHS
ENDED MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................. $1,884 $1,841 $ 212 $ 4,067
------ ------ ----- -------
Operating expenses:
Residence operating
expenses............... 1,090 1,127 125 2,779
Management fees from
related party (Note 1
and 8)................. 92 93
Corporate general and
administrative......... 152 1,252
Building rentals........ 5 64
Building rentals from
related party (Note 1
and 8)................. 37 734
Depreciation and
amortization (Note 1
and 2)................. 132 105 13 296
------ ------ ----- -------
Total operating
expenses............. 1,314 1,325 332 5,125
------ ------ ----- -------
Operating income (loss)... 570 516 (120) (1,058)
------ ------ ----- -------
Interest expense (Note 1
and 6)................... 320 297 8 96
Interest (income)......... (11) (12) (64) (579)
------ ------ ----- -------
Interest expense
(income)--net............ 309 285 (56) (483)
------ ------ ----- -------
Net income (loss)......... $ 261 $ 231 $ (64) $ (575)
====== ====== ===== =======
Unaudited pro forma data:
Net income.............. $ 261 $ 231
Provision for income
taxes.................. 67 85
------ ------
Pro forma net income.... $ 194 $ 146
====== ======
Net loss per common share
(Note 1)................. $(.02) $ (.19)
===== =======
Weighted average common
shares outstanding....... 3,000 3,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JULY 19, 1994 TO DECEMBER 31, 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- ADDITIONAL FAIR MARKET ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL VALUE IN EXCESS DEFICIT EQUITY
------ ------ --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares to
founders............... 1,000 $10 $ 90 $ 100
Net proceeds from public
offering............... 2,000 20 16,402 16,422
Fair market value in
excess of historical
cost of acquired net
assets attributable to
related party
transaction............ $(239) (239)
Net loss................ $ (64) (64)
----- --- ------- ----- ----- -------
Shareholders' equity,
December 31, 1994...... 3,000 $30 $16,492 $(239) $ (64) $16,219
Net loss................ $(575) $ (575)
----- --- ------- ----- ----- -------
Shareholders' equity,
December 31, 1995...... 3,000 $30 $16,492 $(239) $(639) $15,644
===== === ======= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ASSISTED LIVING CONCEPTS GROUP ("THE PREDECESSOR")
STATEMENTS OF CHANGES IN PARTNERS' AND SHAREHOLDERS' EQUITY
FOR THE PERIOD DECEMBER 31, 1992 TO NOVEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Partner's and shareholders' equity, December 31, 1992.................... $ 105
Capital contributions.................................................... 1
Capital distributions.................................................... (104)
Net income............................................................... 261
-----
Partners' and shareholders' equity, December 31, 1993.................... 263
Capital contributions.................................................... --
Capital distributions.................................................... (297)
Net income............................................................... 231
-----
Partners' and shareholders' equity, November 30, 1994.................... $ 197
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- -------------------------
ELEVEN MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........ $ 261 $ 231 $ (64) $ (575)
Adjustment to reconcile
net income (loss) to net
cash provided by (used
for) operating
activities:
Depreciation and
amortization.......... 132 105 13 296
Changes in other non-cash
items:
Accounts receivable.... (13) (9) (58) (78)
Other current assets... (2) (22) (307) (254)
Other assets........... (6) 31 (264) (2,828)
Accounts payable....... (23) 4 177 8,071
Accrued expenses....... 10 96 356 4,350
Accounts payable to
related party......... 1 (7)
Other current
liabilities........... 2 (5) 38 157
----- ------- ------- --------
Net cash provided by
(used for) operating
activities.............. 362 424 (109) 9,139
----- ------- ------- --------
INVESTING ACTIVITIES:
Proceeds from sale and
leasebacks.............. 8,067
Purchases of property and
equipment............... (55) (1,688) (3,069) (45,901)
----- ------- ------- --------
Net cash used for
investing activities.... (55) (1,688) (3,069) (37,834)
----- ------- ------- --------
FINANCING ACTIVITIES:
Proceeds from short-term
construction borrowings
expected to be
refinanced.............. 1,600
Proceeds from long-term
debt.................... 47 3,505
Payments on long-term
debt.................... (40) (33) (1) (18)
Proceeds from issuance of
common stock............ 16,522
Capital contributions.... 1
Proceeds from convertible
subordinated
debentures.............. 19,200
Payments on loan with
related party........... (10)
Capital distributions.... (104) (297)
----- ------- ------- --------
Net cash provided by
(used for) financing
activities.............. (106) 1,270 16,521 22,687
----- ------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............. 201 6 13,343 (6,008)
Cash and cash
equivalents, beginning
of period............... 156 357 13,343
----- ------- ------- --------
Cash and cash
equivalents, end of
period.................. $ 357 $ 363 $13,343 $ 7,335
===== ======= ======= ========
Supplemental disclosure
of cash flow
information:
Cash payments for
interest................ $ 320 $ 297 $ 8 $ 154
===== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Assisted Living Concepts, Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to senior citizens who need
help with the activities of daily living such as bathing and dressing. The
Company provides personal care and support services and makes available
routine nursing services designed to meet the needs of its residents.
The Company was organized in July 1994, initially capitalized through the
sale of 500,000 shares of $0.01 par value common stock for $100,000. From July
19, 1994 to November 22, 1994, the date of its initial public offering, the
Company began to put into place the management organization to commence
operations and execute its strategy to expand the Company's business. On
September 9, 1994, the Company merged with CCL Sub, Inc., a wholly owned
subsidiary of Concepts in Community Living, Inc. Pursuant to the merger
agreement (the "Merger"), the sole shareholder of CCL Sub, Inc. exchanged its
100% interest in CCL Sub, Inc., which consisted primarily of an operating
leasehold interest in its office premises; all management agreements and all
operating systems for six operating facilities known as Juniper House,
Rackleff House, Huffman House, Brookside House, Aspen Court and Hillside
House; and all intangible assets used in connection with these facilities, for
500,000 shares of the Company's $0.01 par value common stock. The shares,
which represented a 50% interest in the Company, were valued at $100,000. Due
to their propriety nature, the assets transferred had no historical basis.
Since the Company's president was the sole shareholder of CCL Sub, Inc., the
recorded value of the assets acquired has been reduced by $100,000 which
represented the president's proportional interest in the excess of the fair
value over historical cost.
On November 22, 1994, the Company sold 2,000,000 shares of common stock at
$9.25 in a public offering realizing net proceeds of $16,422,000. On December
1, 1994, the Company purchased two and leased four assisted living residences
(see Note 2) from Assisted Living Concepts Group ("the Predecessor") and
commenced operations. One of the six residences, which was under construction
as of December 1, 1994 and leased to the Company, commenced operations in
March 1995. The Company developed nineteen additional residences throughout
1995. As of December 31, 1995, a total of twenty-five residences were
operating or had received Certificates of Occupancy. Five of the nineteen
additional residences were sold and leased back to the Company leaving sixteen
residences owned by the Company as of December 31, 1995.
PREDECESSOR
The historical financial statements for the year ended December 31, 1993 and
the eleven months ended November 30, 1994 represent the combined historical
results of operations and financial condition of the Predecessor. The
Predecessor consists of the entities which, prior to December 1, 1994, owned
and operated residences which are now owned and operated by the Company. The
Predecessor developed and owned assisted living residences for senior citizens
and disabled individuals. Pursuant to purchase and lease agreements, the
Company acquired the businesses of the Predecessor. The president of the
Company owned a 30% interest in Madras Elder Care, and the president and her
husband each owned a 20% interest in ALF and jointly owned a 50% interest in
Redbud Associates which owns a 35% interest in Lincoln City Partners ("LCP")
(See Note 8-- Related Party Transactions).
F-10
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The residences operated by the Predecessor were as follows:
<TABLE>
<CAPTION>
COMMENCED
RESIDENCE ENTITY LEGAL FORM OPERATIONS
--------- ------ ---------- ----------
<S> <C> <C> <C>
Aspen Court Madras Elder Care Partnership November 1990
Huffman House ALF S-Corporation October 1992
Rackleff House ALF S-Corporation June 1990
Juniper House ALF S-Corporation April 1991
Hillside House Lincoln City Partners Partnership October 1994
</TABLE>
BASIS OF PRESENTATION
The financial statements as of and for the year ended December 31, 1995 and
the month ended December 31, 1994, are those of the Company. The financial
statements for the year ended December 31, 1993 and the eleven months ended
November 30, 1994, are those of the Predecessor before its business and
substantially all of the assets were acquired by the Company.
The accompanying combined financial statements of the Predecessor include
the assets, liabilities and operations associated with the residences listed
above. Since the residences have ownership and management interest in common,
the assets and liabilities are reflected at historical cost. As discussed in
Note 2, the Predecessor sold and has leased the assets to the Company. All
significant inter-company accounts and transactions have been eliminated in
combination.
REVENUES
Revenues are recorded when services are rendered and consist of residents'
fees for basic housing and support services and fees associated with
additional services such as routine nursing, and personalized assistance on a
fee for service basis.
MANAGEMENT FEES--PREDECESSOR
Each residence of the Predecessor was operated under a management agreement
with Concepts in Community Living, Inc. (CCL), a related party, whereby CCL
charged a management fee of 5% of revenues in exchange for providing each
facility certain management and administrative support services (See Note 8--
Related Party Transactions).
ESTIMATED MALPRACTICE COSTS
The Company provides for estimated malpractice claims when a material loss
is probable and estimable for both reported claims and claims incurred but not
reported. The liability for malpractice claims is presented gross on the
balance sheet even for claims expected to be covered by insurance. The Company
currently has no claims that are probable or estimable, therefore no provision
or liability has been recorded in the financial statements.
CLASSIFICATION OF EXPENSES
All expenses (except interest, depreciation, amortization, residence
operating expenses and management fees) associated with corporate or support
functions have been classified as corporate general and administrative
expense. All other expenses incurred by the Company have been classified as
residence operating expenses.
F-11
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior year's financial
statements to conform with the current year's presentation. Such
reclassifications have no effect on previously reported net income or
partners' and shareholders' equity.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at the lower of cost or net realizable
value with depreciation being provided over the assets' estimated useful lives
on the straight-line basis as follows:
<TABLE>
<S> <C>
Buildings........................................................ 40 years
Furniture and equipment.......................................... 7 years
</TABLE>
Interest incurred during construction periods is capitalized as part of the
building costs. Capitalized interest was $11,000 and $577,000 for the eleven
months ended November 30, 1994 and the year ended December 31, 1995. There was
no interest capitalized during the year ended December 31, 1993 or the month
ended December 31, 1994.
Maintenance and repairs are charged to expense as incurred, and significant
betterments and improvements are capitalized.
In March of 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 121 (FAS121) Accounting for Long-Lived Assets and
Long-Lived Assets To Be Disposed Of. The Company will implement FAS121 on
January 1, 1996. The Company will determine if an asset has been impaired by
analyzing the rental demand by geographical region to determine if future cash
flows (undiscounted and without interest charge) is less than the carrying
amount of the asset. If an impairment is determined to have occurred, an
impairment loss will be recognized. For those assets the Company intends to
hold and use, the fair value of the asset will be used in its calculation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit and debt securities held
at financial institutions with maturities of three months or less at the date
of purchase (Note 5).
DEFERRED FINANCING COSTS
Financing costs included in other assets are deferred and amortized to
interest expense over the term of the related debt using the straight-line
method.
F-12
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ORGANIZATIONAL COSTS
The Company capitalized organizational costs incurred from the Company's
inception (July 19, 1994) to December 1, 1994. Organizational costs of
$35,000, were amortized over a one-year period commencing December 1, 1994.
Amortization expense of $3,000 and $32,000 is reflected in the month ended
December 31, 1994 and the year ended December 31, 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value
because of the short-term nature of these accounts and because they are
invested in accounts earning market rates of interest. The carrying amount of
the Company's debt approximates fair value because the interest rates
approximate the current rates available to the Company.
GOODWILL
Costs in excess of fair value of the net assets acquired at date of
acquisition have been recorded as goodwill and are being amortized over 15
years on a straight-line basis. Management maintains an impairment review
policy whereby the future economic benefit of the recorded balance is
substantiated at the end of each reporting period based on the estimated
undiscounted cash flows from operating activities compared with the carrying
value of the goodwill. If the aggregate future cash flows are less than the
carrying value, a write down would be required, measured by the difference
between the undiscounted future cash flows and the carrying value of the
goodwill.
INCOME TAXES
The businesses comprising the Predecessor elected to be taxed as either S-
Corporations or as Partnerships pursuant to the provisions of the Internal
Revenue Code and, as such, were not individually subject to federal or state
income taxes because their taxable income or loss accrues to individual
shareholders or partners, respectively (See Note 7). The pro forma data
reflects the income tax expense that would have been recorded had the
Predecessor operated as a C-Corporation, subject to income taxes for these
periods.
NET LOSS PER COMMON SHARE
Net loss per common share has been calculated by dividing the net loss for
the period by the weighted average common shares outstanding during the
period.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) Issued
Statement of Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation," which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employee," in accounting for stock-based
compensation issued to employees. The Statement encourages, but does not
require financial reporting to reflect compensation expense for grants of
stock, stock options and other equity instruments to employees based on change
in the fair value of the underlying stock. The Company intends to continue to
apply the existing accounting rules contained in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." While recognition for employee
stock-based compensation is not mandatory, SFAS 123 requires companies that
choose not to adopt the new fair value accounting rules to disclose pro forma
net income and earnings per share under the new method. The Company will
comply with the disclosure requirements beginning January 1, 1996.
F-13
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION OF RESIDENCES
In December 1994, the Company purchased two assisted living residences known
as Aspen Court and Hillside House, from Madras and LCP for $1,705,000 and
$2,173,000, respectively (including closing costs of $20,000 and $9,000,
respectively). The Company paid $2,764,000 cash and assumed $1,114,000 of
long-term notes (see Note 6).
The acquisition has been accounted for as a purchase and, accordingly, the
purchase price was allocated to assets based on estimated fair value at date
of acquisition. Allocation of the cash purchase price is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
ASPEN HILLSIDE
COURT HOUSE TOTAL
------- -------- -------
<S> <C> <C> <C>
Property and equipment............................ $ 1,328 $1,900 $ 3,228
Goodwill.......................................... 186 225 411
Fair value in excess of historical cost........... 191 48 239
Long-term debt.................................... (1,114) (1,114)
------- ------ -------
Total cash purchase price......................... $ 591 $2,173 $ 2,764
======= ====== =======
</TABLE>
The Company's president beneficially owned 48% of the common stock of the
Company prior to the purchase of these residences and was the sole shareholder
of CCL, Sub, Inc. who managed the day-to-day operations of Aspen Court under a
management agreement. The president also held a 30% interest in Madras, and
with her husband, together owned a 17.5% interest in LCP, the predecessor
entities which sold these residences to the Company. Because of the
controlling interest in Aspen Court, the recorded value of Aspen Court was
reduced by $112,000 representing the president's 30% interest in the excess of
Aspen Court's appraised value over its historical cost of $1,068,000. This
amount has been charged directly to shareholders' equity reflected under the
caption "Fair market value in excess of historical cost of acquired net assets
attributable to related party transactions" in the accompanying financial
statements.
Goodwill of $186,000 and $225,000 related to Aspen Court and Hillside House,
respectively, represents the excess of purchase price ($1,705,000 and
$2,173,000, respectively) over appraised value ($1,440,000 and $1,900,000,
respectively). Goodwill related to Aspen Court and Hillside House has been
reduced by $79,000 and $48,000, respectively, in order to reflect a reduction
for the president's 30% interest in Madras and 17.5% interest in LCP. The
aggregate reduction of $127,000 has also been charged directly to
shareholders' equity reflected under the caption "Fair market value in excess
of historical cost of acquired net assets attributable to related party
transactions" in the accompanying financial statements. Amortization of
goodwill was $2,000 and $28,000 for the month ended December 31, 1994 and the
year ended December 31, 1995, respectively.
3. LEASES
In December 1994, the Company entered into agreements to lease four
additional assisted living residences in Oregon. The leases which have fixed
terms of ten years have been accounted for as operating leases (the "Oregon
Leases"). Aggregate deposits on these properties as of December 31, 1995 was
$59,000 which is reflected in other assets in the accompanying financial
statements. In addition during 1995, the Company completed the sale of five
Texas facilities under sell and leaseback arrangements. The Company sold the
facilities for approximately $8.7 million and leased them back over initial
terms ranging from twelve to fifteen years. The transactions produced a gain
of $153,000 which was deferred and is being amortized over the lease period.
Building rent is recorded on a straight-line basis for the residences which
have a specified rent increase. Building rent is recorded as incurred for the
residences which have annual increases based on increases in the consumer
price index.
F-14
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Oregon Leases, the Company entered into a "Lease
Approval Agreement" with the State of Oregon, Housing and Community Services
Department (OHCS) and the lessor of the residences, pursuant to which the
Company is obligated to comply with the terms and conditions of certain
regulatory agreements (see Notes 5 and 6) to which the lessor is a party.
As of December 31, 1995, future minimum lease payments under operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
1996.............................................................. $ 1,600
1997.............................................................. 1,638
1998.............................................................. 1,673
1999.............................................................. 1,713
2000.............................................................. 1,753
Thereafter........................................................ 13,723
-------
$22,100
=======
</TABLE>
4. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following at December 31, 1994 and December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Land......................................................... $ 162 $ 1,747
Buildings.................................................... 2,969 25,804
Equipment.................................................... 69 214
Furniture.................................................... 54 681
------ -------
Sub-total.................................................. 3,254 28,446
Less accumulated depreciation................................ 8 163
------ -------
Total...................................................... $3,246 $28,283
====== =======
</TABLE>
Land and buildings and certain furniture and equipment relating to three
Oregon residences serve as collateral for long-term debt (see Note 6).
Depreciation expense was $100,000, $105,000, $8,000, and $200,000 in the year
ended December 31, 1993, eleven months ended November 30, 1994, month ended
December 31, 1994, and year ended December 31, 1995, respectively.
F-15
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Construction In Process
As of December 31, 1995, the Company has entered into agreements pursuant to
which it may purchase, subject to completion of due diligence and various
other conditions, twenty-two undeveloped sites in Texas, Washington, New
Jersey and Oregon for an aggregate purchase price of approximately $2.8
million. The Company has paid initial deposits relating to these sites and or
has entered into agreements to purchase and has completed or is in the process
of completing demographic analyses and initial architectural plans for these
sites for purposes of building assisted living residences. In addition, the
Company has purchased land in Texas and Washington for twenty-one sites and
has commenced development of residences. As of December 31, 1995, the Company
had capitalized all costs incurred in connection with the development of these
properties, consisting of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
---- -------
<S> <C> <C>
Land purchased............................................... $151 $ 2,402
Earnest money deposits....................................... 36 61
Other costs, including legal fees, building permits and other
development costs........................................... 93 10,612
---- -------
Total...................................................... $280 $13,075
==== =======
</TABLE>
5. OTHER ASSETS
Pursuant to lease agreements, residents are required to provide security
deposits, and in certain cases, the last months rent. Such deposits have been
recorded as other current assets which are restricted as to use by the
Company. The Company has recorded a liability for these deposits, which is
reflected in other current liabilities in the financial statements.
Under the terms of the debt agreements with the OHCS, the Company is
required to maintain escrow deposits for insurance, taxes and building
replacements. Such escrow deposits totaled $66,000 and $42,000 as of December
31, 1994 and December 31, 1995, respectively and have been classified as other
assets and are restricted as to use by the Company (Note 6). In addition, the
Company is required to maintain a contingency escrow reserve for a three year
period or such longer period as determined by the State of Oregon. As of
December 31, 1995, the contingency escrow reserve for the two State of Oregon
loans held in the Company's name was $100,000. These escrow deposits are
restricted to use by the Company in residence operations pursuant to
regulatory agreements and are recorded in other assets.
In August of 1995, the Company entered into an agreement with a Bank that
provided interim construction financing to the developer of three residences
in Washington. The Company has agreed to purchase these three residences for
approximately $7 million once construction is completed. Under the terms of
the agreement, the Company purchased a $1.1 million certificate of deposit
which is being held by the bank as security. These funds will be released by
the Bank at such time that the Company completes the purchase of these
residences. The restricted certificate of deposit is reflected under the
caption other assets.
F-16
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Trust Deed Notes, payable to the State
of Oregon Housing and Community
Services Department.................... $1,113 $4,600
Less current portion.................... (12) (47)
------ ------
Total.................................. $1,101 $4,553
====== ======
</TABLE>
Trust Deed Notes consists of five trust deed notes payable to the OHCS,
secured by buildings, land, furniture and fixtures of five Oregon residences,
payable in monthly installments including interest at effective rates ranging
from 7.375% to 8.9%. These notes have scheduled maturity dates ranging between
January 2021 and October 2028. As of December 31, 1995, the following annual
principal payments are scheduled (in thousands):
<TABLE>
<S> <C>
1995............................................................... $ 47
1996............................................................... 51
1997............................................................... 54
1998............................................................... 58
1999............................................................... 62
Thereafter......................................................... 4,328
</TABLE>
Indebtedness of the Predecessor used to finance Huffman House, Juniper
House, Rackleff House, and Brookside remained an obligation of previous owners
and was not assumed by the Company. The Company has entered into a lease
approval agreement with OHCS and the lessor of the Oregon Leases which
obligates the Company to comply with the terms and conditions of the
underlying trust deed and regulatory agreements relating to the leased
buildings. Under the terms of the OHCS debt agreements, the Company is
required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases, which as of December
31, 1994 and December 31, 1995, was $66,000 and $42,000, respectively and is
reflected in other assets in the accompanying financial statements. In
addition, for the loans in the Company's name, a contingency escrow account in
the amount of 3% of the original loan balance is required. This account had a
balance of $100,000 as of December 31, 1995 and is reflected in other assets
in the accompanying financial statements (See Note 5). Distribution of any
assets or income of any kind to the Company is limited to once per year after
all reserve and loan payments have been made, and only after receipt of
written authorization from OHCS.
As of December 31, 1995, the Company was restricted from paying dividends on
$63,000 and $17,000 of income and retained earnings, respectively, in
accordance with the terms of the regulatory agreements with OHCS. As a further
condition of the debt agreements, the Company is required to comply with the
terms of certain Regulatory Agreements which provide, among other things, that
in order to preserve the federal income tax exempt status of the bonds, the
Company is required to lease at least 20% of the units of the projects to low
or moderate income persons as defined in Section 142(d) of the Internal
Revenue Code.
There are additional requirements as to the age and physical condition of
the residents with which the Company must also comply. Non-compliance with
these restrictions may result in an event of default and cause acceleration of
the scheduled repayment.
F-17
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On August 15, 1995, the Company sold, through a public offering, $20,000,000
aggregate principal amount of 7% Convertible Subordinated Debentures due
August 15, 2005. The debentures are convertible at any time after the
effectiveness of the registration statement filed by the Company and at or
prior to maturity, unless previously redeemed, at a conversion price of $15.00
per share, subject to adjustments under certain circumstances. The net
proceeds were used to fund development activities.
7. INCOME TAX INFORMATION
The accompanying financial statements set forth the provision for income
taxes for the Company and the Predecessor as follows: Effective December 1,
1994, the Company adopted the provisions of SFAS 109, "Accounting for Income
Taxes." SFAS 109 requires the use of an asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to the
differences between the financial statement carrying amounts of the existing
assets and liabilities and their respective tax bases. The Company is subject
to federal and state income taxes and deferred income taxes for the cumulative
difference between the financial statement amounts and the income tax bases of
assets and liabilities.
At December 31, 1995, the Company had a net operating loss carryforward of
approximately $601,000 for income tax purposes. This loss will be carried
forward and expires in the years 2009 and 2010. As such, no provision for
income taxes has been recorded.
The provision for income taxes for the Predecessor is based on the
historical combined financial data of Madras Elder Care, LCP and ALF, as if
the combined companies operated as a C-Corporation, and adopted the provisions
of SFAS 109 on January 1, 1993. Had the Predecessor been taxed as a regular
corporation during the years ended December 31, 1990 and 1991, no income tax
provision would have been recorded because of the operating losses of $83,000
and $51,000, respectively, that were generated during those years. The tax
benefit from those losses would have been available for use in subsequent
years to offset taxable income. The provision for income taxes for the year
ended December 31, 1992 takes this net operating loss carryover into effect,
effectively eliminating any tax liability for 1992. The 1993 tax provision was
also reduced due to the remaining net operating loss carryforward utilized in
1993. Unaudited income taxes for each of the periods subsequent to December
31, 1992 for the Predecessor and audited income taxes for the Company are as
follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------------------------- -----------------------------------
YEAR ENDED ELEVEN MONTHS ENDED MONTH ENDED YEAR ENDED
DECEMBER 31, 1993 NOVEMBER 30, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Current:
Federal........................................ $53 $70 $ -- $ --
State.......................................... 13 16 -- --
Deferred:
Federal........................................ 1 (1) -- --
State.......................................... -- -- -- --
-------------------------------------------------- --- --- -------- --------
$67 $85 $ -- $ --
=== === ======== ========
</TABLE>
F-18
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount of income determined
by applying the applicable U.S. statutory federal rate to pretax income as a
result of the following differences:
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------- -------------------------
ELEVEN MONTHS
YEAR ENDED ENDED MONTH ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Statutory federal tax rate........................................... 34.0% 34.0% 34.0% 34.0%
Increase (decrease) in rate from:
State taxes, net of federal tax benefits............................ 5.0 6.9 -- --
Benefit of operating loss carryforwards............................. (10.3) -- -- --
Increase in valuation reserve........................................ -- -- (34.0%) (34.0%)
Other............................................................... (3.0) (4.1) -- --
----- ---- ----- -----
Effective tax rate................................................... 25.7% 36.8% -- --
===== ==== ===== =====
</TABLE>
An analysis of the tax differences at December 31, 1994 and December 31,
1995 for deferred tax assets and liabilities, consists of the following (in
thousands):
<TABLE>
<CAPTION>
THE COMPANY
-----------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss..................... $ 55 $ 231
Deferred revenue....................... -- 59
Other.................................. -- 43
Deferred tax liabilities:
Depreciation........................... -- (92)
Net deferred asset valuation reserve.... (55) (241)
---- -----
Deferred tax asset (liability).......... $-- $ --
==== =====
</TABLE>
8. RELATED PARTY TRANSACTIONS
THE COMPANY
The Company leases four residences from Assisted Living Facilities, Inc.
(ALF), a related party (see Note 2). The Company's president's spouse owns a
25% interest in ALF. During the month ended December 31, 1994 and year ended
December 31, 1995, the Company paid ALF aggregate lease deposits of $75,000
and $0, respectively and aggregate rentals of $37,000 and $734,000,
respectively.
In December of 1994, the Company purchased Aspen Court and Hillside Manor
from Madras and LCP for $1,685,000 and $2,164,000 (including the assumption of
$1,114,000 in debt, but excluding closing costs), respectively (See Note 2).
Prior to the purchase, the president of the Company owned a 30% interest in
Madras and, together with her spouse, owned a 50% partnership interest in
Redbud Associates which held a 35% partnership interest in LCP. Subsequent to
the purchase, neither the President nor her spouse have any ownership in
Madras or LCP.
F-19
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concepts in Community Living, Inc. (CCL) is a company that is owned 100% by
the President. CCL provides services to several of the developers that have
contracted with the Company to build and develop assisted living facilities.
CCL has performed feasibility studies and pre-development consulting services
for the developers on the Company's behalf. For the year ended December 31,
1995, CCL performed these services on 36 sites collecting fees of $605,000 of
which was capitalized in construction in process on the balance sheet. The
direct costs incurred by CCL in performing these services was approximately
$510,000.
PREDECESSOR
The Predecessor residences operated under management agreements with CCL
(the CCL Management Agreements). Under the terms of the CCL Management
Agreements, CCL provided management and administrative support to the
Predecessor and, as such, was entitled to reimbursement for accounting,
marketing and other expenses incurred on behalf of the Predecessor. Fees paid
to CCL under the CCL Management Agreements are reflected as management fees in
the accompanying Statements of Operations.
9. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") in which options may be
granted as either incentive or non-qualified stock options. The Plan is
administered by the Compensation Committee which sets the terms and provisions
of options granted under the Plan. Incentive options may be granted only to
officers or other full-time employees of the Company, while non-qualified
options may be granted to directors, officers or other employees of the
Company, or consultants who provide services to the Company. The Company has
reserved 300,000 shares of common stock for deferred issuance under the plan.
The following summarizes transactions regarding the nonqualified options for
the year ended December 31, 1995.
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE ($)
------- -------------
<S> <C> <C>
Outstanding December 1, 1994 ..................... -- --
Options Granted................................... 220,000 9.25
-------
Outstanding December 31, 1994..................... 220,000 9.25
Options Granted................................... 95,250 9.25 to 15.00
Options Exercised ................................ -- --
Options Canceled.................................. (32,217) 9.25 to 15.00
-------
Outstanding December 31, 1995..................... 283,033 9.25 to 15.00
=======
</TABLE>
In addition to the above, the Board of Directors have granted, subject to
Shareholder Approval of the amendment to increase the number of shares covered
by the plan from 300,000 to 600,000, 140,000 shares at $13.00 per share. Each
option shall expire on the date specified in the option agreement, but not
later than the tenth anniversary of the date on which the option was granted.
Such options vest three years from the date of issuance and are exercisable
within seven to ten years from the date of vesting. Each option is exercisable
in equal installments as designated by the Compensation Committee at the
option price designated by the Compensation Committee; however, incentive
options cannot be less than the fair market value of the common stock on the
date of grant. All options are nontransferable and subject to adjustment upon
changes in capitalization by the Compensation Committee. The Board of
Directors, at its option, may discontinue the Plan or amend the Plan at any
time. At December 31, 1995, there were 64,445 shares which were exercisable.
F-20
<PAGE>
10. SUBSEQUENT EVENTS
As of March 28, 1996, the Company sold and leasedback eight assisted living
residences in Washington and Texas for fixed terms ranging from twelve to
twenty years at annual lease payments of $1.4 million to LTC Properties, Inc.
In addition, the Company entered into agreements to sale and leaseback, once
development has been completed, an additional three facilities located in
Washington for approximately $7.1 million. The leases will have fixed terms of
twenty years with initial annual lease payments of $596,400. The Company
anticipates these transactions will close by June 30, 1996.
As of March 28, 1996, the Company purchased an additional nine properties in
Oregon and Texas at an aggregate purchase price of approximately $1.3 million
to develop assisted living residences of which seven of the properties were
subject to purchase as of December 31, 1995. In addition, the Company has
entered into fourteen additional option agreements to acquire land for
development, subject to completion of due diligence and various other
conditions, for an aggregate purchase price of approximately $1.5 million.
Between January 1, 1996 and March 28, 1996, the Company had opened or had
received Certificates of Occupancy on five additional residences since
December 31, 1995.
11. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the pro forma statement of operations of the
Company for the years ended December 31, 1993 and 1994, as if the acquisition
of the Predecessor's assets and the initial public offering had occurred at
January 1, 1993 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1993 1994
------ ------
<S> <C> <C>
Revenues................................................. $1,884 $2,053
Operating income......................................... (409) (402)
Interest expense--net.................................... 85 84
Net loss................................................. (494) ( 486)
Loss per common share.................................... $ (.16) $ (.16)
Weighted average common shares........................... 3,000 3,000
</TABLE>
F-21
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARY
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
ASSETS ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 7,335 $ 4,170
Accounts receivable................................. 136 217
Other current assets................................ 558 651
------- -------
Total current assets.............................. 8,029 5,038
------- -------
Property and equipment................................ 28,446 31,856
Less accumulated depreciation....................... 163 267
------- -------
Property and equipment--net......................... 28,283 31,589
------- -------
Construction in process (Note 2)...................... 13,075 15,672
Goodwill.............................................. 393 384
Other assets.......................................... 3,766 4,711
------- -------
Total assets...................................... $53,546 $57,394
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $13,149 $11,340
Current portion of long-term debt................... 47 89
------- -------
Total current liabilities........................... 13,196 11,429
Other non-current liabilities......................... 153 112
Mortgages payable..................................... 4,553 10,350
Convertible subordinated debt......................... 20,000 20,000
------- -------
Total liabilities................................. 37,902 41,891
------- -------
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized;
none issued and outstanding
Common Stock, $.01 par value; 40,000,000 shares au-
thorized;
3,000,000 and 3,004,734 shares issued and outstand-
ing............................................... 30 30
Additional paid-in-capital........................... 16,492 16,538
Fair market value in excess of historical cost of ac-
quired net assets
attributable to related party transactions.......... (239) (239)
Accumulated deficit.................................. (639) (826)
------- -------
Total shareholders' equity........................... 15,644 15,503
------- -------
Total liabilities and shareholders' equity........ $53,546 $57,394
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Revenues................................ $ 682 $2,750
----- ------
Operating expenses:
Residence operating expenses.......... 449 1,936
Corporate general and administrative.. 231 215
Building rentals...................... 0 364
Building rentals from related party... 146 196
Depreciation and amortization......... 39 217
----- ------
Total operating expenses................ 865 2,928
----- ------
Operating loss.......................... (183) (178)
----- ------
Interest expense........................ 24 31
Interest (income)....................... (180) (22)
----- ------
Interest expense (income)--net.......... (156) 9
----- ------
Net loss................................ $ (27) $ (187)
===== ======
Net loss per common share............... $(.01) $ (.06)
===== ======
Weighted average common shares outstand-
ing.................................... 3,000 3,005
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................ $ (27) $ (187)
Adjustment to reconcile net loss to net
cash provided by operating
activities:
Depreciation and amortization......... 39 217
Changes in other non-cash items:
Accounts receivable................... (13) (81)
Other current assets.................. 44 (93)
Other assets.......................... (46) (936)
Accounts payable and accrued ex-
penses............................... 893 (1,809)
------- --------
Net cash provided by (used for) operat-
ing activities......................... 890 (2,889)
------- --------
INVESTING ACTIVITIES:
Proceeds from sale leasebacks........... 14,380
Purchases of property and equipment..... (3,162) (20,541)
------- --------
Net cash used for investing activities.. (3,162) (6,161)
------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt............ 5,865
Payments on long-term debt.............. (4) (26)
Proceeds from exercise of stock op-
tions.................................. 46
------- --------
Net cash provided by (used for) financ-
ing activities......................... (4) 5,885
------- --------
Net decrease in cash and cash equiva-
lents.................................. (2,276) (3,165)
Cash and cash equivalents, beginning of
period................................. 13,453 7,335
------- --------
Cash and cash equivalents, end of peri-
od..................................... $11,177 $ 4,170
------- --------
Supplemental disclosure of cash flow in-
formation:
Cash payments for interest............ $ 24 $ 784
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Assisted Living Concepts, Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to senior citizens who need
help with the activities of daily living such as bathing and dressing. The
Company provides personal care and support services and makes available
routine nursing services designed to meet the needs of its tenants.
The Company was organized in July 1994, initially capitalized through the
sale of 500,000 shares of $0.01 par value common stock for $100,000. From July
19, 1994 to November 30, 1994, the date of its initial public offering, the
Company began to put into place the management organization to commence
operations and execute its strategy to expand the Company's business.
On November 22, 1994, the Company sold 2,000,000 shares of common stock at
$9.25 per share in a public offering realizing net proceeds of $16,422,000. On
December 1, 1994, the Company purchased two and leased four assisted living
residences from Assisted Living Concepts Group ("the Predecessor") and
commenced operations. As of March 31, 1996, the Company had received
certificates of occupancy for 35 residences of which 26 had commenced
operations.
Basis of Presentation
These financial statements have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These condensed financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1995.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The result of operations for the three-month period ended March 31,
1995 and 1996 are not necessarily indicative of the results to be expected for
the full year.
2. PROPERTY AND EQUIPMENT
Construction in Process
As of March 31, 1996, the Company had begun construction or had purchased
land to begin construction on 22 parcels of land. The Company has also entered
into agreements pursuant to which it may purchase, subject to completion of
due diligence and various other conditions, 28 additional sites for
approximately $3.1 million. In addition, the Company has entered into
agreements to manage and or lease 3 additional sites once development has been
completed by outside developers.
F-25
<PAGE>
ASSISTED LIVING CONCEPTS, INC. (THE COMPANY)
AND ASSISTED LIVING CONCEPTS GROUP (PREDECESSOR)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT (CONTINUED)
As of March 31, 1996, the Company had capitalized all costs incurred in
connection with the development of properties, and accordingly, construction
in process consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Land purchased............................................ $ 2,728
Construction costs and architectural fees................. 10,504
Other costs, including legal fees, building permits and
other
development costs........................................ 2,440
-------
$15,672
=======
</TABLE>
During the quarter ended March 31, 1996, the Company capitalized $447,000 of
interest costs relative to financing of construction in process. Of the 35
residences the Company had opened or had received certificates of occupancy,
18 were leases, 15 were owned (8 in Texas, 6 in Oregon and 1 in Washington)
and 2 Washington residences were under agreements to purchase.
3. LEASES
During the quarter ended March 31, 1996, the Company completed the sale of
six Texas residences under sale and leaseback arrangements. The Company sold
the residences for approximately $10,300,000, which approximates cost, and
leased them back over initial terms of twelve years. The residences were
leased back at an initial annual lease rate of approximately $1,047,000. In
addition the Company completed the sale of two Washington residences under
sale and leaseback arrangements. The Company sold the residences for
approximately $4,080,000, which approximate costs, and leased them back over
an initial term of twenty years. The residences were leased back at an initial
annual lease rate of approximately $343,000. The above transactions were
completed with LTC Properties, Inc., the Chairman and President of which are
members of the Board of Directors and Shareholders of the Company.
In addition, the Company completed a lease agreement for one Oregon
residence with an initial term of fifteen years at an initial annual rate of
$208,200.
4. LONG-TERM DEBT
During the quarter ended March 31, 1996, the Company closed three loans with
the State of Oregon Housing and Community Service Department for $5,865,000.
The loans, which bear interest at a rate of 7.375%, have terms of 30 years and
monthly principal and interest payments of $40,510. The Company is also
required to make deposits into an interest bearing account of $10,990 per
month for insurance, real estate taxes and replacement reserves.
5. SUBSEQUENT EVENTS AND COMMITMENTS
The Company has entered into agreements to sell and leaseback, once
development has been completed, an additional three residences located in
Washington for approximately $7.1 million. The leases will have fixed terms of
twenty years with initial annual lease payments of $596,400. The Company
anticipates these transactions will close by June 30, 1996.
The Company completed the sale of eight Texas residences under sale and
leaseback arrangements. The Company sold the residences for approximately
$16.4 million, which approximates cost, and leased them back over terms
ranging from twelve to fifteen years. The residences were leased back at an
annual lease rate of approximately $1,773,700.
F-26
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS IN CONNEC-
TION WITH THIS OFFERING MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR BY ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE OF THIS PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 11
Price Range of Common Stock.............................................. 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Dilution................................................................. 12
Selected Financial Data.................................................. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 24
Management............................................................... 34
Certain Transactions..................................................... 39
Principal and Selling Stockholders and Management Ownership.............. 40
Description of Capital Stock............................................. 41
Shares Eligible for Future Sale.......................................... 42
Underwriting............................................................. 43
Legal Matters............................................................ 44
Experts.................................................................. 44
Available Information.................................................... 45
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,975,000 SHARES
[LOGO OF ASSISTED LIVING CONCEPTS]
COMMON STOCK
----------------
PROSPECTUS
----------------
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.
JULY 3, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $16,745
NASD Fee.......................................................... 4,926
AMEX Listing Fee.................................................. 10,000
Printing and Engraving Expenses................................... 70,000
Legal Fees and Expenses........................................... 100,000
Accounting Fees and Expenses...................................... 60,000
Registrar and Transfer Agent Fees and Expenses.................... 5,000
Miscellaneous Expenses............................................ 39,329
-------
Total........................................................... 306,000
=======
</TABLE>
All of the costs identified above will be paid by the Company, except that
the Selling Stockholders will pay their pro-rata share of the SEC registration
fee ($1,290) and any incremental expenses incurred in connection with the
sales of their shares.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that a director or officer
of the Company shall not be personally liable to the Company or its
stockholders for damages for any breach of fiduciary duty as a director or
officer, except for liability for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or (ii) the
payment of distributions in violation of Nevada Revised Statutes 78.300. In
addition, Nevada Revised Statutes 78.751 and Article III, Section 13 of the
Company's Bylaws, under certain circumstances, provide for the indemnification
of the Company's officers, directors, employees, and agents against
liabilities which they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided for is contained
herein, but that description is qualified in its entirety by reference to
Article III, Section 13 of the Company's Bylaws.
In general, any officer, director, employee or agent shall be indemnified
against expenses including attorneys' fees, fines, settlements, or judgments
which were actually and reasonably incurred in connection with a legal
proceeding, other than one brought by or on behalf of the Company, to which he
was a party as a result of such relationship, if he acted in good faith, and
in the manner he believed to be in or not opposed to the Company's best
interest and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. If the action or suit is
brought by or on behalf of the Company, the person to be indemnified must have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the Company's best interest. No indemnification will be made in
respect of any claim, issue or matter as to which such person shall have
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable to the Company or for amounts paid in settlement to
the Company, unless and only to the extent that the court in which the action
or suit was brought or other court of competent jurisdiction, determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
Any indemnification under the previous paragraphs, unless ordered by a court
or advanced as provided in the succeeding paragraph, must be made by the
Company only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made (i) by the stockholders, (ii) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the act, suit or proceeding, (ii) if a majority vote
of a quorum of
II-1
<PAGE>
directors who were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion or (iv) if a quorum consisting
of directors who were not parties to the act, suit or proceeding cannot be
obtained, by independent legal counsel in a written opinion. To the extent
that a director, officer, employee or agent of the Company has been successful
on the merits or otherwise in defense of any action, suit or proceeding
referred to in the previous paragraph, or in defense of any claim, issue or
matter therein, he must be indemnified by the Company against expenses,
including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
Expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding must be paid by the Company as they are incurred
and in advance of the final disposition of the action, suit or proceeding,
upon receipt of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined by a court of competent
jurisdiction that he is not entitled to be indemnified by the Company as
authorized by the By-Laws. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate.
The indemnification and advancement of expenses authorized in or ordered by
a court as provided in the foregoing paragraphs does not exclude any other
rights to which a person seeking indemnification or advancement of expenses
may be entitled under the Articles of Incorporation or any bylaw, agreement,
vote of shareholders or disinterested directors or otherwise, for either an
action in his official capacity or an action in another capacity while holding
his office, except that indemnification, unless ordered by a court as
described in the third preceding paragraph or for advancement of expenses made
as described in the next preceding paragraph, may not be made to or on behalf
of any director or officer if a final adjudication establishes that his acts
or omissions involved intentional misconduct, fraud or a knowing violation of
the law and was material to the cause of action. If a claim for
indemnification or payment of expenses under Article III, Section 13 of the
By-Laws is not paid in full within ninety (90) days after a written claim
therefor has been received by the Company, the claimant may file suit to
recover the unpaid amount of such claim, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any
such action, the Company shall have the burden of proving that the claimant
was not entitled to the requested indemnification or payment of expenses under
applicable law.
The Board of Directors may authorize, by a vote of a majority of a quorum of
the Board of Directors, the Company to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Company would have the power to indemnify him against such
liability under the provisions of Article III, Section 13 of the By-Laws. The
Board of Directors may authorize the Company to enter into a contract with any
person who is or was a director, officer, employee or agent of the Company or
is or was serving at the request of the Company as a director, officer,
employee or agent of another partnership, joint venture, trust or other
enterprise providing for indemnification rights equivalent to or, if the Board
of Directors so determines, greater than those provided for in Article III,
Section 13 of the By-Laws.
The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On August 15, 1995, the Company issued $20,000,000 aggregate principal
amount of the Debentures in a private placement to certain institutional
investors and individual accredited investors.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Merger Agreement between the Company and CCL Sub, Inc. (Incorporated
by reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.2 Agreement and Plan of Corporate Separation and Reorganization between
Concepts in Community Living, Inc. and Keren Wilson (Incorporated by
reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.3 Assignment, Bill of Sale, License, and Assumption Agreement between
Concepts in Community Living, Inc. and CCL Sub, Inc. (Incorporated by
reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.4 Purchase Agreement between the Company and Lincoln City Limited
Partnership (Incorporated by reference to the same titled exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938).
2.5 Letter Purchase Agreement between the Company and Madras Senior
Residence, LRW partners, Keren Brown Wilson and Mr. Joseph Hughes
(Incorporated by reference to the same titled exhibit to the Company's
Registration Statement on Form S-1, File No. 33-83938).
3.1 Articles of Incorporation of the Company (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
3.2 Bylaws of the Company (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1, File No.
33-83938).
4.1 Indenture, dated as of August 15, 1995, between the Company and Harris
Trust and Savings Bank, as Trustee, in respect of the Company's 7.0%
Convertible Subordinated Debentures due 2005 (Incorporated by
reference to the same titled exhibit to the Company's Quarterly Report
on
Form 10-Q for the period ended September 30, 1995, File No. 1-83938).
4.2 Form of 7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1995,
File No. 1-83938).
4.3 Registration Rights Agreement dated August 2, 1995 between the Company
and the initial purchasers of its 7.0% Convertible Subordinated
Debentures due 2005 (Incorporated by reference to the same titled
exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1995, File No. 1-83938).
5.1 Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey.
10.1 Stock Option Plan of the Company incorporated by referenced exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938.
10.2 Employment Agreement between the Company and Keren B. Wilson
incorporated by referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.3 Employment Agreement between the Company and Stephen J. Toth
incorporated by referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.4 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Rackleff House incorporated by referenced exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938.
10.5 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Juniper House incorporated by referenced exhibit to the
Company's Registration Statement on Form S-1, File No. 33-83938.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------------------------------------------------------
<C> <S>
10.6 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Huffman House incorporated by referenced exhibit to the
Company's Registration Statement on Form S-1, File No. 33-83938.
10.7 Lease Agreement between the Company and Assisted Living Facilities,
Inc. regarding Brookside House incorporated by referenced exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938.
10.8 Amendment to 1994 Stock Option Plan incorporated by reference to the
same titled exhibit to the Company's Registration Statement on Form S-
8, File No. 333-2352.
10.9 Form of Lease between the Company and LTC Properties, Inc.
21.1 List of subsidiaries.
23.1 Consent of Schreck, Jones, Bernhard, Woloson & Godfrey (included in
Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney.**
</TABLE>
- --------
** Previously filed
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer of
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of his counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(b) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Portland, State of
Oregon, as of the 3rd day of July, 1996.
ASSISTED LIVING CONCEPTS, INC.
By: /s/ Keren B. Wilson
_____________________________________
Keren B. Wilson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Keren B. Wilson Director, President and July 3, 1996
____________________________________ Chief Executive Officer
Keren B. Wilson (Principal Executive
Officer)
/s/ Stephen Gordon Chief Administrative Officer July 3, 1996
____________________________________ and Chief Financial Officer
Stephen Gordon (Principal Financial and
Accounting Officer)
* Director July 3, 1996
____________________________________
William McBride III
* Director July 3, 1996
____________________________________
Andre C. Dimitriadis
* Director July 3, 1996
____________________________________
Richard C. Ladd
* Director July 3, 1996
____________________________________
Bradley G. Razook
</TABLE>
*By: /s/ Keren B. Wilson
_______________________________
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NO.
------- --------------------------------------------------------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
2.1 Merger Agreement between the Company and CCL Sub, Inc.
(Incorporated by reference to the same titled exhibit to
the Company's Registration Statement on Form S-1, File
No. 33-83938).
2.2 Agreement and Plan of Corporate Separation and
Reorganization between Concepts in Community Living, Inc.
and Keren Wilson (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
2.3 Assignment, Bill of Sale, License, and Assumption
Agreement between Concepts in Community Living, Inc. and
CCL Sub, Inc. (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
2.4 Purchase Agreement between the Company and Lincoln City
Limited Partnership (Incorporated by reference to the
same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.5 Letter Purchase Agreement between the Company and Madras
Senior Residence, LRW partners, Keren Brown Wilson and
Mr. Joseph Hughes (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
3.1 Articles of Incorporation of the Company (Incorporated by
reference to the same titled exhibit to the Company's
Registration Statement on Form S-1, File No. 33-83938).
3.2 Bylaws of the Company (Incorporated by reference to the
same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
4.1 Indenture, dated as of August 15, 1995, between the
Company and Harris Trust and Savings Bank, as Trustee, in
respect of the Company's 7.0% Convertible Subordinated
Debentures due 2005 (Incorporated by reference to the
same titled exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1995, File
No. 1-83938).
4.2 Form of 7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to
the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1995, File No. 1-83938).
4.3 Registration Rights Agreement dated August 2, 1995
between the Company and the initial purchasers of its
7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to
the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1995, File No. 1-83938).
5.1 Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey.
10.1 Stock Option Plan of the Company incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.2 Employment Agreement between the Company and Keren B.
Wilson incorporated by referenced exhibit to the
Company's Registration Statement on Form S-1, File
No. 33-83938.
10.3 Employment Agreement between the Company and Stephen J.
Toth incorporated by referenced exhibit to the Company's
Registration Statement on Form S-1, File
No. 33-83938.
10.4 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Rackleff House incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NO.
------- -------------------------------------------------------- ----------
<C> <S> <C>
10.5 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Juniper House incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.6 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Huffman House incorporated by
referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.7 Lease Agreement between the Company and Assisted Living
Facilities, Inc. regarding Brookside House incorporated
by referenced exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938.
10.8 Amendment to 1994 Stock Option Plan incorporated by
reference to the same titled exhibit to the Company's
Registration Statement on Form S-8, File No. 333-2352.
10.9 Form of Lease between the Company and LTC Properties,
Inc.
21.1 List of subsidiaries
23.1 Consent of Schreck, Jones, Bernhard, Woloson & Godfrey
(included in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney.**
</TABLE>
- --------
** Previously filed
<PAGE>
EXHIBIT 1.1
1,975,000 Shares
----------------
ASSISTED LIVING CONCEPTS, INC.
------------------------------
Common Stock
------------
UNDERWRITING AGREEMENT
----------------------
July 2, 1996
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT
England
Ladies and Gentlemen:
ASSISTED LIVING CONCEPTS, INC., a Nevada corporation (the "Company"), and
each of the selling shareholders listed on Schedule I hereto (collectively, the
----------
"Selling Shareholders" and each individually, a "Selling Shareholder") propose
to sell an aggregate of 1,975,000 shares (the "Firm Shares") of the Company's
common stock, par value $.01 per share (the "Common Stock"), of which 1,800,000
shares are to be issued and sold by the Company and 175,000 shares are to be
sold by the Selling Shareholders, in each case to you and the other underwriters
named in Schedule II hereto (collectively, the "Underwriters"), for whom you are
-----------
acting as representatives (the "Representatives"). The Company has also agreed
to grant to you and the other Underwriters an option (the "Option") to purchase
up to an additional 296,250 shares of Common Stock (the "Option Shares") on the
terms and for the purposes set forth in Section 1(b) hereto. The Firm Shares
and the Option Shares are hereinafter collectively referred to as the "Shares."
The Company and the Selling Shareholders hereby confirm as follows their
respective agreements with the Representatives and the several other
Underwriters.
<PAGE>
1. Agreement to Sell and Purchase.
------------------------------
(a) On the basis of the representations, warranties and agreements of
the Company and the Selling Shareholders herein contained and subject to all the
terms and conditions of this Agreement, (i) the Company agrees to issue and sell
to each Underwriter and each Underwriter, severally and not jointly, agrees to
purchase from the Company at a purchase price of $18.00 per share, the number
of Firm Shares set forth opposite the name of such Underwriter in Column (1) of
Schedule II hereto, plus such additional number of Firm Shares which such
Underwriter may become obligated to purchase pursuant to Section 11 hereof, and
(ii) each Selling Shareholder, severally and not jointly, agrees to sell to each
Underwriter and each Underwriter, severally and not jointly, agrees to purchase
from such Selling Shareholder at the same purchase price per Share, the number
of Firm Shares set forth opposite the name of such Underwriter in Column (2) of
Schedule II, multiplied by the number of Firm Shares set forth opposite the name
of such Selling Shareholder in Schedule I and divided by the total number of
Firm Shares to be sold by all Selling Shareholders, in each case subject to such
adjustments to eliminate any fractional shares as the Representatives in their
sole discretion shall make, plus such additional number of Firm Shares which
such Underwriter may become obligated to purchase pursuant to Section 11 hereof.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, the Option Shares at the same price per share as the Underwriters
shall pay for the Firm Shares. The option may be exercised only to cover over-
allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time and from time to time on or before the
30th day after the date of this Agreement (or on the next business day if the
30th day is not a business day), upon notice (the "Option Shares Notice") in
writing or by telephone (confirmed in writing) by the Representatives to the
Company no later than 5:00 p.m., New York City time, at least two and no more
than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date") setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company will issue and sell to the Underwriters the
number of Option Shares set forth in the Option Shares Notice and each
Underwriter will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing, as adjusted
by the Representatives in such manner as they deem advisable to avoid fractional
shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to the
--------------------
Representatives for the accounts of the
-2-
<PAGE>
Underwriters against payment of the purchase price by certified or official bank
checks payable in New York Clearing House (same-day) funds to the order of the
Company (the "Closing") at the office of Stroock & Stroock & Lavan, counsel to
the Underwriters, Seven Hanover Square, New York, New York 10004. Such payment
shall be made at 10:00 a.m., New York City time, on July 9, 1996, or at such
other time on such other date, not later than seven business days after the date
of this Agreement, as may be agreed upon by the Company and the Representatives
(such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares to be sold by the Company shall be
in definitive form and shall be registered in such names and in such
denominations as the Representatives shall request at least two business days
prior to the Closing Date or the Option Closing Date, as the case may be, by
written notice to the Company. For the purpose of expediting the checking and
packaging of certificates for the Shares, the Company agrees to make such
certificates available for inspection at least 24 hours prior to the Closing
Date or the Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance, sale and delivery of the Firm Shares and the Option Shares by the
Company to the respective Underwriters shall be borne by the Company. The
Company will pay and save each Underwriter and any subsequent holder of the
Shares harmless from any and all liabilities with respect to or resulting from
any failure or delay in paying Federal or state stamp and other transfer taxes,
if any, which may be payable or determined to be payable in connection with the
issuance, sale or delivery to such Underwriter of the Firm Shares and Option
Shares.
Certificates in negotiable form (endorsed in blank or accompanied by
stock powers in blank, with signatures appropriately guaranteed, and any funds
necessary for the purchase of stock transfer stamps) representing all of the
Shares to be sold by the Selling Shareholders have been placed in custody under
Custody Agreements (each, a "Custody Agreement") with American Stock Transfer &
Trust Company as Custodian (the "Custodian") and each Selling Shareholder has
duly executed and delivered a Power of Attorney (a "Power of Attorney")
appointing Dr. Keren Brown Wilson, Stephen Gordon, and James Pieczynski, and
each of them, as such Selling Shareholder's attorneys-in-fact (the "Attorneys-
in-Fact") with authority to execute this
-3-
<PAGE>
Agreement and to deliver this Agreement on behalf of such Selling Shareholder,
to authorize the delivery of the Shares to be sold by such Selling Shareholder
hereunder and otherwise to act on behalf of such Selling Shareholder in
connection with the transactions contemplated by this Agreement and such Custody
Agreement. Each Selling Shareholder agrees that the Shares represented by the
certificates held in custody for such Selling Shareholder under such Custody
Agreement are subject to the interests of the Underwriters hereunder and the
arrangements made by such Selling Shareholder for such custody, as well as the
appointment by such Selling Shareholder of the Attorneys-in-Fact, are, to that
extent, irrevocable. Each Selling Shareholder specifically agrees that its
obligations hereunder shall not be terminated, except as otherwise provided
herein, by any act of such Selling Shareholder, operation of law or otherwise,
whether by the death or incapacity of such Selling Shareholder or by the
occurrence of any other event. If any Selling Shareholder should die or become
incapacitated or if any other such event should occur before the delivery of the
Shares hereunder, certificates representing the Shares held in custody for such
Selling Shareholder shall be delivered pursuant to the terms and conditions of
this Agreement and such Custody Agreement, and the actions taken by the
Attorneys-in-Fact pursuant to such Power of Attorney shall be as valid as if
such death, incapacity or other event had not occurred, whether or not the
Custodian or the Attorneys-in-Fact shall have received notice of such death,
incapacity or other event.
3. Representations and Warranties of the Company. The Company represents,
---------------------------------------------
warrants and covenants to each Underwriter that:
(a) A registration statement on Form S-1 (Registration No. 333-06095)
relating to the Shares, including a preliminary prospectus relating to the
Shares and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Commission has not issued any order
preventing or suspending the use of the Prospectus (as defined below) or any
Preliminary Prospectus (as defined below). The term "Preliminary Prospectus" as
used herein means a preliminary prospectus relating to the Shares as
contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations
included at any time as part of the foregoing registration statement or any
amendment thereto. Copies of such registration statement and amendments and of
each related Preliminary Prospectus have been delivered to the Representatives.
If such registration statement has not become effective, a further amendment to
such
-4-
<PAGE>
registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If such registration statement has become
effective, a final prospectus relating to the Shares containing information
permitted to be omitted at the time of effectiveness by Rule 430A will be filed
by the Company with the Commission in accordance with Rule 424(b) of the Rules
and Regulations promptly after execution and delivery of this Agreement. The
term "Registration Statement" means the registration statement as amended at the
time it becomes or became effective (the "Effective Date"), including all
financial statements and schedules and all exhibits and any information deemed
to be included therein by Rule 430A. The term "Prospectus" means the prospectus
relating to the Shares as first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no such filing is required, the form
of final prospectus relating to the Shares included in the Registration
Statement at the Effective Date.
(b) On the date that any Preliminary Prospectus was filed with the
Commission, the date the Prospectus is first filed with the Commission pursuant
to Rule 424(b) (if required), at all times subsequent to and including the
Closing Date and, if later, the Option Closing Date and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement, each Preliminary Prospectus and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did or will comply with all applicable provisions of the Act and the
Rules and Regulations and did or will contain all statements required to be
stated therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement or any such
amendment did or will contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto.
-5-
<PAGE>
The Company has not distributed, and, prior to the later to occur of (i) the
Closing Date or, if later, the Option Closing Date and (ii) completion of the
distribution of the Shares, will not distribute, any offering material in
connection with the offering or sale of the Shares other than the Registration
Statement, the Preliminary Prospectus, the Prospectus or any other materials, if
any, permitted by the Act.
(c) Except as set forth in Exhibit 21 to the Registration Statement,
the Company has no subsidiaries. The Company is, and at the Closing Date and the
Option Closing Date will be, duly organized, validly existing and in good
standing under the laws of the State of Nevada. The Company has, and at the
Closing Date and the Option Closing Date will have, full power and authority to
conduct all the activities conducted by it, to own or lease all the assets owned
or leased by it and to conduct its business as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus). The Company is, and at the Closing Date and
the Option Closing Date will be, duly licensed or qualified to do business and
in good standing as a foreign organization in all jurisdictions in which the
nature of the activities conducted by it or the character of the assets owned or
leased by it makes such licensing or qualification necessary, except where the
failure to be so qualified does not and will not have a material adverse effect,
singly or in the aggregate, on the business, properties, prospects, condition
(financial or otherwise), net worth or results of operations of the Company (a
"Material Adverse Effect"). The Company does not own, and at the Closing Date
will not own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in any
firm, partnership, joint venture, association or other entity. Complete and
correct copies of the articles of incorporation and the bylaws of the Company
and all amendments thereto have been delivered to the Representatives, and no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date or, if later, the Option Closing Date.
(d) The outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable and are
not subject to any preemptive or similar rights. The Shares to be issued and
sold by the Company will be, upon such issuance and payment therefor, duly
authorized, validly issued, fully paid and nonassessable and will not be subject
to any preemptive or similar rights. The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus (or, if the Prospectus
is not in existence, in the most recent Preliminary Prospectus). The description
of the securities of the Company in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus) is, and at the Closing Date and, if later, the Option
Closing Date will be,
-6-
<PAGE>
complete and accurate in all respects. Except as set forth in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), the Company does not have outstanding, and
at the Closing Date and, if later, the Option Closing Date will not have
outstanding, any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contracts or
commitments to issue or sell, any shares of its capital stock or any such
warrants, convertible securities or obligations.
(e) The financial statements and the related notes and schedules of the
Company set forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus)
present fairly the financial condition, results of operations, shareholders'
equity and cash flows of the Company for the dates and periods specified
therein. Such financial statements and schedules have been prepared in
conformity with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the entire periods involved, except as otherwise
disclosed therein. The balance sheet and the related notes and schedules of the
Company included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus)
present fairly the financial condition of the Company as of the date indicated,
all in conformity with GAAP, except as otherwise disclosed therein. The
selected financial data for the predecessors and the Company set forth under the
captions "Prospectus Summary--Summary Financial and Operating Data" and
"Selected Financial Data" in the Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) have been prepared on a
basis consistent with the combined financial statements and balance sheets of
the predecessors and the Company. No other financial statements or schedules of
the Company, any predecessor or any other entity are required by the Act or the
Rules and Regulations to be included in the Registration Statement or the
Prospectus. KPMG Peat Marwick LLP (the "Accountants") and Price Waterhouse LLP,
who have reported on those of such financial statements and schedules which are
or have been audited by them, are independent accountants with respect to the
Company as required by the Act and the Rules and Regulations.
(f) The Company maintains a system of internal accounting control
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets is
compared with
-7-
<PAGE>
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(g) Except as set forth in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus and prior to the Closing Date and, if later, the Option
Closing Date, (i) there has not been and will not have been any change in the
capitalization of the Company or any material adverse change in the business,
properties, prospects, condition (financial or otherwise), net worth or results
of operations of the Company arising for any reason whatsoever, (ii) the Company
has not incurred and will not have incurred any material liabilities or
obligations, direct or contingent, (iii) the Company has not entered into and
will not have entered into any material transactions other than pursuant to this
Agreement, and (iv) the Company has not and will not have paid or declared any
dividends or other distributions of any kind on any class of its capital stock.
(h) The Company has good and marketable title to all properties and
assets described in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) as to be owned by it, free and clear of
all liens, security interests, restrictions, pledges, encumbrances, charges,
equities, claims, easements, assessments and tenancies (collectively,
"Encumbrances") the existence of which would have a Material Adverse Effect,
except such as are described in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). The Company has valid,
subsisting and enforceable leases for the properties described in the Prospectus
as to be leased by it, free and clear of all Encumbrances the existence of which
would have a Material Adverse Effect, except such as are described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(i) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(j) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), there are no actions, suits or proceedings pending or
threatened against or affecting the Company or any of its directors or officers
in their capacity as such before or by any Federal or state court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign (collectively, a "Governmental Body") ,
-8-
<PAGE>
wherein an unfavorable ruling, decision or finding have a Material Adverse
Effect.
(k) The Company has and will have at the Closing Date and the Option
Closing Date (if any) all governmental licenses, permits, consents, orders,
approvals and other authorizations (collectively, "Licenses") necessary to carry
on its business and own its properties as contemplated in the Prospectus (or, if
the Prospectus is not in existence, in the most recent Preliminary Prospectus).
The Company has, and at the Closing Date and the Option Closing Date (if any)
will have, complied in all material respects with all laws, regulations and
orders applicable to it or its business and properties, except where the failure
to so comply will not have a Material Adverse Effect. The Company is not, at the
Closing Date and the Option Closing Date (if any), in default (nor has any event
occurred which, with notice or lapse of time or both, would constitute a
default) in the due performance and observation of any term, covenant or
condition of any indenture, mortgage, deed of trust, voting trust agreement,
loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument (collectively, a
"contract or other agreement") to which it is a party or by which any of its
properties is bound or affected, violation of which would have a Material
Adverse Effect. To the best knowledge of the Company, no other party under any
such contract or other agreement is in default in any material respect
thereunder. Without limiting the generality of the foregoing, each of the
assisted living residences to be operated by the Company is certified to
participate in those Medicaid programs in which such residences have
historically participated and such certification currently in effect will remain
in full force and effect, without interruption whatsoever. There are no
governmental proceedings or actions pending or threatened for the purpose of
suspending, modifying or revoking any License held by the Company (including,
without limitation, any proceeding or action to decertify any from participation
in any Medicaid program). The Company is not in violation of any provision of
its articles of incorporation or bylaws .
(l) The Company has full power (corporate and other) and authority to
enter into this Agreement and to carry out all the terms and provisions hereof
and thereof to be carried out by it. This Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and binding
agreement of the Company and is enforceable against the Company in accordance
with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights, to general principals of equity. The Company has full power
and authority to authorize, issue, offer and sell the Shares, as contemplated by
this Agreement, free of any preemptive rights. The offer, issuance and sale by
the Company of any shares of
-9-
<PAGE>
Common Stock prior to the date hereof was and is exempt from the registration
requirements of the Act and applicable state securities and blue sky laws.
(m) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All contracts to which the Company is a party listed in Item 16 of the
Registration Statement have been duly authorized, executed and delivered by the
Company, constitute valid and binding agreements of the Company and are
enforceable against the Company in accordance with the terms thereof.
(n) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Representatives was or will be, when made,
inaccurate, untrue or incorrect.
(o) Neither the Company nor any of its directors, officers or
affiliates (within the meaning of the Rules and Regulations) has taken, nor will
he, she or it take, directly or indirectly, any action designed, or which might
reasonably be expected in the future, to cause or result in, under the Act or
otherwise, or which has constituted, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the Shares or
otherwise.
(p) No holder of securities of the Company has rights to the
registration of any securities of the Company as a result of the filing of the
Registration Statement.
(q) The Shares have been approved for listing on the American Stock
Exchange (the "AMEX"), subject only to notice of issuance.
(r) No labor dispute with the employees of the Company exists or is
threatened or imminent.
(s) The Company owns, or is licensed or otherwise has the full right to
use all material trademarks and trade names which are used in or necessary for
the conduct of its business as described in the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus). To
the Company's best knowledge, no claims have been asserted by any person to the
use of any such trademarks or trade names or challenging or questioning the
validity or effectiveness of any such trademark or trade name. The use, in
connection with the business and operations of the Company of such trademarks
and trade names does not, to the Company's knowledge, infringe on the rights of
any person.
-10-
<PAGE>
(t) Neither the Company nor, to the Company's best knowledge, any
employee or agent of the Company has made any payment of funds of the Company or
received or retained any funds of the Company in violation of any law, rule or
regulation or of a character required to be disclosed in the Prospectus (or, if
the Prospectus is not in existence, in the most recent Preliminary Prospectus).
(u) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the business in which the Company is engaged; The Company has
not been refused any insurance coverage sought or applied for; and the Company
has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires.
(v) The business, operations and facilities of the Company has been
conducted in compliance with all applicable laws, ordinances, rules,
regulations, Licenses, permits, approvals, plans, authorizations or requirements
relating to occupational safety and health, or pollution, or protection of
health or the environment (including, without limitation, those relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic substances, materials or wastes into ambient
air, surface water, groundwater or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of chemical substances, pollutants, contaminants or hazardous or toxic
substances, materials or wastes, whether solid, gaseous or liquid in nature) of
any governmental department, commission, board, bureau, agency or
instrumentality of the United States, any state or political subdivision
thereof, or any foreign jurisdiction, and all applicable judicial or
administrative agency or regulatory decrees, awards, judgments and orders
relatwing thereto; and the Company has not received any notice from any
governpmental instrumentality or any third party alleging any violation thereof
or liability thereunder (including, without limitation, liability for costs of
investigating or remediating sites containing hazardous substances and/or
damages to natural resources).
(w) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof and
has paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable.
(x) Each officer and director of the Company has delivered to NatWest
Securities Limited an agreement in the form set forth as Exhibit A hereto to the
effect that he or she will not, for a period of 180 days after the date hereof,
without the
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<PAGE>
prior written consent of NatWest Securities Limited, offer to sell, sell,
contract to sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option to purchase or other disposition) of any
shares of Common Stock or securities convertible into, or exchangeable or
exercisable for, shares of Common Stock.
(y) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby .
4. Representations and Warranties of the Selling Shareholders. Each of
----------------------------------------------------------
the Selling Shareholders, severally and not jointly, represents, warrants and
covenants to each Underwriter that:
(a) Such Selling Shareholder has full power and authority to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it. All authorizations and consents necessary for the
execution and delivery by such Selling Shareholder of this Agreement have been
given. This Agreement has been duly authorized, executed and delivered by or on
behalf of such Selling Shareholder and constitutes a valid and binding agreement
of such Selling Shareholder and is enforceable against such Selling Shareholder
in accordance with the terms hereof, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors' rights generally or by general principles of
equity relating to the availability of remedies and except as rights to
indemnity or contribution may be limited by federal or state securities laws and
the public policy underlying such laws.
(b) Such Selling Shareholder has full power and authority to
enter into the Power of Attorney in the form heretofore furnished to the
Underwriters and the Custody Agreement in the form heretofore furnished to the
Underwriters and to carry out all the terms and provisions thereof to be carried
out by it. All authorizations and consents necessary for the execution and
delivery by such Selling Shareholder and of the Power of Attorney and the
Custody Agreement have been given. Each of the Power of Attorney and the Custody
Agreement has been duly authorized, executed and delivered by such Selling
Shareholder and is enforceable against such Selling Shareholder in accordance
with the terms thereof, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in effect relating to
or affecting creditors' rights generally or by general principles of equity
relating to the availability of remedies.
-12-
<PAGE>
(c) Such Selling Shareholder now has, and at the time of delivery
thereof hereunder will have, (i) good and marketable title to the Shares to be
sold by such Selling Shareholder hereunder, free and clear of all Encumbrances,
and (ii) full legal right and power, and all authorizations and approvals
required by law, to sell, transfer and deliver the Shares to the Underwriters
hereunder and to make the representations, warranties and agreements made by
such Selling Shareholder herein; and upon delivery of the Shares hereunder, and
assuming that each of the Underwriters acquires such shares in good faith
without notice of any adverse claim (within the meaning of the Uniform
Commercial Code), the Underwriters will receive good and marketable title to the
Shares purchased by it from such Selling Shareholder, free and clear of all
Encumbrances.
(d) On the Closing Date all stock transfer or other taxes (other
than income taxes) which are required to be paid in connection with the sale and
transfer of the Shares to be sold by such Selling Shareholder to the several
Underwriters hereunder will have been fully paid or provided for by such Selling
Shareholder and all laws imposing such taxes will have been fully complied with.
(e) None of the execution, delivery or performance of this
Agreement, the Power of Attorney or the Custody Agreement and the consummation
of the transactions contemplated herein or therein by such Selling Shareholder
conflicts or will conflict with, or results or will result in any breach or
violation of any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any Encumbrance upon, any property or
assets of such Selling Shareholder pursuant to, (i) the terms of any contract or
other agreement to which such Selling Shareholder is a party or by which it is
bound or to which any of its properties is subject, which conflict, breach,
violation or default would adversely affect such Selling Shareholder's ability
to perform its obligations hereunder; (ii) any statute, rule or regulation of
any Governmental Body having jurisdiction over such Selling Shareholder or any
of its activities or properties; or (iii) the terms of any judgment, decree or
order of any arbitration or Governmental Body having such jurisdiction.
(f) No consent, approval, authorization or order of, or any
filing or declaration with, any Governmental Body is required for the
consummation by such Selling Shareholder of the transactions on its part
contemplated herein, except such as have been obtained under the Act or the
Rules and Regulations and such as may be required under state securities or Blue
Sky laws or the bylaws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Shares to be sold by such Selling
Shareholder.
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(g) The sale of the Shares proposed to be sold by such Selling
Shareholder is not prompted by such Selling Shareholder's knowledge of any
material adverse information concerning the Company which is not set forth or
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus).
(h) On the date that any Preliminary Prospectus was filed with
the Commission, the date the Prospectus is first filed with the Commission
pursuant to Rule 424(b) (if required), at all times subsequent to and including
the Closing Date and, if later, the Option Closing Date and when any post-
effective amendment to the Registration Statement becomes effective or any
amendment or supplement to the Prospectus is filed with the Commission, all
information with respect to such Selling Shareholder included in the
Registration Statement, each Preliminary Prospectus and the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment or supplement thereto), did or will comply with all applicable
provisions of the Act and the Rules and Regulations and did or will contain all
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no information
regarding such Selling Shareholder included in the Registration Statement or any
such amendment did or will contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading. At the Effective Date, the
date the Prospectus or any amendment or supplement to the Prospectus is filed
with the Commission and at the Closing Date and, if later, the Option Closing
Date, the information regarding such Selling Shareholder included in the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(i) Such Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in Section 3 are not
true and correct in all material respects.
(j) Such Selling Shareholder has not distributed and will not
distribute the Registration Statement, any Preliminary Prospectus, the
Prospectus or any other offering material in connection with the offering and
sale of the Shares. Such Selling Shareholder has not taken, directly or
indirectly, any action designed, or which might reasonably be expected, to cause
or result in, under the Act or otherwise, or which has caused or resulted in,
stabilization or manipulation of the price
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of any security of the Company to facilitate the sale or resale of the Shares.
(k) Such Selling Shareholder does not have, nor has obtained
waiver prior to the date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the Shares that are to
be sold by the Company or any of the Selling Shareholders to the Underwriters
pursuant to this Agreement; and such Selling Shareholder does not own any
warrants, options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options, or other
securities from the Company, other than those described in the Registration
Statement and the Prospectus.
5. Representations and Warranties of the Underwriters. NatWest Securities
--------------------------------------------------
Limited ("NatWest") represents and agrees that (i) it has not offered or sold
and will not offer or sell in the United Kingdom by means of any document, any
Securities except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, (ii) it
has complied and will comply with all applicable provisions of the Financial
Securities Act 1986 with respect to anything done by it in relation to the
Securities in, from or otherwise involving the United Kingdom, and (iii) it has
only issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the Securities to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom
such document may otherwise lawfully be issued or passed on.
6. Agreements of the Company and the Selling Shareholders. The
------------------------------------------------------
Company (as to Sections 6(a) - (l)) and each Selling Shareholder (as to Sections
6(k) - (m)), severally and not jointly, covenants and agrees with each of the
several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
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(b) The Company will use its best efforts to cause the
Registration Statement to become effective, and will notify the Representatives
promptly, and will confirm such advice in writing, (i) when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective, (ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (iv) of the happening of
any event during the period mentioned in the second sentence of Section 6(f)
that in the judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they are made, not misleading
and (v) of receipt by the Company or any representative or attorney of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any Preliminary Prospectus or the Prospectus. If at
any time the Commission shall issue any order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible moment. If the
Company has omitted any information from the Registration Statement pursuant to
Rule 430A, the Company will use its best efforts to comply with the provisions
of and make all requisite filings with the Commission pursuant to said Rule 430A
and to notify the Representatives promptly of all such filings.
(c) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or the Registration Statement, as then amended
or supplemented, would include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading, or if for any other reason it is necessary at any time to amend or
supplement the Prospectus or the Registration Statement to comply with the Act
or the Rules and Regulations, the Company will promptly notify the
Representatives thereof and, subject to Section 6(b) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(d) The Company will furnish to the Representatives, without
charge, one signed copy of the Registration Statement and
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of any post-effective amendment thereto, including financial statements and
schedules, and all exhibits thereto and will furnish to the Representatives,
without charge, for transmittal to each of the other Underwriters, copies of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(e) The Company will comply with all the provisions of all
undertakings contained in the Registration Statement.
(f) On the Effective Date, and thereafter from time to time for
such period as the Prospectus is required by the Act to be delivered, the
Company will deliver to each of the Underwriters, without charge, as many copies
of the Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request for purposes contemplated by the Act. The Company
consents to the use of the Prospectus or any amendment or supplement thereto by
the several Underwriters and by all dealers to whom the Shares may be sold, both
in connection with the offering or sale of the Shares and for any period of time
thereafter during which the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall occur which
should be set forth in the Prospectus in order to make any statement therein, in
the light of the circumstances under which it was made, not misleading, or in
the Registration Statement in order to make any statement therein not
misleading, or if it is necessary to supplement or amend the Prospectus or the
Registration Statement to comply with law, the Company will forthwith prepare
and duly file with the Commission an appropriate supplement or amendment
thereto, and will deliver to each of the Underwriters, without charge, such
number of copies thereof as the Representatives may reasonably request.
(g) Prior to any public offering of the Shares by the
Underwriters, the Company will cooperate with the Representatives and counsel to
the Underwriters in connection with the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives may request; provided, that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action which would subject it to
general service of process in any jurisdiction where it is not now so subject.
(h) During the period of five years commencing on the Effective
Date, the Company will furnish to the Representatives and each other Underwriter
who may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request
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<PAGE>
a copy of each annual or other report it shall be required to file with the
Commission.
(i) The Company will make generally available to holders of its
securities, as soon as may be practicable, but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in which
the Effective Date falls, a consolidated earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months commencing
after the Effective Date, and satisfying the provisions of Section 11(a) of the
Act (including Rule 158 of the Rules and Regulations).
(j) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds".
(k) Neither the Company nor the Selling Shareholders will at any
time, directly or indirectly, take any action intended, or which might
reasonably be expected, to cause or result in, or which will constitute,
stabilization of the price of the shares of Common Stock to facilitate the sale
or resale of any of the Shares.
(l) The Company and each Selling Shareholder will not for a
period of 180 days after the date hereof, without the prior written consent of
NatWest Securities Limited, offer to sell, sell, contract to sell, grant any
option to purchase or otherwise dispose (or announce any offer sale, grant of
any option to purchase or other disposition) of any shares of Common Stock or
any securities convertible into, or exchangeable or exercisable for, shares of
Common Stock.
7. Expenses.
--------
(a) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will pay,
or reimburse if paid by the Representatives, all costs and expenses incident to
the performance of the obligations of the Company and each Selling Shareholder
under this Agreement, including but not limited to costs and expenses of or
relating to (1) the preparation, printing and filing of the Registration
Statement and exhibits thereto, each Preliminary Prospectus, the Prospectus, any
amendment or supplement to the Registration Statement or the Prospectus, the
Custody Agreements and the Powers of Attorney
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<PAGE>
(2) the preparation and delivery of certificates representing the Shares, (3)
the printing of this Agreement, the Agreement among Underwriters, any Dealer
Agreements and any Underwriters' Questionnaire, (4) furnishing (including costs
of shipping and mailing) such copies of the Registration Statement, the
Prospectus and any Preliminary Prospectus, and all amendments and supplements
thereto, as may be required thereunder, (5) the listing of the Shares on the
AMEX, (6) any filings required to be made by the Underwriters with the National
Association of Securities Dealers, Inc., (7) the registration or qualification
of the Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 6(g), including the reasonable
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (8) counsel and accountants to the
Company and the Selling Shareholders and (9) the transfer agent for the Shares.
(b) If this Agreement shall be terminated by the Company or any
of the Selling Shareholders pursuant to any of the provisions hereof (otherwise
than pursuant to Section 11) or if for any reason the Company or any of the
Selling Shareholders shall be unable to perform its obligations hereunder, the
Company will reimburse the several Underwriters for all out-of-pocket expenses
(including the fees, disbursements and other charges of counsel to the
Underwriters) incurred by them in connection herewith. The Company shall not be
liable to the Underwriters for the loss of anticipated profits from the
transactions covered by this Agreement.
8. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 4:00
p.m., New York City time, on the date of this Agreement or at such later
date and time as shall be consented to in writing by the Representatives
and all filings required by Rule 424 of the Rules and Regulations and Rule
430A shall have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the
qualification or registration of the Shares under the securities or Blue
Sky laws of any jurisdiction shall be in effect and no proceeding for such
purpose shall be pending before or threatened or contemplated by the
Commission or
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<PAGE>
the authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such
authorities shall have been complied with to the satisfaction of the staff
of the Commission or such authorities and (iv) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus
shall have been filed unless a copy thereof was first submitted to the
Representatives and the Representatives did not object thereto in good
faith, and the Representatives shall have received certificates, dated the
Closing Date and the Option Closing Date and signed by the Chief Executive
Officer of the Company and the Chief Financial Officer of the Company (who
may, as to proceedings threatened or contemplated, rely upon the best of
their information and belief), to the effect of the foregoing clauses (i),
(ii) and (iii).
(c) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall not have been
a material adverse change in the general affairs, business, business
prospects, properties, management, condition (financial or otherwise) or
results of operations of the Company whether or not arising from
transactions in the ordinary course of business and the Company shall not
shall have sustained any material loss or interference with its business or
properties from fire, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or any court or legislative
or other governmental action, order or decree, which is not set forth in
the Registration Statement and the Prospectus, if in the judgment of the
Representatives any such development makes it impracticable or inadvisable
to consummate the sale and delivery of the Shares by the Underwriters at
the initial public offering price.
(d) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of its
officers or directors in their capacities as such, before or by any
Governmental Body, in which litigation or proceeding an unfavorable ruling,
decision or finding would have a Material Adverse Effect.
(e) Each of the representations and warranties of the Company
contained herein shall be true and correct at the Closing Date and, with
respect to the Option Shares, at the Option Closing Date, as if made on
such date, and all covenants and agreements herein contained to be
performed on the part of the Company and all conditions herein contained to
be fulfilled or complied with by the Company at or prior to the Closing
Date and, with respect to the Option Shares,
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<PAGE>
at or prior to the Option Closing Date, shall have been fully performed,
fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Latham & Watkins, counsel
for the Company and the Selling Shareholders, in form and substance
satisfactory to you. The Representatives shall have received an opinion,
dated the Closing Date and the Option Closing Date, from Schreck, Jones,
Bernhard, Woloson & Godfrey, Nevada counsel for the Company, in form and
substance satisfactory to you.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on certificates
of responsible officers of the Company, each Selling Shareholder and public
officials. The foregoing opinion of Latham & Watkins shall also state that
the Underwriters are justified in relying upon such opinion of Schreck,
Jones, Bernhard, Woloson & Godfrey and copies of such opinion shall be
delivered to the Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus
in this paragraph (f) or in the above mentioned opinions shall include any
amendment or supplement thereto at the date of such opinion.
(g) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Stroock & Stroock & Lavan,
counsel to the Underwriters, which opinion shall be satisfactory in all
respects to the Representatives. In rendering such opinion, such counsel
may rely as to all matters of Nevada law upon the opinion of Schreck,
Jones, Bernhard Woloson & Godfrey, Las Vegas, Nevada.
(h) Concurrently with the execution and delivery of this
Agreement, or, if the Company elects to rely on Rule 430A, on the date of
the Prospectus, the Accountants shall have furnished to the Representatives
a letter, dated the date of its delivery (the "Original Letter"), addressed
to the Representatives and in form and substance satisfactory to the
Representatives, confirming that (i) they are independent public
accountants with respect to the Company and the predecessor within the
meaning of the Act and the Rules and Regulations; (ii) in their opinion,
the financial statements and any supplementary financial information and
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<PAGE>
schedules included in the Registration Statement and examined by them
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations; (iii) on the basis
of procedures, not constituting an examination in accordance with generally
accepted auditing standards, set forth in detail in the Original Letter,
including a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company, inspections of the minute books of the
Company since the latest audited financial statements included in the
Prospectus, inquiries of officials of the Company responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in the Original Letter to a date not more than five days prior to
the date of the Original Letter, nothing came to their attention that
caused them to believe that: (A) the unaudited financial statements and
schedules included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the Rules and Regulations, or are not fairly presented in conformity
with generally accepted accounting principles applied on a basis
substantially consistent with the basis for the audited financial
statements included in the Prospectus; (B) any other unaudited income
statement data and balance sheet items included in the Prospectus do not
agree with the corresponding items in the unaudited financial statements
from which such data and items were derived, and any such unaudited data
and items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited financial statements
included in the Prospectus; (C) the unaudited financial statements which
were not included in the Prospectus but from which were derived any
unaudited financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the Prospectus
and referred to in Clause (B) were not determined on a basis substantially
consistent with the basis for the audited financial statements included in
the Prospectus; (D) as of a specified date not more than five days prior to
the date of the Original Letter, there have been any changes in the capital
stock of the Company or any increase in the long-term debt of the Company,
or any decreases in net current assets or net assets or other items
specified by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with amounts shown in the
latest balance sheet included in the Prospectus, except in each case for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in the Original Letter; and
(E) for the period from the date of the latest financial statements
included in the Prospectus to the
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<PAGE>
specified date referred to in Clause (D), there were any decreases in
revenues or the total or per share amounts of net income or other items
specified by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the comparable period
of the preceding year and with any other period of corresponding length
specified by the Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may occur or
which are described in the Original Letter; and (iv) in addition to the
examination referred to in their reports included in the Prospectus and the
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an examination in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representatives,
which are derived from the general accounting, financial or other records
of the Company and its predecessors, as the case may be, which appear in
the Prospectus or in Part II of, or in exhibits or schedules to, the
Registration Statement, and have compared such amounts, percentages and
financial information with such accounting, financial and other records and
have found them to be in agreement. At the Closing Date and, as to the
Option Shares, the Option Closing Date, the Accountants shall have
furnished to the Representatives a letter, dated the date of its delivery,
which shall confirm, on the basis of a review in accordance with the
procedures set forth in the Original Letter, that nothing has come to their
attention during the period from the date of the Original Letter referred
to in the prior sentence to a date (specified in the letter) not more than
five days prior to the Closing Date or the Option Closing Date, as the case
may be, which would require any change in the Original Letter if it were
required to be dated and delivered at the Closing Date or the Option
Closing Date, as the case may be.
(i) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form
and substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of
such certificate, (x) the Registration Statement does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements
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<PAGE>
therein not misleading and (y) the Prospectus does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading and (B) since
the Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein not untrue or misleading in any material respect;
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at
the time such certificate is delivered, true and correct in all
respects.
(iii) Each of the covenants required herein to be performed by the
Company on or prior to the date of such certificate has been duly,
timely and fully performed and each condition herein required to be
complied with by the Company on or prior to the delivery of such
certificate has been duly, timely and fully complied with.
(j) The Shares shall be qualified for sale in such states as the
Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing
Date and the Option Closing Date.
(k) Prior to the Closing Date, the Shares shall have been approved for
listing on the AMEX, subject only to notice of issuance.
(l) At the Closing Date, there shall be furnished to the
Representatives an accurate certificate, dated the date of its delivery,
from each Selling Shareholder (which may be signed by an Attorney-in-Fact),
in form and substance satisfactory to the Representatives, to the effect
that:
(i) The Registration Statement and Prospectus and, if any, each
amendment and each supplement thereto contain all statements required
to be included therein regarding such Selling Shareholder, and (A) as
of the date of such certificate, (x) the Registration Statement does
not contain any untrue statement of a material fact regarding such
Selling Shareholder or omit to state a material fact regarding such
Selling Shareholder required to be stated therein or necessary in
order to make the statements therein regarding such Selling
Shareholder not misleading and (y) the Prospectus does not contain any
untrue statement of a material fact regarding such Selling Shareholder
or
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<PAGE>
omit to state a material fact regarding such Selling Shareholder
required to be stated therein or necessary in order to make the
statements therein regarding such Selling Shareholder, in the light of
the circumstances under which they were made, not misleading and (B)
since the Effective Date no event has occurred as a result of which it
is necessary to amend or supplement the Prospectus in order to make
the statements therein regarding such Selling Shareholder not untrue
or misleading in any material respect;
(ii) Each of the representations and warranties of such Selling
Shareholder contained in this Agreement are, at the time such
certificate is delivered, true and correct in all material respects;
and
(iii) Each of the covenants required herein to be performed by
such Selling Shareholder on or prior to the date of such certificate
has been duly, timely and fully performed in all material respects and
each condition herein required to be complied with such Selling
Shareholder on or prior to the delivery of such certificate has been
duly, timely and full complied with in all material respects.
(m) The Company and the Selling Shareholders shall have furnished to
the Representatives such certificates, in addition to those specifically
mentioned herein, as the Representatives may have reasonably requested as
to the accuracy and completeness at the Closing Date and the Option Closing
Date of any statement in the Registration Statement or the Prospectus as to
the accuracy at the Closing Date and the Option Closing Date of the
representations and warranties of the Company or the Selling Shareholders,
as to the performance by the Company or the Selling Shareholders of their
obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Underwriters.
All such opinions, certificates, letters and other documents will
be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you. The Company and the Selling Shareholders
will furnish you with such conformed copies of such opinions, certificates,
letters and other documents as you shall reasonably request.
9. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls each Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended
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<PAGE>
(the "Exchange Act"), against any and all losses, claims, damages or
liabilities, joint or several (and actions in respect thereof), to which such
Underwriter or such controlling person may become subject under the Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement made by the Company in Section 3 of this Agreement, (ii) any
untrue statement or alleged untrue statement of any material fact contained in
(A) the Registration Statement, any Preliminary Prospectus or the Prospectus or
any amendment or supplement to the Registration Statement or the Prospectus or
(B) any application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify the Shares
under the securities or blue sky laws thereof or filed with the Commission or
any securities association or securities exchange (each an "Application"), or
(iii) the omission or alleged omission to state in the Registration Statement,
any Preliminary Prospectus or the Prospectus or any amendment or supplement to
the Registration Statement or the Prospectus, or any Application, a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending or appearing as a third-party witness in connection with any such
loss, claim, damage, liability or action; provided, however, that the Company
-------- -------
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in any of such
documents in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives specifically for
use therein; provided, further, that such indemnity with respect to any
-------- -------
Preliminary Prospectus shall not inure to the benefit of any Underwriter (or any
person controlling such Underwriter) from whom the person asserting any such
loss, claim, damage, liability or action purchased Shares which are the subject
thereof to the extent that any such loss, claim, damage or liability (i) results
from the fact that such Underwriter failed to send or give a copy of the
Prospectus (as amended or supplemented) to such person at or prior to the
confirmation of the sale of such Shares to such person in any case where such
delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (or any amendment or supplement
thereto), unless such failure to deliver the Prospectus (as amended or
supplemented) was the result of noncompliance by the
-26-
<PAGE>
Company with Section 6(f). This indemnity agreement will be in addition to any
liability which the Company may otherwise have. The Company will not, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
each claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of each Underwriter and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls each Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act from and against any and all losses, claims, damages or
liabilities, joint or several (and actions in respect thereof), to which they,
or any of them, may become subject under the Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement made by such
Selling Shareholder in Section 4 of this Agreement, (ii) any untrue statement or
alleged untrue statement of any material fact contained in (A) any Preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus or (B) any
Application executed by such Selling Shareholder or based upon written
information furnished by or on behalf of such Selling Shareholder, or (iii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus or any Application a material fact
required to be stated therein or necessary to make the statements therein (A) in
the case of the Registration Statement, any amendment or supplement to the
Registration Statement or any Application, not misleading and (B) in the case of
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, not misleading in light of the circumstances in which they were made,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that such Selling Shareholder
-------- -------
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based solely upon an untrue statement or
omission or alleged untrue statement or
-27-
<PAGE>
omission in any of such documents made in reliance upon and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of any Underwriter expressly for inclusion
therein; provided, further, that such indemnity with respect to any Preliminary
-------- -------
Prospectus shall not inure to the benefit of any Underwriter (or any such
controlling person) from whom the person asserting any such loss, claim, damage,
liability or action purchased Shares which are the subject thereof to the extent
that any such loss, claim, damage or liability (i) results from the fact that
such Underwriter failed to send or give a copy of the Prospectus (as amended or
supplemented) to such person at or prior to the confirmation of the sale of such
Shares to such person in any case where such delivery is required by the Act and
(ii) arises out of or is based upon an untrue statement or omission of a
material fact contained in such Preliminary Prospectus that was corrected in the
Prospectus (or any amendment or supplement thereto), unless such failure to
deliver the Prospectus (as amended or supplemented) was the result of
noncompliance by the Company with Section 6(f); and provided, further, however,
-------- ------- -------
that such Selling Shareholder will be liable in any such case only to the extent
that such loss, claim, damage, liability or action arises out of or is based
upon any untrue statement or omission or alleged untrue statement or omission
made in the Registration Statement or any amendment thereto or in the Prospectus
or any amendment or supplement thereto or any Application in reliance upon and
in conformity with written information furnished to the Company by such Selling
Shareholder specifically for use therein. The Underwriters acknowledge that for
all purposes under this Agreement, the statements set forth with respect to each
Selling Shareholder under the headings "Risk Factors - Conflicts of Interest,"
"Risk Factors - Shares Eligible for Future Sale," "Management," "Certain
Transactions," "Principal and Selling Stockholders and Management Ownership" and
"Shares Eligible for Future Sale" in any Preliminary Prospectus and Prospectus
constitute the only information relating to any Selling Shareholder furnished by
such Selling Shareholder expressly for inclusion in the Registration Statement,
any Preliminary Prospectus or the Prospectus. This indemnity agreement will be
in addition to any liability that such Selling Shareholder might otherwise have.
Such Selling Shareholder will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to each claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding. The
liability of such Selling Shareholder under this Section 9(b) shall be limited
to an amount equal to the aggregate public offering price of the Shares sold by
such Selling Shareholder to the Underwriters. The Company and such Selling
Shareholder may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(c) Each Underwriter will indemnify and hold harmless the Company,
each of its directors, each of its officers who signed the Registration
Statement, each Selling Shareholder and
-28-
<PAGE>
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act against any losses, claims, damages
or liabilities, joint or several, (and actions in respect thereof) to which the
Company, the Selling Shareholders and any such director, officer or controlling
person may become subject under the Act or other federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or any Application, or material fact required to be stated therein
or (ii) the omission or the alleged omission to state in the Registration
Statement, any Preliminary Prospectus or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus, or any Application,
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company, the Selling Shareholders
and any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have. The Company and the Selling
Shareholders acknowledge that, for all purposes under this Agreement, the
statements set forth in the first, second, third, fourth, seventh, eighth and
ninth paragraphs under the heading "Underwriting" in any Preliminary Prospectus
and the Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of the
Underwriters expressly for inclusion in the Registration Statement, any
Preliminary Prospectus or the Prospectus.
(d) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against one or more indemnifying parties
under this Section 9, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party or
parties will not relieve it or them from any liability which it or they may have
to any indemnified party otherwise than under subsection (a), (b) or (c) of this
Section 9 or to the extent that the indemnifying party was not adversely
-29-
<PAGE>
affected by such omission. In case any such action is brought against an
indemnified party and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties against which a claim is
to be made will be entitled to participate therein and, to the extent that it or
they may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
-------- -------
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the Representatives in the case of paragraph (a) of this Section
9, representing the indemnified parties under such paragraph (a) who are parties
to such action or actions), or (ii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, unless such indemnified party
waived its rights under this Section 9 in which case the indemnified party may
effect such a settlement without such consent.
(e) If the indemnification provided for in the preceding paragraphs of
this Section 9 is unavailable or insufficient to hold harmless an indemnified
party under paragraph (a), (b) or (c) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to therein, then
each indemnifying party shall contribute to the
-30-
<PAGE>
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) (i) in such
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party or parties, on the one hand, and the indemnified party, on
the other, from the offering of the Shares or (ii) if the allocation provided by
the foregoing clause (i) is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the indemnifying party or
parties on the one hand, and the indemnified party, on the other, in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders, on the one hand,
and the Underwriters, on the other, shall be deemed to be in the same proportion
as the total proceeds from the offering of the Shares (before deducting
expenses) received by the Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus; provided
--------
that, in the event the Underwriters shall have purchased any Option Shares
- ----
hereunder, any determination of the relative benefits received by the Company,
the Selling Shareholders or the Underwriters from the offering of the Shares
shall include the total proceeds from the offering (before deducting expenses)
received by the Company, and the underwriting discounts and commissions received
by the Underwriters from the sale of such Option Shares, in each case as set
forth in the notes to the table on the cover page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Selling Shareholders or the Underwriters, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission, and any other equitable considerations
appropriate in the circumstances. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this paragraph (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
The Company, the Selling Shareholders and the Underwriters agree that it would
not be equitable if the amount of such contribution were determined by pro rata
or per capita allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to in the first sentence of this
paragraph (e). Notwithstanding any other provision of this
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<PAGE>
paragraph (e), no Selling Shareholder shall be required to contribute any amount
in excess of the aggregate public offering price of the Shares sold by such
Selling Shareholder to the Underwriters. Notwithstanding any other provision of
this paragraph (e), no Underwriter shall be obligated to make contributions
hereunder that in the aggregate exceed the total underwriting discounts received
by it with respect to the Shares purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion to
their respective underwriting obligations and not joint, and contributions among
Underwriters shall be governed by the provisions of the Agreement Among
Underwriters. For purposes of this paragraph (e), each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act
shall have the same rights to contribution as such Underwriter, and each
director of the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company or any Selling
Shareholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the Company and the
Selling Shareholders, subject in each case to this paragraph (e). Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect to which a claim
for contribution may be made against another party or parties under this
paragraph (e), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any other
obligation (x) it or they may have hereunder or otherwise than under this
paragraph (e) or (y) to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may otherwise have.
10. Termination. The obligations of the several Underwriters under this
-----------
Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from the Representatives, without liability on the part of any
Underwriter to the Company or the Selling Shareholders if, prior to delivery and
payment for the Firm Shares (or the Option Shares, as the case may be), in the
sole judgment of the Representatives, (i) trading in any of the equity
securities of the Company shall have been suspended by the Commission or by an
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<PAGE>
exchange that lists the Shares, (ii) trading in securities generally on the
AMEX, the New York Stock Exchange or the International Stock Exchange of the
United Kingdom and the Republic of Ireland, Limited shall have been suspended or
limited or minimum or maximum prices shall have been generally established on
any of such exchanges, or additional material governmental restrictions, not in
force on the date of this Agreement, shall have been imposed upon trading in
securities generally by any of such exchanges or by order of the Commission or
any court or other governmental authority, (iii) a general banking moratorium
shall have been declared by Federal, New York State or United Kingdom
authorities or (iv) any material adverse change in the financial or securities
markets in the United States or United Kingdom or any outbreak or material
escalation of hostilities or declaration by the United States or the United
Kingdom of a national emergency or war or other calamity or crisis shall have
occurred, the effect of any of which is such as to make it, in the sole judgment
of the Representatives, impracticable or inadvisable to market the Shares on the
terms and in the manner contemplated by the Prospectus. Any termination
pursuant to Section 10 shall be without liability of any party to any other
party except as provided in Sections 7(a) and 9.
11. Default of Underwriters. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Shares or Option Shares hereunder and the aggregate
number of such Shares that such defaulting Underwriter or Underwriters agreed
but failed to purchase is ten percent or less of the aggregate number of Firm
Shares or Option Shares to be purchased by all of the Underwriters at such time
hereunder, the other Underwriters may make arrangements satisfactory to the
Representatives for the purchase of such Shares by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representatives), but if no such arrangements are made by the Closing Date or
the related Option Closing Date, as the case may be, the other Underwriters
shall be obligated severally in proportion to their respective commitments
hereunder to purchase the Firm Shares or Option Shares that such defaulting
Underwriter or Underwriters agreed but failed to purchase. If one or more
Underwriters so default with respect to an aggregate number of Shares that is
more than ten percent of the aggregate number of Firm Shares or Option Shares,
as the case may be, to be purchased by all of the Underwriters at such time
hereunder, and if arrangements satisfactory to the Representatives are not made
within 36 hours after such default for the purchase by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representatives) of the Shares with respect to which such default occurs, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter or the Company other than as provided in Section 12 hereof. In the
event of any default by one or more Underwriters
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<PAGE>
as described in this Section 11, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 1 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Shares or Option Shares, as
the case may be. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 11. Nothing herein
shall relieve any defaulting Underwriter from liability for its default.
12. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers, the
Selling Shareholders and the several Underwriters set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, any Selling
Shareholder, any Underwriter or any controlling person referred to in Section 9
hereof and (ii) delivery of and payment for the Shares. The respective
agreements, covenants, indemnities and other statements set forth in Sections 7
and 9 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
13. Notices. Notice given pursuant to any of the provisions of this
-------
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 10570 S.E.
Washington, Suite 213, Portland, Oregon 97216, with a copy to Latham & Watkins,
633 West Fifth Street, Suite 4000, Los Angeles, CA 90071, Attention: Gary Olson,
Esq., or (b) if to the Selling Shareholders, at the addresses set forth on
Schedule I hereto, or (c) if to the Underwriters, to the Representatives at the
- ----------
offices of NatWest Securities Limited, 135 Bishopsgate, London EC2M 3XT England,
Attention: Melvin Rowe. Any such notice shall be effective only upon receipt.
Any notice under Section 9 or 10 may be made by telex or telephone, but if so
made shall be subsequently confirmed in writing.
14. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Company, the Selling Shareholders and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company and the Selling Shareholders contained in Section
9 of this Agreement shall also
-34-
<PAGE>
be for the benefit of any person or persons who control any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii)
the indemnities of the Underwriters contained in Section 9 of this Agreement
shall also be for the benefit of the directors of the Company, the officers of
the Company who have signed the Registration Statement and any person or persons
who control the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act. No purchaser of Shares from any Underwriter shall be
deemed a successor because of such purchase. This Agreement shall not be
assignable by either party hereto without the prior written consent of the other
party.
15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT,
--------------
AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Shareholders, and the several Underwriters.
Very truly yours,
ASSISTED LIVING CONCEPTS, INC.
By: -----------------------------
Name: Dr. Keren Brown Wilson
Title: Chief Executive Officer
SELLING SHAREHOLDERS
By: -----------------------------
Attorney-in-Fact
for the Selling Shareholders
named in Schedule I hereto
Confirmed as of the date first
above mentioned:
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.
Acting on behalf of
themselves and as the
Representatives of the
other several Underwriters
named in Schedule II hereof.
By: NATWEST SECURITIES LIMITED
By: --------------------------
Name:
Title:
-36-
<PAGE>
SCHEDULE I
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of
Shares to be Sold
-----------------
<S> <C>
Andre Dimitriades (1)................................................... 75,000
William McBride III (1)................................................. 50,000
Dr. Keren Brown Wilson (2).............................................. 25,000
James Pieczynski (1).................................................... 25,000
-------
Total................................................................... 175,000
</TABLE>
- ------------------------------------------------------------------
(1) Address for notices:
c/o LTC Properties, Inc.
300 Esplanade Drive
Suite 1860
Oxnard, California 93030
(2) Address for notices:
c/o Assisted Living Concepts, Inc.
9955 S.E. Washington
Suite 201
Portland, Oregon 97216
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<PAGE>
SCHEDULE II
UNDERWRITERS
<TABLE>
<CAPTION>
(1) (2) (3)
Number of Number of Aggregate
Firm Shares Firm Shares Number of
to be to be Firm
Purchased Purchased from Shares to
from the Selling be
the Company Shareholders Purchased
----------- -------------- ---------
<S> <C> <C> <C>
NatWest Securities
Limited............... 600,000 58,334 658,334
Dean Witter Reynolds
Inc................... 600,000 58,333 658,333
Smith Barney Inc....... 600,000 58,333 658,333
--------- ------- ---------
Total.................. 1,800,000 175,000 1,975,000
========= ======= =========
</TABLE>
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<PAGE>
EXHIBIT A
July __, 1996
NATWEST SECURITIES LIMITED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.
As Representatives of the
several Underwriters
c/o NatWest Securities Limited
135 Bishopsgate
London EC2M 3XT England
Ladies and Gentlemen:
In order to induce the several underwriters, for which NatWest
Securities Limited, Dean Witter Reynolds Inc. and Smith Barney Inc. (the
"Representatives") intend to act as Representatives, to underwrite a proposed
public offering (the "Offering") of shares of common stock, $.01 par value per
share (the "Common Stock"), of Assisted Living Concepts, Inc., a Nevada
corporation (the "Company"), as contemplated by a registration statement filed
with the Securities and Exchange Commission on Form S-1 (Registration No. 333-
06095), the undersigned hereby agrees that the undersigned will not, directly or
indirectly, for a period of 180 days after the commencement of the Offering,
without the prior written consent of NatWest Securities Limited, offer to sell,
sell, contract to sell, grant any option to purchase or otherwise dispose (or
announce any offer, sale, grant of any option to purchase or other disposition)
of any shares of Common Stock or any securities convertible into, or exercisable
or exchangeable for, shares of Common Stock.
This letter shall have no further force or effect if the Company, the
Selling Shareholders and the several Underwriters shall not have executed and
delivered an underwriting agreement related to the Offering by July __, 1996 or
if any underwriting agreement entered into by such parties shall be terminated
prior to the initial closing date provided for therein.
This letter agreement shall not prohibit the undersigned from
transferring any shares of Common Stock to members of his or her immediate
family or to a trust for their benefit, provided that such persons or trust
agree to be bound by the terms hereof.
Very truly yours,
By:_________________________
Name:
A-1
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF SCHRECK, JONES, BERNHARD, WOLOSON & GODFREY]
July 3, 1996
ASSISTED LIVING CONCEPTS, INC.
9955 S.E. Washington, Suite 201
Portland, Oregon 97216
Re: Assisted Living Concepts, Inc.
Registration Statement On Form S-1
Ladies and Gentlemen:
We have represented you, as your special Nevada counsel, in connection with
the sale of 1,975,000 shares of common stock, $.01 par value (the "Common
Stock"), of Assisted Living Concepts, Inc., a Nevada corporation (the
"Company"), and up to an additional 296,250 shares to cover over-allotments, if
any, pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement"), filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"), on
June 14, 1996, and as amended through July 3, 1996.
In our capacity as such counsel, we are familiar with the proceedings taken
and to be taken by the Company in connection with the Common Stock. In
addition, we have made such legal and factual examinations and inquiries,
including an examination of originals or copies certified or otherwise
identified to our satisfaction as being true reproductions of originals of such
documents, corporate records and other instruments, and have obtained from
officers of the Company and agents thereof such certificates and other
representations and assurances as we have deemed necessary or appropriate for
the purposes of this opinion.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the legal capacity
of natural persons executing such documents, the authenticity or the conformity
to authentic original documents of all documents submitted to us as certified,
photostatic or facsimile copies, and the accuracy and completeness of all
corporate records made available to us by the Company.
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
July 3, 1996
Page 2
On the basis of the foregoing, such examinations of law and such other
information as we may deem relevant under the circumstances, we are of the
opinion that the Common Stock has been duly and validly authorized for issuance,
and when sold in accordance with the Plan of Distribution set forth in the
Prospectus covering the Common Stock and forming a part of the Registration
Statement, will be fully paid and non-assessable.
Our opinion herein is limited to the effect on the subject transaction of
the laws of the State of Nevada. We express no opinion concerning and assume no
responsibility regarding the applicability to, or the effect thereon, of the
laws of any other jurisdiction, and we express no opinion herein concerning any
federal law, including any federal securities law, or any state securities or
blue sky laws.
We hereby consent to this filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm in the Prospectus forming
a part of the Registration Statement under the heading "Legal Matters." In
giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
SCHRECK, JONES, BERNHARD,
WOLOSON & GODFREY
/s/ Schreck, Jones, Bernhard,
Woloson & Godfrey
<PAGE>
EXHIBIT 10.9
LEASE
Dated __________, 1996
EXECUTED BY
TEXAS-LTC LIMITED PARTNERSHIP, as Lessor
and
ASSISTED LIVING CONCEPTS, INC., as Lessee
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I ......................................................................... 1
1.1 Leased Property.................................................... 1
1.2 Term............................................................... 2
1.3 Contingencies...................................................... 2
1.3.1 Acquisition of Leased Property............................. 2
1.3.2 Cross-default with Other Leases............................ 2
ARTICLE II......................................................................... 2
2. Definitions........................................................ 2
ARTICLE III........................................................................ 7
3.1 Rent............................................................... 7
3.2 Annual Escalation of Minimum Rent.................................. 7
3.3 Additional Charges................................................. 8
3.4 Net Lease.......................................................... 9
3.5 Late Charge........................................................ 9
ARTICLE IV......................................................................... 9
4.1 Payment of Impositions............................................. 9
4.2 Notice of Impositions.............................................. 11
4.3 Utility Charges.................................................... 11
4.4 Insurance Premiums................................................. 11
4.5 Payables........................................................... 11
ARTICLE V.......................................................................... 11
5.1 No Termination, Abatement, etc..................................... 11
5.2 Abatement Procedures............................................... 12
ARTICLE VI......................................................................... 12
6.1 Ownership of the Leased Property................................... 12
6.2 Lessee's Alterations............................................... 12
6.3 Lessee's Personal Property......................................... 12
6.4 Consumable Inventory............................................... 13
ARTICLE VII........................................................................ 13
7.1 Condition of Leased Property....................................... 13
7.2 Use of the Leased Property......................................... 14
ARTICLE VIII....................................................................... 15
8.1 Compliance with Legal and Insurance Requirements, Instruments, etc. 15
8.2 Legal Requirement Covenants........................................ 15
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<TABLE>
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ARTICLE IX......................................................................... 16
9.1 Maintenance and Repair............................................. 16
9.2 Expenditures to Comply with Law; Construction of Additional
Improvements Pursuant to Certificate of Need....................... 17
9.3 Encroachments, Restrictions, etc................................... 17
ARTICLE X.......................................................................... 18
10.1 Lessee's Obligations for Hazardous Materials....................... 18
10.2 Definition of Hazardous Materials.................................. 18
ARTICLE XI......................................................................... 19
11.1 No Liens........................................................... 19
11.2 Permitted Liens.................................................... 19
ARTICLE XII........................................................................ 20
12. Permitted Contests................................................. 20
ARTICLE XIII....................................................................... 20
13.1 General Insurance Requirements..................................... 20
13.2 Replacement Cost................................................... 22
13.3 Additional Insurance............................................... 22
13.4 Waiver of Subrogation.............................................. 22
13.5 Form Satisfactory, etc............................................. 22
13.6 Increase in Limits................................................. 23
13.7 Blanket Policy..................................................... 23
13.8 No Separate Insurance.............................................. 23
13.9 Continuous Coverage................................................ 23
ARTICLE XIV........................................................................ 24
14.1 Insurance Proceeds................................................. 24
14.2 Reconstruction in the Event of Damage or Destruction Covered by
Insurance Proceeds................................................. 24
14.3 Reconstruction in the Event of Damage or Destruction Not Covered by
Insurance.......................................................... 24
14.4 Lessee's Property.................................................. 25
14.5 Restoration of Lessee's Property................................... 25
14.6 No Abatement of Rent............................................... 25
14.7 Damage Near End of Term............................................ 25
14.8 Termination of Option to Extend.................................... 25
14.9 Waiver............................................................. 25
ARTICLE XV......................................................................... 26
15. Condemnation....................................................... 26
15.1 Definitions........................................................ 26
</TABLE>
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<TABLE>
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15.2 Parties' Rights and Obligations.................................... 26
15.3 Total Condemnation................................................. 26
15.4 Allocation of Portion of Award..................................... 26
15.5 Partial Taking..................................................... 27
15.6 Temporary Taking................................................... 27
ARTICLE XVI........................................................................ 27
16.1 Events of Default.................................................. 27
16.2 Remedies........................................................... 30
16.3 Certain Remedies and Damages....................................... 30
16.4 Waiver............................................................. 32
16.5 Application of Funds............................................... 32
ARTICLE XVII....................................................................... 32
17. Lessor's Right to Cure Lessee's Default............................ 32
ARTICLE XVIII...................................................................... 32
18.1 Options to Extend.................................................. 32
18.2 Minimum Rent During Extended Terms................................. 33
ARTICLE XIX........................................................................ 34
19. Holding Over....................................................... 34
ARTICLE XX......................................................................... 34
20. Risk of Loss....................................................... 34
ARTICLE XXI........................................................................ 35
21. Indemnification.................................................... 35
ARTICLE XXII....................................................................... 36
22. Subletting and Assignment.......................................... 36
22.1 Attornment......................................................... 36
22.2 Sublease Limitation................................................ 36
ARTICLE XXIII...................................................................... 37
23. Officer's Certificates and Financial Statements.................... 37
ARTICLE XXIV....................................................................... 37
24. Lessor's Right to Inspect.......................................... 37
ARTICLE XXV........................................................................ 37
25. No Waiver.......................................................... 37
ARTICLE XXVI....................................................................... 38
</TABLE>
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<TABLE>
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26. Remedies Cumulative................................................ 38
ARTICLE XXVII...................................................................... 38
27. Acceptance of Surrender............................................ 38
ARTICLE XXVIII..................................................................... 38
28. No Merger of Title................................................. 38
ARTICLE XXIX....................................................................... 38
29. Conveyance by Lessor............................................... 38
ARTICLE XXX........................................................................ 38
30. Quiet Enjoyment.................................................... 38
ARTICLE XXXI....................................................................... 39
31. Notices............................................................ 39
ARTICLE XXXII...................................................................... 40
32.1 Lessor May Grant Liens............................................. 40
32.2 Lessee's Right to Cure............................................. 40
32.3 Default by Lessor.................................................. 40
ARTICLE XXXIII..................................................................... 41
33. Miscellaneous...................................................... 41
33.1 Survival of Obligations.................................... 41
33.2 Late Charges; Interest..................................... 41
33.3 Limits of Lessor's Liability............................... 41
33.4 Limits of Lessee's Liability............................... 41
33.5 Transfer of Operations..................................... 41
33.6 Addendum, Amendments and Exhibits.......................... 42
33.7 Headings................................................... 42
33.8 Time....................................................... 42
33.9 Days....................................................... 42
33.10 Rent....................................................... 42
33.11 Applicable Law............................................. 42
33.12 Successors and Assigns..................................... 42
33.13 Recordation................................................ 42
33.14 Prior and Future Agreements................................ 42
33.15 Partial Invalidity......................................... 43
33.16 Attorneys' Fees............................................ 43
33.17 Authority of Lessor and Lessee............................. 43
33.18 Relationship of the Parties................................ 43
33.19 Counterparts............................................... 43
33.20 Brokers.................................................... 44
</TABLE>
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LEASE
THIS LEASE (this "Lease") is made as of the ___ day of __________, 1996,
by and between TEXAS-LTC LIMITED PARTNERSHIP, a Texas limited partnership,
herein called "Lessor", and ASSISTED LIVING CONCEPTS, INC., a Nevada
corporation, herein called "Lessee", subject to the terms, conditions and
contingencies set forth below.
ARTICLE I
1.1 Leased Property. Upon and subject to the terms and conditions
hereinafter set forth, Lessor leases to Lessee, and Lessee rents and hires from
Lessor all of the following (the "Leased Property"):
(i) The real property situated in the State of
________________ and more particularly described in Exhibit "A" attached hereto
(the "Land");
(ii) All buildings, structures, Fixtures (as hereinafter
defined) and other improvements of every kind including, but not limited to,
alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines
(on-site and off-site), parking areas and roadways appurtenant to such buildings
and structures presently situated upon the Land (collectively, the "Leased
Improvements");
(iii) All easements, rights and appurtenances relating
to the Land and the Leased Improvements;
(iv) All permanently affixed equipment, machinery,
fixtures, and other items of real and/or personal property, including all
components thereof, permanently affixed to or incorporated into the Leased
Improvements, including, without limitation, all furnaces, boilers, heaters,
electrical equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control, waste disposal, air-cooling and
air conditioning systems and apparatus, sprinkler systems and fire and theft
protection equipment, all of which to the greatest extent permitted by the law,
are hereby deemed by the parties hereto to constitute real estate, together with
all replacements, modifications, alterations and additions thereto, to the
extent acquired by Lessor pursuant to the "Purchase Agreement" as defined in
Article II hereof (collectively the "Fixtures"); and
(v) All personal tangible and intangible property
comprising the "Personal Property" and/or the "Intangible Property" acquired by
Lessor pursuant to the Purchase Agreement.
The Leased Property includes that certain ___-unit assisted
living facility located in the City of __________________, ____________.
Notwithstanding the foregoing, the Leased
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Property shall not include any property not acquired by Lessor from the Seller
pursuant to the Purchase Agreement. The Leased Property is demised subject to
all covenants, conditions, restrictions, easements, and other matters of record,
and all other matters that affect title, zoning and any other matters set forth
in that certain Title Policy issued by _____________________________ by its
agent ___________________________________ concurrently with Lessor's purchase of
the Leased Property and all matters disclosed in the ALTA survey obtained in
connection with such title insurance (collectively the "Permitted Title
Matters").
1.2 Term. The initial term of the Lease (the "Initial Term")
shall be the period commencing on the closing (the "Closing") under the Purchase
Agreement (the "Commencement Date") and expiring on _________________. Lessee
has the right to extend the term of this Lease, at Lessee's option, as provided
in Article XVIII, below. (The Initial Term plus all validly exercised options to
extend, if any, shall be referred to herein as the "Term"). Lessor and Lessee
agree to execute a memorandum setting forth the Commencement Date.
1.3 Contingencies.
1.3.1 Acquisition of Leased Property. Lessee
acknowledges and agrees that, at the time of executing this Lease, Lessor might
not own the Leased Property, but Lessor has a right to purchase the Leased
Property pursuant to the Purchase Agreement. This Lease, and all obligations
hereunder of either party, are contingent upon Lessor's acquisition of the fee
simple interest in the Leased Property. Therefore, if the fee simple interest in
the Leased Property has not been transferred to Lessor, on or before thirty (30)
days after the date hereof, this Lease shall be null and void and of no force or
effect whatsoever, and both Lessor and Lessee shall be relieved of all
responsibility under the Lease.
1.3.2 Cross-default with Other Leases. Lessee
acknowledges and agrees that Lessor and Lessee are the "Lessor" and the
"Lessee," respectively, under eight (8) other leases (collectively, the "Other
Leases"), each of which shall be amended as of the Commencement Date to be
cross-defaulted as additional security for Lessee's performance under this
Lease, as follows: (a) those two certain leases dated as of
___________________, relating to real property with an assisted living facility
and related improvements thereon, located in the City of ___________________
and the City of ____________________, respectively; (b) those two (2) certain
leases dated as of __________________, relating to real property with an
assisted living facility and related improvements thereon, located in the City
of ______________________ and the City of _________________, respectively; and
(c) those four (4) certain leases dated as of ____________________, relating to
real property with an assisted living facility and related improvements
thereon, located in the City of _____________________, respectively.
ARTICLE II
2. Definitions. For all purposes of this Lease, except as otherwise
expressly provided, (i) the terms defined in this Article II have the meanings
assigned to them in this Article
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II and include the plural as well as the singular; (ii) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles at the time applicable; and (iii) the
words "herein", "hereof" and "hereunder" and other words of similar import refer
to this Lease as a whole and not to any particular Article, Paragraph or other
subdivision:
Additional Charges. As defined in Article III.
Adjusted Rent. As defined in Article XVIII.
Affiliate. When used with respect to any corporation, the term
"Affiliate" shall mean any person or entity (including any trust) which,
directly or indirectly, controls or is controlled by or is under common control
with such corporation. For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, through the ownership
of voting securities, partnership interests or other equity interests. For the
purposes of this definition, "person" shall mean any natural person, trust,
partnership, corporation, joint venture or other legal entity.
Business Day. Each Monday, Tuesday, Wednesday, Thursday, and
Friday, which is not a day on which national banks in the State of _____________
are authorized or obligated, by law or executive order, to close.
C.P.I. As defined in Paragraph 3.2.
Calendar Year. The period from January 1 through and including
December 31 in the same calendar year.
Code. The Internal Revenue Code of 1986, as amended.
Consolidated Financials. For any Fiscal Year or other accounting
period for Lessee and its consolidated subsidiaries, statements of earnings and
retained earnings and of changes in financial position for such period and the
related balance sheet as at the end of such period, together with the notes
thereto, all audited by a certified public accountant and in reasonable detail
and setting forth in comparative form the corresponding figures for the
corresponding period in the preceding Fiscal Year, and prepared in accordance
with generally accepted accounting principles.
Consolidated Net Worth. At any time, the sum of the following
for Lessee and its consolidated subsidiaries, on a consolidated basis determined
in accordance with generally accepted accounting principles:
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<PAGE>
(1) the amount of capital or stated capital (after
deducting the cost of any shares held in its treasury), plus
(2) the amount of capital surplus and retained earnings
(or, in the case of a capital or retained earnings deficit, minus the amount of
such deficit), minus
(3) the sum of the following (without duplication of
deductions in respect of items already deducted in arriving at surplus and
retained earnings): (a) unamortized debt discount and expense; and (b) any
write-up in the book value of assets resulting from a revaluation thereof
subsequent to the most recent Consolidated Financials prior to the date
thereof, except (i) any net write-up in value of foreign currency in accordance
with generally accepted accounting principles; and (ii) any write-up resulting
from a reversal of a reserve for bad debts or depreciation and any write-up
resulting from a change in methods of accounting for inventory.
Encumbrance. As defined in Article XXXII.
Event of Default. As defined in Article XVI.
Extended Term. As defined in Article XVIII.
Facility. That certain ___-unit assisted living facility which
is part of the Leased Property, as defined in Article I, above.
Facility Mortgage. As defined in Article XIII.
Facility Mortgagee. As defined in Article XIII.
Fiscal Year. The twelve (12) month period from January 1 through
the following December 31.
Fixtures. As defined in Article I.
Impositions. Collectively, all taxes (including, without
limitation, all ad valorem, sales and use, single business, gross receipts,
transaction, privilege, rent taxes, bed taxes or fees or any other taxes as the
same relate to or are imposed upon Lessee or Lessor or the business conducted
upon the Leased Property), assessments (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term), ground rents, water, sewer or other rents and charges, excises, tax
levies, fees (including, without limitation, license, permit, inspection,
authorization and similar fees), and all other governmental charges, in each
case whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Leased Property, Lessor, or the
business conducted thereon by Lessee (including all interest and penalties
thereon due to any failure in payment by Lessee), and all increases in all the
above from any cause whatsoever, including reassessment, which at any time
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<PAGE>
prior to, during or in respect of the Term may be assessed or imposed on or in
respect of or be a lien upon (a) Lessor's interest in the Leased Property or any
part thereof; (b) the Leased Property or any part thereof, including without
limitation any Personal Property located thereon or used in connection
therewith, or any rent therefrom or any estate, right, title or interest
therein; or (c) any occupancy, operation, use or possession of, or sales from,
or activity conducted on, or in connection with the Leased Property or the
leasing or use of the Leased Property or any part thereof by Lessee. Without
limiting the foregoing, the term "Imposition" shall include any sales tax on
rents paid under this Lease or by residents of the Facility (including, but not
limited to, rental receipts taxes), bed taxes, depreciation recapture, any other
taxes (except for the specific exclusions stated below), fees or charges imposed
by the State of ______________ and any potential subdivision thereof relating to
the Facility or the Leased Property, this Lease, or rents received under this
Lease, whether relating to any period prior to or after the Commencement Date.
Provided, however, nothing contained in this Lease shall be construed to require
Lessee to pay (1) the following taxes and fees to the extent they relate to
Lessor's business generally (as opposed to relating specifically to Lessor's
ownership of the Facility, lease thereof to Lessee or income therefrom): any
federal, state or local income tax of Lessor, taxes based on outstanding
corporate shares of Lessor or Lessor's equity or capitalization, regardless of
whether denominated as an income tax, franchise tax, capital tax or otherwise;
(2) any income or capital gain tax imposed with respect to the sale, exchange or
other disposition by Lessor of any Leased Property or the proceeds thereof; or
(3) estate, inheritance, gift taxes or documentary transfer taxes.
Insurance Requirements. All terms of any insurance policy
required by this Lease and all requirements of the issuer of any such policy.
Land. As defined in Article I.
Lease. As defined in the Preamble.
Lease Year. Any twelve (12) month period from January 1 to
December 31 in each calendar year during the Term. In the case of the beginning
of the Initial Term, the provision "Lease Year" shall mean the period from the
Commencement Date (defined in Paragraph 1.2, above) to _____________, ____; in
the case of the end of the Term, the provision "Lease Year" shall mean the
period from the last January 1 to occur during the Term to the date of
expiration of the Lease. The Lease Year 1996 shall mean the Commencement Date
through ________________, 1996; the Lease Year 1997 shall mean ______________,
1997 through _____________, 1997; the Lease Year 1998 shall mean
__________________, 1998 through ________________, 1998, and so on.
Leased Improvements; Leased Property. Each as defined in Article
I.
Legal Requirements. All federal, state, county, municipal, and
other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees, and injunctions affecting either the Leased Property or the
construction, use or alteration thereof whether now or hereafter enacted and in
force, including any which may (i) require repairs,
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modifications or alterations in or to the Leased Property; or (ii) in any way
adversely affect the use and enjoyment thereof, and all permits, licenses and
authorizations and regulations thereto, and all covenants, agreements,
restrictions, and encumbrances contained in any instruments, either of record or
known to Lessee, at any time in force affecting the Leased Property.
Lessee. Assisted Living Concepts, Inc., a Nevada corporation
(and any assignee permitted subject to the terms and conditions in this Lease).
Lessee's Personal Property. All machinery, equipment, furniture,
furnishings, movable walls or partitions, computers, or trade fixtures or other
personal property, and consumable inventory and supplies, owned by Lessee and
used or useful in Lessee's business on the Leased Property and located thereon,
including without limitation, all items of furniture, furnishings, equipment,
supplies and inventory, except items (i) included within the definition of
Fixtures; and (ii) personal property described in Paragraph 1.1(v), above.
Lessor. Texas-LTC Limited Partnership, a Texas limited
partnership, and its successors and assigns.
Minimum Rent. As defined in Article III.
Notice. A notice given pursuant to Article XXXI hereof.
Officer's Certificate. A certificate of Lessee signed by (i) the
Chief Executive Officer or the President or any authorized Vice President; and
(ii) the secretary, or another officer authorized by appropriate resolution to
so sign by the Board of Directors. Any signature required above may be
substituted with a signature of another person whose power and authority to act
has been authorized by an appropriate corporate resolution.
Other Leases. As defined in Paragraph 1.3.2.
Overdue Rate. On any date, a rate equal to the Prime Rate
(defined below), plus ___ percent (__%); provided, however, that it is the
intent of Lessor and Lessee that the Overdue Rate (and all other interest rates
provided for hereunder) be in strict compliance with applicable usury laws of
the State of __________, and that in the event the Overdue Rate (or other
interest rate provided for hereunder) shall be deemed to exceed that permitted
to be charged by the laws of the State of __________, any and all excess sums
collected by Lessor shall be credited against the Rent payable under this Lease
or if there is no Rent due, promptly refunded to Lessee.
Payment Date. Any due date for the payment of the installments
of Minimum Rent or any other payments required under this Lease.
Primary Intended Use. As defined in Paragraph 7.2.2.
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Prime Rate. On any date, a rate equal to the annual rate on such
date announced by Citibank, N.A. to be its prime rate for 90-day unsecured loans
to its corporate borrowers of the highest credit standing or, if not available,
such other rate as may be published by The Wall Street Journal as the prime rate
in its listing of "Money Rates."
Purchase Agreement. That certain Agreement of Purchase and Sale
and Joint Escrow Instructions, dated as of the date hereof, by and between
Lessee as the "Seller" and Lessor as the "Buyer," providing for Lessor's
acquisition of the Leased Property and the Related Property at the purchase
price and as more fully described therein.
Related Lease. That certain lease dated as of the date hereof,
between Lessor as "Lessor" and Lessee as "Lessee," relating to that certain
parcel of real property with an assisted living facility and related
improvements thereon located in the City of _________________ ("Related
Property").
Rent. Any and all monetary obligations of Lessee owing under
this Lease.
Subsidiaries. Corporations, of which either Lessee or Lessor
owns, directly or indirectly, more than 50% of the voting stock (individually, a
"Subsidiary").
Term. Collectively, the Initial Term plus any Extended Terms, as
the context may require, unless earlier terminated pursuant to the provisions
hereof.
Unsuitable for its Primary Intended Use. A state of condition of
the Facility such that by reason of damage or destruction, or a partial taking
by Condemnation, in the good faith judgment of Lessor and Lessee, reasonably
exercised, the Facility cannot be operated on a commercially practicable basis
for its Primary Intended Use taking into account, among other relevant factors,
the number of usable units affected by such damage or destruction or partial
Condemnation.
Unavoidable Delays. Delays due to strikes, lock-outs, inability
to procure materials, power failure, acts of God, governmental restrictions,
enemy action, civil commotion, fire, unavoidable casualty or other causes beyond
the control of the party responsible for performing an obligation hereunder;
provided that lack of funds shall not be deemed a cause beyond the control of
either party hereto unless such lack of funds available to Lessor results from
Lessee's failure to perform any of its obligations under this Lease.
The above does not include all the definitions to be used in
this Lease. Various definitions of other terms are included in the other
Articles of this Lease.
ARTICLE III
3.1 Rent. Lessee will pay to Lessor in lawful money of the
United States of America which shall be legal tender for the payment of public
and private debts at Lessor's
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address set forth above or at such other place or to such other person, firms or
corporations as Lessor from time-to-time may designate in a Notice, Minimum Rent
(as defined below), during the Term, as follows:
(a) Initial Term. The Minimum Rent during the
Initial Term is the annual sum of $_______________. The Minimum Rent shall be
subject to increase as and when provided in Paragraphs 3.2 and 3.3. The Minimum
Rent shall be paid in advance in equal, consecutive monthly installments on the
first day of each calendar month of the Term. Minimum Rent shall be prorated for
any partial month at the beginning or end of the Term; and
(b) Extended Terms. The Minimum Rent during the
Extended Terms shall be as stated in Article XVIII, below.
3.2 Annual Escalation of Minimum Rent. Commencing on
________________, ____ and continuing on each subsequent __________ during the
Term (the Initial Term as well as any Extended Terms), the Minimum Rent
(irrespective of any prorations made pursuant to Paragraph 3.1.1 above) shall
increase to an amount equal to the Minimum Rent for the immediately preceding
Lease Year multiplied by a fraction, the numerator of which shall be the C.P.I.
(defined below) for _______________ of the Lease Year then in effect, and the
denominator of which shall be the C.P.I. for ______________ of the immediately
preceding Lease Year; provided, however, that the product of said multiplication
shall not result in an increase of the Minimum Rent by more than two percent
(2%) per year on a cumulative basis ("Annual Multiplier"). If, however, the
Annual Multiplier is less than two percent (2%) in any Lease Year (a "Less Than
2% Lease Year"), then at such time as the Annual Multiplier is determined for
subsequent Lease Years, the Minimum Rent for each Less Than 2% Lease Year shall
be retroactively recalculated such that subsequent Annual Multipliers (whether
less than or greater than 2%) shall be first applied to increase the Annual
Multiplier for each Less Than 2% Lease Year to an amount up to, but not greater
than, 2%, with such recalculations to be made in chronological order beginning
with the earliest Less Than 2% Lease Year and continuing, so long as there is
Annual Multiplier remaining, until recalculations have been made with respect to
all Less Than 2% Lease Years. After each such recalculation has been made, the
shortfall in the Minimum Rent for the newly recalculated Less Than 2% Lease
Years shall be billed to Lessee and Lessee shall pay such shortfall amount to
Lessor together with the next payment of Minimum Rent otherwise coming due
hereunder. Such recalculations and shortfall billings shall be made in each
Lease Year where there remain prior Less Than 2% Lease Years which have not yet
been recalculated to 2%. For purposes of example only, if the initial Minimum
Rent equals $__________, and if (a) the C.P.I. increased 1.5% as of
______________, ____, the Minimum Rent would increase to $____________; (b) the
C.P.I. increased 1.5% as of _____________, ____, the Minimum Rent as of
____________, ____ would increase to $___________; (c) the C.P.I. increased 6%
as of ___________, ____, the Minimum Rent as of __________, ____ would increase
to $___________, which is the Minimum Rent increased by 2% per year for three
years (i.e. the average annual increases have been 3% (1.5% + 1.5% + 6% for the
three years, respectively) subject to the 2% annual limitation), and the total
shortfall amount to be billed to Lessee would be $_______ for Lease Year ____
and $_______ for Lease Year ____. "C.P.I."
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shall mean and refer to the Consumer Price Index of the Bureau of Labor
Statistics of the Department of Labor, U.S. Cities Average, All Items (1982-
84=100); provided that if compilation of the C.P.I. is discontinued or
transferred to any other governmental department or bureau, then the index most
nearly the same as the C.P.I. shall be used. If Lessor is unable to determine
the C.P.I. by January 1 of any Lease Year, Lessee shall continue to pay the
Minimum Rent at the rate paid for the immediately prior Lease Year, and once the
C.P.I. for January 1 of such Lease Year is published, the new Minimum Rent (as
increased by the Annual Multiplier) shall be effective retroactively as of the
first day of such Lease Year and the aggregate amount of any additional Minimum
Rent shall be paid by Lessee promptly after written notice thereof from Lessor
(but not later than the date of the next monthly installment of Minimum Rent,
unless the next installment falls due within five (5) days after Lessor's
notice, in which case not later than the date of the second next monthly
installment of Minimum Rent). No delay by Lessor in providing notice of any such
increase in Minimum Rent shall be deemed a waiver of Lessor's right to increase
the Minimum Rent as provided hereunder.
3.3 Additional Charges. In addition to the Minimum Rent, (1)
Lessee will also pay and discharge as and when due and payable all other
amounts, liabilities, obligations and Impositions which Lessee assumes or agrees
to pay under this Lease, and (2) in the event of any failure on the part of
Lessee to pay any of those items referred to in clause (1) above, Lessee will
also promptly pay and discharge every fine, penalty, interest and cost which may
be added for non-payment or late payment of such items (the items referred to in
clauses (1) and (2) above being referred to herein collectively as the
"Additional Charges"), and Lessor shall have all legal, equitable and
contractual rights, powers and remedies provided either in this Lease or by
statute or otherwise in the case of non-payment of the Additional Charges. If
any elements of Additional Charges shall not be paid within five (5) Business
Days after its due date and Lessor pays any such amount (which Lessor shall have
the right, but not the obligation, to do), then, in addition to Lessor's other
rights and remedies, Lessee will pay Lessor on demand, as Additional Charges,
interest on such unpaid Additional Charges computed at the Overdue Rate from the
due date of such installment to the date of Lessee's payment thereof. To the
extent that Lessee pays any Additional Charges to Lessor pursuant to any
requirement of this Lease, Lessee shall be relieved of its obligation to pay
such Additional Charges to the entity to which they would otherwise be due.
3.4 Net Lease. Subject to the provisions of Article V, below,
without limiting any provision of this Lease, the Rent shall be paid absolutely
net to Lessor, so that this Lease shall yield to Lessor the full amount of the
installments of Minimum Rent and Additional Charges throughout the Term, all as
more fully set forth in Articles IV, VIII, IX and XIII, and other provisions of
this Lease.
3.5 Late Charge. LESSEE HEREBY ACKNOWLEDGES THAT LATE
PAYMENT BY LESSEE TO LESSOR OF RENT (INCLUDING MINIMUM RENT AND ADDITIONAL
CHARGES, BUT EXCLUDING LATE CHARGES) OR OTHER SUMS DUE HEREUNDER (OTHER THAN
THOSE SET FORTH IN PARAGRAPH 3.4) WILL CAUSE LESSOR TO INCUR COSTS NOT
CONTEMPLATED BY THIS LEASE, THE EXACT AMOUNT OF WHICH WILL BE EXTREMELY
DIFFICULT TO ASCERTAIN. SUCH
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COSTS INCLUDE, BUT ARE NOT LIMITED TO, PROCESSING AND ACCOUNTING CHARGES.
ACCORDINGLY, IF ANY INSTALLMENT OF RENT (INCLUDING MINIMUM RENT AND ADDITIONAL
CHARGES, BUT EXCLUDING LATE CHARGES) OR ANY OTHER SUM DUE FROM LESSEE SHALL NOT
BE RECEIVED BY LESSOR WHEN THE SAME BECOMES DUE AND PAYABLE AND SUCH FAILURE IS
NOT CURED WITHIN THREE (3) BUSINESS DAYS AFTER NOTICE THEREOF FROM LESSOR, THEN
LESSEE SHALL PAY TO LESSOR A LATE CHARGE EQUAL TO FIVE PERCENT (5%) OF SUCH
OVERDUE AMOUNT. THE PARTIES HEREBY AGREE THAT SUCH LATE CHARGE REPRESENTS A FAIR
AND REASONABLE ESTIMATE OF THE COSTS LESSOR WILL INCUR BY REASON OF LATE PAYMENT
BY LESSEE. ACCEPTANCE OF SUCH LATE CHARGE BY LESSOR SHALL IN NO EVENT CONSTITUTE
A WAIVER OF LESSEE'S DEFAULT OR BREACH WITH RESPECT TO SUCH OVERDUE AMOUNT, NOR
PREVENT LESSOR FROM EXERCISING ANY OF THE OTHER RIGHTS AND REMEDIES GRANTED
UNDER THIS LEASE.
ARTICLE IV
4.1 Payment of Impositions. Subject to Article XII relating to
permitted contests, Lessee will pay, or cause to be paid, all Impositions coming
due prior to or during the Term, or which relate to any period within the Term
or prior to the Term, before any fine, penalty, interest or cost may be added
for non-payment (or earlier if required by any taxing authority), such payments
to be made directly to the taxing authorities where feasible, and will promptly
furnish to Lessor copies of official receipts or other satisfactory proof
evidencing such payments. Lessee's obligation to pay Impositions shall be deemed
absolutely fixed upon the date such Impositions become a lien upon the Leased
Property or any part thereof. If any Imposition may, at the option of the
taxpayer, lawfully (without penalty) be paid in installments (whether or not
interest shall accrue on the unpaid balance of such Imposition), Lessee may
exercise the option to pay the same (and any accrued interest on the unpaid
balance of such Imposition) in installments and in such event, shall pay such
installments during the Term hereof (subject to Lessee's right of contest
pursuant to the provisions of Article XII) as the same respectively become due
and before any fine, penalty, premium, further interest or cost may be added
thereto. Lessee, at its expense, shall, to the extent required or permitted by
Legal Requirements, prepare and file all tax returns and reports in respect of
any Imposition as may be required by governmental authorities. If any refund
shall be due from any taxing authority in respect of any Imposition, the same
shall be paid over to or retained by Lessee if no Event of Default shall have
occurred hereunder and be continuing, but if such Event of Default has occurred
and is continuing (i.e., it has not been cured), such refund shall be paid to
Lessor and utilized to cure any such continuing Event of Default. After fully
curing such Event of Default, any excess funds from such refund shall be paid by
Lessor to Lessee. Any such funds retained by Lessor, as provided above, shall be
applied as provided in Article XVI. Lessor and Lessee shall, upon request of the
other, provide such data as is maintained by the party to whom the request is
made with respect to the Leased Property as may be necessary to prepare any
required returns and reports. In the event governmental authorities classify any
property covered by this Lease as personal property, Lessee shall file all
personal property tax returns in such jurisdictions where it must legally so
file. Lessor, to the
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extent it possesses the same, and Lessee, to the extent it possesses the same,
will provide the other party, upon request, with cost and depreciation records
necessary for filing returns for any property so classified as personal
property. Where Lessor is legally required to file personal property tax
returns, Lessee will provide to Lessor copies of assessment notices indicating a
value in excess of the reported value in sufficient time for Lessor to file a
protest. Lessee may, upon notice to Lessor, at Lessee's option and at Lessee's
sole cost and expense, protest, appeal or institute such proceedings as Lessee
may deem appropriate to effect a reduction of real estate or personal property
assessments and Lessor, at Lessee's sole cost and expense as aforesaid, shall
fully cooperate with Lessee in such protest, appeal, or other action, provided
that Lessee may not withhold payments pending such challenges except under the
conditions set forth in Article XII. Billings for reimbursement by Lessee to
Lessor of personal property taxes shall be accompanied by copies of a bill
therefor and payments thereof which identify the personal property with respect
to which such payments are made. Lessor shall have the right, once any Event of
Default has occurred hereunder (and irrespective of whether such Event of
Default is continuing or has been cured), to require that Lessee pay to Lessor
1/12th of the annual Impositions each month concurrently with the payment of
Minimum Rent; provided that, during any period when such payments are being
made, Lessor agrees (a) to pay, or cause to be paid, all such Impositions prior
to delinquency, and (b) upon written request from Lessee, to account to Lessee
for all payments then on deposit. Unless Lessee is notified by Lessor otherwise,
Lessee shall pay all "Impositions" directly to the appropriate taxing or other
authorities to which payments are due, and Lessee shall provide Lessor written
evidence and notice that all such payments have been made. Without limiting any
of the other indemnities set forth in this Lease, Lessee hereby agrees to
defend, indemnify, protect and hold harmless Lessor in connection with any
"Impositions" that relate to any time prior to or during the Term, and Lessee
acknowledges and agrees that it will not make claims against, or otherwise look
to, Lessor to reimburse Lessee for payments made relating to any period prior to
the Commencement Date.
4.2 Notice of Impositions. Lessor shall give prompt Notice to
Lessee for all Impositions payable by Lessee hereunder of which Lessor has
knowledge, but Lessor's failure to give any such Notice shall in no way diminish
Lessee's obligations hereunder to pay such Impositions, but such failure shall
obviate any default hereunder for a reasonable time after Lessee receives notice
(from any source) of any Imposition which it is obligated to pay. However,
notwithstanding the foregoing, it shall be Lessee's sole duty to inquire and
determine all of the Impositions for which it is liable as provided herein and
shall promptly pay such Impositions when due, and Lessor shall have no duty of
inquiry concerning Impositions.
4.3 Utility Charges. Lessee will pay or cause to be paid all
charges for electricity, power, gas, oil, water, sewer connection and all other
utilities used in or for the Leased Property during the Term.
4.4 Insurance Premiums. Lessee will pay or cause to be paid
all premiums for the insurance coverage required to be maintained pursuant to
Article XIII during the Term.
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4.5 Payables. Lessee acknowledges and agrees that prior to the
Commencement Date, certain liabilities and other obligations were incurred
arising from the development, construction and operation of the Facility for
which Lessee is and shall remain entirely responsible and liable, and Lessor
shall have no responsibility, liability or obligation whatsoever with respect to
the same. Therefore, Lessee agrees as part of this Lease to pay all liabilities
and obligations concerning the Facility, whether arising before or after the
Commencement Date.
ARTICLE V
5.1 No Termination, Abatement, etc. Except as specifically
provided under Article XV hereunder, Lessee shall not be entitled to any
abatement, deduction, deferment or reduction of Rent, or set-off against the
Rent, nor shall the respective obligations of Lessor and Lessee be otherwise
affected by reasons of (a) any damage to, or destruction of, any Leased Property
or any portion thereof; (b) the lawful or unlawful prohibition of, or
restriction upon, Lessee's use of the Leased Property, or any portion thereof,
the interference with such use by any person, corporation, partnership or other
entity, or by reason of eviction by paramount title; (c) any claim which Lessee
has or might have against Lessor or by reason of any default or breach of any
warranty by Lessor under this Lease or any other agreement between Lessor and
Lessee, or to which Lessor and Lessee are parties; (d) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding-up or other proceedings affecting Lessor or any assignee or transferee
of Lessor; or (e) for any other cause whether similar or dissimilar to any of
the foregoing other than a discharge of Lessee from any such obligations as a
matter of law. Lessee hereby specifically waives all rights, arising from any
occurrence whatsoever, which may now or hereafter be conferred upon it by law to
(i) modify, surrender or terminate this Lease or quit or surrender the Lease
Property or any portion thereof; or (ii) entitle Lessee to any abatement,
reduction, suspension or deferment of the Rent payable under this Lease except
as specifically provided in Article XV hereunder. The obligations of Lessor and
Lessee hereunder shall be separate and independent covenants and agreements and
the Rent due under this Lease shall continue to be payable in all events,
irrespective of Lessor's performance or non-performance under this Lease, unless
the obligations to pay the same shall be terminated pursuant to the express
provisions of this Lease or by termination of this Lease other than by reason of
an Event of Default.
5.2 Abatement Procedures. In the event of Minimum Rent under
Article XV (by reason of any Condemnation as provided thereunder), the Lease
shall not terminate (except as provided in Article XV) but the Minimum Rent
shall be abated in proportion to the reduced capacity of the Leased Property for
the use made of the same by Lessee at the time of the Condemnation (i.e., the
reduction in the number of residents the Leased Property can accommodate under
standards existing immediately prior to the Condemnation). If Lessor and Lessee
are unable to agree upon the amount of such abatement within thirty (30) days
after any partial taking as provided under Article XV, the matter shall be
submitted by either party to a court of competent jurisdiction for resolution,
but Lessee during
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such resolution shall continue to perform its obligations hereunder, including,
but not limited to, payment of that portion of the Minimum Rent which is not
then in dispute.
ARTICLE VI
6.1 Ownership of the Leased Property. Lessee acknowledges
and agrees that the Leased Property is the property of Lessor and that Lessee
has only the right to the exclusive possession and use of the Leased Property
upon the terms and conditions of this Lease.
6.2 Lessee's Alterations. Lessee shall not make any
modifications, alterations or improvements, whether by addition or deletion, to
the Leased Improvements or any portion thereof (collectively, "Alterations")
without Lessor's prior written consent; provided, however that Lessee may, at
its sole cost and expense, make non-structural Alterations to the interior of
the Leased Improvements so long as the total cost thereof is less than
_________________________ Dollars ($_______) and provided that the aggregate
cost over any twelve (12) month period of such Alterations does not exceed
_______________________________ ($__________) unless approved in advance in
writing by Lessor. Any Alterations by Lessee during the Term of this Lease shall
be done in a good and workmanlike manner, with good and sufficient materials,
and in compliance with law. Lessee will not make any Alteration or other
improvement that may materially impair the value or the usefulness of the Leased
Property or any part thereof for its Primary Intended Use. Subject to the
provisions of Article XI, all Alterations and other improvements shall be lien
free (i.e., without mechanics', materialmen's or other liens). Lessee shall
promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessee shall, at its sole cost and expense, repair and
restore the Leased Property as and when required under Paragraph 9.1.
6.3 Lessee's Personal Property. Lessee may (and shall as
provided hereinbelow), at its expense, install, assemble or place on any parcels
of the Land or in any of the Leased Improvements, any items of Lessee's Personal
Property, and Lessee may, subject to the conditions set forth below, remove the
same upon the expiration or any prior termination of the Term. Lessee shall
provide and maintain during the entire Term all such Lessee's Personal Property
as shall be necessary in order to operate the Facility in compliance with all
licensure and certification requirements, in compliance with all applicable
Legal Requirements and Insurance Requirements and otherwise in accordance with
customary practice in the industry for the Primary Intended Use. All of Lessee's
Personal Property not removed by Lessee within twenty (20) days following the
expiration or earlier termination of this Lease shall be considered abandoned by
Lessee and may be used, appropriated, sold, destroyed, or otherwise disposed of
by Lessor without first giving notice thereof to Lessee and without any payment
to Lessee and without any obligation to account therefor. Lessee shall, within
twenty (20) days following the expiration or earlier termination of this Lease,
at its sole cost and expense, repair any damage to the Land or the Leased
Improvements occasioned by the installation, maintenance or removal of Lessee's
Personal Property, and restore the Land or Leased Improvements to its condition
immediately prior to any such installation.
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6.4 Consumable Inventory. Lessor and Lessee acknowledge that
certain inventory, including consumables, at the Facility, as of the
Commencement Date ("Consumable Inventory") will be completely consumed or
otherwise disposed of during the course of Lessee's operation of the Facility.
Lessee agrees that, at the end of the Term or earlier termination of the Lease,
it shall replace and restore the Consumable Inventory to the type and amount
(with the same value) as that existing as of the Commencement Date, and as may
otherwise be sufficient to fully equip the Facility for its operation and
maintenance as may be customary for properties comparable to the Leased Property
in _________.
ARTICLE VII
7.1 Condition of Leased Property. Lessee acknowledges
receipt and delivery of possession of the Leased Property and further
acknowledges that Lessee has examined and otherwise has knowledge of the
condition of the Leased Property prior to the execution and delivery of this
Lease and has found the same to be in good order and repair and satisfactory for
it purposes hereunder. Lessee represents and warrants that the Personal Property
(as defined in Paragraph 1.1(v) hereof) includes all equipment and property
required under applicable federal and state law to operate the Facility at full
capacity. Lessee is leasing the Leased Property "AS-IS" in its present
condition. Lessee waives any claim or action against Lessor in respect of the
condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATIONS,
EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF,
EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR THE MATERIAL OR
WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE
TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN
INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. WITHOUT LIMITING THE FOREGOING,
IT SHALL BE LESSEE'S RESPONSIBILITY TO DETERMINE THE AMOUNT OF REIMBURSEMENT AND
OTHER PAYMENTS THAT IT IS ENTITLED TO RECEIVE FROM THE FEDERAL, STATE OR LOCAL
GOVERNMENTS AND LESSEE'S OBLIGATIONS UNDER THIS LEASE SHALL NOT BE MODIFIED,
CHANGED OR OTHERWISE BE REDUCED IN THE EVENT THAT LESSEE HAS INCORRECTLY
ANALYZED THE AMOUNTS TO BE PAID TO LESSEE BY ANY GOVERNMENT OR AGENCY THEREOF.
7.2 Use of the Leased Property.
7.2.1 Lessee covenants that it will obtain and will at all
times during the Term maintain all approvals needed to use and operate the
Leased Property and the Facility under applicable federal, state and local law,
including, but not limited to, licensure and Medicaid certification, as
applicable. Lessee shall provide to Lessor, at Lessor's request a copy of any
report or survey conducted by any federal, state or local government entity
regarding the quality of care at the Facility, and any other such information or
documents concerning the operation of the Facility.
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7.2.2 After the Commencement Date and during the entire Term,
Lessee shall use or cause to be used the Leased Property as an assisted living
facility licensed by the State of ________ and uses incidental to the foregoing
(the particular such use to which the Leased Property is put at any particular
time is herein referred to as the "Primary Intended Use"). Lessee shall not use
the Leased Property or any portion thereof for any other use without the prior
written consent of Lessor, which consent may be withheld in Lender's sole and
absolute discretion. No use shall be made of the Leased Property, and no acts
shall be done, which will cause the cancellation of any insurance policy to
residents therein, or permit to be kept, used or sold in or about the Leased
Property any article which may be prohibited by law or by the standard form of
fire insurance policies, or any other insurance policies required to be carried
hereunder, or fire underwriter's regulations. Lessee shall, at its sole cost,
comply with all of the requirements pertaining to the Leased Property or other
improvements of any insurance board, association, organization, or company
necessary for the maintenance of insurance, as herein provided, covering the
Leased Property and Lessee's Personal Property.
7.2.3 Lessee covenants and agrees that subject to damage,
destruction and condemnation described in Articles XIV and XV, during the Term
it will operate continuously the Leased Property in accordance with its Primary
Intended Use, provided that Lessee may cease operations for more than ten (10)
days (i) if Lessee obtains Lessor's prior written approval, and (ii) so long as
such cessation of operations does not impair or threaten the status or
effectiveness of the operating license or other certification for operating the
Facility in accordance with its Primary Intended Use.
7.2.4 Lessee shall not commit or suffer to be committed any
waste on the Leased Property, or in the Facility nor shall Lessee cause or
permit any nuisance thereon.
7.2.5 Lessee shall neither suffer nor permit the Leased
Property or any portion thereof, including Lessee's Personal Property, to be
used in such a manner as (i) might reasonably tend to impair Lessor's (or
Lessee's, as the case may be) title thereto or to any portion thereof; or (ii)
may reasonably make possible a claim or claims of adverse usage or adverse
possession by the public, as such, or of implied dedication of the Leased
Property or any portion thereof.
7.2.6 Lessee covenants and agrees that during the Term it will
maintain all licenses, approvals, permits and certifications for reimbursement,
licensure and as otherwise required for operating the Facility in accordance
with its Primary Intended Use.
ARTICLE VIII
8.1 Compliance with Legal and Insurance Requirements,
Instruments, etc. Subject to Article XII relating to permitted contests, Lessee,
at its sole cost and expense, will promptly (a) comply with all applicable Legal
Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair, and restoration of the Leased Property, whether or not
compliance therewith shall require structural changes in any of the Leased
Improvements or interfere with the use and enjoyment of the Leased Property; and
(b) procure, maintain and
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comply with all licenses, certificates of need, provider agreements and other
authorizations, if any, required for any use of the Leased Property and Lessee's
Personal Property then being made, and for the proper erection, installation,
operation, and maintenance of the Leased Property or any part thereof.
8.2 Legal Requirement Covenants. Lessee covenants and agrees
that the Leased Property and Lessee's Personal Property shall not be used for
any unlawful purpose. Lessee further warrants and represents that Lessee has
obtained all necessary governmental approvals and has given all necessary
notices to allow Lessee to operate the Leased Property for its Primary Intended
Use. Lessee shall acquire and maintain all licenses, certificates, permits,
provider agreements and other authorizations and approvals needed to operate the
Leased Property in its customary manner for the Primary Intended Use, and any
other use conducted on the Leased Property as may be permitted by Lessor from
time-to-time hereunder. Lessee further covenants and agrees that Lessee's use of
the Leased Property and maintenance, alteration and operation of the same, and
all parts thereof, shall at all times conform to all applicable federal, state
and local laws, ordinances, rules, and regulations unless the same are held by a
court of competent jurisdiction to be unlawful. Lessee, may, however, upon prior
written notice to Lessor, contest the legality or applicability of any such law,
ordinance, rule, or regulation, or any licensure or certification decision if
Lessee maintains such action in good faith, with due diligence, without
prejudice to Lessor's rights hereunder, and at Lessee's own expense. If by the
terms of any such law, ordinance, rule or regulation, compliance therewith
pending the prosecution of any such proceeding may legally be delayed without
the incurrence of any fine, charge or liability of any kind against the Leased
Property, including the Facility, or Lessee's leasehold interest therein and
without subjecting Lessor to any liability, civil or criminal, for failure so to
comply therewith, Lessee may delay compliance therewith until the final
determination of such proceeding. If any lien, charge or civil or criminal
liability would be incurred by reason of any such delay, Lessee, on the prior
written consent of Lessor, may nonetheless contest as aforesaid and delay as
aforesaid provided that such delay would not subject Lessor to criminal
liability and Lessee both (a) furnishes to Lessor security reasonably
satisfactory to Lessor against any loss or injury by reason of such contest or
delay; and (b) prosecutes the contest continuously, with due diligence and in
good faith.
ARTICLE IX
9.1 Maintenance and Repair.
9.1.1 Lessee, at its sole cost and expense, will keep
the Leased Property and Lessee's Personal Property and all private roadways,
sidewalks and curbs appurtenant thereto and which are under Lessee's control in
good order and repair (whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of the Leased
Property, or any portion thereof), and, except as otherwise provided in Article
XIV, with reasonable promptness, make all necessary and appropriate repairs
thereto of every kind and nature, whether interior or exterior, structural or
non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by
reason of a condition existing prior to the Commencement
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Date (concealed or otherwise). All repairs shall, to the extent reasonably
achievable, be at least equivalent in quality to the original work. Lessee will
not take or omit to take any action the taking or omission of which may
materially impair the value or the usefulness of the Leased Property or any part
thereof for its Primary Intended Use. Any repair work performed by Lessee shall
be paid for so that no lien (i.e., mechanics', materialmen's or other liens)
shall attach to the Leased Property, subject to Article XII.
9.1.2 Lessor shall not under any circumstances be
required to build or rebuild any improvements on the Leased Property, or to make
any repairs, replacements, alterations, restorations, or renewals of any nature
or description to the Leased Property, whether ordinary or extraordinary,
structural or non-structural, foreseen or unforeseen, or to make any expenditure
whatsoever with respect thereto, in connection with this Lease, or to maintain
the Leased Property in any way. Lessee hereby waives, to the extent permitted by
law, the right to make repairs at the expense of Lessor pursuant to any law in
effect at the time of the execution of this Lease or hereafter enacted. Lessor
shall have the right to give, record and post, as appropriate, notices of non-
responsibility (or similar notices) under any mechanics' or materialmen's lien
laws now or hereafter existing.
9.1.3 Nothing contained in this Lease and no action or
inaction by Lessor shall be construed as (i) constituting the consent or request
of Lessor, express or implied, to any contractor, sub-contractor, laborer,
materialman, or vendor to or for the performance of any labor or services or the
furnishing of any materials or other property for the construction, alteration,
addition, repair, or demolition of, or to the Leased Property or any part
thereof; or (ii) giving Lessee any right, power or permission to contract for or
permit the performance of any labor or services or the furnishing of any
materials or other property in such fashion as would permit the making of any
claim against Lessor in respect thereof or to make any agreement that may
create, or in any way be the basis for any right, title, interest, lien, claim,
or other encumbrance upon the estate of Lessor in the Leased Property, or any
portion thereof. Lessor shall have the right to give, record and post, as
appropriate, notices of non-responsibility (or similar notices) under any
mechanics' or materialsmen's lien laws now or hereafter existing.
9.1.4 Unless Lessor shall convey any of the Leased
Property to Lessee pursuant to the provisions of this Lease, and subject to the
provisions of Paragraph 6.3 regarding Lessee's Personal Property, upon the
expiration or prior termination of the Term, all the Leased Property, including
all Fixtures and Personal Property located thereon, and any Alterations,
repairs, restorations, additions or improvements otherwise made by or for
Lessee, shall be Lessor's property and shall be vacated and surrendered to
Lessor in the condition in which the Leased Property was originally received
from Lessor, and in the same type and amount (with the same value) as that
existing as of the Commencement Date, except as repaired, rebuilt, restored,
altered or added to as permitted or required under this Lease, and as otherwise
sufficient to fully equip the Facility for its operation and maintenance as may
be customary for properties comparable to the Leased Property in _________, and
except for ordinary wear and tear (subject to the obligation of Lessee to
maintain the Leased Property) in good order and repair without compensation to
Lessee; provided however that, at the election of Lessor, exercisable by notice
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to Lessee, Lessee shall, at Lessee's sole cost and expense, prior to the
expiration or prior termination of the Term, remove from the Leased Property any
Fixtures, Personal Property, Alterations or other improvements to the Leased
Property or any portion thereof that were not consented to in advance in writing
by Lessor, irrespective of whether Lessor's consent was required hereunder, and
Lessee shall repair any damage to the Leased Property occasioned by the
installation, maintenance or removal of the same, and restore the Leased
Property to its condition immediately prior to such installation.
Notwithstanding the foregoing, if this Lease is terminated pursuant to Paragraph
14.7 due to damage or destruction during the last 24 months of the Term (as
described in Paragraph 14.7), then, unless the damage or destruction was due to
Lessee's negligent acts or omissions or willful misconduct, at the end of the
Term (shortened due to the damage and destruction) Lessee shall not be obligated
to repair any items that were damaged; provided that nothing contained herein
shall affect Lessee's obligation to maintain the Leased Property in good order
and repair during the entire Term. Additionally, Lessor shall own and may
remove, at the end of the Term (or at the earlier termination of this Lease),
all patient records and other records in connection with the Facility, and in
connection with the transfer of such records, Lessee shall take all necessary
action to insure full compliance with any and all patient confidentiality,
patient-physician privileges or any duly enacted "Patient's Bill of Rights" or
similar applicable laws or regulations.
9.2 Expenditures to Comply with Law; Construction of Additional
Improvements Pursuant to Certificate of Need. Without limiting Lessee's other
obligations, during the Term of this Lease, Lessee will, at its expense, make
whatever expenditures (including, but not limited to capital and non-capital
expenditures) that are required to conform the Leased Property to such standards
as may from time-to-time be required by Federal Medicaid (Title 19) assisted
living programs, if applicable, or any other applicable programs or legislation,
or capital improvements required by any other governmental agency having
jurisdiction over the Leased Property as a condition of the continued operation
of the Leased Property during the Term (as extended) as an assisted living
residence or other health-care related facility, approved for Medicaid and
similar programs, pursuant to present or future laws of governmental regulation.
9.3 Encroachments, Restrictions, etc. If any of the Leased
Improvements shall, at any time, encroach upon any property, street or right-of-
way adjacent to the Leased Property, or shall violate the agreements or
conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or shall impair the rights
of others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Lessor at the behest of any person
affected by any such encroachment, violation or impairment, Lessee shall, at its
sole cost and expense, (and after Lessor's prior approval) subject to Lessee's
right to sue Lessor's predecessors in title with respect thereto or to contest
the existence of any such encroachment, violation or impairment and, in such
case, in the event of an adverse final determination, either (i) obtain valid
and effective waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation or impairment, whether the same
shall affect Lessor or the Leased Property; or (ii) make such changes in the
Leased Improvements, and take such other actions, as Lessee in the good faith
exercise of its judgment deems reasonably practicable, to remove such
encroachment, and to end
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such violation or impairment, including, if necessary, the alteration of any of
the Leased Improvements, and in any event take all such actions as may be
necessary in order to be able to continue the operation of the Leased
Improvements for the Primary Intended Use substantially in the manner and to the
extent the Leased Improvements were operated prior to the assertion of such
violation, impairment or encroachment. Any such alteration shall be made in
conformity with the applicable requirements of Paragraph 6.2 and this Article
IX. Lessee's obligations under this Paragraph 9.3 shall be in addition to and
shall in no way discharge or diminish any obligation of any insurer under any
policy of title or other insurance.
ARTICLE X
10.1 Lessee's Obligations for Hazardous Materials. Lessee shall,
at its sole cost and expense, take all actions as required to cause the Leased
Property including, but not limited to, the Land and all Leased Improvements, to
be free and clear of the presence of all Hazardous Materials during the Term;
provided, however, that Lessee shall be entitled to use and maintain Hazardous
Materials on the Leased Property in connection with Lessee's business and in
compliance with all applicable laws. In this connection, Lessee shall, upon its
discovery, belief or suspicion of the presence of Hazardous Materials on, in or
under any part of the Leased Property, including, but not limited to, the Land
and all Leased Improvements, immediately notify Lessor and, at no expense to
Lessor, cause any such Hazardous Materials to be removed immediately, in
compliance with all applicable laws and in a manner causing the least disruption
of or interference with the operation of Lessee's business. Lessee hereby agrees
to fully indemnify, protect, defend and hold harmless Lessor from any costs,
damages, claims, liability or loss of any kind or nature arising out of or in
any way in connection with the presence, suspected presence, removal or
remediation of Hazardous Materials in, on, or about the Leased Property, or any
part thereof. Lessee acknowledges that it has received and reviewed that certain
Environmental Site Investigation, dated as of September, 1995, and updated
thereafter, and prepared by C-K Associates, Inc. (the "Environmental Report"). A
copy of the Environmental Report is attached hereto as Exhibit "B". Without
limiting Lessee's other obligations under this Lease, Lessee agrees, at Lessee's
sole cost, to fully comply with all recommendations set forth in the
Environmental Report, as updated. Lessee's obligations hereunder shall apply to
all Hazardous Materials, irrespective of when they arose or were discovered and
therefore will include any Hazardous Materials that existed prior to, at, or
after the Commencement Date and during the Term.
10.2 Definition of Hazardous Materials. For purposes of this
Lease, "Hazardous Materials" shall include, but not be limited to, any
substance, material, waste, pollutant or contaminant, now or hereafter defined,
listed or regulated by the "Environmental Laws" (defined below) or any other
federal state or local law, regulation or order or by common law decision.
"Environmental Laws" means and includes any law, ordinance, regulation or
requirement now or hereinafter in effect relating to land use, air, soil,
surface water, groundwater (including the protection, cleanup, removal,
remediation or damage thereof), human health and safety or any other
environmental matter, including, without limitation, the following laws as the
same may be amended from time to time: Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. (S) 9601, et seq.;
Federal
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Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901, et seq.; Clean Water
Act, 33 U.S.C. (S) 1251, et seq.; Toxic Substances Control Act, 15 U.S.C. (S)
2601, et seq.; Refuse Act, 33 U.S.C. (S) 407; Occupational Safety and Health
Act, 29 U.S.C. (S) 651, et seq.; Clean Air Act, 42 U.S.C. (S) 7401, et seq.; and
comparable _________ laws, including but not limited to ________ Solid Waste
Disposal Act, Tex. Health & Safety Code, ch. 361 et seq.; _______ Water Quality
Act, Tex. Water Code ch. 26 et seq.; ________ Clean Air Act, Tex. Health &
Safety Code ch. 382 et seq.; ________ Hazard Communication Act, Tex. Health &
Safety Code (S)502 et seq.; and any and all similar state and local laws and
ordinances and the regulations now or hereafter adopted, published and/or
promulgated pursuant thereto.
ARTICLE XI
11.1 No Liens. Subject to the provisions of Article XII relating
to permitted contests, Lessee will not directly or indirectly, voluntarily or by
operation of law, expense any lien, mortgage, encumbrance, attachment, title
retention agreement, or claim upon the Leased Property or any attachment, levy,
claim, or encumbrance in respect of the Rent, not including however, (a) this
Lease; (b) restrictions, liens and other encumbrances created or allowed
pursuant to the provisions of Paragraph 11.2 below; (c) liens for those taxes of
Lessor which Lessee is not required to pay hereunder; (d) subleases permitted by
Article XXIII; (e) liens for Impositions or for sums resulting from non-
compliance with Legal Requirements so long as (1) the same are not yet payable
or are payable without the addition of any fine or penalty, or (2) such liens
are in the process of being contested as permitted by Article XII; (f) liens of
mechanics, laborers, materialmen, suppliers or vendors for sums either disputed
or not yet due, provided that in the case of disputed sums any such liens are in
the process of being contested as permitted by Article XII; (g) any liens which
are the responsibility of Lessor pursuant to the provisions of Article XXXIII of
this Lease; (h) the Permitted Title Matters (defined in Paragraph 1.1 above);
and (i) any other matters that have been consented to in advance in writing by
Lessor.
11.2 Permitted Liens. Lessee may borrow funds to finance all or
any part of the cost of any Alterations or other improvements permitted or
required under this Lease to the extent and upon such terms and conditions as
may be approved in advance in writing by Lessor in Lessor's sole discretion,
subject to Lessor's right of first refusal to finance such Alterations or other
improvements upon commercially reasonable terms and conditions; provided,
however, that Lessor's approval shall not be required for any borrowing of funds
that does not result in a lien, mortgage, encumbrance or other claim affecting
the Leased Property or Lessee's interest under this Lease. Notwithstanding the
foregoing, Lessee may grant security interests encumbering specific items of
Lessee's Personal Property (but not fixtures attached to the Land) in favor of
the lessors of or purchase-money lenders for said items of Lessee's Personal
Property, so long as such personal property is permitted on the Land or in the
Leased Improvements under Paragraph 6.3 hereunder and is not owned by or subject
to any claim or right of Lessor.
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ARTICLE XII
12. Permitted Contests. Lessee shall have the right to contest the
amount or validity of any Imposition or any Legal Requirement or Insurance
Requirement or any lien, attachment, levy, encumbrance, charge or claim
("Claims") not otherwise permitted by Article XI, by appropriate legal
proceedings in good faith and with due diligence, and to delay payment if
legally permitted. Any such legal proceeding (and delay in payment) shall
operate to extend the time for performance of Lessee's covenants to pay such
charges hereunder only so long as such Claims are in the process of being
diligently contested as permitted in this Article XII and such legal proceedings
(and delay in payment) do not cause the sale of the Leased Property, or any part
thereof, to satisfy the same or cause Lessor or Lessee to be in default under
any mortgage or deed of trust encumbering the Leased Property or any interest
therein; provided that such legal proceedings (and delay in payment) shall not
otherwise be deemed or construed as relieving, modifying or extending Lessee's
covenants to pay or its covenants to cause to be paid any such charges at the
time and in the manner provided for under this Lease. Upon the reasonable
request of Lessor, Lessee shall provide to Lessor reasonable security
satisfactory to Lessor, in Lessor's reasonable discretion, to assure the payment
of all Claims which may be assessed against the Leased Property together with
interest and penalties, if any, thereon. Lessor agrees to join in any such
proceedings if the same be required to legally prosecute such contest of the
validity of such Claims; provided, however, that Lessor shall not thereby be
subjected to any liability for the payment of any costs or expenses in
connection with any proceedings brought by Lessee; and Lessee covenants to
indemnify and save harmless Lessor from any such costs or expenses. In the event
that Lessee fails to pay any Claims when due or, upon Lessor's request, to
provide the security therefor as provided in this Article XII and to diligently
prosecute any contest of the same, Lessor may, upon thirty (30) days advance
written Notice to Lessee, pay such charges together with any interest and
penalties and the same shall be repayable by Lessee to Lessor at the next
Payment Date provided for in this Lease. Provided, however, that should Lessor
reasonably determine that the giving of such Notice would risk loss to the
Leased Property or cause damage to Lessor, then Lessor shall give such written
Notice as is practical under the circumstances. Lessee shall be entitled to any
refund of any Claims and such charges and penalties or interest thereon which
have been paid by Lessee or paid by Lessor and for which Lessor has been fully
reimbursed.
ARTICLE XIII
13.1 General Insurance Requirements. Subject to the provisions
of Paragraph 13.8, during the Term, Lessee shall at all times keep the Leased
Property, and all property located in or on the Leased Property, including
Lessee's Personal Property, insured with the kinds and amounts of insurance
described below. This insurance shall be written by companies authorized to do
insurance business in the state in which the Leased Property is located. The
policies must name Lessor as a loss payee and additional insured. Losses shall
be payable to Lessor or Lessee as provided in Article XIV. In addition, upon
Lessor's written request, the policies shall name as mortgagee, loss payee and
additional insured the holder ("Facility Mortgagee") of any mortgage, deed of
trust or other security agreement and any other Encumbrance placed on
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the Leased Property in accordance with the provisions of Article XXXII
("Facility Mortgage") by way of a standard form of mortgagee's loss payable
endorsement. Any loss adjustment shall require the written consent of Lessor,
Lessee, and each Facility Mortgagee. Evidence of insurance shall be deposited
with Lessor and, if requested, with any Facility Mortgagee(s). If any provision
of any Facility Mortgage requires deposits of premiums for insurance to be made
with such Facility Mortgagee, or, pursuant to written direction by Lessor upon
the occurrence of any Event of Default hereunder (and irrespective of whether
such Event of Default is continuing or has been cured), Lessee shall make such
deposits directly with such Facility Mortgagee or with Lessor, as required,
provided that during any period when such deposits are being made, the Facility
Mortgagee or Lessor (depending on which party collects such deposits) agrees (a)
to pay the premiums on a timely basis, and (b) upon written request from Lessee,
to account to Lessee for all funds then on deposit. The policies on the Leased
Property, including the Leased Improvements, Fixtures and Lessee's Personal
Property, shall insure against the following risks:
13.1.1 Loss or damage by fire, vandalism and malicious
mischief, extended coverage perils commonly known as "All Risk," and all
physical loss perils normally included in such All Risk insurance, including,
but not limited to, sprinkler leakage, in an amount not less than one hundred
percent (100%) of the then full replacement cost thereof (as defined below in
Paragraph 13.2);
13.1.2 Loss or damage by explosion of steam boilers,
pressure vessels or similar apparatus, now or hereafter installed in the
Facility, if any, in such amounts with respect to any one accident as may be
reasonably requested by Lessor from time-to-time;
13.1.3 Loss of rental under a rental value insurance
policy covering risk of loss during the first twelve (12) months of
reconstruction necessitated by the occurrence of any of the hazards described in
Paragraph 13.1.1 or 13.1.2 in an amount sufficient to prevent Lessor from
becoming a co-insurer.
13.1.4 Claims for personal injury or property damage
under a policy of comprehensive general public liability insurance with amounts
not less than __________________________ Dollars ($_____________) per
occurrence, and with an annual aggregate of ________________________ Dollars
($_______________);
13.1.5 Claims arising out of malpractice or other
professional actions or omissions under a policy of professional liability
insurance with amounts not less than ____________________ Dollars
($____________) per occurrence, and with an annual aggregate of
_______________________ Dollars ($______________);
13.1.6 Flood (if the Leased Property is located in
whole or in part within a flood plain area, as designated by any governmental or
other responsible agency and if such insurance is available pursuant to
applicable law) and such other hazards and in such amounts as may be customary
for comparable properties in the area; and
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13.1.7 Any other kinds of insurance, and in such
amounts, as Lessor may reasonably require from time to time to the extent
available in the state where the Leased Property is located.
13.2 Replacement Cost. The term "full replacement cost" as
used herein, shall mean the actual replacement cost of the Leased Property
requiring replacement from time-to-time including an increased cost of
construction endorsement, less exclusions provided in the standard form of fire
insurance policy in the state where the Leased Property is located. Lessor and
Lessee agree that as of the Commencement Date the full replacement cost shall be
deemed to be $_________________. In the event either party believes that full
replacement cost (the then replacement cost less such exclusions) has increased
or decreased at any time during the Term, it shall have the right to have such
full replacement cost redetermined.
13.3 Additional Insurance. In addition to the insurance
described above, Lessee shall maintain such additional insurance as may be
reasonably required from time-to-time by Lessor or any Facility Mortgagee (to
the extent available in the state where the Leased Property is located) and
shall further at all times maintain adequate worker's compensation insurance
coverage for all persons employed by Lessee on the Leased Property. Such
worker's compensation insurance shall be in accordance with the requirements of
applicable federal, state and local law.
13.4 Waiver of Subrogation. All insurance policies carried by
either party covering the Leased Property, the Fixtures, the Facility, or
Lessee's Personal Property including without limitations, contents, fire and
casualty insurance, shall expressly waive any right of subrogation on the part
of the insurer against the other party. The parties hereto agree that their
policies will include such waiver clause or endorsement so long as the same are
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to do
so. Upon written request, each party shall provide the other party with a copy
of each insurance policy with the waiver clause or endorsement attached.
13.5 Form Satisfactory, etc. All of the policies of insurance
referred to in this Article XIII shall be written in a form reasonably
satisfactory to Lessor and by insurance companies reasonably satisfactory to
Lessor. Subject to the foregoing, Lessor agrees that it will not unreasonably
withhold its approval as to the form of the policies of insurance or as to the
insurance companies selected by Lessee. Lessee shall pay all of the premiums
therefor, and deliver such policies or certificates thereof to Lessor prior to
their effective date (and, with respect to any renewal policy, prior to the
expiration of the existing policy), and in the event of the failure of Lessee
either to effect such insurance as herein called for or to pay the premiums
therefor, or to deliver such policies or certificates thereof to Lessor at the
times required, Lessor shall be entitled, but shall have no obligation, to
effect such insurance and pay the premiums therefor, which premiums shall be
repayable by Lessee to Lessor upon written demand therefor, and failure to repay
the same shall constitute an Event of Default within the meaning of Paragraph
16.1(c). Each insurer mentioned in this Article XIII shall agree, by endorsement
on the policy or policies issued by it, or by independent instrument furnished
to Lessor, that will give to Lessor (and to
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any Facility Mortgagee, if required by the same) thirty (30) days written notice
before the policy or policies in questions shall be altered, allowed to expire
or cancel.
13.6 Increase in Limits. In the event that Lessor or a Facility
Mortgagee shall at any reasonable time deem the limits of the personal injury or
property damage public liability insurance then carried to be insufficient,
Lessee shall thereafter carry the insurance with increased limits until further
change pursuant to the provisions of this Paragraph; provided that if Lessor
desires to increase the limits of insurance, and such is not pursuant to the
request of a Facility Mortgagee, then Lessor may not demand an increase in
limits above the limits generally consistent with the requirements of owners of
long term care properties in the State of _________.
13.7 Blanket Policy. Notwithstanding anything to the
contrary contained in this Article XIII, Lessee's obligations to carry the
insurance provided for herein may be brought within the coverage of a so-called
blanket policy or policies of insurance carried and maintained by Lessee;
provided, however, that the coverage afforded Lessor will not be reduced or
diminished or otherwise be different from that which would exist under a
separate policy meeting all other requirements of this Lease by reason of the
use of such blanket policy of insurance, and provided further that the
requirements of this Article XIII are otherwise satisfied.
13.8 No Separate Insurance. Lessee shall not on Lessee's own
initiative or pursuant to the request or requirement of any third party take out
separate insurance concurrent in form or contributing in the event of loss with
that required in this Article, to be furnished or which may reasonably be
required to be furnished, by Lessee or increase the amount of any then existing
insurance by securing any additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including in all cases Lessor and all Facility Mortgagees, are included therein
as additional insureds, and the loss is payable under said insurance in the same
manner as losses are payable under the Lease. Lessee shall immediately notify
Lessor of the taking out of any such separate insurance or of the increasing of
any of the amount of the then existing insurance.
13.9 Continuous Coverage. Lessee was the owner of the Leased
Property prior to the date of this Lease. Therefore, Lessee already has in place
insurance with respect to the Leased Property. Lessee shall assure that there is
no gap in the insurance coverage provided in connection with the Facility at or
after the Commencement Date and, therefore, the insurance provided by Lessee
shall be continuous, with the types and amounts of coverage, described herein to
be applicable on the Commencement Date. To the extent there is not full,
complete and continuous coverage for all issues, no matter when arising, claimed
or occurring, Lessee shall, at its sole cost, obtain such insurance.
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ARTICLE XIV
14.1 Insurance Proceeds. All proceeds payable by reason of any loss
of or damage to the Leased Property, or any portion thereof, which is insured
under any policy of insurance required by Article XIII of the Lease, where the
total proceeds paid by the insurer are less than $____________, shall be paid to
Lessee and applied to the reconstruction or repair, as the case may be, of any
damage to or destruction of the Leased Property, or any portion thereof. All
proceeds payable by reason of any loss of or damage to the Leased Property, or
any portion thereof, which is insured under any policy of insurance required by
Article XIII of this Lease where the total proceeds paid by the insurer are
equal to or in excess of $______________ shall be paid to Lessor and held by
Lessor in trust (subject to the provisions of Paragraph 14.7) and shall be made
available for reconstruction or repair, as the case may be, of any damage to or
destruction of the Leased Property, or any portion thereof, and shall be paid
out by Lessor from time-to-time for the reasonable costs of such reconstruction
or repair. Any excess proceeds of insurance remaining after the completion of
the restoration or reconstruction of the Leased Property shall go to Lessee,
provided the Lease is in force and there exists no uncured Event of Default;
otherwise such excess shall be paid to Lessor for application as set forth in
Article XVI hereof. In the event neither Lessor nor Lessee is required or elects
to repair and restore, and the Lease is terminated as described in Paragraph
14.7, all such insurance proceeds shall be retained by Lessor. All salvage
resulting from any risk covered by insurance shall belong to Lessor except that
any salvage relating to Lessee's Personal Property shall belong to Lessee.
14.2 Reconstruction in the Event of Damage or Destruction Covered by
Insurance Proceeds.
14.2.1 Except as provided in Paragraph 14.7, if during
the Term, the Leased Property is totally or partially destroyed by a risk
covered by the insurance described in Article XIII and whether or not the
Facility thereby is rendered Unsuitable for Its Primary Intended Use, Lessee
shall restore the Leased Property to substantially the same condition as existed
immediately before the damage or destruction. Lessee shall be entitled to the
insurance proceeds for the purpose of such repair and restoration.
14.2.2 If the cost of the repair or restoration exceeds
the amount of proceeds received by Lessee or Lessor from the insurance required
under Article XIII as provided in Paragraph 14.1, above, Lessee shall be
obligated to restore the Leased Property and pay the extra cost therefor,
provided that, prior to commencing the repair and restoration, Lessee shall
either (i) contribute any excess amount needed to restore the Leased Property,
or (ii) provide Lessor with satisfactory evidence that such funds are, and
throughout the entire period of reconstruction will be, available. If Lessee
contributes such excess in cash, such excess shall be paid by Lessee to Lessor
to be held in trust, together with any insurance proceeds, for application to
the cost of repair and restoration.
14.3 Reconstruction in the Event of Damage or Destruction Not
Covered by Insurance. Except as provided in Paragraph 14.7 below, if during the
Term, the Leased Property
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is damaged or destroyed irrespective of the extent of the damage from a risk not
covered by the insurance described in Article XIII, whether or not such damage
or renders the Facility Unsuitable for Its Primary Intended Use, Lessee shall
restore the Leased Property to substantially the same condition it was in
immediately before such damage or destruction and such damage or destruction
shall not terminate this Lease.
14.4 Lessee's Property. All insurance proceeds payable by
reason of any loss of or damage to any of Lessee's Personal Property shall be
paid to Lessee, and Lessee shall hold such insurance proceeds in trust to pay
the cost of repairing or replacing damaged Lessee's Personal Property. Any
proceeds in excess of the cost of repairing or replacing any such Lessee's
Personal Property shall belong to Lessee.
14.5 Restoration of Lessee's Property. Without limiting
Lessee's obligation to restore the Leased Property as provided in Paragraphs
14.2 and 14.3, Lessee shall also pay the cost to restore all Alterations and
other improvements made by Lessee which Lessee elects to restore, including
Lessee's Personal Property to the extent that Lessee's Personal Property is
necessary to the operation of the Leased Property for its Primary Intended Use
in accordance with applicable Legal Requirements.
14.6 No Abatement of Rent. This Lease shall remain in full
force and effect and Lessee's obligation to make rental payments and to pay all
other charges required by this Lease shall remain unabated during any period
required for repair and restoration.
14.7 Damage Near End of Term. Notwithstanding any
provisions of Paragraph 14.2 or 14.3 appearing to be contrary, if damage to or
destruction of the Leased Property occurs during the last twenty-four (24)
months of the Term (in calculating such 24 months, any Extended Terms as to
which Lessee exercised its option prior to the occurrence of such damage or
destruction shall be included), and if such damage or destruction cannot be
fully repaired and restored within three (3) months immediately following the
date of damage or destruction, then Lessor and Lessee shall each have the right
to terminate this Lease by giving written notice to the other within thirty (30)
days after the date of damage or destruction. If the Lease so terminates as
provided in this Paragraph 14.7, and unless the damage or destruction was due to
Lessee's negligent acts or omissions or willful misconduct, Lessee shall have no
responsibility to repair or restore the Leased Property.
14.8 Termination of Option to Extend. Any termination of this
Lease pursuant to this Article XIV shall cause any options to extend the Lease
under Article XVIII to be terminated and without further force or effect.
14.9 Waiver. Lessee hereby waives any statutory rights of
termination which may arise by reason of any damage to or destruction of the
Leased Property which Lessor is obligated to restore or may restore under any of
the provisions of this Lease.
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ARTICLE XV
15. Condemnation.
15.1 Definitions.
15.1.1 "Condemnation" means (a) the exercise of any
governmental power, whether by legal proceedings or otherwise, by a Condemnor;
(b) a voluntary sale or transfer by Lessor to any Condemnor, either under threat
of Condemnation or while legal proceedings for Condemnation are pending.
15.1.2 "Date of Taking" means the date the Condemnor
has the right to possession of the property being condemned.
15.1.3 "Award" means all compensation, sums or anything
of value awarded, paid or received on a total or partial Condemnation.
15.1.4 "Condemnor" means any public or quasi-public
authority, or private corporation or individual, having the power of
Condemnation.
15.2 Parties' Rights and Obligations. If during the Term
there is any taking of all or any part of the Leased Property or any interest in
this Lease by Condemnation, the rights and obligations of the parties shall be
determined by this Article XV.
15.3 Total Condemnation. If title to the fee of the whole of
the Leased Property shall be taken or condemned by any Condemnor, this Lease
shall cease and terminate as of the Date of Condemnation by said Condemnor. If
title to the fee of less than the whole of the Leased Property shall be so taken
or condemned, which nevertheless renders the Leased Property Unsuitable for Its
Primary Intended Use, as reasonably determined by Lessor and Lessee, Lessee and
Lessor shall each have the option by written Notice to the other, at any time at
or prior to the taking of possession by, or the date of vesting of title in,
such Condemnor, whichever first occurs, to terminate this Lease as of the date
of the occurrence of such first event. If such Notice has timely been given,
this Lease shall thereupon cease and terminate. Upon the termination of the
Lease, all Minimum Rent, and Additional Charges paid or payable by Lessee
hereunder shall be apportioned as of the date the Lease terminates.
15.4 Allocation of Portion of Award. The total Award made
with respect to all or any portion of the Leased Property or for loss of rent,
or for loss of business, whether or not beyond the Term of this Lease, or for
the loss of value of the leasehold (including the bonus value of the Lease)
shall be solely the property of and payable to Lessor and Lessee hereby assigns
to Lessor any and all rights in such Award; provided, however, that Lessee shall
be entitled to make a separate claim for the taking of Lessee's Personal
Property and relocation expense as long as any such claim will not in any way
diminish Lessor's Award, or for any other loss that can be awarded to Lessee
separately from Lessor's claim and which will not in any
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respect whatsoever diminish or threaten to diminish the total amounts to be
awarded to Lessor, as set forth above or otherwise. To the extent Lessee's claim
may thereafter reduce Lessor's claim, Lessee shall, and hereby does, assign its
claim to Lessor. In any Condemnation proceedings, each of the Lessor and Lessee
shall seek its own claim in conformity herewith, at its own expense.
15.5 Partial Taking. If title to the fee of less than the whole
of the Leased Property shall be so taken or condemned, and the Leased Property
is still suitable for its Primary Intended Use, as reasonably determined by
Lessor and Lessee, or if Lessee or Lessor shall be so entitled, but shall not
elect to terminate this Lease as provided in Paragraph 15.3 hereof, Lessee, at
its own cost and expense (subject to Lessor's contribution described below),
shall with all reasonable dispatch restore the untaken portion of any Leased
Improvements on the Leased Property so that such Leased Improvements shall
constitute a complete architectural unit of the same general character and
condition (as nearly as may be possible under the circumstances) as the Leased
Improvements existed immediately prior to such Condemnation. Lessor shall
contribute to the cost of restoration that part of its Award specifically
allocated to such restoration, provided, however, the amount of such
contribution shall not exceed the cost of restoration. The Minimum Rent shall be
reduced as set forth in Paragraph 5.2.
15.6 Temporary Taking. Lessee agrees that if, at any time
after the date hereof, the whole or any part of the Leased Property or of
Lessee's interest under this Lease, shall be Condemned by any Condemnor for its
temporary use or occupancy, this Lease shall not terminate by reason thereof,
and Lessee shall continue to pay, in the manner and at the times herein
specified, the full amounts of Minimum Rent and Additional Charges. Except only
to the extent that Lessee may be prevented from doing so pursuant to the terms
of the order of the Condemnor, Lessee shall also continue to perform and observe
all of the other terms, covenants, conditions and obligations hereof, on the
part of the Lessee to be performed and observed, as though such Condemnation had
not occurred. In the event of any such Condemnation as in this Paragraph 15.6
described, the entire amount of any such Award made for such temporary use,
whether paid by way of damages, rent or otherwise, shall be paid to Lessee to
the extent attributable to any period within the Initial Term (as extended by
any already exercised options to extend). Lessee covenants that upon the
termination of any such period of temporary use or occupancy as set forth in
this Paragraph 15.6, it will, at its sole cost and expense, restore the Leased
Property as nearly as may be reasonably possible, to the condition in which the
same was immediately prior to the Condemnation, unless such period of temporary
use or occupancy shall extend beyond the expiration of the Term, in which case
Lessee shall not be required to make such restoration, and in such case, Lessee
shall contribute to the cost of such restoration that portion of its entire
Award which is specifically allocated to such restoration in the judgment or
order of the court, if any.
ARTICLE XVI
16.1 Events of Default. Any one or more of the following
events shall be an "Event of Default":
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(a) if Lessee fails to make payment of the Rent payable by
Lessee under this Lease when the same becomes due and payable and such failure
is not cured by Lessee within a period of three (3) business days after Notice
thereof from Lessor; or
(b) if Lessee fails to observe or perform any other term,
covenant or condition of this Lease and such failure is not cured by Lessee
within a period of thirty (30) days after Notice thereof from Lessor, unless
such failure cannot with due diligence be cured within a period of thirty (30)
days, in which case such failure shall not be deemed an Event of Default if
Lessee proceeds promptly and with due diligence to cure the failure and
diligently completes the curing thereof. No Event of Default (other than a
failure to make payment of money) shall be deemed to exist under this clause (b)
during any time the curing thereof is prevented by an Unavoidable Delay,
provided that upon the cessation of such Unavoidable Delay, Lessee shall remedy
such default without further delay; or
(c) if Lessee fails to make payment of rent or other sums
payable by Lessee, or fails to observe or perform any other term, covenant or
condition to be performed by Lessee, as and when the same becomes due and
payable and after expiration of applicable notice and cure periods, under the
Related Lease and/or any of the Other Leases; or
(d) if Lessee does any of the following:
(i) admit in writing its inability to pay its
debts generally as they become due;
(ii) file a petition in bankruptcy or a
petition to take advantage of any
insolvency law;
(iii) make a general assignment for the benefit
of its creditors;
(iv) consent to the appointment of a receiver
of itself or of the whole or any
substantial part of its property; or
(v) file a petition or answer seeking
reorganization or arrangement under the
Federal bankruptcy laws or any other
applicable law or statute of the United
States of America or any state thereof;
or
(e) if Lessee, on a petition in bankruptcy filed against it, is
adjudicated a bankrupt or an order for relief thereunder is entered against it
or a court of competent jurisdiction shall enter an order or decree appointing,
without the consent of Lessee, a receiver for Lessee or of the whole or
substantially all of its property or the Facility, or approving a petition filed
against Lessee seeking reorganization or arrangement of Lessee under the Federal
bankruptcy laws or other applicable law or statute of the United States of
America or any state
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thereof, and such judgment, order or decree shall not be vacated or set
aside within ninety (90) days from the date of the entry thereof; or
(f) if Lessee shall be liquidated or dissolved, or shall begin
proceedings toward such liquidation or dissolution, or shall, in any manner,
permit the sale or divestiture of substantially all of its assets other than in
connection with a merger or consolidation of Lessee into, or a sale of
substantially all of Lessee's assets to, another corporation, provided any such
actions shall also constitute an Event of Default unless: (i) the survivor of
such merger or the purchaser of such assets shall assume all of Lessee's
obligations under this Lease by a written instrument, in form and substance
reasonably satisfactory to Lessor, stating that such instrument of assumption is
valid, binding and enforceable against the parties thereto in accordance with
its terms (subject to usual bankruptcy and other creditor's rights exceptions);
and (ii) immediately after giving effect to any such merger, consolidation or
sale, Lessee or the other corporation (if not Lessee) surviving the same shall
have a Consolidated Net Worth of not less than 75% of the Consolidated Net Worth
of Lessee immediately prior to such merger, consolidation or sale, all as to be
set forth in an Officer's Certificate and delivered to Lessor within a
reasonable period of time after such merger, consolidation or sale; or
(g) if the estate or interest of Lessee in the Leased Property
or any part thereof be levied upon or attached in a proceeding and the same
shall not be vacated or discharged within the later of ninety (90) days after
commencement thereof or thirty (30) days after Notice thereof from Lessor
(unless Lessee shall be contesting such lien or attachment in good faith in
accordance with Article XII hereof), or a mechanic's or similar lien is filed
with respect to the Leased Property and is not released or bonded around for a
period exceeding sixty (60) days after Lessee first has knowledge of the same;
or
(h) if, except as a result of damage, destruction or a partial
or total Condemnation, or Unavoidable Delay, Lessee voluntarily ceases
operations on the Leased Property for a period in excess of ten (10) days;
provided that Lessee may cease operations for more than ten (10) days (i) if
Lessee obtains Lessor's prior written approval, and (ii) so long as such
cessation of operations does not impair or threaten the status or effectiveness
of the operating license or other certification for operating the Facility in
accordance with its Primary Intended Use; or
(i) if any of Lessee's representations or warranties expressly
set forth in this Lease (or financial statements provided to Lessor) proves to
be untrue when made in any material respect which materially and adversely
affects Lessor; or
(j) if Lessee (or any of its Affiliates) commits an "Event of
Default" under any other lease between Lessor (or any of its Affiliates) and
Lessee (or any of its Affiliates). Without limiting the foregoing, if Lessee
commits an "Event of Default" under this Lease, Lessee (or any of its
Affiliates) shall thereby be in default (and shall therefore have committed an
"Event of Default") under all other leases between Lessor (or any of its
Affiliates) and Lessee (or any of its Affiliates); or
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(k) if Lessee attempts to assign or sublease, in violation of
the provisions of this Lease; or
(l) if Lessee fails to obtain the operator's license required to
operate the Facility within a period of thirty (30) days after the date hereof,
or if Lessee otherwise ceases to maintain in effect any License, permit,
certificate or approval necessary or otherwise required to operate the Facility
in accordance with its Primary Intended Use.
Upon the occurrence of an Event of Default, in addition to all
of Lessor's other remedies, Lessor may terminate this Lease by giving Lessee not
less than ten (10) business days Notice of such termination and upon the
expiration of the time fixed in such Notice, the Term shall terminate and all
rights of Lessee under this Lease shall cease.
In the event litigation is commenced with respect to any alleged
default under this Lease, the prevailing party in such litigation shall receive,
in addition to its damages incurred, such sum as the court shall determine as
its reasonable attorneys' fees, and all costs and expenses incurred in
connection therewith, including reasonable attorneys' fees and costs incurred on
appeal.
16.2 Remedies. Lessor shall have remedies and rights provided in law and
equity as a result of an Event of Default or Lessee's other breach under this
Lease. Without limiting the foregoing, if an Event of Default occurs (and the
event giving rise to such Event of Default has not been cured within the
curative period relating thereto as set forth in Paragraph 16.1 above) whether
or not this Lease has been terminated pursuant to Paragraph 16.1, Lessee shall,
to the extent permitted by law, and if required by Lessor to so do, immediately
surrender to Lessor the Leased Property pursuant to the provisions of Paragraph
16.1 and quit the same and Lessor may enter upon and repossess the Leased
Property by reasonable force, summary proceedings, ejectment or otherwise, and
may remove Lessee and all other persons and any and all personal property from
the Leased Property subject to rights of any residents (and their property) and
to any requirements of law. Without limiting all other rights and remedies of
Lessor under this Lease and under law, Lessor shall have the right to accelerate
all Rent (including Minimum Rent and) and therefore, upon Lessee's default, at
Lessor's option, all such Rent shall become immediately due and payable in
accordance with Paragraph 16.3, below. Further, without limiting all other
rights and remedies of Lessor under this Lease and under law, Lessor shall be
entitled to recover from Lessee, and Lessee shall therefore be liable for, all
costs of renovating the Leased Premises for a new Lessee and all other costs of
re-leasing, including, but not limited to, broker's commissions, except as
limited by Paragraph 16.3 below.
16.3 Certain Remedies and Damages. Upon the occurrence of an
Event of Default, Lessor shall have the option to pursue any one or more of the
following remedies without notice:
(a) Lessor may terminate this Lease and forthwith repossess the
Leased Property, and Lessee shall pay to Lessor the sum of (i) all Rent accrued
hereunder to the date of
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such termination, (ii) costs incurred by Lessor in connection with reletting the
whole or any part of the Leased Property, (iii) the cost of removing and storing
Lessee's or any other occupant's property, (iv) the costs of repairing,
altering, remodeling or otherwise putting the Leased Property into condition
acceptable to a new tenant or tenants, (v) all reasonable expenses incurred by
Lessor's remedies, including reasonable attorneys' fees and court costs, plus
(vi) as liquidated damages, an amount equal to the then present value of the
Rent and all other indebtedness as would otherwise have been required to be paid
by Lessee to Lessor during the period following the termination of the Term
measured from the date of such termination to the expiration date stated in this
Lease, less the then present fair market rental value of the Leased Property for
such period.
(b) Lessor may terminate Lessee's right of possession (but not
this Lease) and may repossess the Leased Property by forcible entry and detainer
suit or otherwise, without thereby releasing Lessee from any liability hereunder
and without demand or notice of any kind to Lessee and without terminating this
Lease, in which event Lessor may, but shall be under no obligation to do so,
relet the same for the account of Lessee for such rent and upon such terms as
shall be satisfactory to Lessor. For the purpose of such reletting Lessor is
authorized to decorate or to make any repairs, changes, alterations or additions
in or to the Leased Property as may be reasonably necessary or desirable, and
(i) if Lessor shall fail or refuse to relet the Leased Property, or (ii) if the
same are relet and a sufficient sum shall not be realized from such reletting
after first deducting therefrom, for retention by Lessor, the unpaid rent due
hereunder earned but unpaid at the time of reletting plus interest thereon at
the Overdue Rate, the cost of recovering possession (including reasonable
attorneys' fees and costs of suit), all of the costs and expenses of such
decorations, repairs, changes, alterations, and additions, the expense of such
reletting (including, without limitation, brokerage fees and reasonable
attorneys' fees) and the cost of collection of the rent accruing therefrom to
satisfy the rent provided for in this Lease to be paid, then (A) Lessee shall
pay to Lessor as damages a sum equal to the amount of the Minimum Rent under
this Lease for such period or periods, plus the cost of recovering possession of
the Leased Property (including reasonable attorneys' fees and costs of suit),
the unpaid Rent earned at the time of repossession plus interest thereon at the
Overdue Rate,and the costs incurred in any attempt by Lessor to relet the Leased
Property, or (B) if the Leased Property has been relet, the Lessee shall satisfy
and pay any such deficiency. Any such payments due Lessor shall be made upon
demand therefor from time to time and Lessee agrees that Lessor may file suit to
recover any sums falling due under the terms of this section from time to time.
Such reletting shall not be construed as an election on the part of Lessor to
terminate this Lease unless a written notice of such intention be given to
Lessee by Lessor. Notwithstanding any such reletting without termination, Lessor
may at any time thereafter elect to terminate this Lease for such previous
breach.
(c) Enter upon the Leased Property, by force if necessary,
without terminating this Lease and without being liable for prosecution or for
any claim for damages therefor, and do whatever Lessee is obligated to do under
the terms of this Lease. Lessee agrees to pay Lessor on demand for expenses
which Lessor may incur in thus effecting compliance with Lessee's obligations
under this Lease, together with interest thereon at the Overdue Rate from the
date
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expended until paid. Lessor shall not be liable for any damages resulting
to Lessee from such action, whether caused by negligence of Lessor or otherwise.
Exercise by Lessor of any one or more remedies hereunder granted
or otherwise available shall not be deemed to be an acceptance of surrender of
the Leased Property by Lessor, whether by agreement or by operation of law, it
being understood that such surrender can be effected only by the written
agreement of Lessor and Lessee. Lessee and Lessor further agree that forbearance
by Lessor to enforce its rights pursuant to the Lease, at law or in equity,
shall not be a waiver of Lessor's right to enforce one or more of its rights in
connection with any subsequent default.
16.4 Waiver. If this Lease is terminated pursuant to
Paragraph 16.1, Lessee waives, to the extent permitted by applicable law, the
benefit of any laws now or hereafter in force exempting property from liability
for rent or for debt.
16.5 Application of Funds. Any payments received by Lessor
under any of the provisions of this Lease during the existence or continuance of
any Event of Default shall be applied to Lessee's obligations in the order which
Lessor may determine or as may be prescribed by the laws of the State of
________.
ARTICLE XVII
17. Lessor's Right to Cure Lessee's Default. If Lessee fails to make any
payment or to perform any act required to be made or performed under this Lease,
and to cure the same within the relevant time periods, if any, provided under
this Lease, Lessor, after thirty (30) days Notice to and demand upon Lessee, and
without waiving or releasing any obligation of Lessee or default, may (but shall
be under no obligation to) at any time thereafter make such payment or perform
such act for the account and at the expense of Lessee, and may, to the extent
permitted by law, enter upon the Leased Property for such purpose and take all
such action thereon as, in Lessor's opinion, may be necessary or appropriate
therefor. Provided, however, that should Lessor reasonably determine that the
giving of such Notice would risk loss to the Leased Property or caused damage to
Lessor, then Lessor shall give such written Notice as is practical under the
circumstances. No such entry shall be deemed an eviction of Lessee. In
exercising any remedy under this Article XVII, Lessor shall use its good faith
efforts not to violate any rights of residents of the Facility. All sums so paid
by Lessor and all costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses, in each case) so incurred, together with a late
charge thereon (to the extent permitted by law) at the Overdue Rate from the
date on which sums or expenses are paid or incurred by Lessor, shall be paid by
Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor
contained in this Article shall survive the expiration or earlier termination of
this Lease.
ARTICLE XVIII
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18.1 Options to Extend. Provided there exists no uncured Event
under any of this Lease, the Related Lease and the Other Leases at the time
Lessee exercises any option to extend (in accordance with this Article XVIII),
Lessee will have the right to extend this Lease for two (2) periods of five (5)
years each (each such additional term shall be referred to herein as an
"Extended Term"), commencing immediately following the end of the Initial Term
or the immediately preceding Extended Term, as the case may be; provided,
however, that notwithstanding anything stated in this Paragraph 18.1 or
elsewhere in this Lease, Lessee shall not be entitled to exercise its option to
extend this Lease for any Extended Term (and any such option to extend shall
automatically expire and terminate) unless Lessee concurrently exercises its
option to extend the Related Lease and all the Other Leases for the same period,
as provided in Article XVIII of the Related Lease and the Other Leases. The
Lease during any Extended Term shall be on the same terms and conditions as
during the Initial Term, except that the Minimum Rent shall be determined as set
forth in Paragraph 18.2 below. In the event Lessee desires to exercise any
option to extend granted in this Article XVIII, Lessee shall give Landlord
written notice ("Notice to Extend") not less than one hundred eighty (180) days
prior to the expiration of the Initial Term or the immediately preceding
Extended Term, as the case may be. If Lessee fails to give Landlord any such
notice, then such option to extend and all future options to extend granted in
this Article XVIII shall be null and void and of no further force or effect.
18.2 Minimum Rent During Extended Terms. The Minimum Rent at
the commencement of each Extended Term shall be the Adjusted Rent, as determined
below.
(a) The Adjusted Rent for the first Extended Term shall
be the higher of: (i) the Minimum Rent at the rate paid immediately preceding
the first Extended Term, increased by two percent (2%); and (ii) the Minimum
Rent at the rate that was payable as of the Commencement Date of this Lease (as
adjusted, if applicable, on the Other Lease Adjustment Date), multiplied by a
fraction the numerator of which shall be the "C.P.I." (defined in Paragraph 3.2
of this Lease) of the calendar month during which the Notice of Extend was given
to Lessor, and the denominator of which shall be the C.P.I. for the calendar
month of the Commencement Date of the Initial Term.
(b) The Adjusted Rent for the second Extended Term shall
be the higher of: (i) the Minimum Rent at the rate paid immediately preceding
the second Extended Term, increased by two percent (2%); and (ii) the Fair
Market Rent, as determined below.
(c) If Lessor and Lessee cannot agree on the Fair
Market Rent within thirty (30) days after the date of the Notice to Extend for
the second Extended Term, each party shall, by notice to the other, appoint a
disinterested and licensed M.A.I. Real Estate Appraiser with at least five years
of experience in assisted care properties in __________ (with the same type of
operating license and as that in effect for the Facility) to determine the Fair
Market Rent. If any party should fail to appoint an appraiser within ten (10)
days after notice, the appraiser selected by the other party shall determine the
Fair Market Rent. In determining the Fair Market Rent, each appraiser shall give
appropriate consideration to, among other things, generally
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applicable Minimum Rent for tenancies of property comparable to the Leased
Property in the area in which the Leased Property is located.
(d) If the two appraisers selected pursuant to
Paragraph 18.2(a) above, cannot agree upon the Fair Market Rent within _________
(___) days, they shall immediately give written notice of such inability
("Notice of Disagreement") to both Lessor and Lessee setting forth the Fair
Market Rent determinations of each of the appraisers. If the determinations of
each of the two appraisers of the Fair Market Rent at the commencement of such
second Extended Term differ by less than ten percent (10%) of the lower
determination, the Fair Market Rent shall be fixed at an amount equal to the
average of the two determinations.
(e) If the determinations of each of the two
appraisers selected pursuant to Paragraph 18.2(c), above, differ by ten percent
(10%) or more of the lower determination with respect to the Fair Market Rent to
be paid at the commencement of such second Extended Term, then within thirty
(30) days after the giving of the Notice of Disagreement, the two appraisers
shall appoint a third disinterested and licensed M.A.I. Real Estate Appraiser
with at least 5 years of experience in Texas appraising assisted care properties
in _________ (with the same type of operating license and as that in effect for
the Facility). If the parties cannot then agree on the Fair Market Rent, the
third appraiser shall determine the Fair Market Rent, and in so doing, shall
give appropriate consideration to those items described in Paragraph 18.2(c).
The third appraiser shall not select a Fair Market Value either (a) higher than
the highest of the two appraisals made pursuant to Paragraph 18.2(c); or (b)
lower than the lowest of the two appraisals made pursuant to Paragraph 18.2(c),
above. If the first two appraisers cannot agree on the selection of a third
appraiser within such thirty (30) days, or if the first two appraisers fail to
provide a Notice of Disagreement (as stated above in Paragraph 18.2(d), above,
then the Fair Market Rent shall be determined by a third appraiser selected by
the American Arbitration Association (or such other organization at Lessor's
election) upon application by Lessor.
(f) During the time before the availability of the
C.P.I. or the determination of the Fair Market Rent, as applicable, Lessee shall
continue to pay Minimum Rent at the same rate as paid immediately preceding the
subject Extended Term; provided, however, that, once the Adjusted Rent is
determined, the Minimum Rent owed by Lessee at the Adjusted Rent shall be
effective retroactively as of the first day of such Extended Term. If, after the
Minimum Rent for an Extended Term is adjusted and applied retroactively as of
the first day of such Extended Term, it is determined that additional Minimum
Rent is due Lessor, the aggregate amount of any such additional Minimum Rent
shall be paid to Lessor within thirty (30) days of the determination of the
Adjusted Rent for such Extended Term.
(g) Each of the parties shall pay the fees of the
appraiser that it selects pursuant to Paragraph 18.2(c), above, and shall
equally share the cost of the third appraiser, if necessary, and shall equally
share the cost of arbitration (excluding attorneys' fees), if necessary.
ARTICLE XIX
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19. Holding Over. If Lessee shall for any reason remain in
possession of the Leased Property after the expiration of the Term or earlier
termination of the Term hereof, such possession shall be as a month-to-month
tenant during which time Lessee shall pay as rental each month, one and one-half
times the aggregate of (i) one-twelfth of the aggregate Minimum Rent payable
with respect to the last Lease Year of the Term; (ii) all Additional Charges
accruing during the month; and (iii) all other sums payable by Lessee pursuant
to the provisions of this Lease. During such period of month-to-month tenancy,
Lessee shall be obligated to perform and observe all of the terms, covenants and
conditions of this Lease, but shall have no rights hereunder other than the
right, to the extent given by law to month-to-month tenancies, to continue its
occupancy and use of the Leased Property. Nothing contained herein shall
constitute the consent, express or implied, of Lessor to the holding over of
Lessee after the expiration or earlier termination of this Lease.
ARTICLE XX
20. Risk of Loss. During the Term of this Lease, the risk of loss
or of decrease in the enjoyment and beneficial use of the Leased Property in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures,
attachments, levies or executions (other than those caused by or through Lessor)
is assumed by Lessee, and Lessor shall in no event be answerable or accountable
therefor, nor shall any of the events mentioned in this Paragraph entitle Lessee
to any abatement of Rent except as specifically provided in this Lease, or any
right to terminate this Lease, except as provided in Paragraph 14.7, above.
Without limiting the foregoing, Lessor shall not be liable for injury or damage
to the person or goods, wares, merchandise or other property of Lessee, Lessee's
employees, contractors, invitees, customers, or any other person in or about the
Leased Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, air conditioning, or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Leased Premises or upon other portions of the Land, or any part thereof, or from
other sources or places, and regardless of whether the cause of such damage or
injury or the means of repairing the same is accessible or not. Lessor shall not
be liable for any damages arising from any act or neglect of Lessee, or any
other party named above. Lessor shall, however, remain liable for any damages
arising from Lessor's own gross negligence or willful misconduct.
ARTICLE XXI
21. Indemnification. Notwithstanding the existence of any insurance
provided for in Article XIII, and without regard to the policy limits of any
such insurance, Lessee will protect, indemnify, hold harmless and defend Lessor
from and against all liabilities, obligations, claims, demands damages,
penalties, causes of action, costs, and expenses (including, without
limitation, actual reasonable attorneys' fees and expenses), to the extent
permitted by law, imposed upon or incurred by or asserted against Lessor by
reason of any of the following (except to the extent solely attributable to
Lessor's gross negligence or willful misconduct): (a) any
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accident, injury to or death of persons or loss of or damage to property
occurring on or about the Leased Property or adjoining sidewalks, including
without limitation any claims of malpractice, whether arising in connection with
events occurring prior to or after the Commencement Date hereunder (except to
the extent such events occur after the expiration of this Lease); (b) any
occupancy, use, misuse, non-use, condition, maintenance, or repair by Lessee of
the Leased Property; (c) any Impositions (which are the obligations of Lessee to
pay pursuant to the applicable provisions of this Lease, which include any
Impositions arising prior to the Commencement Date); (d) any failure on the part
of Lessee to perform or comply with any of the terms of this Lease, (e) the non-
performance of any of the terms and provisions of any and all existing and
future subleases of the Leased Property to be performed by the landlord (Lessee)
thereunder; (f) any Hazardous Materials, as defined in Paragraph 10.2, above
that now or hereafter during the Term may be located in, on or around, or
affecting, any part of the Land or Leased Improvements; (g) any and all other
matters pertaining to the Leased Property after the date of this Lease during
the Term; and (h) any liability relating to the construction or development of
the Facility, whether arising in connection with events occurring prior to or
after the Commencement Date hereunder. Any amounts which became payable by
Lessee under this Paragraph shall be paid within ten (10) days of the date the
same becomes due and if not timely paid, shall bear a late charge (to the extent
permitted by law) at the Overdue Rate from the date of such determination to the
date of payment. Lessee, at its expense, shall contest, resist and defend any
such claim, action or proceeding asserted or instituted against Lessor or may
compromise or otherwise dispose of the same as Lessee sees fit, at Lessee's sole
cost, but after consultation with and approval by Lessor, which approval shall
not be unreasonably withheld or delayed. Nothing herein shall be construed as
indemnifying Lessor against its own gross negligence or willful misconduct.
Lessee's liability for a breach of the provisions of this article arising during
the Term hereof shall survive any termination of this Lease.
ARTICLE XXII
22. Subletting and Assignment. Lessee may not assign, sublease or
sublet, encumber, appropriate, pledge or otherwise transfer, the Lease or the
leasehold or other interest in the Leased Property without Lessor's prior
written consent, which consent shall not be unreasonably be withheld; provided,
however, that Lessee may from time to time during the Term of this Lease enter
into rental agreements with residents of the Facility, and execute any documents
necessary in connection therewith, without obtaining Lessor's prior consent.
Upon Lessor's consent, (a) in the case of a subletting, the sublessee shall
comply with the provisions of Paragraph 22.2, (b) in the case of an assignment,
the assignee shall assume in writing and agree to keep and perform all of the
terms of this Lease on the part of Lessee to be kept and performed and shall be,
and become, jointly and severally liable with Lessee for the performance
thereof, (c) an original counterpart of each sublease and assignment and
assumption, duly executed by Lessee and such sublessee or assignee, as the case
may be, in form and substance satisfactory to Lessor, shall be delivered
promptly to Lessor, and (d) in case of either an assignment or subletting,
Lessee shall remain primarily liable, as principal rather than as surety, for
the prompt payment of the Rent and for the performance and observance of all of
the covenants and conditions to be performed by Lessee hereunder.
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22.1 Attornment. Lessee shall insert in each sublease permitted
under Paragraph 22 provisions to that effect that (i) such sublease is subject
and subordinate to all of the terms and provisions of this Lease and to the
rights of Lessor hereunder; (ii) in the event this Lease shall terminate before
the expiration of such sublease, the sublessee thereunder will, at Lessor's
option, attorn to Lessor and waive any right the sublessee may have to terminate
the sublease or to surrender possession thereunder, as a result of the
termination of this Lease; and (iii) in the event the sublessee receives a
written Notice from Lessor or Lessor's assignees, if any, stating that Lessee is
in default under this Lease, the sublessee shall thereafter be obligated to pay
all rentals accruing under said sublease directly to the party giving such
Notice, or as such party may direct. All rents received from the sublessee by
Lessor or Lessor's assignees, if any, as the case may be, shall be credited
against amounts owing by Lessee under this Lease.
22.2 Sublease Limitation. Anything contained in this Lease
to the contrary notwithstanding, Lessee shall not sublet the Leased Property on
any basis such that the rental to be paid by the sublessee thereunder would be
based, in whole or in part, on either (i) the income or profits derived by the
business activities of the sublessee; or (ii) any other formula such that any
portion of the sublease rental received by Lessor would fail to qualify as
"rents from real property" within the meaning of Paragraph 856(d) of the Code,
or any similar or successor provision thereto.
ARTICLE XXIII
23. Officer's Certificates and Financial Statements.
(a) At any time from time-to-time upon not less than
twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an Officer's
Certificate certifying that this Lease unmodified and in full force and effect
(or that this Lease is in full force and effect as modified and setting forth
the modifications), the date to which the Rent has been paid and such other
information concerning this Lease as may be reasonably requested by Lessor. Any
such certificate furnished pursuant to this Paragraph may be relied upon by
Lessor and any prospective purchaser or lender of the Leased Property.
(b) In addition to all other obligations to provide
financial information contained in the Lease, Lessee will furnish the following
statements to Lessor:
(i) within one hundred twenty (120) days after
the end of each Lease Year, an Officer's Certificate stating that to the best of
the signer's knowledge and belief after making reasonable inquiry, Lessee is not
in default in the performance or observance of any of the terms of this Lease,
or if Lessee shall be in default to its knowledge, specifying all such defaults,
the nature thereof, and the steps being taken to remedy the same, and
(ii) with reasonable promptness, such other
information respecting the financial condition and affairs of Lessee as Lessor
may reasonably request from time-to-time.
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(c) Within ninety (90) days after the end of each Fiscal
Year, Lessee agrees to provide to Lessor Consolidated Financials of Lessee for
such Fiscal Year.
ARTICLE XXIV
24. Lessor's Right to Inspect. Lessee shall permit Lessor and its
authorized representatives to inspect the Leased Property on at least one
Business Day's prior notice during usual business hours subject to any
security, health, safety, or confidentiality requirements of Lessee or any
governmental agency or insurance requirement relating to the Leased Property,
or imposed by law or applicable regulations. Lessor shall take reasonable
steps to avoid interference with the residents.
ARTICLE XXV
25. No Waiver. The waiver by Lessor or Lessee of any term, covenant
or condition in this Lease shall not be deemed to be a waiver of any other term,
covenant or condition or any subsequent waiver of the same or any other term,
covenant or condition contained in this Lease. The subsequent acceptance of rent
hereunder by Lessor or any payment by Lessee shall not be deemed to be a waiver
of any preceding default of any term, covenant or condition of this Lease, other
than the failure to pay the particular amount so received and accepted,
regardless of the knowledge of any preceding default at the time of the receipt
or acceptance.
ARTICLE XXVI
26. Remedies Cumulative. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of Lessor now or hereafter
provided either in this Lease or by statute or otherwise shall be cumulative and
concurrent and shall be in addition to every other right, power and remedy and
the exercise or beginning of the exercise by Lessor of any one or more of such
rights, powers and remedies shall not preclude the simultaneous or subsequent
exercise by Lessor of any or all of such other rights, powers and remedies.
ARTICLE XXVII
27. Acceptance of Surrender. No surrender to Lessor of this Lease
or of the Leased Property or any part thereof, or of any interest therein, shall
be valid or effective unless agreed to and accepted in writing by Lessor and no
act by Lessor or any representative or agent of Lessor, other than such a
written acceptance by Lessor, shall constitute an acceptance of any such
surrender.
ARTICLE XXVIII
28. No Merger of Title. There shall be no merger of this Lease or of
the leasehold estate created hereby by reason of the fact that the same person,
firm, corporation, or
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other entity may acquire, own or hold, directly or indirectly, (a) this Lease or
the leasehold estate created hereby or any interest in this Lease or such
leasehold estate; and (b) the fee estate in the Leased Property.
ARTICLE XXIX
29. Conveyance by Lessor. If Lessor or any successor owner of the
Leased Property shall transfer or assign Lessor's title or interest in the
Leased Property or this Lease other than as security for a debt, and provided
the new owner has agreed in writing for the benefit of Lessee to recognize this
Lease and be bound by all of the terms and conditions hereof, Lessor shall
thereupon be released from all future liabilities and obligations of Lessor
under this Lease arising or accruing from and after the date of such transfer or
assignment and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
ARTICLE XXX
30. Quiet Enjoyment. So long as Lessee shall pay all Rent as the
same becomes due and shall comply with all of the terms of this Lease and
perform its obligations hereunder, and except for any claims, actions, liens or
encumbrances arising from the acts or omissions of Lessee or otherwise from
events occurring prior to the Commencement Date hereunder, Lessee shall
peaceably and quietly have, hold and enjoy the Leased Property for the Term
hereof, free of any claim or other action by Lessor or anyone claiming by,
through or under Lessor, but subject to all liens and encumbrances of record as
of the date hereof or hereafter consented to by Lessee. Except as otherwise
provided in this Lease, no failure by Lessor to comply with the foregoing
covenant or any covenant of this Lease shall give Lessee any right to abate,
reduce or made a deduction from or offset against the Rent or any other sum
payable under this Lease, or to fail to perform any other obligation of Lessee
hereunder.
ARTICLE XXXI
31. Notices. All notices, demands, requests, consents, approvals,
and other communications ("Notice" or "Notices") hereunder shall be in writing
and personally served upon an Executive Officer of the party being served or
mailed (by registered or certified mail, return receipt requested and postage
prepaid), overnight delivery service addressed to the respective parties, as
follows:
(a) If to Lessee: Assisted Living Concepts, Inc. 9955
S.E. Washington, Suite
201 Portland, Oregon
97216 Attention: Chief
Financial Officer
with a copy to: Snell & Smith1000 Louisiana,
Suite 3650 Houston, TX 77002
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<PAGE>
Attention: James W. Smith, Jr. Esq.
(b) If to Lessor: Texas-LTC Limited Partnership
c/o LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: William McBride III
with a copy to: Law Offices of Pamela J. Privett
300 Esplanade Drive, Suite 1865
Oxnard, California 93030
Attention: Pamela J. Privett, Esq.
and: Stern, Neubauer, Greenwald & Pauly
1299 Ocean Avenue, Tenth Floor
Santa Monica, CA 904011007
Attention: Dennis L. Greenwald, Esq.
or to such other address as either party may hereafter designate by a Notice
pursuant to this Paragraph. Personally delivered Notice (including Notices
sent by overnight delivery service) shall be effective upon receipt, and Notice
given by mail shall be completed five (5) days after the time of deposit in the
U.S. Mail system. For the purposes hereof, the term "Executive Officer" shall
mean the Chairman of the Board of Directors, the President, any Vice President,
or the Secretary of the corporation upon which service is to be made.
ARTICLE XXXII
32.1 Lessor May Grant Liens. Lessor may, subject to the terms
and conditions set forth below in this Paragraph 32.1, from time-to-time,
directly or indirectly, create or otherwise cause to exist any lien or
encumbrance or any other change of title ("Encumbrance") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such Encumbrance shall
contain the right to prepay (whether or not subject to a prepayment penalty) and
shall provide that it is subject to the rights of Lessee under this Lease,
provided that any holder of an Encumbrance shall (a) give Lessee the same
notice, if any, given to Lessor of any default or acceleration of any obligation
underlying any such mortgage or any sale in foreclosure under such mortgage; (b)
permit Lessee to cure any such default on Lessor's behalf within any applicable
cure period, and Lessee shall be reimbursed by Lessor or shall be entitled to
offset against Minimum Rent payments next accruing or coming due for any and all
costs incurred in effecting such cure, including, without limitation, out-of-
pocket costs incurred to effect any such cure (including reasonable attorneys'
fees); (c) permit Lessee to appear and to bid at any sale in foreclosure made
with respect to any such mortgage, and (d) provide that in the event of
foreclosure or other possession of the Leased Property by the Mortgagee, that
the Mortgagee shall be bound by the terms and provisions of this lease. Upon the
reasonable request of Lessor, Lessee shall execute
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<PAGE>
an agreement to the effect that this Lease shall be subject and subordinate to
the lien of a new mortgage on the Leased Property and that in the event of any
default or foreclosure under such mortgage, Lessee shall attorn to the new
mortgagee, and as otherwise requested by Lessor; provided that the proposed
mortgagee execute a non-disturbance agreement recognizing this Lease and
agreeing, for itself and its successor and assigns, to comply with the
provisions of this Article XXXII.
32.2 Lessee's Right to Cure. Subject to the provisions of
Paragraph 32.3, if Lessor breaches any covenant to be performed by after Notice
to and demand upon Lessor, without waiving or releasing any obligation
hereunder, and in addition to any other remedies available to Lessee, may (but
shall be under no obligation at any time thereafter to) make such payment or
perform such act for the account and at the expense of Lessor. All sums so paid
by Lessee and all costs and expenses (including, without limitation, reasonable
attorneys' fees) so incurred, together with interest thereon (at the Overdue
Rate) from the date on which such sums or expenses are paid or incurred by
Lessee, shall be paid by Lessor to Lessee on demand, but may not be offset by
Lessee against Minimum Rent payments. The rights of Lessee hereunder to cure and
to secure payment from Lessor in accordance with this Paragraph 32.2 shall
survive the termination of this Lease.
32.3 Default by Lessor. It shall be a default of this Lease
if Lessor fails to observe or perform any term, covenant or condition of this
Lease on its part to be performed, and such failure shall continue for a period
of ten (10) days after Notice thereof from Lessee in the case of a monetary
default or thirty (30) days after Notice thereof from Lessee (or such shorter
time as may be required in order to protect the health or welfare of any
patients or other residents of the Leased Property) in the case of a non-
monetary default, unless in the case of a non-monetary default such failure
cannot with due diligence be cured within a period of thirty (30) days, in which
case such failure shall not be deemed to continue if Lessor, within said thirty
(30) day period, proceeds promptly, continuously and with due diligence to cure
the failure and diligently completes the curing thereof. The time within which
Lessor shall be obligated to cure any such failure shall also be subject to
extension of time due to the occurrence of any Unavoidable Delay.
ARTICLE XXXIII
33. Miscellaneous.
33.1 Survival of Obligations. Anything contained in this
Lease to the contrary notwithstanding, all claims against, and liabilities of,
Lessee or Lessor arising prior to, or in connection with any event occurring
prior to, the date of any expiration or termination of this Lease or the date of
Lessee's surrender of possession of the Leased Property, whichever is later,
shall survive such termination or surrender of possession.
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<PAGE>
33.2 Late Charges; Interest. If any interest rate provided for
in any provision of this Lease is based upon a rate in excess of the maximum
rate permitted by applicable law, the parties agree that such charges shall be
fixed at the maximum permissible rate.
33.3 Limits of Lessor's Liability. Lessee specifically agrees
to look solely to the assets of Lessor for recovery of any judgment against
Lessor, it being specifically agreed that no constituent shareholder, officer or
director of Lessor shall ever be personally liable for any such judgment or the
payment of any monetary obligation to Lessee. The provision contained in the
foregoing sentence is not intended to, and shall not, limit any right that
Lessee might otherwise have to obtain injunctive relief against Lessor or
Lessor's successors in interest, or any action not involving the personal
liability of Lessor (original or successor). Additionally, Lessor shall be
exonerated from any further liability under this Lease upon Lessor's transfer or
other divestiture of its ownership of the Leased Property, provided that the
assignee or grantee shall expressly assume in writing the obligations of Lessor
hereunder. Furthermore, in no event shall Lessor (original or successor) ever be
liable to Lessee for any indirect or consequential damages suffered by Lessee
from whatever cause.
33.4 Limits of Lessee's Liability. Lessor specifically agrees to
look solely to the assets of Lessee for recovery of any judgment against Lessee,
it being specifically agreed that no constituent shareholder, officer or
director of Lessee shall ever be personally liable for any such judgment or the
payment of any monetary obligation to Lessor. The provision contained in the
foregoing sentence is not intended to, and shall not, limit any right that
Lessor might otherwise have to obtain injunctive relief against Lessee or
Lessee's successors in interest, or any action not involving the personal
liability of Lessee (original or successor). Furthermore, in no event shall
Lessee (original or successor) ever be liable to Lessor for any indirect or
consequential damages suffered by Lessor from whatever cause.
33.5 Transfer of Operations. At Lessor's request, upon the
expiration or earlier termination of the Term, Lessee shall use its best efforts
to transfer to Lessor or Lessor's nominee (or to cooperate with Lessor or
Lessor's nominee in connection with the processing by Lessor or Lessor's nominee
of any applications for) all licenses, operating permits and other governmental
authorizations and all contracts, including contracts with governmental or
quasi-governmental entities which may be necessary for the operation of the
Facility; provided that the costs and expenses of any such transfer or the
processing of any such application shall be paid by Lessor or Lessor's nominee.
33.6 Addendum, Amendments and Exhibits. Any addendum,
amendments and exhibits attached to this Lease are hereby incorporated in this
Lease and made a part of this Lease.
33.7 Headings. The headings and paragraph titles in this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part of this Lease.
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<PAGE>
33.8 Time. Time is of the essence of this Lease and each and all
of its provisions.
33.9 Days. Unless otherwise expressly indicated herein, any
reference to "days" in this Lease shall be deemed to refer to calendar days.
33.10 Rent. Each and every monetary obligation under this
Lease shall be deemed to be "Rent" under this Lease and for all other purposes
under law.
33.11 Applicable Law. This Lease shall be governed by and
construed in accordance with the laws of the State of _____, but not including
its conflicts of laws rules; thus the law that will apply is the law applicable
to a transaction solely within the State of _____, including parties solely
domiciled in the State of _____.
33.12 Successors and Assigns. The covenants and conditions
contained in this Lease shall, subject to the provisions regarding assignment
(Article XXII), apply to and bind the heirs, successors, executors,
administrators, and assigns of Lessor and Lessee.
33.13 Recordation. Lessor and Lessee shall execute with
appropriate acknowledgments and record in the Official Records of the county in
which the Leased Property is located, that certain Short Form Lease in the form
and content of Exhibit "C" attached hereto. Lessor and Lessee shall equally
share the cost of recording the Memorandum of Lease. In no event shall this
Lease otherwise be recorded.
33.14 Prior and Future Agreements. This Lease contains all of
the agreements of Lessor and Lessee with respect to any matter covered or
mentioned in this Lease, and no prior agreements or understanding pertaining to
any such matters shall be effective for any purpose. No provision of this Lease
may be amended or supplemented except by an agreement in writing signed by both
Lessor and Lessee or their respective successors in interest. This Lease shall
not be effective or binding on any party until fully executed by both Lessor and
Lessee.
33.15 Partial Invalidity. Any provision of this Lease which
shall be held by a court of competent jurisdiction to be invalid, void or
illegal shall in no way affect, impair or invalidate any other provision or term
of this Lease, and such other provision or terms shall remain in full force and
effect.
33.16 Attorneys' Fees. In the event of any action or proceeding
brought by one party against the other under this Lease, the prevailing party
shall be entitled to recover its reasonable attorneys' fees in such action or
proceeding from the other party, including all attorneys' fees incurred in
connection with any appeals, and any post-judgment attorneys' fees incurred in
efforts to collect on any judgment.
33.17 Authority of Lessor and Lessee. Lessor and Lessee each
hereby represent and warrant that the individuals signing on its behalf are duly
authorized to execute and deliver
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this Lease on behalf of the corporation, in accordance with the bylaws of the
corporation, and that this Lease is binding upon the corporation.
33.18 Relationship of the Parties. Nothing contained in this
Lease shall be deemed or construed by Lessor or Lessee, nor by any third party,
as creating the relationship of principal and agent or a partnership, or a joint
venture by Lessor or Lessee, it being understood and agreed that no provision
contained in this Lease nor any acts of Lessor and Lessee shall be deemed to
create any relationship other than the relationship of landlord and tenant.
33.19 Counterparts. This Lease may be executed in one or more
separate counterparts, each of which, once they are executed, shall be deemed to
be an original. Such counterparts shall be and constitute one and the same
instrument.
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<PAGE>
33.20 Brokers. Lessor and Lessee each warrants that it has had
no dealings with any real estate broker or agent in connection with the
negotiation of this Lease and it knows of no real estate broker or agent who is
entitled to a commission in connection with this Lease. Lessor and Lessee hereby
agree to indemnify the other and to hold the other harmless from and against any
and all costs, expenses, claims, damages, suits, including attorneys' fees, in
any way resulting from claims or demands for commissions or other compensation
from any real estate brokers claiming through such party with respect to this
Lease.
WHEREFORE, each of the parties has accepted and agreed by affixing their
respective authorized signatures below as of the date first above written.
"LESSEE" ASSISTED LIVING CONCEPTS, INC.,
a Nevada corporation
By:_____________________________
Stephen Gordon,
Chief Administrative Officer
"LESSOR" TEXAS-LTC LIMITED PARTNERSHIP,
a Texas limited partnership
By: L-Tex GP, Inc.,
a Delaware corporation,
Its General Partner
By:________________________
Its:____________________
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<PAGE>
INDEX OF EXHIBITS
- -----------------
Exhibit "A" - Legal Description
Exhibit "B" - Environmental Report
Exhibit "C" - Short Form Lease
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<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
<PAGE>
EXHIBIT "B"
ENVIRONMENTAL REPORT
(attached hereto)
<PAGE>
EXHIBIT "C"
SHORT FORM LEASE
(attached hereto)
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
STERN, NEUBAUER, GREENWALD & PAULY,
A Professional Corporation
1299 Ocean Avenue, Tenth Floor
Santa Monica, California 90401-1007
Attention: Dennis L. Greenwald, Esq.
SHORT FORM LEASE
----------------
(____________ Facility)
THIS SHORT FORM LEASE is made as of ____________, _____ by and between
Texas-LTC Limited Partnership, a Texas limited partnership ("Lessor") and
Assisted Living Concepts, Inc., a Nevada corporation ("Lessee").
W I T N E S S E T H:
1. In consideration of the covenants of Lessee, Lessor leases to Lessee,
and Lessee leases from Lessor, that certain real property and improvements
thereon located in the City of ________________________ ("Facility"), as more
particularly described in Exhibit "A", attached hereto.
2. This is a short form lease relating to that certain Lease dated as of
___________, 1996 ("Lease"). The Lease has been executed by the parties and
each party has a full copy thereof.
3. The term of the Lease shall be for a period of time commencing on
__________, 1996, and shall continue to and include the ____ day of
____________, ____ unless the Lease is sooner terminated according to the terms
of the Lease or extended according to specific extension rights set forth in
the Lease.
4. The Lease provides, and Lessor and Lessee hereby confirm, that
neither Lessee nor anyone claiming by, through or under Lessee, including
contractors, subcontractors, materialmen, mechanics and laborers, shall have any
mechanics', materialmans' or construction liens of any sort whatsoever upon the
interest of Lessor in the Facility, and, to the contrary, any such lien is
specifically prohibited. All parties with whom Lessee may deal are hereby put on
notice that Lessee has no power to subject the interest of Lessor in the
Facility to any claim or lien of any kind or character, and all such persons
dealing with Lessee must look solely to Lessee for payment and not to Lessor's
interest in the Facility or any other asset of Lessor.
5. The terms, conditions, provisions, covenants and agreements set forth
in the Lease shall be binding upon the Lessor and Lessee, their respective
heirs, legal representatives, successors and assigns, shall be deemed to be
covenants running with the Facility,
<PAGE>
and are hereby incorporated herein by this reference. In addition to those terms
referred to herein, the Lease contains numerous other terms, conditions and
provisions. In the event of any conflict between the provisions of this Short
Form Lease and the Lease, the provisions of the Lease shall govern, control and
prevail.
6. This Short Form Lease may be executed in one or more separate
counterparts, each of which, once they are executed, shall be deemed to be an
original. Such counterparts shall be and constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Short Form Lease to
be signed respectively as of the date first above written.
"LESSEE" ASSISTED LIVING CONCEPTS, INC.,
a Nevada corporation
By:____________________________________
Stephen Gordon
Chief Administrative Officer
"LESSOR" TEXAS-LTC LIMITED PARTNERSHIP,
a Texas limited partnership
By: L-Tex GP, Inc.,
a Delaware corporation,
Its General Partner
By:____________________________
Its:_____________________
<PAGE>
ACKNOWLEDGEMENT
STATE OF CALIFORNIA )
) SS.
COUNTY OF )
On _____________________________ before me, _________________________,
Notary Public, personally appeared______________________________________________
__________________________________________________________________ personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument person(s), or the entity upon behalf of which the person(s) acted,
executed the instrument.
WITNESS my hand and official seal.
_______________________________________
NOTARY PUBLIC
State of California
STATE OF OREGON )
) SS.
COUNTY OF )
On ______________________________ before me, _______________________,
Notary Public, personally appeared_____________________________________________
____________________________________________________________________ personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument person(s), or the entity upon behalf of which the person(s) acted,
executed the instrument.
WITNESS my hand and official seal.
_______________________________________
NOTARY PUBLIC
State of Oregon
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Texas ALC, Inc., a Nevada corporation
Nevada ALC, Inc., a Nevada corporation
Texas ALC Partners, L.P., a Texas limited partnership
Lexington House of Vancouver, Inc., a Washington corporation
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated March 17, 1995, which
appear in such Prospectus, relating to the financial statements of Assisted
Living Concepts Group (which is comprised of Assisted Living Facilities, Inc.,
a subchapter S Corporation, Madras Elder Care (dba Aspen Court), a general
partnership, and Lincoln City Partners, a general partnership) for the eleven
months ended November 30, 1994 and the year ended December 31, 1993, and of
Assisted Living Concepts, Inc. for the one month period ended December 31,
1994, respectively. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."
PRICE WATERHOUSE LLP
Portland, Oregon
July 3, 1996
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Assisted Living Concepts, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
KPMG Peat Marwick LLP
Portland, Oregon
July 3, 1996
