-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KsOYMgw72+MdNAWhHmsqkXzmWjQ6UrEwyKfmt4chFwgKs/OioB0cS9ElTtv5CQ7J NX5dUEPEDfGLn/bIWBXoQw== 0000950131-99-002026.txt : 19990409 0000950131-99-002026.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950131-99-002026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROOKDALE LIVING COMMUNITIES INC CENTRAL INDEX KEY: 0001023010 STANDARD INDUSTRIAL CLASSIFICATION: 8050 IRS NUMBER: 364103821 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22253 FILM NUMBER: 99584004 BUSINESS ADDRESS: STREET 1: 77 W WACKER DR STREET 2: STE 4400 CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3129773700 MAIL ADDRESS: STREET 1: 77 WEST WACKER DRIVE SUITE 4400 CITY: CHICAGO STATE: IL ZIP: 60601 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1998 ---------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from --------------------- to ----------------------- Commission File Number 0-22253 ------- BROOKDALE LIVING COMMUNITIES, INC. (Exact name of registrant as specified in its charter) Delaware 36-4103821 - - --------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 77 West Wacker Drive, Suite 4400, Chicago, IL 60601 (Address of principal executive offices and zip code) (312) 977-3700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share - - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. As of March 25, 1999, there were 11,572,082 shares of the Registrant's common stock outstanding. The aggregate market value of the Registrant's shares held on such date by non-affiliates of the Registrant, based on the closing price ($14.94 per share) of the Registrant's common stock on the Nasdaq National Market on such date, was $172,886,905. DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 1999.
BROOKDALE LIVING COMMUNITIES, INC. Form 10-K December 31, 1998 TABLE OF CONTENTS ----------------- Part I Page - - ------ ---- Item 1. Business .................................................................. 1 Item 2. Properties ................................................................ 9 Item 3. Legal Proceedings ......................................................... 10 Item 4. Submission of Matters to a Vote of Security Holders ....................... 10 Part II - - ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..... 10 Item 6. Selected Financial Data ................................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................... 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................ 17 Item 8. Financial Statements and Supplementary Data ............................... 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................................... 35 Part III - - -------- Item 10. Directors and Executive Officers of the Registrant ........................ 35 Item 11. Executive Compensation .................................................... 35 Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 35 Item 13. Certain Relationships and Related Transactions ............................ 35 Part IV - - ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 35 Signatures .......................................................................... 45
PART I ITEM 1. BUSINESS. The Company Brookdale Living Communities, Inc. and its subsidiaries (collectively, the "Company" or "Brookdale") provide senior independent and assisted living services to the elderly through their facilities located in urban and suburban areas of major metropolitan markets. As of December 31, 1998, the Company operated 18 senior independent and assisted living facilities in 11 states containing a total of 3,903 units which, as of December 31, 1998, were 95% occupied. The Company owns 4 of such facilities, leases 12 facilities and manages 2 facilities pursuant to management contracts. With facilities that contained an average of approximately 217 units, the Company believes it is able to achieve economies of scale within its facilities and provide senior independent and assisted living services in a more cost-effective manner. The Company plans to acquire or lease approximately 4 to 6 facilities per year containing an aggregate of approximately 800 to 1,200 units, and to commence development of 2 to 3 new facilities per year containing approximately 220 units each. Brookdale's facilities are designed for middle to upper income residents who desire an upscale residential environment providing the highest level of quality, care and value. The Company's objective is to allow its residents to age-in-place by providing them with a continuum of senior independent and assisted living services. The residents in a Brookdale facility have the ability to maintain their residency in such facility for an extended period of time due to the range of service options available to such residents as their needs change. An individual can move into a Brookdale facility while the individual is able to live independently, requiring little or no assistance with the activities of daily living. As the resident ages and requires more assistance with the activities of daily living, the resident is able to receive an enhanced level of services at the Brookdale facility and does not have to move to another facility to receive such level of services. The ability to allow residents to age-in-place is beneficial to Brookdale's residents as well as their families who are burdened with care option decisions for their elderly relatives. In addition to studio, one-bedroom and two-bedroom units, the Company provides all residents with basic services, such as meal service, 24-hour emergency response, housekeeping, concierge services, transportation and recreational activities. For residents who require additional supplemental care services, the Company provides assistance with activities of daily living. As of December 31, 1998, the average age of Brookdale's residents was approximately 82 years old, and many of these residents require some level of assistance with their activities of daily living. The Company intends to bring "in-house" as many of these services as practicable and has established a program providing various levels and combinations of these services called "Personally Yours"SM. The levels of care provided by the Company to residents vary from facility to facility depending upon the licensing requirements of the state in which the facility is located. The Company was incorporated in Delaware on September 4, 1996 by an affiliate of The Prime Group, Inc. The Company was formed to continue and expand the business and operations of the senior independent and assisted living division of The Prime Group, Inc. and certain of its affiliates (collectively, "PGI"), which, since 1985, had been involved in the development, construction, marketing and operation of senior independent and assisted living facilities for the elderly. At the completion of the Company's initial public offering of its common stock on May 7, 1997 (the "IPO"), the shares of the Company owned by such affiliate were repurchased by the Company at a nominal price in accordance with a subscription agreement between the Company and such affiliate. In connection with the completion of the IPO, PGI and senior management of the Company contributed their interests in the senior independent and assisted living division of PGI to the Company in exchange for 2,000,000 shares of the Company's common stock. PGI also purchased 2,500,000 shares of the 4,500,000 shares of the Company's common stock sold in the IPO. Since the IPO, the Company has managed, and continues to manage, The Island on Lake Travis facility, which continues to be owned by PGI. The Company's principal executive offices are located at 77 West Wacker Drive, Suite 4400, Chicago, Illinois 60601, and its telephone number is (312) 977-3700. Cautionary Statements This annual report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believes," "expects," "anticipates," "estimates" and similar words and expressions are generally intended to identify forward-looking statements. Statements that describe the Company's future strategic plans, goals or objectives are also forward-looking statements. Readers of this report are cautioned that forward-looking statements, including those regarding the intent, belief, or current expectations of the Company or management, are not guarantees of future performance, results or events and involve risks and uncertainties, and that actual results and events may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to (i) general economic conditions in the markets in which the Company operates, (ii) competitive pressures within the industry and/or the markets in which the Company operates, (iii) the effect of future legislation or regulatory changes on the Company's operations and (iv) other factors described from time to time in the Company's filings with the Securities and Exchange Commission. The forward-looking statements included in this report are made only as of the date hereof. Except as required by law, the Company undertakes no obligation to update such forward-looking statements to reflect subsequent events or circumstances. The Senior Independent and Assisted Living Industry The senior independent and assisted living industry is a rapidly growing component of the non-acute health care system for the elderly. The senior independent and assisted living industry serves the needs of the elderly who benefit from living in a supportive environment and may require or prefer occasional assistance with the activities of daily living, and who no longer desire, or cannot live alone. It is estimated that 35% of the people over age 85 require assistance with more than one activity of daily living, such as bathing, eating, personal hygiene, grooming and dressing. -1- The rapid growth of the senior independent and assisted living industry is supported by several significant trends, including the following: Favorable Demographics. The primary consumers of senior independent and assisted living services are persons over age 65. This group represents one of the fastest growing segments of the U.S. population. According to U.S. Bureau of the Census data, the number of people in the U.S. age 65 and older increased by more than 27% from 1981 to 1994, growing from 26.2 million to 33.2 million. The segment of the population over 85 years of age, which comprises the largest percentage of residents at senior care facilities, is projected to increase by more than 40% between the years 1990 and 2000. Brookdale believes that these trends will contribute to continued strong demand for senior independent and assisted living services. Consumer Preference. The Company believes that senior independent and assisted living facilities provide prospective residents and their families with an attractive alternative to home care or skilled nursing facilities, particularly those prospective residents who do not require the level of care or institutional setting provided by skilled nursing facilities. Senior independent and assisted living facilities allow residents, who typically furnish their own units, to age-in-place and preserve their independence in a more residential setting. The Company believes these factors result in a higher quality of life than that experienced in the more institutional or clinical settings. Cost-Effective Alternative. The annual per resident cost for senior independent and assisted living care is significantly less than the annual per resident cost for skilled nursing care. The Company believes that the cost of senior independent and assisted living care (which includes housing and meal preparation) compares favorably with home health care when the costs associated with housing and meal preparation are added to the costs of home health care. Pricing pressure is also forcing skilled nursing facilities to shift their focus toward providing more intense levels of care enabling them to charge higher fees, thus adding to the shortage of facilities providing less intensive care. The rapid growth of the elderly population coupled with continuing constraints on the supply and availability of long-term care beds is leading to a continued shortage of long-term care beds for the elderly. Increasing Awareness of Benefits of Congregate Living. The Company believes that consumers and their adult children are becoming increasingly aware of the benefits of living in senior independent or congregate living facilities which provide assisted living services. For the potential resident who may not necessarily require assistance with activities of daily living, senior independent living facilities can provide significant benefits to improve quality of life. By receiving proper nutrition and the enhanced physical, mental, and social stimulation, which are provided in a senior independent or congregate living facility, residents may realize such improved quality of living. In facilities, such as the Company's facilities, which also provide assistance with activities of daily living, residents and their adult children can take comfort in knowing that such residents can age-in-place in a more secure and structured environment than typically available in the home. Changing Family Dynamics. As a result of the growing number of two-income families, many children are not able to care for elderly parents in their own homes. Two-income families are, however, better able to provide financial support for elderly parents. In addition, other factors, such as the growth in the divorce rate and single-parent households, as well as the increasing geographic dispersion of families, have contributed to the growing inability of children to care for aging parents in the home. Business and Growth Strategy The Company's business and growth strategy is based on the following key elements: Purchase and Lease Existing Senior Independent and Assisted Living Facilities. The Company believes that significant opportunities exist to take advantage of the fragmented senior independent and assisted living industry by selectively purchasing or leasing existing facilities. The Company's acquisition and leasing strategy has focused, and will continue to focus, primarily on facilities that are designed or can be repositioned by the Company, by improving or enhancing available services and amenities, for middle to upper-income private pay residents. Facilities which the Company expects to purchase or lease will primarily consist of large facilities, similar to the Company's current facilities that contain an average of approximately 217 units, located in urban and suburban areas of major metropolitan markets. See "--Acquisitions, Leases and Development." Develop the Brookdale Prototype Facility in Targeted Markets. The Company intends to continue to leverage its development expertise and construct its prototype facility on selected sites located in urban and suburban areas of major metropolitan markets. The Company's prototype facility, which is flexible and can be adapted to the specific requirements of individual markets and site requirements, contains 220 units, but can be constructed to accommodate between 150 and 250 units. The prototype offers a mix of studio, one-bedroom and two-bedroom units and common areas providing premium amenities. The Company intends to begin development of at least 2 to 3 facilities on behalf of third parties in each of the next 5 years and anticipates that each development will require approximately 22 to 24 months to complete. See "--Acquisitions, Leases and Development." Provide Access to a Full Continuum of Senior Independent and Assisted Living Services. The Company's strategy is to provide access to a full continuum of senior independent and assisted living services that allows its residents to age-in-place. These services are provided either by the Company or by outside agencies. It is the Company's strategy to increase the availability of additional services and to capture the incremental revenue generated by providing these services through Company employees. In addition, one of Brookdale's goals is to establish hospital or health care network affiliations for each of its facilities. Hospital and health care network affiliations provide for on-site physician and nursing services and facilitate the provision of health care services and wellness programs to the -2- Company's residents. In addition, the Company is presently developing an 82-bed skilled nursing facility on the campus of The Devonshire facility located in Lisle, Illinois. The Company does not currently intend to pursue the development of additional skilled nursing facilities at its other facilities. See "--Company Operations -- Hospital and Health Care Network Affiliations." Utilize Sophisticated Marketing Programs to Maintain High Occupancy Rates. The Company utilizes sophisticated marketing programs to achieve high occupancy rates. As of December 31, 1998, the Company's facilities were 95% occupied. The Company believes that its marketing programs will improve the occupancy rates of facilities that the Company purchases or leases in the future. The Company's marketing programs are designed to create community awareness of the Company, its facilities and its services, and to cultivate relationships with referral sources such as health care providers, physicians, clergy, area agencies for the elderly, home health agencies and social workers. In addition, hospital affiliations have been successfully implemented by the Company at certain of its facilities, which provide referrals of prospective residents. The Company believes that the success of its marketing programs is demonstrated not only by its high occupancy rates, but also by the Company's ability to maintain waiting lists at its facilities for prospective residents who pay a deposit in order to be included on such lists. See "--Company Operations--Marketing and Sales." Utilize Operational Expertise to Enhance Profitability. The Company has developed and implemented sophisticated management and operational procedures resulting in strong operating margins and occupancy rates. These procedures include securing national vendor contracts to ensure consistent low pricing, implementing sophisticated budgeting and financial controls at each facility and establishing standardized training and operations procedures. Although the Company's business is not dependent on its national vendor contracts, such contracts provide the Company with better pricing on required goods and services due to high volume purchases from a few national vendors. There are, however, several other vendors from whom the Company could purchase its required goods and services if the national vendor contracts were to be terminated or were to expire. The Company believes that the systematic implementation of its management and operating policies will enable the Company to enhance the financial performance of its existing and future facilities and will continue to improve the profitability of its stabilized facilities. Expand Facilities Where Economically Advantageous. The Company has found that certain of its facilities with stabilized occupancies benefit from additions and expansions offering increased capacity, as well as additional levels of service for residents requiring higher levels of care. Furthermore, the expansion of existing facilities allows the Company to enhance its economies of scale by increasing the revenue base at a facility while leveraging such facility's existing infrastructure such as the laundry equipment and the kitchen. In addition to the planned 82-bed skilled nursing facility on the campus of The Devonshire facility, the Company is currently expanding its Hawthorn Lakes facility located in Vernon Hills, Illinois with an additional 54 assisted living units. Services The Company's senior independent and assisted living facilities offer residents personal support services and assistance with certain activities of daily living in a supportive, home-like setting. Residents of the Company's facilities are typically unable or choose not to live alone, but do not require the 24-hour nursing care provided in skilled nursing facilities. The Company's service options are designed to meet residents' changing needs and to achieve a continuity of care, enabling seniors to age-in-place and thereby maintain their residency for a longer time period. Basic Care Program The basic care package, which is received by all residents, includes meal service, housekeeping services within the resident's unit, social and recreational activities, scheduled transportation to medical centers and shopping, security, emergency call response, access to on-site medical services and medical education and wellness programs. Supplemental Care Services In addition to the basic care program, the Company offers custom tailored supplemental care services for residents who desire or need such services. Optional supplemental care services include check-in services and escort and companion services. Residents with cognitive or physical frailties and higher level service needs are either accommodated with supplemental services in their own units or, in certain facilities, are cared for in a more structured and supervised environment on a separate wing or floor of the facility with a dedicated staff and with separate dining room and activity areas. Depending on the particular facility and as dictated by state licensing requirements, the Company also provides assistance with activities of daily living such as dressing and bathing and medication administration or reminders. The Company plans to expand its supplemental service offerings, as permitted by licensing, in order to capture incremental revenue and enable its residents to remain in its facilities longer. In addition, where practicable, the Company intends to obtain licensing to provide home health services to residents. At present, many residents receive supplemental health care services from outside third parties. The Company's ability to provide certain services depends on the licensing requirements of particular states. However, the Company's general strategy is to provide assistance with activities of daily living, subject to states licensing limitations. Certain services, such as physician care, infusion therapy, which includes intravenous delivery of medication, physical and speech therapy and other more intensive home health care services, are provided to many of Brookdale's residents by third parties. The Company assists residents in locating qualified providers for such health care services. -3- Company Operations Overview The Company continually reviews opportunities to expand the amount of services it provides to its residents. To date, the Company has been able to increase its monthly service fees on an annual basis and has experienced increasing facility operating margins through a combination of the implementation of efficient operating procedures and the economies of scale associated with the size of its facilities. The Company's operating procedures include securing national vendor contracts to obtain consistent low pricing for certain services such as food and energy, implementing strict budgeting and financial controls at each facility and establishing standardized training and operations procedures. The Company believes that successful senior independent and assisted living operators must effectively combine the business disciplines of hospitality, health care, marketing, finance and real estate expertise. Brookdale has implemented intensive standards, policies and procedures and systems, including detailed staff manuals, which the Company believes have contributed to Brookdale's facility operating margins. The Company has centralized accounting controls, finance and other operating functions at its corporate headquarters so that, consistent with its operating philosophy, facility-based personnel can focus on resident care and efficient operations. Headquarters staff in Chicago, Illinois are responsible for the establishment of Company-wide policies and procedures relating to, among other things, resident care, facility design and facility operations; billings and collections; accounts payable; finance and accounting; development of employee training materials and programs; marketing activities; the hiring and training of management and other facility-based personnel; compliance with applicable local and state regulatory requirements; and implementation of the Company's acquisition, development and leasing plans. Facility Staffing and Training Each facility has an Executive Director responsible for the day-to-day operations of the facility, including quality of care, social services and financial performance. Each Executive Director receives specialized training from the Company. In addition, a portion of each Executive Director's compensation is directly tied to the operating performance of the facility and to the maintenance of high occupancy levels. The Company believes that the quality and size of its facilities, coupled with its competitive compensation philosophy, have enabled it to attract high-quality, professional administrators. Each Executive Director is supported by a Resident Services Director who is directly responsible for day-to-day care of the residents and a Marketing Director who oversees the facility's marketing and community outreach programs. Other key positions at each facility include the Food Service Director, the Activities Director, the Housekeeping Director, the Engineering Director and the Business Manager. The Company believes that quality of care and operating efficiency can be maximized by direct resident and staff contact. Employees involved in resident care, including the administrative staff, are trained in the support and care needs of the residents and emergency response techniques. The Company has adopted formal training and evaluation procedures to help ensure quality care for its residents. The Company has extensive policy and procedure manuals for each department and holds frequent training sessions for management and staff at each site. Quality Assurance The Company maintains quality assurance programs at each of its facilities through its corporate headquarters staff. The Company's quality assurance program is designed to achieve a high degree of resident and family member satisfaction with the care and services provided by the Company. The Company's quality control measures include, among other things, facility inspections conducted by corporate staff on at least a monthly basis. These inspections cover the appearance of the exterior and grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; resident care plans; the quality of activities and the dining program; observance of residents in their daily living activities; and compliance with government regulations. The Company's quality control measures also include the survey of residents and family members on a regular basis to monitor the quality of services provided to residents. The survey process begins with a visitor's survey sent one week following a potential resident's visit to a facility to ascertain his or her opinions and initial impressions. Detailed annual written surveys and exit surveys are used to appraise and monitor the level of satisfaction of residents and their families with facility operations and services. In order to foster a sense of community as well as to respond to residents' desires, the Company has established at each facility a resident council, an advisory committee elected by the residents, that meets monthly with the Executive Director of the facility. Separate resident committees also exist or are being initiated for food service, activities, marketing and hospitality. These committees promote resident involvement and satisfaction and enable facility management to be more responsive to the residents' needs and desires. Marketing and Sales The Company's marketing strategy is intended to create awareness of the Company, its facilities and its services among potential residents and their family members and among referral sources, such as hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing facilities, home health agencies and social workers. Brookdale's marketing staff develops overall strategies for promoting the Company's properties and monitors the success of the Company's marketing efforts. Each facility has a Director of -4- Marketing who oversees the facility's marketing and outreach programs and supervises the on-site marketing staff and move-in coordinators. Besides direct contacts with prospective referral sources, the Company also relies on print advertising, yellow pages advertising, direct mail, signage and special events, such as grand openings for new facilities, health fairs and community receptions. In addition, resident referral programs have been established and are promoted at each facility. Hospital and Health Care Network Affiliations Another key element in the Company's operating strategy is to establish affiliations between Brookdale's facilities and hospitals and health care networks. Hospital and health care network affiliations provide for on-site physician and nursing services and facilitate the provision of health care services and wellness programs to the Company's residents and provide the Company with a referral source. Such affiliations exist at various Brookdale facilities. As examples, The Hallmark (located in Chicago, Illinois) and The Heritage (located in Des Plaines, Illinois) facilities are affiliated with Saint Joseph Health Centers and Hospital and Holy Family Hospital, respectively, pursuant to agreements with the respective hospitals. The agreements establishing the affiliations typically grant the hospital or health care network the right to lease space at a Brookdale facility and provide that the hospital or health care network will maintain centers in the facility to make services available to facility residents. The hospital or health care network pays rent for its leased space and is compensated for making the services they render available at the facility. The annual amounts paid by the hospital or health care network approximate the annual amounts paid to such hospital or health care network. The Company intends to establish affiliations with hospitals and health care networks if the Company believes such affiliations would be beneficial to the residents of the facility and if the facility can accommodate such affiliations. Acquisitions, Leases and Development The Company evaluates markets for acquisition, lease and development opportunities based on demographics and market studies. The Company's acquisition, lease and development strategy focuses on the urban and suburban areas of major metropolitan markets. Acquisitions and Leases The Company currently expects to purchase or lease 4 to 6 facilities per year containing an aggregate of approximately 800 to 1,200 units. In some cases, the purchase contract for a facility may be assigned to a third party which would acquire the facility and in turn enter into an operating lease with a wholly-owned subsidiary of the Company, with the subsidiary obtaining substantially all of the benefits and risks of ownership. The Company utilizes an operating lease structure for its acquisitions in order to minimize its overall cost of capital. The Company may acquire facilities as a means of entry into new markets and may also attempt to increase its market share in existing markets through selected acquisitions based on its experience in and knowledge of existing markets. Acquisitions are expected to consist primarily of large facilities that are similar to the Company's current facilities, which average approximately 217 units per facility. In reviewing acquisition opportunities, the Company considers, among other things, underlying demographics, facility location within its neighborhood or community, the current reputation of the facility in the marketplace and the ability of the Company to improve or enhance a facility's available services and amenities. Further, the Company evaluates the opportunity to improve or enhance services and operating results through the implementation of the Company's standard operating procedures. Development It is the Company's development strategy to commence the development and construction of 2 to 3 facilities per year on behalf of third party owners. The Company's flexible prototype facility contains approximately 220 units, but can be constructed to accommodate between 150 to 250 units. The size of a particular facility will depend on site size, zoning and underlying market characteristics. The Company's 220-unit prototype contains approximately 220,000 square feet in a four-story building and contains a mix of studio, one-bedroom and two-bedroom units. In addition to the living units, the Company's prototype contains common areas for residents, including a living room, library, lounges, billiards room, multi-purpose room, arts and crafts room, exercise room, convenience store, beauty/barber shop, mail room, common dining room and private dining room. The Company anticipates that new developments will require 8 to 10 months for pre-construction development, 12 to 14 months for construction and approximately 12 months after opening to achieve stabilized occupancy. The total construction costs for the 220-unit prototype, including construction period financing costs and operating deficits during the lease-up period, are estimated to be approximately $35.0 million, or approximately $159,000 per unit. The Company evaluates markets in which to develop its prototype based on a number of factors, including demographic profiles of both potential residents and their adult children, existing competitors and the foreseeable level of new entrants in the market, estimated market demand and zoning prospects. Site selection is based on established criteria relating to land cost and condition, visibility, accessibility, immediate adjacencies, community perception and zoning prospects. Full market feasibility studies, which include evaluations of all potential competitors, extensive interviews with key municipal officials and health care providers, and demographic studies are conducted for each site. -5- The table set forth below summarizes certain information related to the Company's operating lease transactions and developments during 1998:
Operating Leases ---------------- Property Location Units Date Acquired -------- -------- ----- ------------- Harbor Village Chicago, Illinois 276 March 6, 1998 The Atrium San Jose, California 292 May 12, 1998 The Chatfield West Hartford, Connecticut 120 July 2, 1998 The Ponce de Leon Santa Fe, New Mexico 144 October 21, 1998 Woodside Terrace Redwood City, California 270 December 22, 1998 ----- Total Units 1,102 =====
On January 19, 1999, the Company entered into an operating lease for The River Bay Club, a 285-unit senior living facility located in Quincy, Massachusetts.
Third Party Developments ------------------------ Projected Development Location Units Completion Date ----------- -------- ----- --------------- The Heritage at Austin Austin, Texas 209 June, 1999 The Heritage at Southfield Southfield, Michigan 219 June, 1999 The Meadows of Glen Ellyn Glen Ellyn, Illinois 233 January, 2000 The Heritage at Raleigh Raleigh, North Carolina 219 May, 2000 The Hallmark at Battery Park New York, New York 218 June, 2000 The Heritage at Mt. Lebanon Pittsburgh, Pennsylvania 233 February, 2001 ----- Total Units 1,331 =====
Competition The senior independent and assisted living industry is highly competitive, and the Company expects that it will become more competitive in the future. The Company will continue to face competition from numerous local, regional and national providers of senior independent and assisted living services. The Company will compete with such providers primarily on the basis of cost, quality of care and the array of services provided. The Company will also compete with companies providing home based health care based on those factors as well as the reputation, geographic location and physical appearance of facilities and family preferences. Some of the Company's competitors operate on a not-for-profit basis or as charitable organizations or have, or may obtain, greater financial resources than those of the Company. Moreover, in the implementation of the Company's business and growth strategy, the Company expects to face competition for the acquisition and development of senior independent and assisted living facilities. Consequently, there can be no assurance that the Company will not encounter increased competition in the future which could limit its ability to attract residents or expand its business and could have a material adverse effect on the Company's financial condition, results of operations and prospects. Governmental Regulation Senior independent and assisted living facilities are subject to varying degrees of federal, state and local regulation and licensing by local and state health and social service agencies and other regulatory authorities. While regulations and licensing requirements often vary significantly from state to state, they typically address, among other things, personnel education, training and records; facility services; physical plant specifications; furnishing of resident units; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities. In many states, senior independent and assisted living facilities also are subject to state or local building codes, fire codes and food service licensing or certification requirements. Assisted living facilities may be subject to periodic survey or inspection by governmental authorities. To date, state regulation has not had a material adverse effect on the Company's ability to offer services or conduct its business. In certain states where the Company operates and where the Company may operate in the future, the Company may be unable to provide certain higher levels of assisted living services without obtaining the appropriate licenses. The Company's success will depend in part on its ability to satisfy such regulations and requirements and to acquire and maintain required licenses. The Company's operations could also be adversely affected by, among other things, regulatory developments such as revisions in licensing and certification standards. Some states have adopted certificate of need or similar laws applicable to assisted living and nursing facilities which generally require that the appropriate state agency approve certain acquisitions or capital expenditures and determine whether a need exists for certain new unit or bed additions or new services. Certain states have placed a moratorium on granting certificates of need or otherwise stated their intent not to grant approval for such capital expenditures. To the extent certificates of need or other similar approvals are required for expansion of Company operations, such expansion could be adversely affected by the failure or inability to obtain the necessary approvals or possible delays in obtaining such approvals. -6- Although the Company currently does not participate in the Medicare or Medicaid programs, the hospitals and other health care providers with which it has affiliations do participate in those programs, and the Company may participate in the Medicare program at the skilled nursing facility to be constructed at The Devonshire facility. As of December 31, 1998, the Company is paid for services it provides to 12 residents in the state of Washington by the Department of Social and Health Services. Some portion of such funds are derived by such agency from the federal Medicaid program. Also, all of the Company's residents are eligible for Medicare benefits. Therefore, certain aspects of the Company's business are and will be subject to federal and state laws and regulations which govern financial and other arrangements between and among health care providers, suppliers and vendors. These laws prohibit certain direct and indirect payments and fee-splitting arrangements designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider or other entity or person for medical products and services. These laws include, but are not limited to, the federal "anti-kickback law" which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. The Office of the Inspector General of the Department of Health and Human Services, the Department of Justice and other federal agencies interpret these statutes liberally and enforce them aggressively. Congress and state legislatures have proposed legislation that would significantly expand the government's involvement in curtailing fraud and abuse and increase the monetary penalties for violation of these provisions. Violation of these laws can result in, among other things, loss of licensing, civil and criminal penalties for individuals and entities and exclusion of health care providers or suppliers from participation in the Medicare and/or Medicaid programs. In addition, although the Company is not a Medicare or Medicaid provider or supplier, it is subject to these laws because (i) the state laws typically apply regardless of whether Medicare or Medicaid payments are at issue, (ii) the Company plans to build and operate a skilled nursing facility at its Devonshire facility and may establish licensed home health agencies which are intended to participate in the Medicare program and (iii) as required under some state licensing laws, or for the convenience of its residents, some of the Company's senior independent and assisted living facilities maintain affiliations with hospitals and other health care providers, including pharmacies, home health agencies and hospices, through which the health care providers make their health care items or services (some of which may be covered by Medicare or Medicaid) available to facility residents. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist which also may require modifications to existing and planned properties to create access to the properties by disabled persons. While the Company believes that its facilities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. The Company and its activities are subject to zoning and other state and local government regulations. Zoning variances or use permits are often required for construction. Severely restrictive regulations could impair the ability of the Company to open additional facilities at desired locations or could result in delays, which could adversely affect the Company's business and growth strategy and results of operations. Environmental Matters Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous substances on its property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous substances. The costs of remediation or removal may be substantial, and the presence of the hazardous substances, or the failure to promptly remediate them, may adversely affect the owner's ability to sell the real estate or to borrow using the real estate as collateral. In connection with its ownership and operation of its facilities, the Company may be potentially liable for the costs of removal or remediation of hazardous substances. The Company has no knowledge, nor has the Company been notified by any governmental authority, of any material noncompliance, liability or claim relating to hazardous substances in connection with any properties in which any of such entities now has or heretofore had an interest. However, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of its facilities will not be affected by the condition of the properties in the vicinity of its facilities (such as the presence of underground storage tanks) or by third parties unrelated to the Company. Employees As of December 31, 1998, the Company had approximately 1,700 employees, of which 78 were employed at the Company's headquarters. The Company believes employee relations are good. Insurance The provision of personal and health care services entails an inherent risk of liability. Compared to more institutional long-term care facilities, senior independent and assisted living residences offer residents a greater degree of independence in their daily lives. This -7- increased level of independence, however, may subject the resident and the Company to certain risks that would be reduced in more institutionalized settings. The Company currently maintains liability insurance intended to cover such claims, in addition to fire, flood, and property insurance. The Company believes its insurance coverage is adequate based on the nature of the risks, its historical experience and industry standards. Executive Officers The following table sets forth certain information concerning each of the Company's executive officers:
Name Age Position with the Company - - ---- --- ------------------------- Michael W. Reschke ......... 43 Chairman of the Board, Director Mark J. Schulte ............ 45 President and Chief Executive Officer, Director Darryl W. Copeland, Jr. .... 39 Executive Vice President and Chief Financial Officer, Director Robert J. Rudnik ........... 44 Executive Vice President, General Counsel and Secretary R. Stanley Young ........... 46 Senior Vice President - Finance and Treasurer David J. Schaus ............ 43 Senior Vice President - Human Services Matthew F. Whitlock ........ 34 Vice President - Acquisitions Stephan T. Beck ............ 43 Vice President - Operations Sheryl A. Wolf ............. 36 Controller
Michael W. Reschke has served as Chairman of the Board and as a Director of the Company since May 1997. Mr. Reschke founded PGI in 1981 and, since that time, has served as PGI's Chairman, Chief Executive Officer and President. For the last 18 years, Mr. Reschke has directed and managed the development, finance, construction, leasing, marketing, acquisition, renovation and property management activities of PGI. Mr. Reschke is also Chairman of the Board and a Director of Prime Retail, Inc. (NYSE:PRT), a publicly traded real estate investment trust involved in the ownership, acquisition, development and management of factory outlet centers and the successor in interest to the former retail division of PGI, and is Chairman of the Board and a Director of Prime Group Realty Trust (NYSE:PGE), a publicly traded real estate investment trust involved in the ownership, acquisition, development and management of office and industrial buildings and the successor in interest to the former office and industrial divisions of PGI. Mr. Reschke is also a member of the Board of Directors of Horizon Group Properties, Inc. (NASDAQ:HPGI), a publicly traded real estate investment trust involved in the ownership, acquisition, redevelopment and management of factory outlet centers. Mr. Reschke is licensed to practice law in the State of Illinois and is a certified public accountant. Mr. Reschke is a member of the Chairman's Roundtable and the Executive Committee of the National Realty Committee, as well as a full member of the Urban Land Institute. Mr. Reschke also serves on the Board of Visitors of the University of Illinois Law School. Mark J. Schulte has served as President and Chief Executive Officer and a director of the Company since May 1997. From January 1991 to May 1997, Mr. Schulte was employed by PGI in its Senior Housing Division, most recently serving as Executive Vice President, with primary responsibility for overseeing all aspects of PGI's Senior Housing Division. Prior to joining PGI, Mr. Schulte had 13 years of experience in the development and operation of multi-family housing, senior housing, senior independent and assisted living and health care facilities. Mr. Schulte is licensed to practice law in the State of New York. Mr. Schulte serves on the Executive Committee of the American Seniors Housing Association. Darryl W. Copeland, Jr. has served as Executive Vice President and a director of the Company since May 1997 and as the Chief Financial Officer since May, 1998. From August 1989 to February 1997, Mr. Copeland was employed by Donaldson, Lufkin & Jenrette Securities Corporation as an investment banker, most recently serving as Senior Vice President in the Health Care and Leveraged Finance groups. Robert J. Rudnik has served as Executive Vice President, General Counsel and Secretary of the Company since July 1997. Mr. Rudnik also serves as Executive Vice President, General Counsel and Secretary of PGI. Mr. Rudnik has served in such capacity for PGI since 1984. Mr. Rudnik is licensed to practice law in the State of Illinois and is a member of the bar in the State of Florida. R. Stanley Young has served as Senior Vice President-Finance and Treasurer of the Company since August 1998. From 1977 to 1998, Mr. Young was with KPMG Peat Marwick LLP, and was admitted to the partnership in 1987. Mr. Young is a certified public accountant. David J. Schaus has served as Senior Vice President-Human Services of the Company since August 1998. From January 1997 to August 1998, Mr. Schaus was a principal in the firm of Workplace Dynamics, Inc., a human resources consulting firm, and from August 1989 to January 1997, Mr. Schaus served as Senior Vice President and Managing Director of Dain Rauscher, a financial services broker-dealer. Prior to joining Brookdale, Mr. Schaus had over twenty years of management experience. Matthew F. Whitlock has served as Vice President - Acquisitions of the Company since May 1997. From August 1996 to May 1997, Mr. Whitlock was employed by PGI in its Senior Housing Division as Director of Acquisitions. Prior to joining PGI, Mr. Whitlock was employed by the Forum Group, previously one of the largest operators of senior and assisted living facilities, as an acquisition specialist from August 1995 to July 1996. Mr. Whitlock was a principal with Concordia Group, a senior and assisted living consulting firm, from June 1991 to July 1995. -8- Stephan T. Beck has served as Vice President - Operations of the Company since May 1997. From January 1993 to May 1997, Mr. Beck was employed by PGI, most recently serving as Corporate Director of Operations of its Senior Housing Division. Prior to joining PGI, Mr. Beck was employed by Classic Residence by Hyatt as Executive Director of The Hallmark facility, which was then managed by Classic Residence by Hyatt, from August 1990 to December 1992. Sheryl A. Wolf has served as Controller of the Company since May 1997. From September 1991 to May 1997, Ms. Wolf was employed by PGI, most recently serving as Corporate Director of Finance of its Senior Housing Division. ITEM 2. PROPERTIES. Facilities The following table sets forth certain information regarding the Company's facilities:
Year Occupancy Rate at Ownership Facility Location Units Opened December 31, (1) Status(2)(3) - - -------- -------- ----- ------ ----------------- ------------ 1998 1997 ---- ---- The Hallmark............................ Chicago, IL 341 1990 99% 100% Leased The Devonshire (4)...................... Lisle, IL 321 1990 100% 100% Owned The Classic at West Palm Beach.......... West Palm Beach, FL 301 1990 95% 92% Leased The Heritage............................ Des Plaines, IL 254 1993 98% 100% Owned The Park Place.......................... Spokane, WA 208 1992 95% 88% Leased Edina Park Plaza........................ Edina, MN 208 1987 94% 96% Owned The Island on Lake Travis............... Lago Vista, TX 207 1988 90% 91% Managed Hawthorn Lakes (4)...................... Vernon Hills, IL 202 1987 98% 100% Owned The Springs of East Mesa................ Mesa, AZ 185 1986 95% 100% Leased The Gables at Farmington................ Farmington, CT 172 1984 94% 99% Leased The Kenwood............................. Minneapolis, MN 154 1987 100% 100% Managed The Brendenwood Retirement Community.... Voorhees, NJ 145 1987 92% 88% Leased The Gables at Brighton.................. Brighton, NY 103 1988 78% 95% Leased ------ Total Units as of December 31, 1997 .. 2,801 ------ Harbor Village (5)...................... Chicago, IL 276 1954 82% 78% Leased The Atrium.............................. San Jose, CA 292 1987 100% N/A Leased The Chatfield........................... West Hartford, CT 120 1989 91% N/A Leased The Ponce de Leon....................... Santa Fe, NM 144 1985 97% N/A Leased Woodside Terrace........................ Redwood City, CA 270 1988 96% N/A Leased ------ Total Units as of December 31, 1998 .. 3,903 ====== The River Bay Club...................... Quincy, MA 285 1986 (6) N/A Leased - - ------------------ (1) Occupancy rate is calculated by dividing total occupied units by total units operated as of such date. (2) All facilities indicated as "Owned" are 100% owned by Brookdale. (3) The operating lease terms vary from 1 to 5 years (with 5 to 14 one-year extension options) to 23 years (with two 25-year extension options). (4) Total units exclude the planned 82-bed skilled nursing facility at The Devonshire facility and the 54-unit expansion at the Hawthorn Lakes facility currently under construction. (5) This facility was operated as an apartment building until 1991, at which point the prior owner purchased, substantially renovated and began operating it as a senior independent and assisted living facility. (6) This facility was 94% leased on January 19, 1999, the date on which the Company began leasing this facility.
The following table sets forth certain information regarding facilities under development by the Company for third parties:
Estimated Location Units Status Expected Opening -------- -------- ------ ---------------- Austin, TX .......................... 209 Under Construction June, 1999 Southfield, MI ...................... 219 Under Construction June, 1999 Glen Ellyn, IL ...................... 233 Under Construction January, 2000 Raleigh, NC ......................... 219 Under Construction May, 2000 New York (Battery Park City), NY .... 218 Under Construction August, 2000 Pittsburgh, PA ...................... 233 In Development February, 2001 -------- Total Estimated Units ........... 1,331 ========
-9- Corporate Office Lease On September 25, 1997, the Company entered into a 5-year lease (the "Office Lease"), which commenced October 1, 1997, for its corporate office with 77 West Wacker Limited Partnership (the "Landlord"), a partnership which is currently owned by Prime Group Realty Trust, an affiliate of PGI. The original Office Lease provided for the lease by the Company of approximately 13,500 square feet of office space on the 48th floor, with base rent of $18.50 per square foot, escalating by $0.75 per square foot at each anniversary of the commencement date. On October 2, 1997, in consideration for the signing of the Office Lease, the Company received a $404,000 cash payment from the Landlord for tenant improvements which are amortized over the term of the Office Lease. On March 17, 1998, the Company and the Landlord amended the Office Lease, pursuant to which the Company and the Landlord agreed (i) to relocate the Company's corporate office from the 48th floor to the 44th floor effective April 24, 1998, (ii) to increase the space leased by the Company to approximately 22,600 square feet and (iii) to extend the term of the Office Lease until April 30, 2005. The base rent under the amended Office Lease continues to be $18.50 per square foot, escalating $0.75 per square foot on each May 1 of the term commencing May 1, 1999. In consideration for executing the amendment of the Office Lease, which required the Company to relocate to another floor and lease additional space, the Company received a $452,000 cash payment from the Landlord for tenant improvements which are amortized over the term of the amended Office Lease. The Company's corporate office is located at 77 West Wacker Drive, Suite 4400, Chicago, Illinois 60601. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management of the Company, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the quarter ended December 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Price Range of Common Stock The Company's common stock is listed and traded on the Nasdaq National Market ("Nasdaq") under the symbol "BLCI." The following table sets forth the high and low closing prices for the common stock, as reported by Nasdaq, for the periods indicated:
1998 1997 ------ ------ High Low High Low First Quarter..................... $ 25.25 $ 16.50 $ -- $ -- Second Quarter (1)................ 29.25 22.63 12.13 11.50 Third Quarter..................... 25.63 17.44 19.00 11.88 Fourth Quarter.................... 21.59 13.25 20.63 16.50 - - ------------------ (1) The common stock commenced trading on May 2, 1997.
On March 25, 1999, the closing price for the common stock, as reported by Nasdaq was $14.94 per share. At such date, the Company had approximately 860 holders of record of common stock. Dividend Policy The Company has never declared or paid any cash dividends on its common stock and currently plans to retain future earnings, if any, to finance the growth of the Company's business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on the financial condition, results of operations, terms of debt covenants and capital requirements of the Company as well as other factors deemed to be relevant by the Company's Board of Directors. ITEM 6. SELECTED FINANCIAL DATA. The following table presents selected financial and operating data for the Company. The selected financial data as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 have been derived from the consolidated financial statements of the Company and the audited combined financial statements of The Heritage, The Hallmark, The Devonshire, The Gables of Brighton, and The Springs of East Mesa facilities (the "Predecessor Properties") included elsewhere in this Annual Report on Form 10-K which should be read in conjunction with those financial statements and notes thereto. The selected financial data as of December 31, 1996, 1995 and 1994 and for the years ended December 31, 1995 and 1994 have been derived from the combined financial statements of the Predecessor -10- Properties not included in this Annual Report on Form 10-K which should be read in conjunction with those financial statements and notes thereto. The Company initiated operations on May 7, 1997 in connection with the consummation of the IPO.
Predecessor Properties ------------------------------------------- Years Ended December 31, Brookdale Living Communities, Inc. ------------------------ ---------------------------------- January 1, to May 7, to Year Ended 1994(1) 1995(1) 1996(1) May 6, 1997(2) December 31, 1997(2) December 31, 1998 ------- ------- ------- ------------- ----------------- ----------------- (in thousands, except per share and operating data) Statement of Operations Data: Revenues .................................. $ 15,122 $ 21,848 $ 23,221 $ 10,473 $ 30,237 $ 77,701 Facility operating expenses(3) ............ (11,270) (13,253) (12,805) (6,102) (15,892) (39,935) Lease expense ............................. -- -- -- (3,042) (6,942) (17,876) General and administrative expenses(3) .... -- -- -- -- (2,187) (4,878) Depreciation and amortization ............. (4,029) (4,598) (3,527) (857) (2,967) (4,853) -------- -------- -------- -------- -------- -------- Operating (loss) income ................... (177) 3,997 6,889 472 2,249 10,159 Interest (expense) income, net ............ (3,227) (5,421) (4,524) (762) (2,326) 122 -------- -------- -------- -------- -------- -------- (Loss) income before minority interest, (provision)/benefit for income taxes and extraordinary item .................. (3,404) (1,424) 2,365 (290) (77) 10,281 Loss (income) allocated to minority interest ............................... 1,178 802 (756) (138) -- -- -------- -------- -------- -------- -------- -------- (Loss) income before (provision)/benefit benefit for income taxes and extraordinary item ..................... (2,226) (622) 1,609 (428) (77) 10,281 (Provision)/benefit for income taxes ..... -- -- -- (236) 558 (3,627) Extraordinary item (net of deferred tax benefit for income taxes of $24 for 1997) -- 3,274 -- -- (36) -- -------- -------- -------- -------- -------- -------- Net (loss) income ........................ $ (2,226) $ 2,652 $ 1,609 $ (664) $ 445 $ 6,654 ======== ======== ======== ======== ======== ======== Basic earnings per common share .......... -- -- -- -- $ 0.06 $ 0.68 Diluted earnings per common share ........ -- -- -- -- $ 0.06 $ 0.67 Basic weighted average shares outstanding ............................ -- -- -- -- 7,208 9,751 Diluted weighted average shares outstanding ............................ -- -- -- -- 7,351 9,978 Selected Operating and Other Data: Number of facilities (at end of period) 3 3 5 (9) 13 18 Total units operated (4) ................. 916 916 1,204 (9) 2,801 3,903 Occupancy rate (4)(6) .................... 95.6% 98.1% 99.7% (9) 96.4% 94.8% Average monthly revenue per unit (5)(6) $ 1,732 $ 2,015 $ 2,050 (9) $ 1,965 $ 2,046 Balance Sheet Data: Cash and cash equivalents ................ $ 4,127 $ 5,086 $ 4,230 $ 1,915 $ 13,292 $ 1,065 Cash and investments-restricted (7) ...... 2,047 1,733 1,089 2,269 5,920 8,226 Investment certificates - restricted ..... -- -- -- -- -- 15,951 Letter of credit deposit (7) ............. -- -- -- -- 12,138 13,919 Lease security deposits (8) .............. -- -- -- -- 18,542 55,453 Total assets ............................. 102,579 100,325 57,836 55,982 183,169 244,633 Total long-term debt ..................... 101,242 99,627 65,000 65,000 96,167 95,880 Total stockholders' equity and predecessor capital (deficit) .......... 1,852 3,597 (25,427) (28,685) 57,920 101,316
(1) The historical financial and operating data for the years ended December 31, 1994, 1995 and 1996 represent combined historical financial data for the Predecessor Properties. (2) The financial and operating data for year ended December 31, 1997 represent combined historical financial data for the Predecessor Properties until May 7, 1997 and, thereafter, the operations of the Company. (3) Prior to May 7, 1997, general and administrative expenses were allocated to the then existing facilities; however, following such date, the Company began reporting general and administrative expenses as a separate item. (4) Total units operated represents the total units operated as of the end of the period. Occupancy rate is calculated by dividing total occupied units by total units operated as of the end of the period. (5) Average monthly revenue per unit represents the average of the total monthly revenues divided by occupied units at the end of the period averaged over the respective period presented and for the period of time in operation during the period. (6) For the year ended December 31, 1996, all the properties of the Predecessor Properties have been included in the occupancy rate. However, the average monthly revenue per unit excludes The Gables at Brighton and The Springs of East Mesa which were leased for less than a full month in 1996. -11- (7) Cash and investments-restricted represents segregated amounts to be used for the payment of real estate taxes and other operating activities and deposits in accordance with governmental and debt agreement requirements. Letter of credit deposit represents cash collateral securing the credit enhancement issued to secure the $65.0 million of tax-exempt bonds with respect to The Heritage and The Devonshire facilities. The Company earns interest income on both cash and investments-restricted and letter of credit deposits amounts. See Note 3 to the Consolidated and Combined Financial Statements included elsewhere in this Annual Report on Form 10-K. (8) Lease security deposits represents investments collateralizing the Company's lease obligations. (9) All Selected Operating and Other Data for 1997 is as of and for the year ended December 31, 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview As of December 31, 1998 and 1997, the Company operated 18 and 13 senior independent and assisted living facilities, respectively, containing a total of 3,903 units and 2,801 units, respectively. Four of such facilities are owned by the Company, 12 (seven at December 31, 1997) facilities are leased by the Company and 2 facilities (one of which is owned by PGI) are managed by the Company pursuant to management contracts. The Company's senior independent and assisted living facilities offer residents a supportive, "home-like" setting as well as assistance with activities of daily living. By providing residents a range of service options as their needs change, the Company seeks to achieve greater continuity of care, enabling senior independents to age-in-place and thereby maintain their residency for a longer time period. The ability to allow residents to age-in-place is beneficial to the Company's residents as well as their families who are burdened with care decisions for their elderly relatives. The Company derives its revenue from resident fees, development fees and management fees. Resident fees typically are paid monthly by residents, their families or other responsible parties. As of December 31, 1998 and 1997, over 99% of the Company's resident fee revenue was derived from private pay sources. Development fees are earned for developing senior independent and assisted living facilities for third parties. Management services income consists of management fees, which typically range from 3.0% to 5.0% of a managed facility's total gross revenues. All such fees are recognized as revenues when services are provided. The Company classifies its operating expenses into the following categories: (i) facility operating expenses, which includes labor, food, marketing and other direct facility expenses and real estate taxes; (ii) general and administrative expenses, which primarily include corporate headquarters and other overhead costs; (iii) lease payments; and (iv) depreciation and amortization.
Results of Operations Year Ended January 1 to May 7 to Year Ended December 31, May 6, December 31, December 31, ------------ ------------ ----------- ------------ 1996 1997 1997 1998 ----------- ------------ ----------- ------------ Total revenue ............................................. 100.0 % 100.0 % 100.0 % 100.0 % Facility operating expenses (1) ........................... (55.1) (58.3) (52.6) (51.4) Lease expense ............................................. -- (29.0 (23.0) (23.0) General and administrative expenses (1) ................... -- -- (7.2) (6.3) Depreciation and amortization ............................. (15.2) (8.2) (9.8) (6.2) ----------- ------------ ----------- ------------ Operating income .......................................... 29.7 4.5 7.4 13.1 Interest income (expense), net ............................ (19.5) (7.3) (7.7) 0.2 ----------- ------------ ----------- ------------ Income (loss) before minority interest, (provision)/benefit for income taxes and extraordinary item ................ 10.2 (2.8) (0.3) 13.3 Income allocated to minority interest ..................... (3.3) (1.3) -- -- ----------- ------------ ----------- ------------ Income (loss) before (provision)/benefit for income taxes and extraordinary item ................................. 6.9 (4.1) (0.3) 13.3 (Provision)/benefit for income taxes ...................... -- (2.2) 1.8 (4.7) Extraordinary item (net of deferred tax benefit for income taxes of 0.1% for 1997) ................................ -- -- (0.1) -- ----------- ------------ ----------- ------------ Net income (loss) ......................................... 6.9 % (6.3)% 1.4 % 8.6 % =========== ============ =========== ============ Selected Operating and Other Data: Number of facilities (at end of period) (5) .......... 5 -- 13 18 Total units operated (2)(5) .......................... 1,204 -- 2,801 3,903 Occupancy rate (2)(5) ................................ 99.7 % -- 96.4 % 95.3 % Average monthly revenue per unit (3)(4)(5) ........... $2,050 -- $1,965 $2,046
- - ------------------ (1) Prior to May 7, 1997, general and administrative expenses were allocated to the then existing facilities; however, following May 7, 1997, the Company, which commenced operations as of such date, began reporting general and administrative expenses as a separate item. -12- (2) Total units operated represents the total units operated as of the end of the period. Occupancy rate is calculated by dividing total occupied units by total units operated as of the end of the period. (3) Average monthly revenue per unit represents the average of the total monthly resident fees divided by occupied units at the end of the period averaged over the respective period presented and for the period of time in operation during the period. (4) For the year ended December 31, 1996, The Hallmark, The Heritage, The Devonshire, The Springs of East Mesa and The Gables at Brighton (The Springs of East Mesa and Gables of Brighton beginning December 26, 1996) (the "Predecessor Properties") have been included in the occupancy rate. However, the average monthly revenue per unit excludes The Gables at Brighton and The Springs of East Mesa which were leased for less than a full month in 1996. (5) All Selected Operating and Other Data is as of and for the year ended December 31, 1997. Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997 For the year ended December 31, 1997, results reflect operations of the Predecessor Properties facilities through May 7, 1997 and all of the Company's facilities thereafter. Revenue. Total revenue increased by $37.0 million, or 90.9%, to $77.7 million for the year ended December 31, 1998 when compared to the year ended December 31, 1997. Of this increase, $31.2 million was from increased resident fees, $5.7 million was from development fees earned from third parties, and $.1 million was from management fees. Of the increased resident fees, $1.4 million (an increase of 4%) was from the five "same store" properties operated for the full year 1998 and 1997, $20.0 million was from the six properties purchased or leased during 1997 and operated for the full year 1998, and $9.8 million was from the five properties leased in 1998. Operating Expenses. Total operating expenses increased by $29.6 million, or 77.8%, to $67.5 million for the year ended December 31, 1998 when compared to the year ended December 31, 1997. Facility operating expenses increased $18.2 million, or 83.5%; general and administrative increased $2.7 million, or 123% (there was no general and administrative expense prior to the IPO on May 7, 1997); lease expense increased $7.9 million, or 79%; depreciation and amortization increased $1.0 million, or 26.9%; and property management fees for the Predecessor Properties decreased $.2 million, or 100%, as a result of the Predecessor Properties contracting for outside management. Of the increased facility operating expenses, $0 was from the five "same store" properties operated from the full year 1998 and 1997, $11.8 million was from the six facilities purchased or leased during 1997 and operated for the full year 1998, and $6.4 million was from the five facilities leased in 1998. The increased lease expense was due to the four facilities leased during 1997 and operated for the full year 1998, and the five additional facilities leased in 1998. General and administrative expenses increased $2.7 million, or 123%, due to a full year of operations subsequent to the formation of the Company on May 7, 1997. Increased general and administrative costs were partially offset by the $.2 million decrease in property management fees for the Predecessor Properties prior to the formation of the Company on May 7, 1997. Depreciation and amortization increased $1.0 million primarily due to full year's depreciation of the Hawthorn Lakes and Edina Park Plaza facilities purchased on May 7, 1997, and depreciation of additional furniture, fixtures and equipment at the Company's corporate office. Interest income increased $3.5 million, or 461.0%, for the year ended December 31, 1998 when compared to December 31, 1997, due primarily to the increase of restricted deposits in connection with the leased facilities, cash investments collateralizing The Devonshire and The Heritage letters of credit and investment certificates acquired by the Company in 1998. Interest expense increased $.3 million for the year ended December 31, 1998 when compared to December 31, 1997 primarily due to the full year in 1998 of mortgage interest for the Hawthorn Lakes and Edina Park Plaza facilities which was partially offset by the lower interest rates on The Devonshire and The Heritage facilities' variable rate tax-exempt bonds. Net Income. Net income of $6.7 million for the year ended December 31, 1998 increased from the combined net loss of the Predecessor Properties and the Company for the year ended December 31, 1997 due to improved operations for the five "same store" properties, a full year's operation of the seven facilities purchased or leased in 1997 and the operation of five facilities leased in 1998. -13- Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996 For the year ended December 31, 1996, results reflect operations of The Hallmark, The Heritage and The Devonshire facilities. For the year ended December 31, 1997, results reflect operations of the Predecessor Properties facilities through May 7, 1997 and all of the Company's facilities thereafter. Revenue. Total revenue increased by $17.5 million, or 75.3%, to $40.7 million for the year ended December 31, 1997 when compared to the year ended December 31, 1996. Of this increase, approximately $1.6 million (or an increase of 7.0%) relates to increased resident fees at the properties that have been operated during both periods. Approximately $14.9 million of such increase relates to revenue from The Springs of East Mesa, The Gables at Brighton, Hawthorn Lakes, Edina Park Plaza and The Park Place facilities acquired or leased in December 1996 or during 1997, and approximately $1.0 million of such increase relates to revenue from The Gables at Farmington, The Classic at West Palm Beach and The Brendenwood Retirement Community facilities leased in November and December of 1997. Operating Expenses. Total operating expenses increased by $21.7 million, or 132.6%, to $38.0 million for the year ended December 31, 1997 when compared to the year ended December 31, 1996. Facility operating expenses increased by $9.9 million, or 83.3%, to $21.8 million primarily due to the inclusion of the acquired or leased facilities. From the commencement of operations on May 7, 1997 through December 31, 1997, the Company managed its facilities and, accordingly, did not pay any property management fees, but incurred general and administrative expenses of approximately $2.2 million. Lease expense increased by $10.0 million due to the inclusion of The Springs of East Mesa, The Gables at Brighton, The Hallmark, The Park Place, The Gables at Farmington, The Classic at West Palm Beach and The Brendenwood Retirement Community facilities. Depreciation and amortization increased by approximately $297,000, or 8.4%, to $3.8 million for the year ended December 31, 1997. Of this increase, approximately $182,000 relates to the depreciation of the step-up basis of The Devonshire and The Heritage properties that resulted in connection with the IPO, which totaled $130,000 and $52,000, respectively. The remainder of the increase, or approximately $115,000, relates to the depreciation of the acquired or leased facilities of $1.1 million offset by a decrease in depreciation on The Hallmark facility of $1.2 million due to the sale and lease-back of this facility at the end of 1996. Interest expense decreased by approximately $890,000, or 18.8%, to $3.9 million for the year ended December 31, 1997 primarily due to the sale and lease-back of The Hallmark facility. As a result of the sale and lease-back of such facility on December 27, 1996, the facility was no longer encumbered by debt. This decrease was slightly offset by the assumption of debt on the Hawthorn Lakes and Edina Park Plaza facilities in connection with the purchase of these properties during 1997. Interest income increased by approximately $546,000, or 252.8%, to $762,000 due to an increase in average cash balances. Property management fees decreased by approximately $700,000, or 75.3%, to $230,000 due to the elimination of all management fee expense with respect to facilities owned or leased by the Company once the Company commenced operations on May 7, 1997. Net Income. For the year ended December 31, 1997, net income, when combining the Predecessor Properties and the Company, decreased by approximately $1.8 million, or 113.6%, to a net loss of $219,000 when compared to the year ended December 31, 1996. The net loss of $219,000 is composed of net income of the Company of $445,000 for the period from May 7, 1997 to December 31, 1997 and a net loss of the Predecessor Properties of $664,000 for the period from January 1, 1997 to May 6, 1997. Net income for the year ended December 31, 1997 (which included the Predecessor Properties through May 7, 1997 and all of the Company's facilities thereafter), versus net income for the year ended December 31, 1996, which included the Predecessor Properties only, is not necessarily comparable, in the opinion of management, due to the different ownership and capital structures for the respective years. Liquidity and Capital Resources Since formation of the Company on May 7, 1997, the Company has financed its growth through issuances of common stock, borrowings under lines of credit, entering into operating leases with third parties and cash generated from the operation of the facilities. Cash and cash equivalents (which excludes cash and investments-restricted of $8.2 million, letter of credit deposits of $13.9 million, investment certificates of $16.0 million, and lease security deposits of $55.5 million) decreased by $12.2 million to $1.1 million at December 31, 1998 compared to $13.3 million at December 31, 1997. The decrease was primarily due to the funding of lease security deposits in connection with the leasing of five facilities in 1998, earnest money deposits for The River Bay Club facility leased in January, 1999, development costs related to development activities, improvements at owned and leased facilities and general corporate purposes. Net cash provided by operating activities for the year ended December 31, 1998 increased to $10.3 million from $4.9 million for the year ended December 31, 1997. The increase is primarily due to an additional five facilities leased in 1998, a full year's operating results for the six facilities purchased and leased during 1997 and improved operating results for the five facilities operated for the full year 1998 and 1997. Net cash used in investing activities increased for the year ended December 31, 1998 to $66.8 million from $61.8 million for the year ended December 31, 1997 due to increased development activity for third parties which was partially offset by the decrease in cash paid for lease security deposits and acquisitions. In 1998, the Company leased five facilities, and in 1997, the Company leased four facilities, purchased the Hawthorn Lakes and Edina Park Plaza facilities and acquired a third party's interest in The Heritage and The Devonshire facilities. -14- Net cash provided by financing activities for the year ended December 31, 1998 decreased to $44.3 million from $66.0 million for the year ended December 31, 1997. The decrease was primarily due to the decrease in proceeds from the issuance of common stock from the follow-on offerings of $45.9 million offset by increased borrowings under the line of credit of $11.0 million and decreased fundings in letter of credit deposits of $10.4 million related to tax-exempt bonds. In January, 1999 the Company increased its unsecured line of credit to $25.0 million of which approximately $11.0 million was drawn at December 31, 1998. The line of credit bears interest at prime plus 1/2% per annum (8.25% at December 31, 1998). The Company obtained an additional line of credit of $5.0 million bearing interest at 12% per annum subsequent to December 31, 1998. As of December 31, 1998 and 1997, the Company had $65.0 million of long-term indebtedness in the form of variable rate tax-exempt bonds. The interest rates (exclusive of credit enhancement and other fees) on such debt was 4.1% and 3.8% at December 31, 1998 and 1997, respectively (the average interest rate was 3.5%, 3.7%, and 3.4% for the years ended December 31, 1998, 1997 and 1996, respectively). Such tax-exempt bonds contain covenants requiring the facilities to maintain a minimum number of units for income qualified residents. The Company currently plans to acquire or lease 4 to 6 senior independent and assisted living facilities per year containing an aggregate of approximately 800 to 1,200 units, and to commence development of 2 to 3 new facilities per year containing approximately 220 units. The Company anticipates that new developments will require 8 to 10 months for pre-construction development, 12 to 14 months for construction and approximately 12 months after opening to achieve a stabilized occupancy rate of approximately 95%. The total construction costs, including construction period financing costs and operating deficits during the lease-up period, for the 220-unit prototype are estimated to be approximately $35.0 million, or approximately $159,000 per unit. At March 29, 1999, the Company had 6 sites under development for third parties for new senior independent and assisted living facilities, 5 of which were under construction. The Company's estimated capital expenditures related to sites under development aggregate to approximately $10.8 million to $14.8 million. Capital expenditures related to the Company's existing facilities, including the 54-unit expansion at the Hawthorn Lakes facility currently under construction, are estimated to be approximately $6.0 million to $7.0 million in 1999. The Company is currently negotiating to increase and extend its line of credit. The Company has an effective "shelf" registration statement pursuant to which the Company may issue up to $200.0 million of equity or debt securities. In November 1998, the Company issued $33.0 million of common stock and may consider additional financing through the issuance of debt and/or equity. In order to achieve its growth plans, the Company will be required to obtain a substantial amount of additional financing. The Company anticipates that it may use a combination of additional equity financing and debt financing, lease transactions and cash generated from operations to fund its acquisition and development activities. The Company presently has no commitment, arrangement or understanding regarding financing to fund the debt portion of the Company's acquisition and development plans other than the $100.0 million commitment from Capital Corporation of America, of which $51 million has been committed to the Austin, Texas and Southfield, Michigan development projects which are being developed for third parties. There can be no assurance that the Company will be able to obtain the financing necessary for its acquisition and development programs. The Company is dependent on third-party financing for its acquisition and development programs. Some financing obtained in the future is expected to contain terms and conditions and representations and warranties that are customary for such loans and may contain financing covenants and other restrictions that (i) require the Company to meet certain financial tests and maintain certain amounts of funds in escrow, (ii) limit, among other things, the ability of the Company to borrow additional funds, dispose of assets and engage in mergers or other business combinations and (iii) restrict the ability of the Company to operate competing facilities within certain distances from mortgaged facilities. There can be no assurance that financing for the Company's acquisition and development program will be available to the Company on acceptable terms or at all. A lack of funds may require the Company to delay or eliminate all or some of its development projects and acquisition plans and could therefore have a material adverse effect on the Company's growth plans and its business plan, financial condition and results of operations. To date, the Company's ability to increase cash flow to meet rising costs has not been adversely affected in any material way by existing, or proposed, rent control ordinances. Rent control ordinances may not be applicable to the Company's facilities due to the services provided for the monthly fees charged to its residents. If the Company's facilities were subject to rent control ordinances, an imposed limitation on the resident fees that the Company may charge at such facility could impair the Company's ability to meet any rising costs of operating the facility. Impact of Inflation Resident fees from senior independent and assisted living facilities owned or leased by the Company and management fees from facilities managed by the Company for third parties are its primary sources of revenue. These revenues are affected by monthly resident fee rates and facility occupancy rates. The rates charged for senior independent and assisted living services are highly dependent upon local market conditions and the competitive environment in which the facilities operate. Substantially all of the Company's resident agreements allow for adjustments in the monthly fees payable thereunder not less frequently than every 13 months, thereby enabling the Company to seek increases in monthly fees due to inflation or other factors. Any such increase would be subject to market and competitive conditions and could result in a decrease in occupancy at the Company's facilities. The Company believes, however, that the ability of the Company to periodically adjust the monthly fee generally serves to reduce the risk to the Company of the adverse effect of inflation. In addition, employee compensation expense is a principal cost element of facility operations and is also dependent upon local market conditions. There can be no assurance that resident fees will increase or that costs will not increase due to inflation or other causes. In addition, as of December 31, 1998, approximately $65.0 million in principal amount of the Company's indebtedness bore interest at tax-exempt floating rates and future indebtedness may bear floating rate interest. Inflation, and its impact on floating interest rates, could affect the amount of interest payments due on such indebtedness. -15- Readiness for Year 2000 The Company has implemented a program to assess, remediate and mitigate the potential impact of the Year 2000 Issue throughout the Company. The Company's program has been structured to address its internal computer systems and applications, network services operations, facilities operations and third-party vendors and suppliers. The Company believes that it is taking the necessary steps within its control to mitigate the potential impact of the Year 2000 Issue on the Company. Information Systems The Company is in the process of upgrading its accounting, human resources, property management and marketing systems prior to the assessment of its Year 2000 Issue. The Company expects that the replacement of its current system will mitigate the impact of the Year 2000 Issue on its accounting operations. The corporate software selection has been completed, a contract was executed in the third quarter of 1998 and development and implementation were commenced in the fourth quarter of 1998. The Company has one vendor software package that is used to process property level accounting information at each facility which is not Year 2000 compliant. The vendor is developing a conversion to ensure that the software package is Year 2000 compliant. The Company is in the process of selecting replacement software at the facilities it owns or operates and is expected to do so in the second quarter of 1999 in the event it is determined that the vendor of the current software is unable to ensure the software package is Year 2000 compliant. The Company anticipates completing the corporate project no later than the second quarter of 1999 and the facilities' project no later than the fourth quarter of 1999. Facilities The Company has commenced an assessment of each facility, including an assessment of infrastructure equipment such as elevator, HVAC and security systems, and other critical service provider readiness issues. The Company completed its preliminary assessment by December 31, 1998. The vendor software package at each facility is used for resident billing and payable processing. As noted above, the Company is in the process of selecting replacement software in the event the vendor of the current software is unable to ensure that the existing software is Year 2000 compliant. During the first half of 1999, the Company will undertake contingency planning for each of its facilities as necessary. Third-Party Vendors and Suppliers The Company's approach to third-party suppliers involves the process of identification and prioritization of critical suppliers and communicating with them about their plans and progress in addressing the Year 2000 Issue. This evaluation, including prioritization of critical suppliers, and the subsequent contingency planning will be undertaken during the first half of calendar 1999. Costs The final cost to complete the project has not yet been determined; however, the estimated total cost, including capital expenditures, will approximate $2.5 million to $3.0 million through December 31, 2000. The Company's costs include outside consultants and contractors and hardware and software replacements and upgrades. The Company anticipates that cash on hand, cash generated from operations and additional debt and equity financings will provide sufficient cash to fund Year 2000 compliance expenditures. The Company's allocation of other personnel resources and planned expenditures has not resulted in the deferral of any information technology projects. Remediation costs, other than the planned expenditures described above, are not expected to be material. Risks The Company may face potential Year 2000 related risks and may experience business interruption to its operations as a result of third-party vendors and suppliers failing to address their Year 2000 compliance issues. The Company's plan includes an assessment of third-party vendors and suppliers to identify Year 2000 compliance issues and the potential impact upon the Company and its operations. Project completion dates are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the ability of third parties to modify the Company's systems on a timely basis. There can be no guarantee that the project will be completed in a timely manner. Specific factors that might delay completion of the project include, but are not limited to, the availability of qualified personnel, the ability to locate and correct all relevant computer codes, and similar uncertainties. Although the Company intends to continue preparations for Year 2000, it is not possible to quantify potential indirect effects resulting from the lack of readiness of any third party with whom the Company conducts its business. Readers are cautioned that forward-looking statements contained in the Year 2000 disclosure should be read in conjunction with "Cautionary Statements" on page 1. -16- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to interest rate risk primarily through its borrowing and leasing activities. There is inherent risk from borrowings and leasing as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. The Company does not enter into financial instruments transactions for trading or other speculative purposes. Long-term debt -- As of December 31, 1998, the Company had $95,880,000 of long-term debt at a weighted average interest rate of 4.16% of which $3,000,000 matures May 1, 1999. Mortgage notes of $27,880,000 bear interest of 8.0 to 8.525% through maturity in 2027 when the loans are fully repaid. Two facilities are financed with variable rate tax-exempt bonds of $33,000,000 and $32,000,000 which are payable interest only until maturity in 2025 and 2019, respectively. Line of credit -- As of December 31, 1998, the Company had $10,997,000 outstanding on its unsecured line of credit which has a variable rate of prime plus 1/2%. The Company has entered into interest rate lock agreements on behalf of third party owners of development projects to limit their exposure to movements in variable interest rates. The notional amount of the construction loans is $103,689,000 and the approximate value of the liability is $2,092,000. The Company is to be reimbursed by the third party for any payments made pursuant to the agreements. If interest rates on the Company's variable rate debt, including tax-exempt bonds, increased by 1 percentage point, the annual interest expense would increase by approximately $750,000. Lease expense -- The Company has entered into operating leases which have fixed terms and are subject to renewal at the option of the Company. The Company has an option to purchase the properties prior to or at the end of the lease. Four of the facilities' lease requires the payment of additional rent of 10% of the excess of each year's revenue compared to 1998. The Company does not enter into financial instruments transactions for trading or other speculative purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements The information required by this Item is set forth at the pages indicated below. Report of Independent Auditors....................................................................................18 Consolidated Balance Sheets of Brookdale Living Communities, Inc. as of December 31, 1998 and 1997................19 Consolidated Statements of Operations of Brookdale Living Communities, Inc. for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997 and Combined Statements of Operations of Predecessor Properties (predecessor to Brookdale Living Communities, Inc.) for the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996 ................................20 Consolidated Statements of Stockholders' Equity of Brookdale Living Communities, Inc. for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997 ..................................21 Combined Statements of Changes in Partners' Capital (Deficit) of Predecessor Properties (predecessor to Brookdale Living Communities, Inc.) for the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996 .....................................................................................22 Consolidated Statements of Cash Flows of Brookdale Living Communities, Inc. for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997 and Combined Statements of Cash Flows of Predecessor Properties (predecessor to Brookdale Living Communities, Inc.) for the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996 .....................................23 Notes to Consolidated and Combined Financial Statements of Brookdale Living Communities, Inc. and the Predecessor Properties (predecessor to Brookdale Living Communities, Inc.) .......................................25 Financial Statement Schedules Not Filed: All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted.
-17- REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Brookdale Living Communities, Inc. We have audited the accompanying consolidated balance sheets of Brookdale Living Communities, Inc., a Delaware corporation, and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1998 and for the period from May 7, 1997 (date of formation) through December 31, 1997. We have also audited the combined statements of operations, changes in partners' capital (deficit) and cash flows of the Predecessor Properties (predecessor to Brookdale Living Communities, Inc.) (the "Predecessor") for the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996. These financial statements are the responsibility of the Company's and the Predecessor's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Brookdale Living Communities, Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997, and the combined results of operations and cash flows of the Predecessor Properties for the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois March 4, 1999 -18-
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") CONSOLIDATED BALANCE SHEETS OF THE COMPANY December 31, 1998 and 1997 (In Thousands, Except Par Value Amounts) Assets 1998 1997 ---- ---- Current assets: Cash and cash equivalents.............................................. $ 1,065 $ 13,292 Accounts receivable.................................................... 379 312 Notes receivable....................................................... 3,486 -- Reimbursable development costs......................................... 9,815 210 Prepaid expenses and other............................................. 4,752 2,769 ------------- ------------- Total current assets............................................. 19,497 16,583 ------------- ------------- Property, plant and equipment.......................................... 115,801 113,294 Accumulated depreciation............................................... (5,689) (2,164) ------------- ------------- Property, plant and equipment, net..................................... 110,112 111,130 ------------- ------------- Property under development............................................. 11,221 11,427 Cash and investments - restricted...................................... 8,226 5,920 Investment certificates - restricted................................... 15,951 -- Letter of credit deposits.............................................. 13,919 12,138 Lease security deposits................................................ 55,453 18,542 Other.................................................................. 10,254 7,429 ------------- ------------- Total assets..................................................... $ 244,633 $ 183,169 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt...................................... $ 3,310 $ 286 Unsecured line of credit............................................... 10,997 -- Current portion of deferred gain on sale of property................... 806 806 Accrued interest payable............................................... 968 566 Accrued real estate taxes.............................................. 1,485 1,284 Accounts payable and accrued expenses.................................. 7,749 2,972 Tenant refundable entrance fees and security deposits.................. 5,838 4,377 Other.................................................................. 629 344 ------------- ------------- Total current liabilities........................................ 31,782 10,635 ------------- ------------- Long-term debt, less current portion................................... 92,570 95,881 Deferred lease liability............................................... 2,849 1,811 Deferred gain on sale of property, less current portion................ 16,116 16,922 ------------- ------------- Total liabilities................................................ 143,317 125,249 ------------- ------------- Commitments and contingencies Stockholders' Equity: Preferred stock, $.01 par value, 20,000 shares authorized, none issued. -- -- Common stock, $.01 par value, 75,000 shares authorized, 11,572 and 9,175 shares issued and outstanding at December 31, 1998 and 1997, respectively ...................................................... 116 92 Additional paid-in-capital............................................. 94,101 57,383 Accumulated earnings................................................... 7,099 445 ------------- ------------- Total stockholders' equity....................................... 101,316 57,920 ------------- ------------- Total liabilities and stockholders' equity....................... $ 244,633 $ 183,169 ============= =============
See accompanying notes to consolidated and combined financial statements. -19-
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY AND COMBINED STATEMENTS OF OPERATIONS OF THE PREDECESSOR (In Thousands, Except Per Share Amounts) Brookdale Living Communities, Inc. Predecessor Properties ------------------------------------ --------------------------------- Period from Period from May 7, 1997 January 1, 1997 Year Ended through through Year Ended December 31, 1998 December 31, 1997 May 6, 1997 December 31, 1996 ----------------- ----------------- ------------- ----------------- Revenue Resident fees ....................................... $ 71,785 $ 30,105 $ 10,473 $ 23,221 Development fees .................................... 5,655 -- -- -- Management fees ..................................... 261 132 -- -- ------------- ----------- -------- --------- Total revenue .................................. 77,701 30,237 10,473 23,221 ------------- ----------- -------- --------- Expenses Facility operating .................................. 39,935 15,892 5,872 11,875 General and administrative .......................... 4,878 2,187 -- -- Lease expense ....................................... 17,876 6,942 3,042 -- Depreciation and amortization ....................... 4,853 2,967 857 3,527 Property management fees ............................ -- -- 230 930 ------------- ----------- -------- --------- Total operating expenses ....................... 67,542 27,988 10,001 16,332 ------------- ----------- -------- --------- Income from operations ......................... 10,159 2,249 472 6,889 Interest income ..................................... 4,275 694 68 216 Interest expense .................................... (4,153) (3,020) (830) (4,740) ------------- ----------- -------- --------- Income (loss) before minority interest, (provision)/benefit for income taxes and extraordinary item ........................... 10,281 (77) (290) 2,365 Minority interest ................................... -- -- (138) (756) (Provision)/benefit for income taxes ................ (3,627) 558 (236) -- ------------- ----------- -------- --------- Income (loss) from continuing operations before extraordinary item .................... 6,654 481 (664) 1,609 Extraordinary item (net of deferred tax benefit of $24 for 1997) ......................... -- (36) -- -- ------------- ----------- -------- --------- Net income (loss) .............................. $ 6,654 $ 445 $ (664) $ 1,609 ============= =========== ======== ========= Basic earnings per common share: Income from continuing operations before extraordinary item ............................. $ 0.68 $ 0.07 Extraordinary item ............................... -- (0.01) ------------- ----------- Net income ....................................... $ 0.68 $ 0.06 ============= =========== Diluted earnings per common share: Income from continuing operations before extraordinary item ............................. $ 0.67 $ 0.07 Extraordinary item ............................... -- (0.01) ------------ ----------- Net income ....................................... $ 0.67 $ 0.06 ============ =========== Weighted average shares used for computing basic earnings per share ............. 9,751 7,208 ============= ============ Weighted average shares used for computing diluted earnings per share ........... 9,978 7,351 ============= ============
See accompanying notes to consolidated and combined financial statements. -20-
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY OF THE COMPANY YEAR ENDED DECEMBER 31, 1998 AND PERIOD FROM MAY 7, 1997 THROUGH DECEMBER 31, 1997 (In Thousands) Brookdale Living Common Stock Communities, Inc. ------------------------ Additional Accumulated Shares Amount Paid-in Capital Earnings ------------------------ --------------- ----------------- Balances at May 7, 1997 .............................. -- $ -- $ -- $ -- Reclassification of net deficit of predecessor ....... -- -- (28,685) -- Deferred tax asset ................................... -- -- 4,002 -- Issuance of common stock, net ........................ 9,175 92 82,066 -- Net income ........................................... -- -- -- 445 ------------------------ ----------- ----------- Balances at December 31, 1997 ........................ 9,175 92 57,383 445 ------------------------ ----------- ----------- Issuance of common stock, net ........................ 2,397 24 36,234 -- Tax benefit on options ............................... -- -- 484 -- Net income ........................................... -- -- -- 6,654 ------------------------ ----------- ----------- Balances at December 31, 1998 ....................... 11,572 $ 116 $ 94,101 $ 7,099 ======================== =========== ===========
See accompanying notes to consolidated and combined financial statements. -21- PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY) COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) OF THE PREDECESSOR PERIOD FROM JANUARY 1, 1997 THROUGH MAY 6, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1996 (In Thousands) Balance at January 1, 1996 .................... $ 3,597 Contributions ................................. 51 Distributions ................................. (26,152) Advances made to general partners ............. (4,532) Net income .................................... 1,609 ------------- Balance at December 31, 1996 .................. (25,427) Contributions ................................. 813 Distributions ................................. (3,407) Net loss ...................................... (664) ------------- Balance at May 6, 1997 ........................ $ (28,685) ============= See accompanying notes to consolidated and combined financial statements. -22-
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (In Thousands) Brookdale Living Communities, Inc. Predecessor Properties ------------------------------------ ---------------------------------- Period from Period from May 7, 1997 January 1, 1997 Year Ended through through Year Ended December 31, 1998 December 31, 1997 May 6, 1997 December 31,1996 ----------------- ----------------- ------------- ------------------ Cash Flows from Operating Activities: Net income (loss) $ 6,654 $ 445 $ (664) $ 1,609 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ..................... 4,853 2,967 857 3,527 Minority interest ................................. -- -- 138 756 Extraordinary item ................................ -- 36 -- -- Increase in deferred lease liability .............. 1,038 1,379 419 13 Deferred gain on sale of property ................. (806) (525) (281) -- Deferred income taxes ............................. 2,628 (582) -- -- Changes in: Accounts receivable ............................. (67) (218) (5) (66) Prepaid expenses and other assets................ (7,719) (1,120) 597 (1,114) Due from/to affiliates, net ..................... -- 53 (763) 531 Accrued interest payable ........................ 402 273 111 (22) Accrued real estate taxes ....................... 24 199 54 38 Accounts payable and accrued expenses ........... 4,671 1,786 377 223 Tenant refundable entrance fees and security deposits ....................................... (8) 374 35 354 Other liabilities................................ (1,381) (2,101) 1,022 616 ----------------- ----------------- ------------- ------------------ Net cash provided by operating activities ..... 10,289 2,966 1,897 6,465 ----------------- ----------------- ------------- ------------------ Cash Flows from Investing Activities: Cash paid for lease security deposits and acquisitions, net ................................. (35,203) (47,705) -- -- Proceeds from sale of property under development, net 5,550 -- -- -- Changes in cash and investments-restricted .......... (758) (2,614) (1,180) 1,529 Increase in investment certificates-restricted ...... (15,951) -- -- -- Cash paid for property under development ............ (18,615) (8,350) (2) (6) Proceeds from sale of property ...................... -- -- -- 24,152 Payments received on notes receivable ............... 9,785 -- -- -- Additions to property, plant and equipment and reimbursable development costs .................... (11,588) (1,769) (149) (358) ----------------- ----------------- ------------- ------------------ Net cash (used in) provided by investing activities ........................ (66,780) (60,438) (1,331) 25,317 ----------------- ----------------- ------------- ------------------- Cash Flows from Financing Activities: Repayment of long-term debt ......................... (286) (178) -- (306) Proceeds from unsecured line of credit .............. 46,946 -- -- -- Repayment of unsecured line of credit ............... (35,950) -- -- -- Increase in letter of credit deposit ................ (1,781) (12,138) -- -- Payment of deferred costs ........................... (923) (993) (287) (814) Proceeds from issuance of common stock, net ......... 36,258 82,158 -- -- Net contributions, advances/distributions to partners -- -- (2,594) (30,633) ----------------- ----------------- ------------- ------------------- Net cash provided by (used in) financing activities ........................ 44,264 68,849 (2,881) (31,753) ----------------- ----------------- ------------- ------------------- Net (decrease) increase in cash and cash equivalents ... (12,227) 11,377 (2,315) 29 Cash and cash equivalents at beginning of period ....... 13,292 1,915 4,230 4,201 ----------------- ----------------- ------------- ------------------- Cash and cash equivalents at end of period ............. $ 1,065 $ 13,292 $ 1,915 $ 4,230 ================= ================= ============= ====================
See accompanying notes to consolidated and combined financial statements. -23-
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (continued) (In Thousands) Brookdale Living Communities, Inc. Predecessor Properties ------------------------------------ ---------------------------------- Period from Period from May 7, 1997 January 1, 1997 Year Ended through through Year Ended December 31, 1998 December 31, 1997 May 6, 1997 December 31,1996 ----------------- ----------------- ------------- ------------------ Supplemental Disclosure of Cash Flow Information: Interest paid, net of amounts capitalized .............. $ 3,751 $ 2,747 $ 723 $ 4,762 ================= ================= ============= ==================== Income taxes paid ...................................... $ 661 $ -- $ -- $ -- ================= ================= ============= ==================== Supplemental Schedule of Noncash Investing and Financial Activities: In connection with net lease transactions and acquisitions, assets acquired and liabilities assumed were as follows - Fair value of assets acquired ........................ $ 35,151 $ 87,260 $ -- $ -- Less cash paid ....................................... 31,591 47,643 -- -- ----------------- ----------------- ------------- -------------------- Liabilities assumed .................................. $ 3,560 $ 39,617 $ -- $ -- ================= ================= ============= ====================
The following assets and liabilities were contributed by the Predecessor to the Company on May 7, 1997: Cash ................................................... $ 1,915 Cash-restricted ........................................ 2,269 Accounts receivable .................................... 95 Prepaid rent ........................................... 396 Due from affiliates, net ............................... 53 Property, plant and equipment, net ..................... 48,808 Property under development ............................. 77 Deferred costs, net .................................... 1,710 Other assets ........................................... 421 ---------- Total assets ...................................... 55,744 Deferred gain on sale of property, current ............. 806 Prepaid rent ........................................... 1,402 Accrued interest payable ............................... 293 Accrued real estate taxes .............................. 1,085 Accounts payable and accrued expenses .................. 1,190 Income taxes payable ................................... 236 Tenant refundable entrance fees and security deposits .. 2,649 Deferred lease liability ............................... 432 Bonds payable .......................................... 65,000 Deferred gain on sale of property, noncurrent .......... 17,447 ---------- Total liabilities ................................. 90,540 Minority interest ..................................... (6,111) ---------- Predecessor owners' deficit contributed ................ $ (28,685) ========== See accompanying notes to consolidated and combined financial statements. -24- Brookdale Living Communities, Inc. AND SUBSIDIARIES (the "Company") and Predecessor Properties (the "Predecessor" to the Company) Notes to Consolidated and Combined Financial Statements (In Thousands, Except Per Share Amounts and Square Feet) 1. Organization Brookdale Living Communities, Inc. was incorporated in Delaware on September 4, 1996 and commenced operations upon completion of its initial public offering (the "IPO") which closed on May 7, 1997. Brookdale Living Communities, Inc. and its subsidiaries (collectively, "the Company") were formed in order to create a company focused on senior independent and assisted living, which would succeed to such property ownership interests and operations of the senior independent and assisted living division of The Prime Group, Inc. and certain of its affiliates (collectively, "PGI"). In connection with the IPO, which closed on May 7, 1997, the Company sold 4,500 shares of its common stock at $11.50 per share and received net proceeds of $44,097. PGI contributed its senior independent and assisted living property ownership interests and operations of the Predecessor Properties as described below, in exchange for 1,703 shares of common stock of the Company. Mark J. Schulte (President and Chief Executive Officer of the Company) contributed his interests in PGI's senior independent and assisted living division to the Company in exchange for 297 shares of common stock of the Company. PGI also purchased 2,500 of the 4,500 shares of common stock sold in the IPO. In connection with the IPO, the Company granted the underwriters an option to purchase up to 675 additional shares of common stock for the purpose of covering over-allotments. On June 3, 1997, the underwriters exercised their over-allotment option, and the Company sold an additional 675 shares at $11.50 per share. The Company received net proceeds of approximately $7,210 from the sale of these additional shares. On December 24, 1997, January 21, 1998 and November 18, 1998, the Company completed follow-on public offerings of 2,000, 300 and 2,000 shares of its common stock at $16.6875, $16.6875 and $16.50 per share, respectively. In connection with the IPO, the Company acquired a third party's interest in two of the Predecessor Properties, acquired two facilities from an unaffiliated third party and entered into an agreement to lease another facility from an unaffiliated third party. The consolidated financial statements of the Company include the properties owned or leased by the Company. The combined financial statements of the Predecessor Properties include the properties owned or leased by the senior independent and assisted living division of PGI, which consisted of five properties as indicated in the table below (PGI owned or leased The Heritage, The Devonshire and The Hallmark facilities during the period from January 1, 1995 through May 6, 1997 and leased The Springs of East Mesa and The Gables at Brighton facilities for the period from December 27, 1996 through May 6, 1997). The Company operates in the senior independent and assisted living segment. Its properties, which are owned, leased, managed or under development by the Company (collectively, the "Properties") are located throughout the United States as indicated below: Property Name Date Owned or Leased Location ------------- -------------------- -------- Owned Facilities: The Heritage (1) May 7, 1997 Des Plaines, IL - - ---------------- The Devonshire (1) May 7, 1997 Lisle, IL Hawthorn Lakes May 7, 1997 Vernon Hills, IL Edina Park Plaza May 7, 1997 Edina, MN Leased Facilities: The Hallmark (1) May 7, 1997 Chicago, IL - - ----------------- The Springs of East Mesa (1) May 7, 1997 Mesa, AZ The Gables of Brighton (1) May 7, 1997 Rochester, NY The Park Place May 7, 1997 Spokane, WA The Gables at Farmington November 24, 1997 Farmington, CT The Classic at West Palm Beach December 18, 1997 West Palm Beach, FL The Brendenwood Retirement Community December 22, 1997 Vorhees, NJ Harbor Village March 6, 1998 Chicago, IL The Atrium May 12, 1998 San Jose, CA The Chatfield July 2, 1998 West Hartford, CT The Ponce de Leon October 21, 1998 Santa Fe, NM Woodside Terrace December 22, 1998 Redwood City, CA The River Bay Club January 19, 1999 (See Note 18) Quincy, MA Managed Facilities: The Island on Lake Travis (2) Lago Vista, TX - - ------------------ The Kenwood (3) Minneapolis, MN Development Projects Under Construction (4): - - ------------------------------------------- Austin, Texas Southfield, Michigan Glen Ellyn, Illinois Raleigh, North Carolina New York (Battery Park City), New York Pittsburgh, Pennsylvania
(1) Collectively referred to as "the Predecessor Properties" (2) Management services commenced May 7, 1997 -25- (3) Management services commenced July 1, 1997 (4) The Company is developing these projects for third party owners 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated and combined financial statements include the accounts of the Company and the Predecessor Properties. Principles of Consolidation The consolidated financial statements include the financial statements of Brookdale Living Communities, Inc. and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation and combination. Use of Estimates The preparation of the consolidated and combined financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated and combined financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all investments with an original maturity of three months or less to be cash equivalents. Resident Fee Revenue Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional services such as personalized health and assisted living care. Resident leases are generally for a term of one year. Development Fees Development fees related to development activities provided for projects owned by third parties are earned over the term of the development. Such fees are recognized as revenue as the development services are provided to the owner during the pre-construction and construction periods, which typically extend for 12 to 14 months. Property, Plant and Equipment Property, plant and equipment are carried at cost less accumulated depreciation. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements which improve and/or extend the useful life of the asset are capitalized and depreciated over the shorter of their estimated useful life and the term of the operating lease. Depreciation is calculated on a straight-line basis over the estimated useful lives of assets, which are as follows: Buildings and improvements 40-45 years Leasehold improvements 5-23 years Furniture and equipment 3-12 years Property Under Development Development costs, including interest, fees and costs incurred in developing new properties, are capitalized to property under development as incurred. Upon completion of construction, development costs are amortized over the useful lives of the respective properties on a straight-line basis. Deferred Costs Bond credit enhancement costs are amortized on a straight-line basis over the term of the letters of credit. Deferred financing costs are amortized on a straight-line basis over the term of the long-term debt. Deferred lease costs are amortized on a straight-line basis over the term of the lease. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. -26- Prior to May 7, 1997, certain PGI entities were partnerships and, as such, were not taxable entities. The income or loss from the partnerships was includable on the respective federal income tax returns of the partners. Stock Based Compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations, in accounting for its fixed plan stock options. As such, no compensation expense is recognized for the stock option grants because the exercise price of the options equals the market price of the underlying stock at the date of grant. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Investments and Hedging Activities" which is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 provides guidance for the recognition and measurement of derivatives and hedging activities. Adoption of SFAS No. 133 is not anticipated to affect the consolidated results of operations, financial position or cash flows of the Company. Reclassifications Certain prior period amounts have been reclassified to conform with the current financial statement presentation. 3. Cash and Investments-Restricted Cash and investments-restricted consists of: December 31, ------------ 1998 1997 ------------ ----------- Life Care escrow deposits ................... $ 3,033 $ 2,899 Tenant security deposits .................... 2,346 2,121 Construction escrow deposit ................. 1,150 -- Real estate tax and insurance reserve ....... 1,697 900 ------------ ----------- Total cash and investments-restricted .. $ 8,226 $ 5,920 ============ =========== The Heritage and The Hallmark are required to make Life Care escrow deposits under the Illinois Life Care Facility Act, Section 7(b) which have been and will be funded from time to time in accordance with a schedule provided by the Illinois Department of Public Health. Investment certificates-restricted in connection with certain development related activities consist of long-term investments which earn interest at 9% per annum. 4. Property, Plant and Equipment Property, plant and equipment consists of: December 31, ------------ 1998 1997 ----------- ---------- Land ........................................ $ 9,988 $ 9,988 Buildings and improvements .................. 99,262 98,849 Leasehold improvements ...................... 1,361 349 Furniture and equipment ..................... 5,190 4,108 ----------- ---------- 115,801 113,294 Less accumulated depreciation ............... (5,689) (2,164) ----------- ---------- Net property, plant and equipment ........... $ 110,112 $ 111,130 =========== ========== During 1998, the Company was reimbursed for leasehold improvements of $187 and the related accumulated depreciation of $16 was written off. -27- 5. Deferred Costs Deferred costs, included in other assets in the accompanying consolidated balance sheets, consist of the following: December 31, ------------------ 1998 1997 --------- --------- Bond credit enhancement and deferred financing costs .. $ 3,631 $ 2,642 Lease costs ........................................... 179 787 --------- --------- 3,810 3,429 Less accumulated amortization ......................... (1,511) (199) --------- --------- Net deferred costs .................................... $ 2,299 $ 3,230 ========= ========= 6. Credit Agreement During 1998, the Company obtained an original $15,000 unsecured revolving line of credit which was increased to $25,000 in January 1999 and matures April 26, 1999. Borrowings under the line of credit bear interest at prime plus 1/2% per annum (8.25% percent at December 31, 1998) and a fee of 1/4% on the unused line of credit payable quarterly. As of December 31, 1998, the Company had $903 of outstanding letters of credit which reduces the amount available under the line of credit. Pursuant to the terms of the agreement, the Company must maintain certain facility operating margins, and is required to repay a portion or all of the loan if the Company's publicly traded stock is less than a per share price all as defined (See note 18). During 1997, the Company obtained an unsecured $20,000 interim credit facility from a financial institution for working capital and acquisition needs. Interest accrued on the outstanding principal amount of the loan at the prime plus 1% per annum and was payable monthly. The credit facility was repaid and terminated on December 24, 1997, which resulted in an extraordinary loss on extinguishment of debt, net of a $24 tax benefit, of $36. Otherwise, the maturity date was April 1998. 7. Long-Term Debt Long-term debt consists of the following:
December 31, -------------------- 1998 1997 ----------- --------- Mortgage notes payable, issued by local municipalities secured by the Edina Park Plaza and Hawthorn Lakes facilities, bearing interest at 8.0% to 8.525% through maturity in 2027 ................................ $ 27,880 $ 28,167 Note payable bearing interest at 8% payable upon maturity on May 1, 1999 ................................. 3,000 3,000 Variable rate tax-exempt bonds issued by state and local governmental authorities (a) ...................... 65,000 65,000 ----------- --------- Total debt .................................................. 95,880 96,167 Less current portion ........................................ 3,310 286 ----------- --------- Total long-term debt ........................................ $ 92,570 $ 95,881 =========== =========
(a) Permanent financing for The Devonshire and The Heritage facilities has been provided by an aggregate of $65,000 (The Devonshire - $33,000, The Heritage - $32,000) of tax-exempt Qualified Residential Rental Bonds (the "Bonds"). The Bonds mature on December 15, 2025 and December 15, 2019, respectively. Under the terms of the bond loan agreement, The Devonshire and The Heritage (the "Partnerships") are required to make interest-only payments monthly, calculated using a floating rate that is adjusted weekly based upon the remarketing rate of the Bonds. The weighted average interest rate was 3.53%, 3.74% and 3.43% for the years ended December 31, 1998, 1997 and 1996, respectively. The interest rates for The Devonshire and The Heritage were 4.07% and 4.20%, and 3.77% and 3.80% at December 31, 1998 and 1997, respectively. The annual interest rate on the Bonds cannot exceed 15%. Under certain conditions, the interest rate on the Bonds may be converted to a fixed rate at the request of the Company. Beginning May 7, 1997, the Bonds were collateralized by letters of credit in the stated amount of $66,715 which were issued by two financial institutions with a stated termination date of May 18, 2000. The letters of credit are collateralized, in part, by the $13,919 and $12,138 letter of credit deposit with the financial institutions at December 31, 1998 and 1997, respectively. The Company amortized letter of credit and other credit enhancement fees of $1,205 and $549 during the year ended December 31, 1998 and the period from May 7, 1997 through December 31, 1997. Prior to May 7, 1997, the Bonds were collateralized by irrevocable letters of credit issued by various financial institutions. The Predecessor Properties amortized letter of credit and the credit enhancement fees of $250 and $581 during the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996, respectively. -28- The annual aggregate scheduled maturities of debt obligations for the five years subsequent to December 31, 1998 are as follows: Year ended December 31, 1999 ........................ $ 3,310 2000 ........................ 336 2001 ........................ 365 2002 ........................ 396 2003 ........................ 429 Thereafter .................. 91,044 --------- $ 95,880 ========= The Company and the Predecessor Properties incurred interest cost for the year ended December 31, 1998, period from May 7, 1997 to December 31, 1997, the period from January 1, 1997 to May 6, 1997 and for the year ended December 31, 1996 of $5,711, $3,211, $830 and $4,740, respectively, of which $1,558 and $191 was capitalized for the year ended December 31, 1998 and for the period from May 7, 1997 to December 31, 1997, respectively. On December 27, 1996, The Hallmark facility was sold by PGI in a sale-leaseback transaction and a portion of the sale proceeds was used to repay a mortgage note secured by The Hallmark. In addition, The Hallmark was required to pay a prepayment fee of $2,723, which was netted against the deferred gain on sale of property. The deferred gain on sale of property is being recognized over the life of the lease as a reduction of the related lease expense. 8. Developments At December 31, 1997, the Company had development sites in Austin, Texas and Southfield, Michigan, and, in 1998, sold these sites at cost, including expenses incurred by the Company with respect to said sites. During 1998, the Company sold certain of its rights and interests in development sites in Glen Ellyn, Illinois; Raleigh, North Carolina; and Pittsburgh, Pennsylvania and Battery Park City, New York for a price equal to the Company's cost and, in connection with each of the sales, entered development agreements with respect to such sites. The aggregate sales price for the development sites and the Company's rights and interests therein, was $18,821, all of which has been paid in cash by December 31, 1998 with the exception of promissory notes of $3,486 for three projects which bear interest at 9% per annum and are due through September, 2001 of which one note receivable of $1,903 was repaid in February, 1999. No gain or loss was recognized by the Company in connection with these sales as the development sites were sold at cost. At December 31, 1998, the Company had $2,467 of unbilled reimbursable development costs. Included in other assets at December 31, 1998 in the accompanying consolidated balance sheets, are development fees of $5,655 related to development activities provided for projects owned by third parties. The Company has entered into interest rate lock agreements on behalf of third party owners of development projects with respect to interest rates on floating rate construction debt. The agreements are designed to limit the exposure to movements in floating interest rates on the development construction project loans and the Company is to be reimbursed by the third party for any payments made pursuant to the agreements. The notional amount of the construction loans is $103,689 and the approximate current value of the liability under such hedging contracts is $2,092. 9. Stock Based Compensation Plan The Company has granted stock options to various employees and directors under its 1998 and 1997 Stock Incentive Plans. Under the provisions of the Company's non-qualified and incentive stock option plans for officers and key employees, 250 shares and 733 shares of common stock are reserved for issuance under the 1998 and 1997 Stock Incentive Plans, respectively, at December 31, 1998. All options have 10 year terms and vest and become exercisable either immediately or over a three to four year period at the date of grant. The prices of all options granted were equal to the fair market value at the date of the grant. In November 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation". SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures provisions of SFAS No. 123. The per share weighted-average fair value of stock options granted during 1998 and 1997 was $10.78 and $4.89 and is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used: 1998 - risk-free interest rate 5.5%; expected volatility of 55.5%; expected life of 4 years and no expected dividend yield; 1997 - risk free interest rate of 6.6%; expected volatility of 43.5%; expected life of 4 years and no expected dividend yield. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. -29- Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following unaudited pro forma amounts: Period from May 7, 1997 Year Ended through December 31, 1998 December 31, 1997 ----------------- ----------------- Net income: As reported ... $ 6,654 $ 445 Pro forma ..... $ 5,181 $ 92 Basic EPS: As reported ... $ 0.68 $ 0.06 Pro forma ..... $ 0.53 $ 0.01 Diluted EPS: As reported ... $ 0.67 $ 0.06 Pro forma ..... $ 0.52 $ 0.01 The table below summarizes the transactions in the Company's stock incentive plan during 1998 and 1997:
1998 1997 ------ ------ Number Weighted-Average Number Weighted-Average of Shares Exercise Price of Shares Exercise Price --------- ---------------- --------- ---------------- Options outstanding at beginning of year .. 762 $11.60 -- $ -- Granted ................................... 312 22.85 762 11.60 Exercised ................................. (97) 11.50 -- -- Canceled .................................. (76) 14.27 -- -- --------- ------- Options outstanding at end of year....... 901 15.28 762 11.60 ========= ======= Exercisable at end of year ............... 207 18.08 -- -- ========= =======
The following table summarizes information about certain options in the Company's stock incentive plan outstanding as of December 31, 1998 in accordance with SFAS 123:
Options Outstanding Options Exercisable --------------------------------------------- ---------------------------- Weighted Avg. Number Remaining Weighted Avg. Number Weighted Avg. Range of Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price ------------------------ ----------- ---------------- -------------- ----------- -------------- $11.50 ...................... 542 8.35 years $11.50 78 $11.50 $11.88 - $21.42 ............. 141 9.12 years $17.11 17 $12.64 $23.48 ...................... 218 9.39 years $23.48 112 $23.48 ---- ---- $11.50 - $23.48 ............. 901 8.72 years $15.28 207 $18.08 ==== ===== ====== ==== ======
10. Income Taxes The (provision) benefit for income taxes (including income taxes on extraordinary item in 1997) is composed of the following:
Period from Period from May 7, 1997 January 1, 1997 Year Ended through through December 31, 1998 December 31, 1997 May 6, 1997 ----------------- ----------------- ------------- Federal: Current ........................ $ (894) $ - $ (195) Deferred ....................... (2,271) 509 - ---------- ---------- --------- (3,165) 509 (195) ---------- ---------- --------- State: Current ........................ (105) - (41) Deferred ....................... (357) 73 - ----------- ---------- --------- (462) 73 (41) ----------- ---------- --------- $ (3,627) $ 582 $ (236) ========== ========== =========
-30- A reconciliation of the (provision) benefit for income taxes to the amount computed at the U.S. federal statutory rate of 34% and 35% for 1998 and 1997, respectively, is as follows:
Period from Period from May 7, 1997 January 1, 1997 Year Ended through through December 31, 1998 December 31, 1997 May 6, 1997 ----------------- ----------------- ------------- Computed "expected" tax (expense) benefit........... $ (3,495) $ 27 $ 150 State taxes, net of federal income tax benefit ..... (305) 73 (41) Non-taxable amortization of deferred gain on sale of property ................................. 274 184 - Income of non-taxable Predecessor Properties ....................................... - - (71) Rental income taxable to the Predecessor ........... - 286 (242) Deferred lease costs ............................... - - (43) Extraordinary item ................................. - 21 - Other, net ......................................... (101) (9) 11 ----------------- ----------------- ------------- $ (3,627) $ 582 $ (236) ================= ================= ==============
During 1998, the Company received a tax benefit of $484 in connection with the exercise by certain employee stock options. Such amount was credited to additional paid-in capital. Prior to formation of the Company on May 7, 1997, the Predecessor Properties were held in either partnerships which passed through tax liabilities and benefits to the owners or in a C-Corporation (operations began December 12, 1997) which was subject to income taxes. The transfer of assets at the formation of the Company was taxable, in part, to the owners, which resulted in a $4,002 deferred tax asset at the contribution date. In addition, the Predecessor had $236 of current income taxes payable for the period from January 1, 1997 through May 6, 1997, which were paid in 1998. Accordingly, the tax basis of a majority of the property and equipment of the Company exceeds its respective book basis for financial reporting purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets recognized as of the date of formation of the Company and at December 31, 1998 and 1997 are presented below and included in other assets and other current liabilities in the accompanying consolidated balance sheets.
December 31, 1998 December 31, 1997 ----------------- ----------------- Noncurrent: Deferred tax assets: Property, plant and equipment .................... $ 481 $ 3,676 Deferred lease costs ............................. 914 523 Operating loss carryforward ...................... 397 343 AMT tax credit ................................... 508 -- Deferred revenue ................................. -- 42 ------------ ------------ Total gross deferred tax assets .................. 2,300 4,584 Less valuation allowance ......................... -- -- ------------ ------------ Net noncurrent deferred tax assets ............... $ 2,300 $ 4,584 ============ ============ Current deferred tax liability - deferred revenue .. $ 344 $ -- ============ ============
At December 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,045 which are available to offset future federal taxable income, if any, through 2011. 11. Tax Incremental Financing The Heritage is located in a redevelopment area designated by a local municipality as a tax incremental financing district ("TIF"). Under the terms of the redevelopment agreement, The Heritage was eligible to receive payments, in accordance with the terms of the Tax Incremental Financing Bond ("Bond") issued to it. The Bond was scheduled to mature on December 1, 2007 and had interest at 10% per annum, with principal and interest payable annually on each December 1. The Bond was subject to optional redemption, in whole or in part, at any time, at a redemption price equal to the principal outstanding at the date redeemed. The Bond was subject to mandatory redemption, in part, by the application of annual sinking fund installments by the municipality on each December 1, at a redemption price equal to the principal outstanding at the date redeemed. The Bond was payable solely from real estate tax incremental revenues and certain sales tax receipts generated in the TIF. Payments were to be made to the extent of available TIF revenues. The insufficiency of TIF revenues generated in the redevelopment area for any given year would not be considered a default in payment, but all past due amounts would be a continuing obligation payable from future TIF revenues. Any unpaid amounts including interest, at maturity, would be forgiven. As the collectibility of the Bond principal and interest was dependent upon sufficient TIF revenues being generated in the redevelopment area, revenue was recognized by The Heritage when principal and interest were received. For the period from May 7, 1997 through December 31, 1997 (final payment) and for the year ended December 31, 1996, The Heritage received payments totaling $576 and $610, respectively. -31- 12. Employee Benefit Plan In August 1994, PGI established a 401(k) plan for all employees of the PGI Entities who meet minimum employment criteria. The plan provides that the participants may defer up to 15% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. PGI contributed an additional 25% of the employee's contribution to the plan, up to $500 per employee per annum. On September 1, 1997, the Company established a 401(k) plan for all employees of the Company's entities that meet minimum employment criteria. The plan provides that the participants may defer up to 15% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. The Company contributes an additional 25% of the employee's contribution to the plan. Employees are always 100% vested in their own contributions and vested in PGI's and the Company's contributions over five years. The Company and the PGI entities made contributions to such plans in the amount of $176, $55, $15 and $30 for the year ended December 31, 1998, the period from May 7, 1997 through December 31, 1997, the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996, respectively. Such amounts are included in facility operating expense in the consolidated and combined statements of operations. 13. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997.
Period May 7, 1997 Year Ended through December 31, 1998 December 31, 1997 ----------------- ----------------- Numerator: Income from continuing operations before extraordinary item $ 6,654 $ 481 Extraordinary item (net of tax benefit of $24 for 1997) - (36) --------- -------- Numerator for basic and diluted earnings per common share $ 6,654 $ 445 ========= ======== Denominator: Denominator for basic earnings per share - weighted-average shares 9,751 7,208 Effect of dilutive securities - Employee stock options 227 143 --------- --------- Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 9,978 7,351 ========= ========= Basic earnings per share $ 0.68 $ 0.06 ========= ========= Diluted earnings per share $ 0.67 $ 0.06 ========= =========
Options to purchase 297 and 11 shares of common stock at $22.96 and $16.66 weighted average per share were outstanding during the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997, respectively, and warrants to purchase 83 shares of common stock at $25.25 weighted average per share were outstanding at December 31, 1998 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. 14. Related Party Transactions Prior to the IPO, in connection with the management and administration of The Heritage, The Devonshire and the Hallmark facilities, PGI was entitled to fees for services provided. Such amounts incurred for the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996 are summarized as follows:
Period from January 1, 1997 through Year Ended May 6, 1997 December 31, 1996 -------------- ----------------- Property management fee of 5% (3% for The Hallmark facility through December 26, 1996) $ 230 $ 930 ====== ====== Administration fee for providing services to The Devonshire and The Heritage facilities $ 130 $ 372 ====== ======
On May 7, 1997, the Company began providing management services for The Island on Lake Travis facility, which is owned by PGI. The Company is entitled to a fee based on 5% of revenue. The Company recognized $210 and $132 in management fee revenue for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997, respectively. 15. Fair Value of Financial Instruments Cash and cash equivalents, cash and investments-restricted and variable rate and fixed rate debt are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value. Management estimates the fair value of its long-term fixed rate debt using a discounted cash flow analysis based upon the Company's current borrowing rate for debt with similar maturities. -32- 16. Commitments and Contingencies Leases The Company entered into operating lease agreements ("Lease Agreements") with various third parties for the Leased Facilities. The Lease Agreement for The Hallmark, The Springs of East Mesa, The Gables at Brighton and The Park Place facilities has an initial term of 23 years, with two options to extend for 25 years each, and requires annual base rent payments ranging from $10,185 to $11,204. The Lease Agreement for these four facilities also requires additional rent each year beginning in 1999 based on 10% of the excess of each year's revenue compared to 1998 revenue. The Lease Agreements for the remaining facilities have initial terms of one to five years with options to extend (as defined). The Company has the option to acquire the Leased Facilities at fair market value prior to or at the end of such lease terms. The Company has pledged lease security deposits of $55,453 and $18,542 at December 31, 1998 and 1997, respectively, in connection with certain leased facilities. On September 25, 1997, the Company entered into a five year lease for its corporate office with an affiliate of PGI (the "Landlord") which was amended on March 17, 1998. The lease expires April 30, 2005, with base rent that escalates at each anniversary of the commencement date by $0.75 per square foot per year. In conjunction with the signing of the lease and the amendment, the Company received cash payments of $404 and $452, respectively, from the Landlord, which have been deferred and are being amortized using the straight-line method over the life of the office lease. Office lease expense of $300 and $193 for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997 is included in General and Administrative expense. The aggregate amount of all future minimum operating lease payments including $3,006 of payments to be made to the Landlord for the office lease as of December 31, 1998 are as follows: Year ended December 31, 1999 $ 24,062 2000 25,017 2001 25,092 2002 24,940 2003 17,461 Thereafter 180,146 ----------- $ 296,718 =========== Litigation The Company is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management of the Company, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on the Company's business, financial condition and results of operations. Other The Company has a $100,000 commitment from Capital Corporation of America of which $51,000 has been committed to the third parties developing the Austin, Texas and Southfield, Michigan projects. In connection with the aforementioned projects and certain other developments, the Company has guarantees for construction loans aggregating approximately $82,000 of which $18,982 was outstanding at December 31, 1998. 17. Pro Forma (Unaudited) The following unaudited pro forma financial information of the Company for the years ended December 31, 1998 and 1997 are presented as if, at January 1, 1998 and 1997, the Company had sold and issued 11,572 shares of its common stock, purchased the Owned Facilities and leased the Leased Facilities and The River Bay Club (see note 18) which was leased beginning January 19, 1999. If The River Bay Club was not included in the pro forma operations, revenue, net income, basic earnings per share and diluted earnings per share would be $92,013, $8,006, $0.69, and $0.68, respectively, for 1998 and $83,617, $3,226, $0.28, and $0.28, respectively for 1997. -33- These unaudited pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the IPO and follow-on public offerings had been consummated at the beginning of each period presented, nor do they purport to represent the results of operations of the Company for future periods. Year ended December 31, ---------------------- 1998 1997 ---- ---- Revenue $98,195 $89,799 Net income 8,758 3,978 Basic earnings per share 0.76 0.34 Diluted earnings per share 0.74 0.34 Weighted diluted shares 11,799 11,715 18. Subsequent Events On January 19, 1999, the Company entered into an operating lease agreement to lease The River Bay Club facility, a 285-unit facility located in Quincy, Massachusetts. The lease is an operating lease with an initial five-year term with five one-year renewal option periods with annual payment amounts of approximately $2,500 through the initial lease term. The Company has an option to acquire this facility at the end of the lease term. On January 25, 1999, the Company entered into a $5,000 unsecured loan agreement bearing interest at 12%, payable interest only, and maturing April 26, 1999. The loan is subordinated to the Company's existing unsecured line of credit (see Note 6) and prohibits the Company from paying any dividends. 17. Quarterly Financial Information (Unaudited)
1998 Quarter Ended 1997 Quarter Ended --------------------------------------- -------------------------------- Mar. 31 Jun. 30 Sept. 30 Dec. 31 June 30 (1) Sept. 30 Dec. 31 ------- ------- -------- ------- ----------- -------- ------- Revenue ..................................$ 16,898 $ 18,651 $ 20,482 $ 21,670 $ 6,571 $11,242 $12,424 Operating expenses ....................... (13,730) (15,036) (16,785) (17,138) (5,505) (9,020) (10,496) Interest income (expense), net ........... (217) -- 244 95 (589) (884) (853) Depreciation and amortization ............ (1,226) (1,205) (1,146) (1,276) (691) (1,158) (1,118) -------- ------- ------- -------- -------- ------- ------- Income (loss) before (provision)/benefit for income taxes and extraordinary item 1,725 2,410 2,795 3,351 (214) 180 (43) (Provision)/benefit for income taxes...... (614) (889) (982) (1,142) 133 10 415 -------- ------- ------- -------- -------- ------- ------- Income (loss) from continuing operations before extraordinary item .............. 1,111 1,521 1,813 2,209 (81) 190 372 Extraordinary item (net of deferred tax benefit for income taxes of $24) ....... -- -- -- -- -- -- (36) -------- ------- ------- -------- -------- ------- ------- Net income (loss) ......................$ 1,111 $ 1,521 $ 1,813 $ 2,209 $ (81) $ 190 $ 336 ======== ======= ======= ======== ======== ======= ======= Basic earnings per common share: Income (loss) from continuing operations before extraordinary item ..............$ 0.12 $ 0.16 $ 0.19 $ 0.21 $ (0.01) $ 0.03 $ 0.05 Extraordinary item ....................... -- -- -- -- -- -- -- -------- ------- ------- -------- -------- ------- ------- Net income (loss) ........................$ 0.12 $ 0.16 $ 0.19 $ 0.21 $ (0.01) $ 0.03 $ 0.05 ======== ======= ======= ======== ======== ======= ======= Weighted average shares used for computing basic earnings per common share .................................. 9,408 9,487 9,569 10,529 6,844 7,175 7,458 ======== ======= ======= ======== ======== ======= ======= Diluted earnings per common share: Income (loss) from continuing operations before extraordinary item .............$ 0.12 $ 0.16 $ 0.19 $ 0.21 $ (0.01) $ 0.03 $ 0.05 Extraordinary item ....................... -- -- -- -- -- -- (0.01) -------- ------- -------- -------- -------- ------- ------- Net income (loss) ........................$ 0.12 $ 0.16 $ 0.19 $ 0.21 $ (0.01) $ 0.03 $ 0.04 ======== ======= ======== ======== ======== ======= ======= Weighted average shares used for computing diluted earnings per common share .................................. 9,646 9,793 9,771 10,672 6,844 7,317 7,671 ======== ======= ======= ======== ========= ======== ======= (1) The period includes operations from May 7, 1997 through June 30, 1997.
-34- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to the information contained under the headings "Election of Directors" and "Other Information-Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's 1999 Annual Meeting Proxy Statement, which the Company intends to file within 120 days of its fiscal year end. Certain information regarding executive officers is contained in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the information contained under the headings "Compensation of Executive Officers," "Compensation Committee Interlocks and Insider Participation" and "Report of Compensation Committee" in the Company's 1999 Annual Meeting Proxy Statement, which the Company intends to file within 120 days of its fiscal year end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the information contained under the heading "Principal Security Holders of the Company" in the Company's 1999 Annual Meeting Proxy Statement, which the Company intends to file within 120 days of its fiscal year end. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the information contained under the heading "Other Information-Certain Relationships and Related Transactions" in the Company's 1999 Annual Meeting Proxy Statement, which the Company intends to file within 120 days of its fiscal year end. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements The financial statements files as part of this report are set forth in response to Item 8. (a)(2) Financial Statement Schedules (a)(3) Exhibits Exhibit Number Description - - ------- ----------- 3.1 Restated Certificate of Incorporation of the Company, as filed with the Securities and Exchange Commission on June 16, 1997 as Exhibit 3.1 to the Company's Form 10-Q for the period ended March 31, 1997 (File No. 0-22253) and incorporated herein by reference 3.2 Amended and Restated By-laws of the Company, as filed with the Securities and Exchange Commission on June 16, 1997 as Exhibit 3.2 to the Company's Form 10-Q for the period ended March 31, 1997 (File No. 0-22253) and incorporated herein by reference 4.1 Form of certificate representing Common Stock of the Company, as filed with the Securities and Exchange Commission on March 17, 1997 as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (Registration No. 333-12259) and incorporated herein by reference 10.1 Lease dated as of March 6, 1998 by and between Brookdale Living Communities of Illinois-H.V., Inc., as lessee, and The Harbor Village Business Trust, as lessor, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.1 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.2 Loan Agreement dated as of March 6, 1998 by and among The Harbor Village Business Trust, Brookdale Living Communities of Illinois-H.V., Inc. and Nomura Asset Capital Corporation, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.2 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference -35- Exhibit Number Description - - ------- ----------- 10.3 Certificate Pledge Agreement dated as of March 6, 1998 by Brookdale Living Communities of Illinois-H.V., Inc. in favor of The Harbor Village Business Trust, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.3 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.4 Securities Pledge Agreement dated as of March 6, 1998 by Brookdale Living Communities of Illinois-H.V., Inc. in favor of The Harbor Village Business Trust and Wilmington Trust Company, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.4 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.5 Indemnity Agreement dated as of March 6, 1998 from Brookdale Living Communities, Inc. in favor of Wilmington Trust Company and FBTC Leasing Corp., as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.5 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.6 Guaranty and Suretyship Agreement dated as of March 6, 1998 from Brookdale Living Communities of Illinois-H.V., Inc. in favor of Nomura Asset Capital Corporation, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.6 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.7 Environmental Indemnity Agreement dated as of March 6, 1998 from Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.7 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.8 Mezzanine Loan Agreement dated as of March 6, 1998 by and among The Harbor Village Business Trust, Brookdale Living Communities of Illinois-H.V., Inc. and Nomura Asset Capital Corporation, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.8 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.9 Mezzanine Guaranty and Suretyship Agreement dated as of March 6, 1998 from Brookdale Living Communities of Illinois-H.V., Inc. in favor of Nomura Asset Capital Corporation, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.9 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.10 Mezzanine Environmental Indemnity Agreement dated as of March 6, 1998 from Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation, as filed with the Securities and Exchange Commission on April 14, 1998 as Exhibit 10.10 to the Company's Form 8-K dated March 6, 1998 (File No. 0-22253) and incorporated herein by reference 10.11 Purchase and Sale Agreement, dated as of March 31, 1998, by and between Brookdale Living Communities of Michigan, Inc. and AH Michigan Owner Limited Partnership, as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.1 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.12 Note, dated March 31, 1998, issued by AH Michigan Owner Limited Partnership payable to the order of Brookdale Living Communities of Michigan, Inc. in the principal amount of $3,044,082.12, as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.2 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.13 Development Agreement, dated as of March 31, 1998, by and between AH Michigan Owner Limited Partnership and Brookdale Living Communities of Michigan, Inc., as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.3 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.14 Guaranty Agreement, dated as of March 31, 1998, issued by AH Michigan CPG, Inc. and AH Michigan Subordinated, LLC in favor of Brookdale Living Communities, Inc., as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.4 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.15 Collateral Assignment of Partnership Interests, dated as of March 31, 1998, issued by AH Michigan CPG, Inc. and AH Subordinated, LLC for the benefit of Brookdale Living Communities of Michigan, Inc., as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.5 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference -36- Exhibit Number Description - - ------- ----------- 10.16 Purchase and Sale Agreement, dated as of March 31, 1998, by and between BLC of Texas-II, L.P. and AH Texas Owner Limited Partnership, as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.6 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.17 Note, dated March 31, 1998, issued by AH Texas Owner Limited Partnership payable to the order of BLC of Texas-II, L.P. in the principal amount of $4,016,340.53., as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.7 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.18 Development Agreement, dated as of March 31, 1998, by and between AH Texas Owner Limited Partnership and BLC of Texas-II, L.P., as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.8 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.19 Guaranty Agreement, dated as of March 31, 1998, issued by AH Texas CPG, Inc. and AH Texas Subordinated, LLC in favor of BLC of Texas-II, L.P., as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.9 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.20 Collateral Assignment of Partnership Interests, dated as of March 31, 1998, issued by AH Texas CPG, Inc. and AH Texas Subordinated, LLC for the benefit of BLC of Texas-II, L.P., as filed with the Securities and Exchange Commission on April 15, 1998 as Exhibit 10.10 to the Company's Form 8-K dated March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.21 Development Agreement, dated as of March 31, 1998, by and between Brookdale Living Communities, Inc. and National Development Eastern Associates, Inc., as filed with the Securities and Exchange Commission on May 15, 1998 as Exhibit 10.21 to the Company's Form 10-Q for the period ended March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.22 Agreement to Assign Agreement of Sale and Purchase, dated as of March 31, 1998, by and among Brookdale Living Communities, Inc., National Development Eastern Associates, Inc., Kenneth A. LeDonne, Robert A. LeDonne, Karen A. LeDonne, Peter O. LeDonne and Dorthea J. LeDonne, as filed with the Securities and Exchange Commission on May 15, 1998 as Exhibit 10.22 to the Company's Form 10-Q for the period ended March 31, 1998 (File No. 0-22253) and incorporated herein by reference 10.23 Lease dated as of May 11, 1998 by and between Brookdale Living Communities of California, Inc., as lessee, and Atrium of San Jose LLC, as lessor-owner, as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.1 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference 10.24 Note and Deed of Trust Modification and Assumption Agreement dated as of May 12, 1998 by and among LaSalle National Bank, as Trustee for the Registered Holders of DLJ Mortgage Acceptance Corp., Commercial Mortgage Pass-Through Certificates, Series 1996-CF1 ("Trustee"), Atrium Venture, The Atrium of San Jose LLC and Brookdale Living Communities of California, Inc., as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.2 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference 10.25 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of May 12, 1998 by Brookdale Living Communities of California, Inc. in favor of The Atrium of San Jose LLC, as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.3 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference 10.26 Pledge and Security Agreement dated as of May 12, 1998 by Brookdale Living Communities of California, Inc. and The Atrium of San Jose LLC in favor of Key Corporate Capital, Inc. and SELCO Service Corporation, as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.4 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference 10.27 Indemnity and Guaranty Agreement dated as of May 12, 1998 from Brookdale Living Communities of California, Inc. and Brookdale Living Communities, Inc. in favor of Trustee, as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.5 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference -37- Exhibit Number Description - - ------- ----------- 10.28 Hazardous Substances Indemnity Agreement dated as of May 12, 1998 from The Atrium of San Jose LLC, Brookdale Living Communities of California, Inc. and Brookdale Living Communities, Inc. in favor of Trustee, as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.6 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference 10.29 Indemnity and Guaranty Agreement dated as of May 12, 1998 from Brookdale Living Communities, Inc. in favor of Healthcare Realty Trust Incorporated, as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.7 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference 10.30 Indemnity Agreement dated as of May 12, 1998 by and among Brookdale Living Communities, Inc. in favor of The Atrium of San Jose LLC, Healthcare Realty Trust Incorporated, Key Corporate Capital, Inc., SELCO Service Corporation and Wilmington Trust Company, as filed with the Securities and Exchange Commission on May 26, 1998 as Exhibit 10.8 to the Company's Form 8-K dated May 12, 1998 (File No. 0-22253) and incorporated herein by reference 10.31 Master Facility Agreement, dated as of June 17, 1998, by and between Brookdale Living Communities, Inc. and Nomura Asset Capital Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.1 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.32 Loan Agreement, dated as of June 17, 1998, by and among Nomura Asset Capital Corporation, AH Texas Owner Limited Partnership and BLC of Texas-II, L.P. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.2 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.33 Building Loan Agreement, dated as of June 17, 1998, by and among Nomura Asset Capital Corporation, AH Texas Owner Limited Partnership and BLC of Texas-II, L.P. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.3 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.34 Guaranty of Payment of Note, Rate Lock Obligations, Carrying Costs and Recourse Obligations, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.4 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.35 Guaranty of Completion, dated as of June 17, 1998, by Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.5 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.36 Environmental Indemnity Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.6 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.37 Loan Agreement, dated as of June 17, 1998, by and between Banc One Capital Partners IV, Ltd. and AH Texas Subordinated, LLC. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.7 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.38 Guaranty Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.8 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.39 Guaranty of Completion, dated as of June 17, 1998, by Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.9 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.40 Non-recourse Guaranty Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.10 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference -38- Exhibit Number Description - - ------- ----------- 10.41 Environmental Indemnity Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.11 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.42 Environmental Indemnity Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of the Indemnified Parties (as defined therein) and AH Texas Owner Limited Partnership as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.12 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.43 Conditional Investment Agreement, dated as of June 17, 1998, by and between Brookdale Living Communities, Inc. and Banc One Capital Funding Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.13 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.44 Warrant Certificate, dated as of June 17, 1998, issued by Brookdale Living Communities, Inc. in favor of Banc One Capital Markets, Inc. for up to 5,000 shares of Common Stock of Brookdale Living Communities, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.14 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.45 Warrant Certificate, dated as of June 17, 1998, issued by Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. for up to 20,000 shares of Common Stock of Brookdale Living Communities, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.15 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.46 Amended and Restated Development Agreement, dated as of June 17, 1998, by and between BLC of Texas-II, L.P. and AH Texas Owner Limited Partnership as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.16 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.47 Management Agreement, dated as of June 17, 1998, by and between BLC of Texas-II, L.P. and AH Texas Owner Limited Partnership as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.17 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.48 Equity Option Agreement, dated as of June 17, 1998, by and among Brookdale Living Communities, Inc., AH Texas Owner Limited Partnership, AH Texas Subordinated, LLC, AH Texas CGP, Inc. and AH Texas Investor, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.18 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.49 Property Option Agreement, dated as of June 17, 1998, by and among Brookdale Living Communities, Inc., AH Texas Owner Limited Partnership and AH Texas Subordinated, LLC, as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.19 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.50 Loan Agreement, dated as of June 17, 1998, by and among Nomura Asset Capital Corporation, AH Michigan Owner Limited Partnership and Brookdale Living Communities of Michigan, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.20 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.51 Building Loan Agreement, dated as of June 17, 1998, by and among Nomura Asset Capital Corporation, AH Michigan Owner Limited Partnership and Brookdale Living Communities of Michigan, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.21 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.52 Guaranty of Payment of Note, Rate Lock Obligations, Carrying Costs and Recourse Obligations, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.22 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.53 Guaranty of Completion, dated as of June 17, 1998, by Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.23 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference -39- Exhibit Number Description - - ------- ----------- 10.54 Environmental Indemnity Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Nomura Asset Capital Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.24 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.55 Loan Agreement, dated as of June 17, 1998, by and between Banc One Capital Partners IV, Ltd. and AH Michigan Subordinated, LLC as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.25 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.56 Guaranty Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.26 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.57 Guaranty of Completion, dated as of June 17, 1998, by Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.27 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.58 Non-recourse Guaranty Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.28 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.59 Environmental Indemnity Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.29 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.60 Environmental Indemnity Agreement, dated as of June 17, 1998, from Brookdale Living Communities, Inc. in favor of the Indemnified Parties (as defined therein) and AH Michigan Owner Limited Partnership as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.30 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.61 Conditional Investment Agreement, dated as of June 17, 1998, by and between Brookdale Living Communities, Inc. and Banc One Capital Funding Corporation as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.31 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.62 Warrant Certificate, dated as of June 17, 1998, issued by Brookdale Living Communities, Inc. in favor of Banc One Capital Markets, Inc. for up to 5,000 shares of Common Stock of Brookdale Living Communities, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.32 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.63 Warrant Certificate, dated as of June 17, 1998, issued by Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. for up to 20,000 shares of Common Stock of Brookdale Living Communities, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.33 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.64 Amended and Restated Development Agreement, dated as of June 17, 1998, by and between Brookdale Living Communities of Michigan, Inc. and AH Michigan Owner Limited Partnership as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.34 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.65 Management Agreement, dated as of June 17, 1998, by and between Brookdale Living Communities of Michigan, Inc. and AH Michigan Owner Limited Partnership as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.35 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference -40- Exhibit Number Description - - ------- ----------- 10.66 Equity Option Agreement, dated as of June 17, 1998, by and among Brookdale Living Communities, Inc., AH Michigan Owner Limited Partnership, AH Michigan Subordinated, LLC, AH Michigan CGP, Inc. and AH Michigan Investor, Inc. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.36 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.67 Property Option Agreement, dated as of June 17, 1998, by and among Brookdale Living Communities, Inc., AH Michigan Owner Limited Partnership and AH Michigan Subordinated, LLC. as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.37 to the Company's Form 8-K dated June 25, 1998 (File No. 0-22253) and incorporated herein by reference 10.68 Purchase and Sale Agreement, dated as of June 30, 1998, by and between AH North Carolina Owner Limited Partnership and Brookdale Living Communities of North Carolina, Inc., and guaranteed by Brookdale Living Communities, Inc. as filed with the Securities and Exchange Commission on July 17, 1998 as Exhibit 10.1 to the Company's Form 8-K dated June 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.69 Note, dated June 30, 1998, issued by AH North Carolina Owner Limited Partnership in favor of Brookdale Living Communities of North Carolina, Inc. in the principal amount of $1,902,776.97 as filed with the Securities and Exchange Commission on July 17, 1998 as Exhibit 10.2 to the Company's Form 8-K dated June 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.70 Development Agreement, dated as of June 30, 1998, by and between AH North Carolina Owner Limited Partnership and Brookdale Living Communities of North Carolina, Inc., and guaranteed by Brookdale Living Communities, Inc. as filed with the Securities and Exchange Commission on July 17, 1998 as Exhibit 10.3 to the Company's Form 8-K dated June 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.71 Guaranty Agreement, dated as of June 30, 1998, issued by AH North Carolina CPG, Inc. and AH North Carolina Subordinated, LLC in favor of Brookdale Living Communities of North Carolina, Inc. as filed with the Securities and Exchange Commission on July 17, 1998 as Exhibit 10.4 to the Company's Form 10-Q for the period ended June 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.72 Collateral Assignment of Partnership Interests, dated as of June 30, 1998, issued by AH North Carolina CPG, Inc. and AH North Carolina Subordinated, LLC for the benefit of Brookdale Living Communities of North Carolina, Inc. as filed with the Securities and Exchange Commission on July 17, 1998 as Exhibit 10.5 to the Company's Form 10-Q for the period ended June 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.73 Loan Agreement dated as of April 27, 1998 by and between the Company and LaSalle National Bank, as filed with the Securities and Exchange Commission on July 17, 1998 as Exhibit 10.51 to the Company's Form 10-Q for the period ended June 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.74 Note dated April 27, 1998 issued by the Company payable to the order of LaSalle National Bank as filed with the Securities and Exchange Commission on July 17, 1998, as Exhibit 10.52 to the Company's Form 10-Q for the period ended June 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.75 Lease, dated as of July 1, 1998, by and between Brookdale Living Communities of Connecticut-WH, Inc., as lessee, and The Chatfield Business Trust, S.T., as lessor-owner, as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.1 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference 10.76 Fixed Rate Program Promissory Note Secured by Mortgage, dated July 1, 1998, from The Chatfield Business Trust, S.T., as maker, payable to the order of Heller Financial, Inc., as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.2 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference 10.77 Guaranty, dated as of July 1, 1998, issued by Brookdale Living Communities of Connecticut-WH, Inc. in favor of Heller Financial, Inc., as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.3 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference 10.78 Certificate A Pledge Agreement, dated as of July 1, 1998, by Brookdale Living Communities of Connecticut-WH, Inc. in favor of The Chatfield Business Trust, S.T., Wilmington Trust Company and LaSalle National Bank, as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.4 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference -41- Exhibit Number Description - - ------- ----------- 10.79 Certificate B Pledge Agreement, dated as of July 1, 1998, by Brookdale Living Communities of Connecticut-WH, Inc. in favor of The Chatfield Business Trust, S.T., Wilmington Trust Company and LaSalle National Bank, as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.5 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference 10.80 Hazardous Substance Indemnification Agreement, dated as of July 1, 1998, from Brookdale Living Communities of Connecticut-WH, Inc. and Brookdale Living Communities, Inc. in favor of Heller Financial, Inc., as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.6 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference 10.81 Indemnity Agreement, dated as of July 1, 1998, from Brookdale Living Communities, Inc. in favor of Wilmington Trust Company and Bank Hapoalim, B.M., as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.7 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference 10.82 Letter Agreement regarding liability for carve-outs to non-recourse provisions, dated July 1, 1998, issued by Brookdale Living Communities, Inc. in favor of Heller Financial, Inc., as filed with the Securities and Exchange Commission on July 16, 1998 as Exhibit 10.8 to the Company's Form 8-K dated July 2, 1998 (File No. 0-22253) and incorporated herein by reference 10.83 First Amendment to Loan Agreement and Documents, dated as of July 16, 1998, by and between the Company and LaSalle National Bank., as filed with the Securities and Exchange Commission on November 16, 1998 as Exhibit 10.9 to the Company's Form 10-Q for the period ended September 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.84 Amended and Restated Note dated July 16, 1998 issued by the Company payable to the order of LaSalle National Bank, as filed with the Securities and Exchange Commission on November 16, 1998 as Exhibit 10.10 to the Company's Form 10-Q for the period ended September 30, 1998 (File No. 0-22253) and incorporated herein by reference 10.85 Lease, dated as of October 14, 1998, by and between Brookdale Living Communities of New Mexico-SF, Inc., as lessee, and The PDL Business Trust, S.T., as lessor-owner, as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.1 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference 10.86 Fixed Rate Program Promissory Note Secured by Mortgage, dated October 14, 1998, from The PDL Business Trust, S.T., as maker, payable to the order of Heller Financial, Inc., as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.2 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference 10.87 Guaranty, dated as of October 14, 1998, issued by Brookdale Living Communities of New Mexico-SF, Inc. in favor of Heller Financial, Inc., as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.3 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference 10.88 Certificate A Pledge Agreement, dated as of October 14, 1998, by Brookdale Living Communities of New Mexico-SF, Inc. in favor of The PDL Business Trust, S.T., Wilmington Trust Company, as valuation agent, and LaSalle National Bank, as collateral account bank, as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.4 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference 10.89 Certificate B Pledge Agreement, dated as of October 14, 1998, by Brookdale Living Communities of New Mexico-SF, Inc. in favor of The PDL Business Trust, S.T., Wilmington Trust Company, as valuation agent, and LaSalle National Bank, as collateral account bank, as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.5 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference 10.90 Hazardous Substance Indemnification Agreement, dated as of October 14, 1998, from Brookdale Living Communities of New Mexico-SF, Inc. and Brookdale Living Communities, Inc. in favor of Heller Financial, Inc., as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.6 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference -42- Exhibit Number Description - - ------- ----------- 10.91 Indemnity Agreement, dated as of October 14, 1998, from Brookdale Living Communities, Inc. in favor of Wilmington Trust Company, SELCO Service Corporation and Bank Hapoalim B.M., as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.7 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference 10.92 Letter Agreement regarding liability for carve-outs to non-recourse provisions, dated October 14, 1998, issued by Brookdale Living Communities, Inc. in favor of Heller Financial, Inc., as filed with the Securities and Exchange Commission on November 2, 1998 as Exhibit 10.8 to the Company's Form 8-K dated October 21, 1998 (File No. 0-22253) and incorporated herein by reference 10.93 Lease, dated as of December 18, 1998, by and between Brookdale Living Communities of California-RC, Inc., as lessee, and The Woodside Business Trust, as lessor-owner, as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.1 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.94 Multifamily Note, dated December 18, 1998, from The Woodside Business Trust, as maker, payable to the order of Glaser Financial Group, Inc., as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.2 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.95 Multifamily Guaranty Agreement, dated as of December 18, 1998, issued by Brookdale Living Communities of California-RC, Inc. in favor of Glaser Financial Group, Inc., as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.3 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.96 Multifamily Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of December 18, 1998, issued by Brookdale Living Communities of California-RC, Inc. in favor of Chicago Title Company, as trustee, for the benefit of Glaser Financial Group, Inc., as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.4 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.97 Certificate A Pledge Agreement, dated as of December 22, 1998, by Brookdale Living Communities of California-RC, Inc. in favor of The Woodside Business Trust, Wilmington Trust Company, as valuation agent, and LaSalle National Bank, as collateral account bank, as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.5 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.98 Certificate B Pledge Agreement, dated as of December 22, 1998, by Brookdale Living Communities of California-RC, Inc. in favor of The Woodside Business Trust, Wilmington Trust Company, as valuation agent, and LaSalle National Bank, as collateral account bank, as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.6 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.99 Exceptions to Non-Recourse Guaranty, dated as of December 18, 1998, from Brookdale Living Communities, Inc. in favor of Glaser Financial Group, Inc., as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.7 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.100 Indemnity Agreement, dated as of December 22, 1998, from Brookdale Living Communities, Inc. in favor of Wilmington Trust Company and SELCO Service Corporation, as filed with the Securities and Exchange Commission on January 6, 1999 as Exhibit 10.8 to the Company's Form 8-K dated December 22, 1998 (File No. 0-22253) and incorporated herein by reference 10.101 Second Amendment to Loan Agreement and Documents, dated as of October 14, 1998, by and between the Company and LaSalle National Bank 10.102 Third Amendment to Loan Agreement and Documents, dated as of October 20, 1998, by and between the Company and LaSalle National Bank 10.103 Fourth Amendment to Loan Agreement and Documents, dated as of November 3, 1998, by and between the Company and LaSalle National Bank 10.104 Fifth Amendment to Loan Agreement and Documents, dated as of December 21, 1998, by and between the Company and LaSalle National Bank -43- Exhibit Number Description - - ------- ----------- 10.105 Third Amended and Restated Note dated December 21, 1998 issued by the Company payable to the order of LaSalle National Bank 10.106 Warrant Certificate, dated as of October 23, 1998, issued by Brookdale Living Communities, Inc. in favor of Banc One Capital Partners IV, Ltd. for up to 33.163 shares of Common Stock of Brookdale Living Communities, Inc. 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 21 Subsidiaries of the Registrant 23 Consent of Ernst & Young LLP 27 Financial Data Schedule (b) Reports on Form 8-K On November 2, 1998, the Company filed a Current Report on Form 8-K dated October 21, 1998 announcing pursuant to Item 5 of Form 8-K the lease of The Ponce de Leon which commenced on October 21, 1998. On November 4, 1998, the Company filed a Current Report on Form 8-K dated November 3, 1998 announcing pursuant to Item 5 of Form 8-K the Company's third quarter 1998 results. On November 10, 1998, the Company filed a Current Report on Form 8-K dated June 30, 1998 announcing pursuant to Item 7 of Form 8-K the Company's Computation of Ratio of Earnings to Combined Fixed Charges for the Six Months Ended June 30, 1998 On November 19, 1998, the Company filed a Current Report on Form 8-K/A dated June 30, 1998 announcing pursuant to Item 7 of Form 8-K/A the Company's Computation of Ratio of Earnings to Combined Fixed Charges for the Six Months Ended June 30, 1998 On December 7, 1998, the Company filed a Current Report on Form 8-K dated December 4, 1998 announcing pursuant to Item 5 of Form 8-K the Company's interest in acquiring ILM Senior Living, Inc., ILM II Senior Living, Inc., ILM I Lease Corporation and ILM II Lease Corporation. (c) Exhibits The list of exhibits filed with this report is set forth in response to Item 14(a)(3). The required exhibits have been filed as indicated in the Exhibit Index. (d) Financial Statements and Schedules Not applicable. -44- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BROOKDALE LIVING COMMUNITIES, INC. Registrant Dated: March 31, 1999 /s/ Mark J. Schulte ----------------------------------------------- Mark J. Schulte President and Chief Executive Officer Dated: March 31, 1999 /s/ Darryl W. Copeland, Jr. ----------------------------------------------- Darryl W. Copeland, Jr. Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Michael W. Reschke March 31, 1999 --------------------------------------------------- Michael W. Reschke Chairman of the Board, Director /s/ Mark J. Schulte March 31, 1999 --------------------------------------------------- Mark J. Schulte President and Chief Executive Officer, Director (Principal Executive Officer) /s/ Darryl W. Copeland, Jr. March 31, 1999 --------------------------------------------------- Darryl W. Copeland, Jr. Executive Vice President and Chief Financial Officer, Director (Principal Financial Officer) /s/ R. Stanley Young March 31, 1999 --------------------------------------------------- R. Stanley Young Senior Vice President - Finance and Treasurer (Principal Accounting Officer) /s/ Wayne D. Boberg March 31, 1999 --------------------------------------------------- Wayne D. Boberg, Director /s/ Bruce L. Gewertz March 31, 1999 --------------------------------------------------- Bruce L. Gewertz, Director /s/ Darryl W. Hartley-Leonard March 31, 1999 --------------------------------------------------- Darryl W. Hartley-Leonard, Director /s/ Daniel J. Hennessy, Director March 31, 1999 --------------------------------------------------- Daniel J. Hennessy, Director -45- EX-10.101 2 SECOND AMENDMENT TO LOAN AGREEMENT SECOND AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS THIS SECOND AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS, dated as of October 14, 1998 (the "Amendment"), is entered into by and between BROOKDALE LIVING COMMUNITIES, INC., a Delaware corporation (the "Borrower"), and LaSALLE NATIONAL BANK, a national banking association (the "Bank"). WITNESSETH WHEREAS, Borrower has previously executed and delivered to the Bank a certain Note dated April 27, 1998 in the original principal amount of up to Fifteen Million Dollars ($15,000,000.00) (the "Original Note") evidencing a certain loan (the "Loan") set forth more fully in and governed by a certain Loan Agreement of that same date to which the Bank is also a party (the "Original Loan Agreement"); WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Amended and Restated Note dated July 16, 1998 increasing the principal amount of the Loan by $10,000,000.00, on an interim basis only, from $15,000,000.00 to $25,000,000.00 (the "Amended and Restated Note") and a certain First Amendment to Loan Agreement and Documents of that same date to which the Bank is also a party (the "First Amendment") that (a) increased the principal amount of the Loan on an interim basis as aforesaid and (b) permitted a portion of the Loan to be reserved for the issuance of standby Letters of Credit by the Bank to and for the benefit of municipalities and other governmental units in connection with projects developed by Borrower from time to time as set forth more fully therein (the Original Loan Agreement, as amended by the First Amendment, is herein referred to as the "Loan Agreement"); WHEREAS, subject to the terms and conditions of this Amendment, Borrower has requested the Bank (a) to consent to the Borrower's issuance of a convertible subordinated and unsecured note to OZ Master Fund, Ltd. in the principal amount of Ten Million Dollars ($10,000,000.00), (b) to permit Borrower to guarantee financing from other financial institutions to certain Subsidiaries of Borrower in connection with certain development projects located in New York, New York (Battery Park City), Glen Ellyn, Illinois and Raleigh, North Carolina, which projects were to be originally financed by Nomura Asset Capital Corporation, (c) to modify the Event of Default set forth in Section 7.01(O) of the Loan Agreement, and (d) to extend the Interim Maturity Date to November 3, 1998 (the foregoing matters referred to in (a), (b) (c) and (d) of this recital paragraph being referred to collectively herein as the "Requested Activities"); WHEREAS, the Requested Activities are prohibited under the existing Loan Agreement and Documents and require the consent of the Bank; and WHEREAS, the Bank is willing to consent to the Requested Activities, subject to and conditioned upon the terms and conditions set forth in this Amendment. NOW, THEREFORE, in consideration of the premises, the covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Incorporation of Recitals. The above and foregoing recitals are incorporated into and made a part of this Amendment. All capitalized terms used herein, if not otherwise specifically defined, shall have the meanings and definitions prescribed in the Loan Agreement and the Documents referred to therein. -1- 2. Outstanding Principal Balance of Loan. For purposes of this Amendment and the Loan Agreement, the outstanding principal balance of the Loan at any time shall be the sum of (a) all amounts of the Loan Advances made under the Loan Agreement remaining unpaid plus (b) all outstanding LC Reserves. 3. Consent to Subordinated Note. The Bank consents to the Borrower's proposed issuance of a convertible subordinated and unsecured note to OZ Master Fund, Ltd. in the principal amount of Ten Million Dollars ($10,000,000.00) in accordance with terms and conditions not materially different (as determined by the Bank in its sole discretion) than those set forth in the Term Sheet provided to the Bank on October 14, 1998 (the "Term Sheet") [the "Subordinated Note"] and acknowledges that the Subordinated Note shall not constitute an Event of Default under the Loan Agreement upon the condition that (a) the Subordinated Note shall be subordinate to the Loan and (b) proceeds from the Subordinated Note shall be used and applied immediately and directly to reduce the outstanding principal balance of the Loan to $15,000,000.00 on or before the Interim Maturity Date, and (c) the terms and conditions of the Subordinated Note are not materially different (as determined by the Bank in its sole discretion) than those set forth in the Term Sheet. 4. Interim Maturity Date. The term "Interim Maturity Date" is hereby amended and restated to mean the earlier of (a) November 3, 1998, or (b) a date certain which is the date on which Borrower issues the Subordinated Note. 5. Decreased Loan Commitment. On the Interim Maturity Date, without further notice and without regard to whether the Offering has occurred, (a) the outstanding principal balance of the Loan shall be reduced to $15,000,000.00, and (b) the principal amount of the Loan and Maximum Revolving Loan Commitment shall be decreased from $25,000,000.00 to an amount not to exceed $15,000,000.00. 6. Maturity Date. The term "Maturity Date" is hereby amended and restated to mean (a) the Interim Maturity Date as to any and all amounts of the outstanding principal balance of the Loan in excess of $15,000,000.00, and (b) April 26, 1999 as to the outstanding principal balance of the Loan together with any accrued but unpaid interest thereon and any other costs or amount owed to the Bank under the Loan Agreement as amended hereby. 7. Interim Interest Rate. Effective as of October 14, 1998, (a) any and all outstanding principal balance of the Loan in excess of $15,000,000.00 shall bear interest payable on demand at the Prime Rate plus four and one-half of one percent (4.50%) and (b) any and all outstanding principal balance of the Loan not in excess of $15,000,000.00 shall bear interest payable at the Prime Rate plus one-half of one percent (0.50%) per annum (the "Interim Interest Rate"). The Interim Interest Rate is, during its pendency, in lieu of the interest rate set forth in Section 2.02 of the Loan Agreement. 8. Interim Maturity Default Rate. If the outstanding principal balance of the Loan is not reduced to $15,000,000.00 by the Interim Maturity Date as required under this Amendment, Borrower shall be considered in default under the Loan Agreement and, in addition to all other rights and remedies available to the Bank under the Loan Agreement, the Documents, at law or equity, any and all amounts outstanding under the Loan Agreement shall, without notice, bear interest payable on demand at the Prime Rate plus six and one-half of one percent (6.50%) ("Revised Default Rate"). The Revised Default Rate is, during its pendency, in lieu of the default rate of interest set forth in Section 2.03 of the Loan Agreement. -2- 9. Consent to Outside Financing. The Bank consents to the Borrower's guarantee of financing to certain Subsidiaries of Borrower from financial institutions (including, but not limited to, insurance companies) other than Nomura Asset Capital Corporation in connection with certain development projects located in New York, New York (Battery Park City), Glen Ellyn, Illinois and Raleigh, North Carolina (the "Guarantees") and acknowledges that the Guarantees shall not constitute (a) a breach of Section 5.08(iv)(B) of the Loan Agreement or (b) an Event of Default under the Loan Agreement; provided however, that prior to the execution of any documents relating to the Guarantees and as a condition to the foregoing consent, Borrower shall provide the Bank with commitment letters setting forth the terms and conditions of each such financing and the Bank shall approve the terms and conditions of each such financing, which approval shall be at the Bank's sole but reasonable discretion. 10. Further Decrease of Loan Commitment. As of the date of this Amendment, the Loan Agreement and Documents are hereby amended and restated to provide that if at any time that any portion of the loan remains outstanding and the closing price of Borrower's publicly traded shares of stock as quoted on the NASDAQ (the "Stock Price") (the date of the occurrence described herein is hereafter referred to as the "Trigger Date") is: a. Less than $14.00 per share but not less than $12.50 per share, the principal amount of the Loan and the Maximum Revolving Loan Commitment shall, without further notice, be decreased to $10,000,000.00 and Borrower shall pay within one business day of the Trigger Date, without further notice or demand, amounts necessary to reduce the outstanding principal balance of the Loan to $10,000,000.00. b. Less than $12.50 per share but not less than $10.00, the principal amount of the Loan and the Maximum Revolving Loan Commitment shall, without further notice, be decreased to $5,000,000.00 and Borrower shall pay within one business day of Trigger Date, without further notice or demand, amounts necessary to reduce the outstanding principal balance of the Loan to $5,000,000.00. c. Less than $10.00 per share, the principal amount of the Loan and the Maximum Revolving Loan Commitment shall, without further notice, be decreased to $0.00 and Borrower shall pay within one business day of Trigger Date, without further notice or demand, amounts necessary to reduce the outstanding principal balance of the Loan to $0.00. If any amount of the outstanding principal balance of the Loan is comprised of LC Reserves, Borrower shall provide the Bank with cash collateral in an amount equal to the outstanding LC Reserve to secure the amount of the outstanding principal balance comprised of the LC Reserve. If the outstanding principal balance of the Loan is not reduced to the applicable amount by the close of the next business day immediately following the Trigger Date or if Borrower fails to provide the Bank with sufficient cash collateral as required in subsection (c) herein, Borrower shall be considered in default under the Loan Agreement and, in addition to all other rights and remedies available to the Bank under the Loan Agreement, the Documents, at law or equity, any and all amounts outstanding under the Loan Agreement shall, without notice, bear interest payable on demand at (i) the default rate of interest set forth in Section 2.03 of the Loan Agreement if the event of default set forth herein occurs after the Interim Maturity Date or (ii) the Revised Default Rate if the event of default set forth herein occurs before the Interim Maturity Date. 11. NASDAQ Registration. If at any time that any portion of the loan remains outstanding and Borrower's publicly traded shares of stock cease to be quoted on the NASDAQ, Borrower shall be considered to be in default under the Loan Agreement. -3- 12. Information. Borrower shall provide Bank, upon request, with copies of all documentation and information concerning the Subordinated Note and the outside financing referred to in this Amendment. 13. Reaffirmation. To the extent any term(s) or condition(s) in any of the Documents (including, without limitation, the Amended and Restated Note) shall contradict or be in conflict with the amended terms of the Loan as set forth herein, such terms and conditions are hereby deemed modified and amended accordingly, upon the effective date hereof, to reflect the terms of the Loan as so amended herein. All terms of the Documents (including, without limitation, the Amended and Restated Note), as amended hereby, shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower to the Bank. As of the date of this Amendment, Borrower herein restates, ratifies and reaffirms each and every term and condition set forth in the Documents as amended herein. There are no other changes to the Documents except for the changes specifically set forth herein. 14. Certification. To further induce the Bank to enter into this Amendment, Borrower represents and warrants to the Bank as follows: (a) Borrower is empowered to perform all acts and things undertaken and done pursuant to this Amendment and has taken all corporate or other action necessary to authorize the execution, delivery and performance of the of this Amendment; (b) the officers of Borrower executing this Amendment have been duly elected or appointed and have been fully authorized to execute the same at the time executed; (c) this Amendment, when executed and delivered, will be the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its respective terms; and (d) Borrower is delivering to the Bank contemporaneously herewith, a certificate of Borrower's Secretary certifying as to the resolutions of the Executive Committee of Borrower's Board of Directors approving this Amendment and the incumbency and signatures of the officers of Borrower signing this Amendment. 15. Absence Of Claim. To further induce the Bank to enter into this Amendment, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against the Bank with respect to the Obligations to the Bank. 16. Illinois Law To Govern. This Amendment and each transaction contemplated hereunder shall be deemed to be made under and shall be construed and interpreted in accordance with the laws of the State of Illinois. 17. Binding Effect. The terms, provisions and conditions of this Amendment shall be binding upon and inure to the benefit of each respective party and their respective legal representatives, successors and assigns. -4- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: BROOKDALE LIVING COMMUNITIES, INC. By: /s/ Robert J. Rudnik Print Name: Robert J. Rudnik Title: Executive Vice President ATTEST: By: /s/ R. Stanley Young Print Name: R. Stanley Young Title: Senior Vice President BANK: LaSALLE NATIONAL BANK By: /s/ Ann B. O'Shaughnessy Print Name: Ann B. O'Shaughnessy Title: Assistant Vice President -5- EX-10.102 3 THIRD AMENDMENT TO LOAN AGREEMENT THIRD AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS THIS THIRD AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS, dated as of October 20, 1998 (the "Amendment"), is entered into by and between BROOKDALE LIVING COMMUNITIES, INC., a Delaware corporation (the "Borrower"), and LaSALLE NATIONAL BANK, a national banking association (the "Bank"). WITNESSETH WHEREAS, Borrower has previously executed and delivered to the Bank a certain Note dated April 27, 1998 in the original principal amount of up to Fifteen Million Dollars ($15,000,000.00) (the "Original Note") evidencing a certain loan (the "Loan") set forth more fully in and governed by a certain Loan Agreement of that same date to which the Bank is also a party (the "Original Loan Agreement"); WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Amended and Restated Note dated July 16, 1998 increasing the principal amount of the Loan by $10,000,000.00, on an interim basis only, from $15,000,000.00 to $25,000,000.00 (the "Amended and Restated Note") and a certain First Amendment to Loan Agreement and Documents of that same date to which the Bank is also a party (the "First Amendment") that (a) increased the principal amount of the Loan on an interim basis as aforesaid and (b) permitted a portion of the Loan to be reserved for the issuance of standby Letters of Credit by the Bank to and for the benefit of municipalities and other governmental units in connection with projects developed by Borrower from time to time as set forth more fully therein; WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Second Amendment to Loan Agreement and Documents dated October 14, 1998 to which the Bank is also a party (the "Second Amendment") wherein (a) the Bank consented to the Borrower's proposed issuance of a convertible subordinated and unsecured note to OZ Master Fund, Ltd. in the principal amount of Ten Million Dollars ($10,000,000.00), (b) the Bank permitted the Borrower to guarantee financing from other financial institutions to certain Subsidiaries of Borrower in connection with certain development projects located in New York, New York (Battery Park City), Glen Ellyn, Illinois and Raleigh, North Carolina, which projects were to be originally financed by Nomura Asset Capital Corporation, (c) the Event of Default set forth in Section 7.01(O) of the Loan Agreement was modified and restructured, and (d) the Interim Maturity Date was extended to November 3, 1998, all of the foregoing as set forth more fully in and subject to the terms and conditions of the Second Amendment (the Original Loan Agreement, as amended by the First Amendment and the Second Amendment, is herein referred to as the "Loan Agreement"); WHEREAS, the Borrower has requested to Bank to modify certain provisions of the Loan Agreement, which the Bank is willing to do subject to the terms and conditions set forth herein: NOW, THEREFORE, in consideration of the premises, the covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Incorporation of Recitals. The above and foregoing recitals are incorporated into and made a part of this Amendment. All capitalized terms used herein, if not otherwise specifically defined, shall have the meanings and definitions prescribed in the Loan Agreement and the Documents referred to therein. - 1 - 2. Outstanding Principal Balance of Loan. For purposes of this Amendment and the Loan Agreement, the outstanding principal balance of the Loan at any time shall be the sum of (a) all amounts of the Loan Advances made under the Loan Agreement remaining unpaid plus (b) all outstanding LC Reserves. 3. Borrowing Availability Restricted. As of the date of this Amendment, the outstanding principal balance of the Loan is $24,953,750.00 (the "Outstanding Principal Amount"). Notwithstanding any provision of the Loan Agreement or the Documents to the contrary, the Maximum Revolving Loan Commitment is hereby frozen at, and shall not exceed, the Outstanding Principal Amount, unless otherwise consented to by the Bank in writing. 4. Interim Maturity Date. The term "Interim Maturity Date" is hereby amended and restated to mean November 3, 1998. 5. Decreased Loan Commitment. On the Interim Maturity Date, without further notice (a) the outstanding principal balance of the Loan shall be reduced to $10,000,000.00, and (b) the principal amount of the Loan and Maximum Revolving Loan Commitment shall be decreased from $25,000,000.00 to an amount not to exceed $10,000,000.00. 6. Maturity Date. The term "Maturity Date" is hereby amended and restated to mean (a) the Interim Maturity Date as to any and all amounts of the outstanding principal balance of the Loan in excess of $10,000,000.00, and (b) April 26, 1999 as to the outstanding principal balance of the Loan together with any accrued but unpaid interest thereon and any other costs or amount owed to the Bank under the Loan Agreement as amended hereby. 7. Interim Interest Rate. The Loan Agreement is hereby amended to provide that, effective as of October 20, 1998, (a) the outstanding principal balance of the Loan in excess of $10,000,000.00 shall bear interest payable on demand at the Prime Rate plus four percent (4.0%) and (b) the outstanding principal balance of the Loan not in excess of $10,000,000.00 shall bear interest payable at the Prime Rate plus one-half of one percent (0.50%) per annum (the "Interim Interest Rate"). The Interim Interest Rate is, during its pendency, in lieu of the interest rate set forth in Section 2.02 of the Loan Agreement and in lieu of the Interim Interest Rate set forth in the Second Amendment. 8. Interim Maturity Default Rate. The Loan Agreement is hereby amended to provide that if the outstanding principal balance of the Loan is not reduced to $10,000,000.00 by the Interim Maturity Date as required under this Amendment, Borrower shall be considered in default under the Loan Agreement and, in addition to all other rights and remedies available to the Bank under the Loan Agreement, the Documents, at law or equity, any and all amounts outstanding under the Loan Agreement shall, without notice, bear interest payable on demand at the Prime Rate plus six and one-half of one percent (6.50%) ("Revised Default Rate"). The Revised Default Rate is, during its pendency, in lieu of the default rate of interest set forth in Section 2.03 of the Loan Agreement and in lieu of the Revised Default Rate set forth in the Second Amendment. 9. Further Decrease of Loan Commitment. As of the date of this Amendment, the Loan Agreement and Documents are hereby amended and restated to provide that if at any time that any portion of the loan remains outstanding and the closing price of Borrower's publicly traded shares of stock as quoted on the NASDAQ (the "Stock Price") (the date of the occurrence described herein is hereafter referred to as the "Trigger Date") is: a. Less than $12.50 per share but not less than $10.00, the principal amount of the Loan and the Maximum Revolving Loan Commitment shall, without further notice, be decreased to $5,000,000.00 and Borrower shall pay within one business day of Trigger Date, without further notice or demand, amounts - 2 - necessary to reduce the outstanding principal balance of the Loan to $5,000,000.00. b. Less than $10.00 per share, the principal amount of the Loan and the Maximum Revolving Loan Commitment shall, without further notice, be decreased to $0.00 and Borrower shall pay within one business day of Trigger Date, without further notice or demand, amounts necessary to reduce the outstanding principal balance of the Loan to $0.00. If any amount of the outstanding principal balance of the Loan is comprised of LC Reserves, Borrower shall provide the Bank with cash collateral in an amount equal to the outstanding LC Reserve to secure the amount of the outstanding principal balance comprised of the LC Reserve. If the outstanding principal balance of the Loan is not reduced to the applicable amount by the close of the next business day immediately following the Trigger Date or if Borrower fails to provide the Bank with sufficient cash collateral as required in subsection (b) herein, Borrower shall be considered in default under the Loan Agreement and, in addition to all other rights and remedies available to the Bank under the Loan Agreement, the Documents, at law or equity, any and all amounts outstanding under the Loan Agreement shall, without notice, bear interest payable on demand at (i) the default rate of interest set forth in Section 2.03 of the Loan Agreement if the event of default set forth herein occurs after the Interim Maturity Date or (ii) the Revised Default Rate if the event of default set forth herein occurs before the Interim Maturity Date. The Bank waives any prior default that occurred under the Second Amendment due to the Borrower not reducing the outstanding principal balance of the Loan to $10,000,000.00 or less within one business day after the Stock Price closed below 14.00 per share. 10. Reaffirmation. To the extent any term(s) or condition(s) in any of the Documents (including, without limitation, the Amended and Restated Note) shall contradict or be in conflict with the amended terms of the Loan as set forth herein, such terms and conditions are hereby deemed modified and amended accordingly, upon the effective date hereof, to reflect the terms of the Loan as so amended herein. All terms of the Documents (including, without limitation, the Amended and Restated Note), as amended hereby, shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower to the Bank. As of the date of this Amendment, Borrower herein restates, ratifies and reaffirms each and every term and condition set forth in the Documents as amended herein. There are no other changes to the Documents except for the changes specifically set forth herein. 11. No Waiver. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder or under any other Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder or under any other Document. The remedies herein provided and under any other Document are cumulative and not exclusive of any remedies provided by law. 12. Certification. To further induce the Bank to enter into this Amendment, Borrower represents and warrants to the Bank as follows: (a) Borrower is empowered to perform all acts and things undertaken and done pursuant to this Amendment and has taken all corporate or other action necessary to authorize the execution, delivery and performance of the of this Amendment; (b) the officers of Borrower executing this Amendment have been duly elected or appointed and have been fully authorized to execute the same at the time executed; (c) this Amendment, when executed and delivered, will be the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its respective terms; and (d) Borrower is delivering to the Bank contemporaneously herewith, a certificate of Borrower's Secretary certifying as to the resolutions of the Executive Committee of Borrower's Board of Directors approving this Amendment and the incumbency and signatures of the officers of Borrower signing this Amendment. - 3 - 13. Absence Of Claim. To further induce the Bank to enter into this Amendment, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against the Bank with respect to the Obligations to the Bank. 14. Illinois Law To Govern. This Amendment and each transaction contemplated hereunder shall be deemed to be made under and shall be construed and interpreted in accordance with the laws of the State of Illinois. 15. Binding Effect. The terms, provisions and conditions of this Amendment shall be binding upon and inure to the benefit of each respective party and their respective legal representatives, successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: BROOKDALE LIVING COMMUNITIES, INC. By: /s/ Darryl W. Copeland, Jr. Print Name: Darryl W. Copeland, Jr. Title: Executive Vice President ATTEST: By: /s/ Robert J. Rudnik Print Name: Robert J. Rudnik Title: Secretary BANK: LaSALLE NATIONAL BANK By: /s/ Ann B. O'Shaughnessy Print Name: Ann B. O'Shaughnessy Title: Assistant Vice President - 4 - EX-10.103 4 FOURTH AMENDMENT TO LOAN AGREEMENT FOURTH AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS THIS FOURTH AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS, dated as of November 3, 1998 (the "Amendment"), is entered into by and between BROOKDALE LIVING COMMUNITIES, INC., a Delaware corporation (the "Borrower"), and LaSALLE NATIONAL BANK, a national banking association (the "Bank"). WITNESSETH WHEREAS, Borrower has previously executed and delivered to the Bank a certain Note dated April 27, 1998 in the original principal amount of up to Fifteen Million Dollars ($15,000,000.00) (the "Original Note") evidencing a certain loan (the "Loan") set forth more fully in and governed by a certain Loan Agreement of that same date to which the Bank is also a party (the "Original Loan Agreement"); WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Amended and Restated Note dated July 16, 1998 increasing the principal amount of the Loan by $10,000,000.00, on an interim basis only, from $15,000,000.00 to $25,000,000.00 (the "Amended and Restated Note") and a certain First Amendment to Loan Agreement and Documents of that same date to which the Bank is also a party (the "First Amendment") that (a) increased the principal amount of the Loan on an interim basis as aforesaid and (b) permitted a portion of the Loan to be reserved for the issuance of standby Letters of Credit by the Bank to and for the benefit of municipalities and other governmental units in connection with projects developed by Borrower from time to time as set forth more fully therein; WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Second Amendment to Loan Agreement and Documents dated October 14, 1998 to which the Bank is also a party (the "Second Amendment") wherein (a) the Bank consented to the Borrower's proposed issuance of a convertible subordinated and unsecured note to OZ Master Fund, Ltd. in the principal amount of Ten Million Dollars ($10,000,000.00), (b) the Bank permitted the Borrower to guarantee financing from other financial institutions to certain Subsidiaries of Borrower in connection with certain development projects located in New York, New York (Battery Park City), Glen Ellyn, Illinois and Raleigh, North Carolina, which projects were to be originally financed by Nomura Asset Capital Corporation, (c) the Event of Default set forth in Section 7.01(O) of the Loan Agreement was modified and restructured, and (d) the Interim Maturity Date was extended to November 3, 1998; WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Third Amendment to Loan Agreement and Documents dated October 20, 1998 to which the Bank is also a party (the "Third Amendment") wherein (a) the Maximum Revolving Loan Commitment was frozen at $24,953,750 (the "Outstanding Principal Amount"), (b) the "Interim Maturity Date" was extended to November 3, 1998, (c) it was agreed that, on the Interim Maturity Date (x) the outstanding principal balance of the Loan was to be reduced to $10,000,000, and (y) the principal amount of the Loan and Maximum Revolving Loan Commitment were to be decreased from $25,000,000 to an amount not to exceed $10,000,000, (d) the Interim Interest Rate and the Revised Default Rate were adjusted, and (e) certain additional changes to the Maximum Revolving Loan Commitment were mandated based upon the Stock Price of the Company from time to time, all of the foregoing as set forth more fully in and subject to the terms and conditions of the Third Amendment (the Original Loan Agreement, as amended by the First Amendment, the Second Amendment, and the Third Amendment, is herein referred to as the "Loan Agreement"); - 1 - WHEREAS, the Borrower has represented to the Bank that it intends to close on a convertible subordinated debt offering of approximately $35,000,000 (the "Offering") on or about November 18, 1998, the proceeds of which would be used by the Borrower to reduce the outstanding principal balance of the Loan to zero, and has therefore requested the Bank to extend the Interim Maturity Date as set forth herein, which the Bank is willing to do subject to the terms and conditions set forth herein: NOW, THEREFORE, in consideration of the premises, the covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Incorporation of Recitals. The above and foregoing recitals are incorporated into and made a part of this Amendment. All capitalized terms used herein, if not otherwise specifically defined, shall have the meanings and definitions prescribed in the Loan Agreement and the Documents referred to therein. 2. Outstanding Principal Balance of Loan. Except for the provisions of Paragraph 4 (a) of this Amendment, for purposes of this Amendment and the Loan Agreement, the outstanding principal balance of the Loan at any time shall be the sum of (a) all amounts of the Loan Advances made under the Loan Agreement remaining unpaid plus (b) all outstanding LC Reserves. For the purposes of Paragraph 4 (a) of this Amendment, the outstanding principal balance of the Loan shall mean all amounts of the Loan Advances made under the Loan Agreement remaining unpaid excluding the outstanding LC Reserves. 3. Interim Maturity Date. The term "Interim Maturity Date" is hereby amended and restated to mean a date certain which is the first to occur of (a) November 30, 1998, or (b) the date on which Borrower closes on the Offering. 4. Decreased Loan Balance and Commitment. On the Interim Maturity Date, without further notice, (a) the Borrower shall pay down the outstanding principal balance of the Loan to zero ($0.00) provided the Offering has closed, and (b) the Borrower shall pay down the outstanding principal balance of the Loan to $10,000,000.00 regardless of whether the Offering has closed, and (c) the principal amount of the Loan and Maximum Revolving Loan Commitment shall be decreased from $25,000,000.00 to an amount not to exceed $10,000,000.00 regardless of whether the Offering has closed. 5. Maturity Date. The term "Maturity Date" is hereby amended and restated to mean (a) the Interim Maturity Date as to any and all amounts of the outstanding principal balance of the Loan in excess of $10,000,000.00, and (b) April 26, 1999 as to the outstanding principal balance of the Loan at or below $10,000,000.00 together with any accrued but unpaid interest thereon and any other costs or amount owed to the Bank under the Loan Agreement as amended hereby. 6. Interim Interest Rate. The Borrower acknowledges and agrees that effective as of October 20, 1998, (a) the outstanding principal balance of the Loan in excess of $10,000,000.00 has been bearing and shall continue to bear interest at the Prime Rate plus four percent (4.0%), and (b) the outstanding principal balance of the Loan not in excess of $10,000,000.00 has been bearing and shall continue to bear interest payable at the Prime Rate plus one-half of one percent (0.50%) per annum (the "Interim Interest Rate"). The Interim Interest Rate is, during its pendency, in lieu of the interest rate set forth in Section 2.02 of the Loan Agreement and in lieu of the Interim Interest Rate set forth in the Second Amendment. - 2 - 7. Fee. As an inducement and condition to the execution of this Amendment by the Bank, the Borrower shall pay the Bank an extension fee in the amount of $50,000.00 (the "Extension Fee"). If on the Interim Maturity Date the outstanding principal balance of the Loan is reduced to zero ($0.00) by application of the proceeds of the Offering and if the Borrower is not otherwise in default under the Loan Agreement or the Documents, the Extension Fee shall be refunded to Borrower. If on the Interim Maturity Date the outstanding principal balance of the Loan has not been reduced to zero ($0.00) by application of the proceeds of the Offering or if the Borrower is otherwise in default under the Loan Agreement or the Documents, the Extension Fee shall be deemed fully paid to and earned by the Bank. 8. Reaffirmation. To the extent any term(s) or condition(s) in any of the Documents (including, without limitation, the Amended and Restated Note) shall contradict or be in conflict with the amended terms of the Loan as set forth herein, such terms and conditions are hereby deemed modified and amended accordingly, upon the effective date hereof, to reflect the terms of the Loan as so amended herein. All terms of the Documents (including, without limitation, the Amended and Restated Note), as amended hereby, shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower to the Bank. As of the date of this Amendment, Borrower herein restates, ratifies and reaffirms each and every term and condition set forth in the Documents as amended herein. There are no other changes to the Documents, including without limitation the Loan Agreement, except for the changes specifically set forth herein. 9. No Waiver. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder or under any other Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder or under any other Document. The remedies herein provided and under any other Document are cumulative and not exclusive of any remedies provided by law. 10. Certification. To further induce the Bank to enter into this Amendment, Borrower represents and warrants to the Bank as follows: (a) Borrower is empowered to perform all acts and things undertaken and done pursuant to this Amendment and has taken all corporate or other action necessary to authorize the execution, delivery and performance of the of this Amendment; (b) the officers of Borrower executing this Amendment have been duly elected or appointed and have been fully authorized to execute the same at the time executed; (c) this Amendment, when executed and delivered, will be the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its respective terms; and (d) Borrower is delivering to the Bank contemporaneously herewith, a certificate of Borrower's Secretary certifying as to the resolutions of the Executive Committee of Borrower's Board of Directors approving this Amendment and the incumbency and signatures of the officers of Borrower signing this Amendment. 11. Absence Of Claim. To further induce the Bank to enter into this Amendment, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against the Bank with respect to the Obligations to the Bank. 12. Illinois Law To Govern. This Amendment and each transaction contemplated hereunder shall be deemed to be made under and shall be construed and interpreted in accordance with the laws of the State of Illinois. 13. Binding Effect. The terms, provisions and conditions of this Amendment shall be binding upon and inure to the benefit of each respective party and their respective legal representatives, successors and assigns. - 3 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: BROOKDALE LIVING COMMUNITIES, INC. By: /s/ Darryl W. Copeland, Jr. Print Name: Darryl W. Copeland, Jr. Title: Executive Vice President ATTEST: By: /s/ Robert J. Rudnik Print Name: Robert J. Rudnik Title: Secretary BANK: LaSALLE NATIONAL BANK By: /s/ Ann B. O'Shaughnessy Print Name: Ann B. O'Shaughnessy Title: Assistant Vice President - 4 - EX-10.104 5 FIFTH AMENDMENT TO LOAN AGREEMENT FIFTH AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS THIS FIFTH AMENDMENT TO LOAN AGREEMENT AND DOCUMENTS, dated as of December 21, 1998 (this "Amendment"), is entered into by and between BROOKDALE LIVING COMMUNITIES, INC., a Delaware corporation (the "Borrower"), and LaSALLE NATIONAL BANK, a national banking association (the "Bank"). WITNESSETH WHEREAS, Borrower has previously executed and delivered to the Bank a certain Note dated April 27, 1998 in the original principal amount of up to Fifteen Million Dollars ($15,000,000.00) (the "Original Note") evidencing a certain loan (the "Loan") set forth more fully in and governed by a certain Loan Agreement of that same date to which the Bank is also a party (the "Original Loan Agreement"); WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Amended and Restated Note dated July 16, 1998 increasing the principal amount of the Loan by $10,000,000.00, on an interim basis only, from $15,000,000.00 to $25,000,000.00 (the "Amended and Restated Note") and a certain First Amendment to Loan Agreement and Documents of that same date to which the Bank is also a party (the "First Amendment") that (a) increased the principal amount of the Loan on an interim basis as aforesaid and (b) permitted a portion of the Loan to be reserved for the issuance of standby Letters of Credit by the Bank to and for the benefit of municipalities and other governmental units in connection with projects developed by Borrower from time to time as set forth more fully therein; WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Second Amendment to Loan Agreement and Documents dated October 14, 1998 to which the Bank is also a party (the "Second Amendment") wherein (a) the Bank consented to the Borrower's proposed issuance of a convertible subordinated and unsecured note to OZ Master Fund, Ltd. in the principal amount of Ten Million Dollars ($10,000,000.00), (b) the Bank permitted the Borrower to guarantee financing from other financial institutions to certain Subsidiaries of Borrower in connection with certain development projects located in New York, New York (Battery Park City), Glen Ellyn, Illinois and Raleigh, North Carolina, which projects were to be originally financed by Nomura Asset Capital Corporation, (c) the Event of Default set forth in Section 7.01(O) of the Loan Agreement was modified and restructured, and (d) the Interim Maturity Date was extended to November 3, 1998; WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Third Amendment to Loan Agreement and Documents dated October 20, 1998 to which the Bank is also a party (the "Third Amendment") wherein (a) the Maximum Revolving Loan Commitment was frozen at $24,953,750.00, (b) the "Interim Maturity Date" was extended to November 3, 1998, (c) it was agreed that, on the Interim Maturity Date (x) the outstanding principal balance of the Loan was to be reduced to $10,000,000.00, and (y) the principal amount of the Loan and Maximum Revolving Loan Commitment were to be decreased from $25,000,000.00 to an amount not to exceed $10,000,000.00, (d) the Interim Interest Rate and the Revised Default Rate were adjusted, and (e) certain additional changes to the Maximum Revolving Loan Commitment were mandated based upon the Stock Price of the Company from time to time, all of the foregoing as set forth more fully in and subject to the terms and conditions of the Third Amendment; - 1 - WHEREAS, the Loan was subsequently modified and amended by Borrower's execution and delivery to the Bank of a certain Fourth Amendment to Loan Agreement and Documents dated November 3, 1998 to which the Bank is also a party (the "Fourth Amendment") wherein (a) the "Interim Maturity Date" was extended to a date certain which was the first to occur of (x) the earlier of November 30, 1998, or (y) the date on which Borrower closed on the "Offering," and (b) it was agreed that, on the Interim Maturity Date (x) the outstanding principal balance of the Loan was to be reduced to zero ($0.00) provided that the Offering had closed, (y) the outstanding principal balance of the Loan was to be reduced to $10,000,000.00 regardless of whether the Offering had closed, and (z) the principal amount of the Loan and Maximum Revolving Loan Commitment were to be decreased from $25,000,000.00 to an amount not to exceed $10,000,000.00 regardless of whether the Offering had closed, all of the foregoing as set forth more fully in and subject to the terms and conditions of the Fourth Amendment (the Original Loan Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment, and the Fourth Amendment is herein referred to as the "Loan Agreement"); WHEREAS, subject to the terms and conditions of this Amendment, Borrower has requested the Bank to increase the principal amount of the Loan and of the Maximum Revolving Loan Commitment by $5,000,000.00 from $10,000,000.00 to $15,000,000.00, to which the Bank is willing to agree subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises, the covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Incorporation of Recitals. The above and foregoing recitals are incorporated into and made a part of this Amendment. All capitalized terms used herein, if not otherwise specifically defined, shall have the meanings and definitions prescribed in the Loan Agreement and the Documents referred to therein. 2. Increased Loan Commitment. As of the date of this Amendment, the Loan Agreement and the Documents are hereby amended to increase the principal amount of the Loan and the Maximum Revolving Loan Commitment from $10,000,000.00 to $15,000,000.00. 3. Interest Rate. Except as provided in Section 2.03 of the Loan Agreement, Loan Advances under the Loan Commitment shall bear interest at the Prime Rate plus one-half of one percent (0.50%) per annum. The Interim Interest Rate is no longer applicable and accordingly, all references to Interim Interest Rate in the Loan Agreement are hereby deleted. 4. Execution Note. Contemporaneous with the execution of this Agreement, the Borrower has executed and delivered Third Amended and Restated Note in the principal sum of up to $15,000,000.00 evidencing the Loan as amended by this Amendment, which Third Amended and Restated Note shall replace and supersede the Second Amended and Restated Note. 5. Maturity Date. The definition of Maturity Date in the Loan Agreement is confirmed and defined to be April 26, 1999. All outstanding Loan Advances together with any accrued but unpaid interest thereon and any other costs or amounts owed to the Bank hereunder shall be due and paid in full on the Maturity Date. - 2 - 6. Default Rate. Any Obligation of the Borrower under the Loan Agreement or any of the other Documents which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall, without notice, bear interest payable on demand at the interest rate then in effect with respect thereto plus three percent (3%). In addition, after the occurrence of any other Event of Default and delivery to the Borrower of the Bank's notice to charge post-default interest, all Obligations of the Borrowers hereunder shall bear interest at the rate provided for in the immediately preceding sentence. 7. Reaffirmation. To the extent any term(s) or condition(s) in the Loan Agreement or any of the Documents shall contradict or be in conflict with the amended terms of the Loan as set forth herein, such terms and conditions are hereby deemed modified and amended accordingly, upon the effective date hereof, to reflect the terms of the Loan as so amended herein. All terms of the Loan Agreement and the Documents, as amended hereby, shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower to the Bank. As of the date of this Amendment, Borrower herein restates, ratifies and reaffirms each and every term and condition set forth in the Loan Agreement and the Documents as amended herein. There are no other changes to the Documents, including without limitation the Loan Agreement, except for the changes specifically set forth herein. 8. No Waiver. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder or under any other Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder or under any other Document. The remedies herein provided and under any other Document are cumulative and not exclusive of any remedies provided by law. 9. Certification. To further induce the Bank to enter into this Amendment, Borrower represents and warrants to the Bank as follows: (a) Borrower is empowered to perform all acts and things undertaken and done pursuant to this Amendment and has taken all corporate or other action necessary to authorize the execution, delivery and performance of the of this Amendment; (b) the officers of Borrower executing this Amendment have been duly elected or appointed and have been fully authorized to execute the same at the time executed; (c) this Amendment, when executed and delivered, will be the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its respective terms; and (d) Borrower is delivering to the Bank contemporaneously herewith, a certificate of Borrower's Secretary certifying as to the resolutions of the Executive Committee of Borrower's Board of Directors approving this Amendment and the incumbency and signatures of the officers of Borrower signing this Amendment. 10. Absence Of Claim. To further induce the Bank to enter into this Amendment, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against the Bank with respect to the Obligations to the Bank. 11. Illinois Law To Govern. This Amendment and each transaction contemplated hereunder shall be deemed to be made under and shall be construed and interpreted in accordance with the laws of the State of Illinois. 12. Binding Effect. The terms, provisions and conditions of this Amendment shall be binding upon and inure to the benefit of each respective party and their respective legal representatives, successors and assigns. - 3 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: BROOKDALE LIVING COMMUNITIES, INC. By: /s/ Darryl W. Copeland, Jr. Print Name: Darryl W. Copeland, Jr. Title: Executive Vice President ATTEST: By: /s/ Robert J. Rudnik Print Name: Robert J. Rudnik Title: Secretary BANK: LaSALLE NATIONAL BANK By: /s/ Ann B. O'Shaughnessy Print Name: Ann B. O'Shaughnessy Title: Assistant Vice President - 4 - EX-10.105 6 THIRD AMENDED AND RESTATED NOTE THIRD AMENDED AND RESTATED NOTE $15,000,000.00 Chicago, Illinois December 21, 1998 FOR VALUE RECEIVED, BROOKDALE LIVING COMMUNITIES, INC., a Delaware corporation (the "Maker"), with its principal place of business at 77 West Wacker Drive, Suite 4400, Chicago, Illinois 60601, hereby promises to pay to the order of LaSALLE NATIONAL BANK, a national banking association (the "Bank"), at its office at 135 South LaSalle Street, Chicago, Illinois 60603, or such other place as Bank may direct from time to time, in lawful money of the United States and in available funds, the principal amount of FIFTEEN MILLION DOLLARS ($15,000,000.00), or such lesser amount as Bank advanced to Maker hereunder which is outstanding as of the Maturity Date, as defined in that certain Fifth Amendment to Loan Agreement and Documents dated December 21, 1998 by and between Maker and the Bank (the "Fifth Amendment"). Maker previously executed and delivered to the Bank a certain Note dated April 27, 1998 in the original principal amount of $15,000,000.00 (the "Original Note") pursuant to a Loan Agreement dated April 27, 1998 (the "Original Loan Agreement") evidencing a Loan made by the Bank to the Maker pursuant to such Original Loan Agreement. Maker subsequently executed and delivered to the Bank a certain Amended and Restated Note dated July 16, 1998 in the principal amount of $25,000,000.00 (the "Restated Note") pursuant to a certain First Amendment to Loan Agreement and Documents of the same date (the "First Amendment"), as amended by a Second Amendment to Loan Agreement and Documents (the "Second Amendment") with the Bank dated October 14, 1998, and further evidenced by a Second Amended and Restated Note dated October 14, 1998 (the "Second Amended and Restated Note"), as amended by a Third Amendment to Loan Agreement and Documents (the "Third Amendment") with the Bank dated October 20, 1998, and as amended by a Fourth Amendment to Loan Agreement and Documents (the "Fourth Amendment") with the Bank dated November 3, 1998 (the Original Loan Agreement, as Amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment and the Fifth Amendment, is herein referred to as the "Loan Agreement"). The Second Amended and Restated Note is amended, restated and superseded in its entirety by this Third Amended and Restated Note, and any amounts outstanding under the Second Amended and Restated Note are transferred to this Third Amended and Restated Note. The Loan evidenced by this Third Amended and Restated Note constitutes a revolving credit under applicable Laws and Maker may repay and reborrow hereunder subject to the terms and conditions of the Loan Agreement and Documents. All advances under this Third Amended and Restated Note shall bear interest in accordance with and be governed by the terms and provisions of the Loan Agreement. All payments received from the Maker hereunder shall be applied by the Bank in accordance with the terms of the Loan Agreement. - 1 - The Borrower may prepay the outstanding amounts of the Loan from time to time in whole or in part on any business day without penalty or premium. This Third Amended and Restated Note is issued under the Loan Agreement, and this Third Amended and Restated Note and the Bank are entitled to all of the benefits, rights and remedies provided for by the Loan Agreement or referred to therein, to which Loan Agreement reference is made for a statement thereof. All capitalized terms used herein which are not defined herein, but which are defined in the Loan Agreement, shall have the meaning prescribed in the Loan Agreement. All unpaid amounts owing on this Third Amended and Restated Note or on any other Obligations under the Loan Agreement or the other Documents immediately shall become due and payable at the option of the Bank, without notice or demand, upon the occurrence of any Event of Default. In the event of default in the payment of any sums due under this Third Amended and Restated Note, the Maker hereby agrees that the Bank may offset all of Maker's money, bank or other deposits or credits now or hereafter held by the Bank or owed by the Bank to the Maker against all amounts due under this Third Amended and Restated Note or against any other amounts which may be due the Bank from the Maker. No clause or provision contained in this Third Amended and Restated Note or any documents related hereto shall be construed or shall so operate (a) to raise the interest rate set forth in this Third Amended and Restated Note above the lawful maximum, if any, in effect from time to time in the applicable jurisdiction for loans to borrowers of the type, in the amount, for the purposes, and otherwise of the kind contemplated, or (b) to require the payment or the doing of any act contrary to law, but if any clause or provision contained shall otherwise so operate to invalidate this Third Amended and Restated Note, in whole or in part, then (i) such clauses or provisions shall be deemed modified to the extent necessary to be in compliance with the law, or (ii) to the extent not possible, shall be deemed void as though not contained and the remainder of this Third Amended and Restated Note and such document shall remain operative and in full force and effect. All makers and any endorsers, guarantors, sureties, accommodation parties and all other persons liable or to become liable for all or any part of the indebtedness evidenced by this Third Amended and Restated Note, jointly and severally waive, to the extent permitted by law, except as otherwise provided in the Loan Agreement or the other Documents, diligence, presentment, protest and demand, and also notice of protest, of demand, of nonpayment, of dishonor and of maturity and also recourse or suretyship defenses generally; and they also jointly and severally hereby consent to any and all renewals, extensions or modifications of the terms of this Third Amended and Restated Note, including time for payment, and further agree that any such renewals, extension or modification of the terms of this Third Amended and Restated Note or the release or substitution of any security for the indebtedness under this Third Amended and Restated Note or any other indulgences shall not affect the liability of any of the parties for the indebtedness evidenced by this - 2 - Third Amended and Restated Note. Any such renewals, extensions or modifications may be made without notice to any of said parties. The Maker shall be liable to the Bank for all costs and expenses incurred in connection with collection, whether by suit or otherwise, of any amount due under this Third Amended and Restated Note, including, without limitation, reasonable attorneys' fees, as more fully set forth in the Loan Agreement. This Third Amended and Restated Note shall be governed by and construed in accordance with the laws of the State of Illinois. BROOKDALE LIVING COMMUNITIES, INC., a Delaware corporation By: /s/ Darryl W. Copeland, Jr. Print Name: Darryl W. Copeland, Jr. Title: Executive Vice President - 3 - EX-10.106 7 WARRANT-GLEN ELLYN THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE DISTRIBUTED, SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR OFFERED UNLESS THERE IS IN EFFECT A REGISTRATION STATEMENT UNDER SUCH ACT AND LAWS COVERING SUCH SECURITIES OR THE ISSUER RECEIVES AN OPINION OF COUNSEL OR A NO-ACTION LETTER FROM THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION STATING THAT SUCH DISTRIBUTION, SALE, TRANSFER, ASSIGNMENT, HYPOTHECATION OR OFFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND LAWS. ----------------------------------------------------- Brookdale Living Communities, Inc. Warrant Certificate Issued to Banc One Capital Partners IV, Ltd. in the Purchase of Common Stock of Brookdale Living Communities, Inc. ------------------------------------------------------- Dated as of October 23, 1998 1 TABLE OF CONTENTS Page Section 1. Definitions..................................................1 Section 2. Duration and Exercise of Warrant.............................6 2.1 Number of Shares of Common Stock. ................6 2.2 Warrant Exercise Period. ..........................6 2.3 Manner of Exercise. ..............................6 2.4 When Exercise Effective. .........................6 2.5 Delivery of Stock Certificates, New Warrant Certificate, etc......................6 Section 3. Anti-dilution Adjustment.....................................6 3.1 Adjustment Event. .................................6 3.2 Reorganization Event. .............................7 3.3 Other Event. ......................................7 3.4 Rights Offering. ..................................7 3.5 Preemptive Rights. ................................8 Section 4. Restrictions on Transfer.....................................8 4.1 Restrictive Legends.................................8 4.2 Notice of Proposed Transfer; Opinion of Counsel.....9 Section 5. Availability of Information.................................10 Section 6. Reservation of Stock, Etc...................................10 Section 7. Capitalization..............................................10 Section 8. Ownership; Registration of Transfer; Exchange and Substitution of Warrant..................................................10 8.1 Ownership of Warrant...............................10 8.2 Registration of Transfers..........................11 8.3 Replacement of Warrant Certificate.................11 8.4 Expenses...........................................11 Section 9. No Rights as Stockholder....................................11 Section 10. Demand Registration Rights .................................11 10.1 Demand for Registration............................11 10.2 Registration Statement Form........................12 i 10.3 Effective Registration Statement...................12 10.4 Expenses...........................................12 10.5 Underwritten Offerings.............................12 10.6 Priority in Requested Registrations................12 Section 11. "Piggyback" Registration Rights.............................13 11.1 Participation in Registration......................13 11.2 Expenses..........................................13 11.3 Underwritten Offerings.............................13 11.4 Priority in Registrations..........................14 Section 12. Registration Procedures.....................................14 Section 13. Indemnification.............................................17 13.1 Indemnification by the Company.....................17 13.2 Indemnification by the Holder......................17 13.3 Procedures for Claims..............................18 Section 14. Rule 144....................................................18 Section 15. Termination of Registration Rights..........................18 Section 16. Miscellaneous...............................................19 16.1 Amendment..........................................19 16.2 Choice of Law......................................19 16.3 Headings...........................................19 Form of Warrant Certificate..................................................A-1 Form of Assignment of Warrant................................................B-1 ii Warrant Certificate Dated as of October 23, 1998 This Warrant Certificate ("Warrant Certificate") certifies that, for value received, Banc One Capital Partners IV, Ltd., an Ohio limited liability company (the "BOCP IV"), is entitled to purchase from Brookdale Living Communities, Inc., a Delaware corporation (the "Company"), up to 33,163 shares of the Common Stock of the Company as hereinafter provided, in the manner and subject to the terms and conditions set forth herein. The Warrant evidenced by this Warrant Certificate is being issued by the Company to the Holder as additional consideration with respect to a certain loan transaction entered into between AH Illinois Subordinated, LLC, an Ohio limited liability company (the "Borrower"), as borrower, and Holder, as lender, effective the date hereof, wherein Holder is making loans to the Borrower in the aggregate principal amount of $8,497,766 (collectively, the "Loan"). The Company has issued a limited recourse guarantee in connection with the Loan and will derive significant benefits from the Loan. Section 1. Definitions. 1.1 "Affiliate" of any specified Person means any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such specified Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to vote 10% or more of the Voting Power of a Person, or the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. 1.2 "Applicable Law" means, with respect to any Person, any and all federal, national, state, regional, local, municipal or foreign laws, statutes, rules, regulations, guidelines, ordinances, licenses, permits, judicial or administrative decisions of any country, or any political subdivision, agency, commission, official or court thereof having jurisdiction over such Person or its business. 1.3 "Adjustment Event" means any of the following events: (i) the Company declares a dividend or makes a distribution with respect to outstanding shares of its Capital Stock, which dividend or distribution is paid entirely or in part in shares of Common Stock or Convertible Securities; or (ii) the Company subdivides, combines or reclassifies outstanding shares of its Common Stock or Convertible Securities. 1 In no event shall an offering described in Section 3.5 also constitute an Adjustment Event. 1.4 "BOCP IV" means Banc One Capital Partners IV, Ltd., an Ohio limited liability company, together with its successors. 1.5 "Borrower" has the definition set forth in the second grammatical paragraph of this Warrant Certificate. 1.6 "Business Day" means any day other than a Saturday, Sunday or day on which banking institutions are authorized or required by law or executive order to be closed in the City of Columbus, Ohio or in the City of Chicago, Illinois. 1.7 "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock (including each class of common stock and preferred stock) or partnership or membership interests of such Person. 1.8 "Charter Documents" mean a Person's formation or other governing documents, including but not limited to, as applicable, its certificate or articles of incorporation, by-laws, code of regulations, articles of organization, operating agreement, certificate of limited partnership and partnership agreement. 1.9 "Commission" means the United States Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. 1.10 "Common Shares" or "Common Stock" means the shares of common stock, $0.01 par value per share, of the Company, treated as a single class of stock, at any time outstanding. 1.11 "Company" means Brookdale Living Communities, Inc., a Delaware corporation, and includes any Person which shall succeed to or assume the obligations of the Company, through restructuring or otherwise. 1.12 "Convertible Securities" means evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for, with or without payment of additional consideration in cash or property, or options, warrants or other rights that are exercisable for, Common Shares, whether or not the right to convert, exchange or exercise is at the time exercisable. 1.13 "Formation Registration Rights Agreement" means that certain Registration Rights Agreement, dated as of May 7, 1997, by and among the Company, The Prime Group, Inc., Prime Group Limited Partnership, and Prime Group VI, L.P., as amended. 2 1.14 "Formation Holders" means the "Holders" as defined in the Formation Registration Rights Agreement. 1.15 "Holder" means BOCP IV, together with its successors and permitted assigns. 1.16 "Loan" has the definition set forth in the second grammatical paragraph of this Warrant Certificate. 1.17 "Notice" has the meaning set forth in ss.4.2. 1.18 "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization, governmental authority or any other form of entity. 1.19 "Preemption Offering" means any offering of Common Shares, Convertible Securities or other shares of Capital Stock of the Company by or on behalf of the Company other than: (i) any Rights Offering; (ii) the issuance of the Warrant Shares subject to this Warrant Certificate; (iii) the issuance of Common Shares to the holder of any other warrant certificates issued to BOCP IV by the Company in exercise of such warrant certificate; (iv) the issuance of Common Shares to the holder of any other warrant certificates issued to any of BOCP IV's Affiliates (including but not limited to those two warrant certificates dated June 17, 1998 for 5,000 shares each issued to Banc One Capital Markets, Inc.) by the Company in exercise of such warrant certificate; (v) the issuance or sale of Common Shares pursuant to any employee, officer or director stock option plan approved by the board of directors of the Company; provided, that (a) options are granted only with respect to Common Shares, (b) the minimum exercise price per Common Share for such shares is not less than the market determined value per share on the date such options were granted, as determined in accordance with the Company's stock incentive plans, and (c) no options are granted to Persons other than officers, directors and employees of the Company or any Subsidiary; and 3 (vi) the sale and issuance of Common Shares, Convertible Securities or other Capital Stock pursuant to any Qualified Public Offering. 1.19 "Qualified Public Offering" means the first offer and sale to the public by the Company or any holders of shares of any Common Shares, Convertible Securities or other Capital Stock, after the dated hereof, pursuant to a registration statement that has been declared effective by the Commission. 1.20 "Reorganization Event" means: (i) any capital reorganization or reclassification or recapitalization of any shares of Capital Stock of the Company (other than an event described in Section 1.3); (ii) any merger or consolidation of the Company with or into any other Person in which the Company is not the surviving entity, or which effects a reclassification or recapitalization of any shares of Capital Stock of the Company; or (iii) the sale, exchange or transfer of all or substantially all of the property of the Company to any other Person. 1.21 "Restricted Securities" means (a) any Warrant bearing the applicable legend set forth in such Warrant, (b) any Warrant Shares which are evidenced by a certificate or certificates bearing such legend, and (c) unless the context otherwise requires, any Common Shares which are at the time issuable upon the exercise of any Warrant and which, when so issued, will be evidenced by a certificate or certificates bearing such legend. 1.22 "Rights Offering" means any offering of Capital Stock or Convertible Securities of the Company or any distribution of rights to purchase Capital Stock or Convertible Securities of the Company that is made substantially on a pro rata basis among the holders of Capital Stock of the Company. 1.23 "Securities" means collectively, the Warrant and the Warrant Shares. 1.24 "Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as of the same shall be in effect at the time. References to a particular section of the Securities Act of 1933 shall include a reference to the comparable section, if any, of any such similar successor federal statute. 4 1.25 "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as of the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934 shall include a reference to the comparable section, if any, of any similar successor federal statute. 1.26 "Subsidiary" means any entity of which more than 50% of the Voting Power is owned or controlled by the Company at any date of determination, either directly or through Subsidiaries. 1.27 "Tax(es)" means any federal, state, local or foreign income, gross receipts, license, franchise, payroll, employment, excise, unemployment, personal property, severance, disability, real property, sales, use, transfer, value added, alternative, estimated or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. 1.28 "Transfer", "Transferred" means, with respect to any item, the sale, exchange, pledge (except with respect to ss.8), conveyance, lease, transfer or other disposition of such item or any interest therein. 1.29 "Voting Power" means with respect to any entity, the power to vote for or designate members of the board of directors or similar group, whether exercised by virtue of the record ownership of securities, under a close corporation or similar agreement or under an irrevocable proxy. 1.30 "Warrant" means the warrant issued by the Company to the Holder evidenced by this Warrant Certificate. 1.31 "Warrant Certificate" means this warrant certificate or any replacement warrant certificate issued to the Holder. 1.32 "Warrant Exercise Price" means $------------- per Warrant Share, which is equal to 110% the average of the daily per share closing prices of the Common Stock on NASDAQ for the ten (10) consecutive trading days prior to the date hereof. 1.33 "Warrant Expiration Date" means the fourth anniversary of the date hereof. 1.34 "Warrant Shares" means the Common Shares issuable upon exercise of the Warrant. 5 Section 2. Duration and Exercise of Warrant. 2.1 Number of Shares of Common Stock. Subject to the terms and conditions set forth in this Warrant Certificate, Holder may purchase up to 33,163 shares of Common Stock of Company. The number of Warrant Shares that may be purchased by the Holder pursuant to this Section 2.1 in consideration of the payment of the Warrant Exercise Price is subject to adjustment as provided for in Section 3. 2.2 Warrant Exercise Period. The Warrant shall be exercisable in a single or partial exercise at any time after the date hereof but on or before the Warrant Expiration Date. 2.3 Manner of Exercise. The Warrant may be exercised by the Holder in a single exercise upon surrender of this Warrant Certificate and the delivery of the Notice of Exercise attached hereto duly completed and executed on behalf of the Holder, at the principal office of the Company (or at such other office or agency of the Company as it may designate by notice to the Holder at the address of the Holder appearing on the books of the Company), upon payment of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares to be purchased pursuant to such exercise by wire transfer or delivery of a certified or cashier's check to the Company. Any exercise of a Warrant pursuant to this Warrant Certificate shall be for only full Warrant Shares and shall not be for partial Warrant Shares. 2.4 When Exercise Effective. The exercise of the Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which (a) the Notice of Exercise shall have been delivered to the Company, (b) this Warrant Certificate shall have been surrendered to the Company, and (c) the Company shall have received payment of the Warrant Exercise Price for the Warrant Shares to be purchased in connection with such exercise as provided in Section 2.3, and immediately prior to the close of business on such Business Day the Holder shall be deemed to have become the holder of record of the Warrant Shares. 2.5 Delivery of Stock Certificates, New Warrant Certificate, etc. As soon as practicable after the effective exercise of the Warrant, the Company at its expense (including any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder a certificate or certificates for the number of Warrant Shares to which the Holder shall be entitled upon such exercise. Section 3. Anti-dilution Adjustment. 3.1 Adjustment Event. Upon the occurrence of any Adjustment Event, the number of Warrant Shares shall be adjusted immediately after the applicable record date with respect to such Adjustment Event as follows. The adjusted number of Warrant Shares shall be a number equal to the number of Warrant Shares issuable upon exercise of the Warrant immediately prior to 6 such record date multiplied by a fraction (i) the numerator of which is the number of outstanding Common Shares immediately after such Adjustment Event, and (ii) the denominator of which is the number of outstanding Common Shares immediately prior to the record date. Any such adjustment shall be calculated to the nearest whole Warrant Share. Notwithstanding any other provision of this Section 3.1, no adjustment shall be made with respect to the issuance of Common Shares, Convertible Securities or other Capital Stock after the date hereof when such issuance constitutes a Preemption Offering. 3.2 Reorganization Event. Upon the occurrence of a Reorganization Event, there shall thereafter be issuable upon the exercise of the Warrant (in lieu of the Warrant Shares), as appropriate, the number of shares of stock, other securities or property to which the Holder would have been entitled had the Holder exercised the Warrant and received the Warrant Shares immediately prior to the record date for such Reorganization Event. Prior to and as a condition of the consummation of any Reorganization Event, the Company shall cause effective provisions to be made to effect the purposes of this Section 3.2, including, if appropriate, an agreement among the Company, any successor to the Company and the Holder. 3.3 Other Event. In case any event shall occur as to which the other provisions of this Section 3 are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by the Warrant in accordance with the essential intent and principles hereof, then the Holder may request in writing within one hundred twenty (120) days after the occurrence of such event that the Company examine the propriety of an adjustment to the number of Warrant Shares issuable upon exercise of the Warrant. Unless the Company and the Holder shall have mutually agreed upon an adjustment, or that no adjustment is required, within thirty (30) days after the receipt of such request, the Company shall appoint a firm of independent certified public accountants of recognized national standing (which may be the regularly engaged accountants of the Company), to give an opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in this Section 3, necessary to preserve the purchase rights represented by the Warrant. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder and shall make the adjustments, if any, described therein. If such opinion states that no such adjustment is necessary, the Holder shall reimburse the Company for the cost and expense of such opinion, and if an adjustment is necessary, the Company shall pay the cost and expense of such opinion. Notwithstanding any other provision of this Section 3.3, no adjustment shall be made with respect to the issuance of Common Shares, Convertible Securities or other Capital Stock after the date hereof when such issuance constitutes a Preemption Offering. 3.4 Rights Offering. In the event the Company shall effect a Rights Offering, the Holder shall be entitled, at its option, to elect to participate in each and every such offering as if the Warrant had been exercised and the Holder was, at the time of any such rights offering, then 7 a holder of that number of Common Shares to which the Holder is then entitled on the exercise of the Warrant. 3.5 Preemptive Rights. In the event of any Preemption Offering, (i) the Company shall notify the Holder in writing of the number of Common Shares, Convertible Securities or other Capital Stock subject to such Preemption Offering and the cash or cash equivalent purchase price (determined by the Company in good faith) thereof, and (ii) the Holder shall have the right for a period of thirty (30) days following such notice to purchase prior to the exercise of the Warrant up to that number of Common Shares, Convertible Securities or other Capital Stock that is sufficient to permit the Holder to maintain the percentage of outstanding Common Shares which the Holder owns or would be entitled to purchase upon exercise of the Warrant, after giving effect to the Holder's purchase under this Section 3.5 and the sale of the Common Shares subject to such Preemption Offering. The Holder shall have the right, during the period specified herein, to purchase any or all of the new Common Shares or Convertible Securities that it is entitled to purchase under this provision at the purchase price and on the terms stated in the Preemption Offering. Notice by the Holder of its participation, in whole or in part, in the Preemption Offering shall be in writing and signed by the Holder and shall be delivered to the Company prior to the end of the period specified herein, setting forth the number of new Common Shares or Convertible Securities the Holder elects to purchase. With respect to any of the new Common Shares or Convertible Securities not purchased by the Holder hereunder, the Company may during the period one hundred and eighty (180) days following the date of expiration of the Preemption Offering sell to any other Person or Persons all or any part of such Common Shares or Convertible Securities, but only on terms and conditions that are no more favorable to such Person or Persons or less favorable to the Company than those set forth in the Preemption Offering. Section 4. Restrictions on Transfer. 4.1 Restrictive Legends. Except as otherwise permitted by this Section 4, the Warrant, each Warrant issued in exchange or substitution for any Warrant, each Warrant issued upon the registration of Transfer of any Warrant, each certificate representing the Warrant Shares and each certificate issued upon the registration of Transfer of any Warrant Shares, shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE DISTRIBUTED, SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR OFFERED UNLESS THERE IS IN EFFECT A REGISTRATION STATEMENT UNDER SUCH ACT AND LAWS COVERING SUCH SECURITIES OR THE ISSUER 8 RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER OR A NO-ACTION LETTER FROM THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION STATING THAT SUCH DISTRIBUTION, SALE, TRANSFER, ASSIGNMENT, HYPOTHECATION OR OFFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND LAWS." 4.2 Notice of Proposed Transfer; Opinion of Counsel. Prior to any Transfer of any Restricted Securities, the Holder will give written notice ("Notice") to the Company of the Holder's intention to effect such Transfer. Each such Notice of a proposed Transfer (a) shall describe the manner and circumstances of the proposed Transfer in sufficient detail to enable counsel to render the opinion referred to below, and (b) shall designate counsel for the Holder. The Holder will submit a copy of such Notice to the counsel designated in such Notice and the Company will promptly submit a copy of the Notice to its counsel. The following provisions shall then apply: (i) If in the opinion of counsel to the Company the proposed Transfer may be effected without registration of such Restricted Securities under the Securities Act, the Company will promptly notify the Holder and the Holder shall thereupon be entitled to Transfer such Restricted Securities in accordance with the terms of the Notice delivered by the Holder to the Company. Each Warrant or certificate for Warrant Shares, if any, issued upon or in connection with such Transfer shall bear the applicable restrictive legend set forth in Section 4.1, unless in the opinion of such counsel, such legend, ----------- requires modification or is no longer required to ensure compliance with the Securities Act. If for any reason, counsel for the Company (after having been furnished with the information required by this Section 4.2) shall fail to deliver an opinion to the Company, or the ----------- Company shall fail to notify the Holder as aforesaid, within sixty (60) days after receipt of Notice of the Holder's intention to effect a Transfer, then for all purposes of the Warrant, the opinion of counsel for the Holder shall be sufficient to authorize the proposed Transfer, provided the opinion is issued by counsel recognized as experts in security law matters, and the opinion of counsel for the Company shall not be required in connection with such proposed Transfer; or (ii) If, in the opinion of counsel to the Company, the proposed Transfer may not be effected without registration of such Restricted Securities under the Securities Act, the Company will promptly so notify the Holder and the Holder shall not be entitled to Transfer such Restricted Securities until receipt of a further Notice from the 9 Company under clause (i) above or until registration of such Restricted Securities under the Securities Act has become effective. Section 5. Availability of Information. To the extent they are applicable to the Company, the Company will comply with the reporting requirements of Sections 13 and 15(d) of the Securities Exchange Act and all other public information reporting requirements of the Commission (including the requirements of Rule 144 promulgated by the Commission under the Securities Act) from time to time in effect. The Company will cooperate with the Holder at the Holder's expense to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the Transfer of any Restricted Securities or the Transfer of Restricted Securities by Affiliates of the Company. Section 6. Reservation of Stock, Etc. The Company will at all times prior to the Warrant Expiration Date reserve and keep available, solely for issuance and delivery upon the exercise of the Warrant and free from preemptive rights, a sufficient number of shares of Common Stock to cover the Warrant Shares issuable or exchangeable upon the exercise of the Warrant. All such shares shall be duly authorized and, when issued upon such exercise against payment therefor as provided for in Section 2.3, shall be validly issued, fully paid and non-assessable. Section 7. Capitalization. The Company represents and warrants that its authorized Capital Stock as of the date hereof consists solely of (i) 75,000,000 shares of Common Stock, of which 9,572,082 shares are issued and outstanding and 50,000 shares are reserved for issuance upon the exercise or conversion of outstanding Convertible Securities, and 982,918 shares are reserved for issuance upon the exercise of options under the Company's Stock Incentive Plans, and (ii) 20,000,000 shares of preferred stock of which zero (0) shares are issued and outstanding and that it has no other Capital Stock authorized, issued or outstanding. Section 8. Ownership; Registration of Transfer; Exchange and Substitution of Warrant. 8.1 Ownership of Warrant. Until due presentment for Transfer, the Company may treat the Person in whose name the Warrant is registered on the register kept at the Company's principal office as the owner and holder hereof for all purposes, notwithstanding any notice to the contrary, provided that when the Warrant has been properly Transferred, the Company shall treat such transferee as the owner of the Warrant for all purposes, notwithstanding any Notice to the 10 contrary. Subject to the foregoing provisions and to Section 4, the Warrant, if properly Transferred, may be exercised by the transferee without first having a new Warrant Certificate issued. 8.2 Registration of Transfers. Subject to Section 4 hereof, the Company shall register the Transfer of the Warrant permitted under the terms hereof upon records to be maintained by the Company for that purpose upon surrender of this Warrant Certificate to the Company at the Company's principal office, together with the Form of Assignment attached hereto duly completed and executed. Upon any such registration of Transfer, a new Warrant Certificate in substantially the form of this Warrant Certificate, shall be issued to the transferee. 8.3 Replacement of Warrant Certificate. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and of an indemnification reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender of this Warrant Certificate for cancellation at the Company's principal office, the Company at the Holder's expense will promptly execute and deliver, in lieu thereof, a new Warrant Certificate of like tenor. 8.4 Expenses. Except as otherwise provided for herein, the Company will pay all expenses, Taxes (other than transfer and income Taxes) and other charges in connection with the preparation, issuance and delivery from time to time of this Warrant Certificate or the Warrant Shares. Section 9. No Rights as Stockholder. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder any rights as a stockholder of the Company prior to the exercise hereof or as imposing any obligation on the Holder to purchase any Capital Stock of the Company. Section 10. Demand Registration Rights. 10.1 Demand for Registration. At anytime after the exercise of the Warrant, and subject to the conditions set forth below, if the Company shall receive a written request from the Holder requesting that the Company effect the registration under the Securities Act of all of the Holder's and its Affiliate's Warrant Shares, the Company shall use its reasonable best efforts to effect such registration as soon as practicable. Subject to the provisions of Section 10.6, the Company may register for sale in such registration other securities which the Company has been requested or otherwise desires to register by the holders thereof (which may include Common Shares held by the Formation Holders and/or their permitted assigns); provided, however, that no securities other than Warrant Shares shall be included in such registration if the managing underwriter advises the Holder that the inclusion of such other securities would adversely affect such offering unless the Holder shall have consented in writing to the inclusion of such other securities. The Company shall 11 not be required to effect more than one registration pursuant to requests made pursuant to this Section 10, and shall not be required to effect any registration pursuant to this Section 10 unless any registration can be made on Form S-3. 10.2 Registration Statement Form. Registrations under this Section 10 shall be on such appropriate registration forms as shall be selected by the Company, provided that such forms permit the disposition of the Warrant Shares in accordance with the Holder's intended method or methods of disposition as specified in its request for such registration. The Company shall include in any such registration statement all information which the Holder shall reasonably request. 10.3 Effective Registration Statement. A registration requested pursuant to this Section 10 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective under the Securities Act, (ii) if such registration is not kept continuously effective in accordance with Section 12, (iii) if such registration becomes the subject of any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason other than an act or omission of the Holder and the effectiveness or such registration statement is not re-instituted within ninety (90) days, or (iv) if any conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied for any reason other than an act or omission of the Holder. 10.4 Expenses. The Company shall pay all registration expenses in connection with any registration requested pursuant to this Section 10. The Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or other disposition of its Warrant Shares. 10.5 Underwritten Offerings. Only if a registration pursuant to this Section 10 involves any Capital Stock of the Company or any other securities other than the Warrant Shares held by the Holder and its Affiliates, may the Holder at its option, request an underwritten offering. The underwriter or underwriters thereof shall be selected by the Company. To the extent customary for transactions similar to the transactions contemplated hereby, the Holder may, at its option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Holder. Holder shall not be required to make any representations and warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding the Holder, the Holder's intended method of distribution, any other information provided by the Holder for inclusion in the registration statement or prospectus and any other representation required by law or by customary practice of underwritten secondary offerings. 10.6 Priority in Requested Registrations. If a requested registration pursuant to this Section 10 involves an underwritten offering, and if the managing underwriter shall advise the Company in writing that, in its opinion, the number of securities of any class requested to be 12 included in such registration exceeds the number which can be sold in (or during the time of) such offering without delaying or jeopardizing the success of the offering, then the Company will include in such registration (i) first, all of the Holder's Warrant Shares that the Company is so advised can be sold in such offering, (ii) second, to the extent permitted by the managing underwriter, securities to be registered by the Company for its own account and/or by other holders of securities (which may include the Formation Holders and/or their permitted assigns) in such manner and amounts required by the Formation Registration Rights Agreement, if applicable, or as the Company shall determine. Section 11. "Piggyback" Registration Rights. 11.1 Participation in Registration. If the Company at any time proposes to register any securities under the Securities Act (other than by a registration on Form S-4 or Form S-8 or any successor or similar form and other than pursuant to Section 10), whether or not for sale for its own account, it will each such time, promptly give notice to the Holder. Upon the written request of the Holder made within thirty (30) days after the receipt of any such Notice (which request shall specify the Warrant Shares intended to be disposed of and the intended method of disposition), the Holder shall have the right, subject to the prior registration rights of the Formation Holders, to participate in such registration on the terms and conditions thereof. If, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to the Holder and, thereupon, (i) in the case of a determination not to register, the Company shall be relieved of its obligation to register any Warrant Shares in connection with such registration (but not from its obligation to pay any registration expenses in connection therewith), without prejudice, however, to the rights of the Holder to request that such registration be effected as a registration under Section 10, and (ii) in the case of a determination to delay registration, the Company shall be permitted to delay registering any Warrant Shares for the same period as the delay in registering such other securities. No registration effected under this Section 11 shall relieve the Company of its obligation to effect any registration under Section 10. 11.2 Expenses. The Company will pay all registration expenses in connection with each registration of Warrant Shares requested pursuant to this Section 11. The Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or other disposition of its Warrant Shares. 11.3 Underwritten Offerings. If a registration pursuant to this Section 11 involves an underwritten offering, the Company shall, if requested by the Holder, and subject to the prior registration rights of the Formation Holders, arrange for such underwriters to include the Holder's Warrant Shares among the securities to be distributed by such underwriters. In such case, the Holder shall be a party to the underwriting agreement and may, at its option, require that any or 13 all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Holder. Holder shall not be required to make any representations and warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding the Holder, the Holder's intended method of distribution, any other information provided by the Holder for inclusion in the registration statement or prospectus and any other representation required by law or by customary practices for such transactions. 11.4 Priority in Registrations. If a registration pursuant to this Section 11 involves an underwritten offering, and if the managing underwriter shall advise the Company in writing that, in its opinion, the number of securities of any class requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering without delaying, jeopardizing or otherwise adversely affecting the success of the offering, then the Company will include in such registration, to the extent to which the Company is advised can be sold in such offering, first, all securities proposed by the Company to be sold for its own account, and second, such Common Shares held by the Formation Holders and/or their permitted assigns requested by the Formation Holders and/or their permitted assigns to be included in such registration pursuant to the Formation Registration Rights Agreement, and third, such Warrant Shares requested to be included in such registration and all other securities proposed to be sold by other holders shall be included in such registration pro rata on the basis of the number of shares so proposed to be sold. Section 12. Registration Procedures. If the Company is required to effect the registration of any Warrant Shares as provided herein (subject to the minimum number of Warrant Shares to be registered pursuant to Section 10.1), the Company shall proceed in the following manner: (i) prepare and as expeditiously as possible file (and in any event within one hundred and twenty (120) days of receipt of Holder's request under Section 10) with the Commission the registration statement to effect such registration and use its reasonable best efforts to cause such Registration Statement to become effective; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all Warrant Shares have been disposed of in accordance with the intended methods of disposition by the Holder, but, in no event longer than two (2) years; 14 (iii) furnish to Holder such number of prospectuses (including preliminary prospectuses) and copies of each amendment and supplement thereto and such other documents as Holder may reasonably request in order to facilitate the disposition of the Warrant Shares; (iv) use its reasonable best efforts to register or qualify all Warrant Shares covered by such registration statement under the securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or desirable to enable the Holder to consummate the disposition of its Warrant Shares in such jurisdictions in accordance with the intended method of disposition, provided, however, that the Company shall not be required to register or qualify to the Warrant Shares under the securities or blue sky laws of any jurisdiction if so qualifying or registering the Warrant Shares would require the Company to qualify to do business, to consent to general service of process, or to register as a broker or dealer in any such jurisdiction; (v) enter into and perform its obligations under any underwriting or placement agreement, and take all reasonable actions in connection therewith in order to expedite or facilitate the disposition of the Warrant Shares; (vi) notify the Holder in writing of (i) any stop order or the commencement of any proceedings for that purpose, (ii) any suspension of the qualification of the Warrant Shares for sale in any jurisdiction or the commencement of any proceedings for that purpose, or (iii) any notification received by the Company regarding the necessity or desirability of filing any supplement or amendment to the registration statement; (vii) in any underwritten offering, furnish to the Holder (a) an opinion of counsel for the Company, dated the effective date of such registration statement, in form and substance as is customarily given to underwriters, and (b) a comfort letter, dated the effective date of such registration statement, signed by the Company's independent public accountants in form and substance as is customarily given to 15 underwriters, in each case addressed to the underwriters and the Holder; (viii) notify Holder upon discovery of the happening of any event as a result of which the prospectus included in such registration statement includes an untrue statement of any material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, or any other event that would cause the registration statement to no longer be current as required by the Securities Act, and at the request of the Holder promptly prepare, file and furnish to Holder a reasonable number of copies of a supplement or an amendment to such prospectus which may be required on account of such event and use its reasonable best efforts to cause such supplement or amendment to become effective; (ix) cause to be maintained a transfer agent for its securities from and after a date not later than the effective date of such registration statement; (x) use its reasonable best efforts to list all Warrant Shares covered by such registration statement on any securities exchange on which any of the Common Shares is then listed; and (xi) enter into such agreements and take such other actions as the Holder shall reasonably request in order to expedite or facilitate the disposition of such Warrant Shares. The Holder shall furnish to the Company such information regarding the Holder and the distribution of the Warrant Shares as the Company may from time to time reasonably request in writing. Upon receipt of any Notice from the Company of the happening of any circumstance or event of the kind described in subdivision (viii) of this Section 12, the Holder shall forthwith discontinue the disposition of Warrant Shares pursuant to the registration statement until it receives copies of the supplemented or amended prospectus or other notification that such disposition may be resumed, and, if so directed by the Company, will destroy all copies, other than permanent file copies, then in Holder's possession of the prospectus relating to such Warrant Shares. The Company will use its reasonable best efforts to effect such amendment or supplement as promptly as possible. 16 Section 13. Indemnification. 13.1 Indemnification by the Company. In the event of any registration pursuant to Section 11 or 12, the Company will, and hereby does, indemnify and hold harmless the Holder, its directors, partners, members and officers, any underwriter acting on behalf of the Holder and each other Person, if any, who controls any such Person within the meaning of the Securities Act (individually, an "Indemnified Party", and, collectively the "Indemnified Parties"), against any losses, claims, damages, expenses (including reasonable legal fees and expenses) or liabilities, joint or several, to which any one of them may become subject under the Securities Act or otherwise; provided, however, that the Company shall not be so liable (i) to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon the Company's reliance upon written information furnished to the Company by any Indemnified Party expressly stating that it is for use in the registration statement, (ii) to the extent that any such loss, claim, damage, liability or expense arise out of such Indemnified Party's failure to provide a copy of the final prospectus, as the same may be then supplemented or amended, to the purchaser at or prior to the written confirmation of the sale of Warrant Shares and (iii) to the extent that any such loss, claim, damage, liability or expense arise from an act or omission in a violation of the Securities Act by Holder or such Indemnified Party or from the gross negligence or willful misconduct of the Holder or such Indemnified Party. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Holder or other Person and shall survive the transfer of the Warrant Shares by the Holder. 13.2 Indemnification by the Holder. As a condition to the Company's obligation to include any Warrant Shares in any registration statement filed pursuant to Section 11 or 12, the Holder shall indemnify and hold harmless (in the same manner and to the same extent as the Company is required to indemnify and hold harmless the Indemnified Parties as set forth in Section 13.1) the Company, each director and officer of the Company and any underwriter acting on behalf of the Company and each other Person, if any, who controls any such Person within the meaning of the Securities Act, against any losses, claims, damages, expenses (including reasonable legal fees and expenses) or liabilities, joint or several, to which any one of them may become subject under the Securities Act or otherwise, (i) to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon the Company's reliance upon written information furnished to the Company by such Person expressly stating that it is for use in the registration statement; provided, however, that the Holder shall not be so liable to the extent that any such loss, claim, damage, liability or expense arise out of such Person's (other than the Holder's or any Indemnified Party's) failure to provide a copy of the final prospectus, as the same may be then supplemented or amended, to the purchaser at or prior to the written confirmation of the sale of any securities; (ii) to the extent that any such loss, claim, damage, liability or expense arise out of the Holder's failure to provide a copy of the final prospectus, as the same may be then supplemented or amended, to the purchaser at or prior to the written confirmation of the sale of Warrant Shares; and (iii) to the extent that any such loss, claim, damage, liability or expense arise from an act or omission in a violation of the 17 Securities Act by Holder or from the gross negligence or willful misconduct of the Holder. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such Person and shall survive the transfer of such Registrable Securities or Warrant Shares by the Holder. 13.3 Procedures for Claims. Promptly after receipt of notice of the commencement of any action or proceeding involving a claim referred to in this Section 13, an indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give Notice to the indemnifying party of the commencement of such action. Failure to give prompt Notice shall not relieve the indemnifying party of its obligation under this Section 13, except to the extent that the indemnifying party is actually prejudiced by such failure. The indemnifying party shall be entitled to participate in and to assume the defense of such action at its expense, jointly with any other indemnifying party, with counsel reasonably satisfactory to the indemnified party; provided, however, that an indemnified party shall have the right to retain its own counsel, with fees and expenses thereof to be paid by the indemnifying party, if in such indemnified party's reasonable judgment an actual or potential conflict of interest between such indemnified and indemnifying party may exist in respect of such claim. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof a release from all liability by the plaintiff to the indemnified party. The amount paid or payable by an indemnifying party shall include any legal or other expenses reasonably incurred by the indemnified party in connection with the investigation or defense of any such action or claim. Section 14. Rule 144. If the Company shall have filed a registration statement, the Company will file the reports required to be filed by it under the Securities Act and the Securities Exchange Act and the rules and regulations adopted by the Commission thereunder. The Company shall, upon the reasonable request of the Holder, provide the Holder and any institutional investor designated by such Holder such financial and other information as the Holder may reasonably determine to be necessary in order to permit the Holder's compliance with Rule 144A under the Securities Act in connection with the resale of any Warrant Shares, except at such time as the Company is subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act. Section 15. Termination of Registration Rights. The registration rights granted herein shall terminate on the date that neither the Holder nor any Affiliate of the Holder owns any Warrant Shares. 18 Section 16. Miscellaneous. 16.1 Amendment. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 16.2 Choice of Law. This Warrant Certificate and the Warrant evidenced thereby shall be governed by the laws of the State of Delaware without regard to conflict of laws principles. 16.3 Headings. The Headings in this Warrant Certificate are inserted for convenience only and shall not be deemed to constitute a part hereof. BROOKDALE LIVING COMMUNITIES, INC. By:---------------------------------- Name:-------------------------------- Its:--------------------------------- 19 FORM OF NOTICE OF EXERCISE OF WARRANT The undersigned is the holder of, and hereby elects to exercise, the Warrant evidenced by that certain Warrant Certificate, dated as of October 23, 1998 issued to Banc One Capital Partners IV, Ltd. by Brookdale Living Communities, Inc. ( the "Warrant Certificate"), and to purchase the Warrant Shares issuable pursuant to the Warrant Certificate and herewith makes payment in full therefor by delivery of a certified check payable to the order of the Company in the amount of the Warrant Exercise Price or by wire transfer of immediately available funds in the amount of the Warrant Exercise Price and requests that certificate(s) for such Warrant Shares be issued in the name of and delivered to -----------------------------------------------, or in such denominations as requested by the undersigned in writing to the Company concurrently herewith. Capitalized terms used herein which are not defined herein, but which are defined in the Warrant Certificate, shall have the meanings given such terms in the Warrant Certificate. Name of Holder (Print):-------------------------- Dated:----------------------------------- By:-------------------------------------- Title:----------------------------------- 20 FORM OF ASSIGNMENT OF WARRANT FOR VALUED RECEIVED, ------------------- hereby sells, assigns and transfers to -------------------- all of the rights of the undersigned in and to this Warrant and in and to that certain Warrant Certificate dated October 23, 1998, issued by Brookdale Living Communities, Inc. to Banc One Capital Partners IV, Ltd. Name of Holder (Print):-------------------------- Dated:----------------------------------- By:-------------------------------------- Title:----------------------------------- 21 EX-12 8 STATEMENT RE: COMPUTATION OF RATIOS
Exhibit 12 BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES (THE "COMPANY") AND PREDECESSOR PROPERTIES (THE "PREDECESSOR" TO THE COMPANY) STATEMENTS REGARDING COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (In Thousands, Except Ratios) Predecessor Predecessor Historical Historical Brookdale Living Communities, Inc. ---------------------- --------------- --------------------------------- Years ended December 31, January 1, 1997 May 7, 1997 ------------------------ to to Year ended 1994 1995 1996 May 6, 1997 Dec. 31, 1997 Dec. 31, 1998 ------ ------ ------ ------------- ------------- ------------- EARNINGS - - -------- Income (loss) before minority interest, (provision)/benefit for income taxes and extraordinary item . $ (3,404) $ (1,424) $ 2,365 $ (290) $ (77) $ 10,281 Interest cost ........................ 3,427 5,626 4,740 3,872 10,153 23,139 Interest cost (capitalized) .......... -- -- -- -- (191) (1,558) Amortization of debt expense ......... 743 878 581 225 846 1,292 Preferred stock dividends ............ -- -- -- -- -- -- ---------- -------- --------- ---------- ----------- ------------ Earnings ............................. $ 766 $ 5,080 $ 7,686 $ 3,807 $ 10,731 $ 33,154 ========== ======== ========= ========== =========== ============ FIXED CHARGES - - ------------- Interest cost ........................ $ 3,427 $ 5,626 $ 4,740 $ 3,872 $ 10,153 $ 23,139 Amortization of debt expense ......... 743 878 581 225 846 1,292 Preferred stock dividends ............ -- -- -- -- -- -- ---------- -------- --------- ---------- ----------- ------------ Total fixed charges .................. $ 4,170 $ 6,504 $ 5,321 $ 4,097 $ 10,999 $ 24,431 ========== ======== ========= ========== =========== ============ Ratio of earnings to combined fixed charges and preferred stock dividends .................... -- -- 1.44 -- -- 1.36 ========== ======== ========= ========== =========== ============ Excess (deficit) of earnings to combined fixed charges and preferred stock dividends .......... $ (3,404) $ (1,424) $ 2,365 $ (290) $ (268) $ 8,723 ========== ======== ========= ========== =========== ============
EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Brookdale Living Communities, Inc. List of Subsidiaries Direct or Indirect Subsidiaries Ownership - - ------------ ------------------ BLC Acquisitions, Inc. 100% BLC of New York Holdings, Inc. 100% BLC of Texas II L.P. 100% BLC Property, Inc. 100% Brookdale Holdings, Inc. 100% Brookdale Living Communities of Arizona, Inc. 100% Brookdale Living Communities of California, Inc. 100% Brookdale Living Communities of California-RC, Inc. 100% Brookdale Living Communities of Connecticut, Inc. 100% Brookdale Living Communities of Connecticut-WH, Inc. 100% Brookdale Living Communities of Delaware, Inc. 100% Brookdale Living Communities of Florida, Inc. 100% Brookdale Living Communities of Illinois II, Inc. 100% Brookdale Living Communities of Illinois, Inc. 100% Brookdale Living Communities of Illinois-GE, Inc. 100% Brookdale Living Communities of Illinois-H.V., Inc. 100% Brookdale Living Communities of Massachusetts-RB, Inc. 100% Brookdale Living Communities of Michigan, Inc. 100% Brookdale Living Communities of Minnesota II, Inc. 100% Brookdale Living Communities of Minnesota, Inc. 100% Brookdale Living Communities of New Jersey, Inc. 100% Brookdale Living Communities of New Mexico-SF, Inc. 100% Brookdale Living Communities of New York, Inc. 100% Brookdale Living Communities of New York-BPC, Inc. 100% Brookdale Living Communities of New York-CPW, Inc. 100% Brookdale Living Communities of North Carolina, Inc. 100% Brookdale Living Communities of Pennsylvania-ML, Inc. 100% Brookdale Living Communities of Texas II, Inc. 100% Brookdale Living Communities of Texas, Inc. 100% Brookdale Living Communities of Washington, Inc. 100% Madison Senior Care, Inc. 100% River Oaks Partners 100% The Ponds of Pembroke, L.P. 100% EX-23 10 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements indicated below of Brookdale Living Communities, Inc. of our report indicated below filed with the Securities and Exchange Commission. Registration Statements - - ----------------------- Form S-8 No. 333-51493 Form S-3 No. 333-53969 Form S-3 No. 333-65843 Financial Statements Date of Auditor's Report -------------------- ------------------------ Consolidated Financial Statements of March 4, 1999 Brookdale Living Communities, Inc. as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and for the period from May 7, 1997 through December 31, 1997 and the combined statements of operations, changes in partners' capital (deficit) and cash flows of Predecessor Properties for the period from January 1, 1997 through May 6, 1997 and for the year ended December 31, 1996 included in the Annual Report (Form 10-K) of Brookdale Living Communities, Inc. for the year ended December 31, 1998 dated March 31, 1999. /s/ Ernst & Young LLP Chicago, Illinois March 30, 1999 EX-27 11 FDS -- FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,065 0 3,865 0 0 19,497 115,801 5,689 244,633 31,782 92,570 0 0 116 101,200 244,633 71,785 77,701 39,935 67,542 0 0 4,153 10,281 (3,627) 6,654 0 0 0 6,654 0.68 0.67
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