AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 2002
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------
ASSISTED LIVING CONCEPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------
NEVADA 8050 93-1148702
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
11835 N.E. GLENN WIDING DRIVE
BUILDING E
PORTLAND, OREGON 97220
(503) 252-6233
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CARRIAGE HOUSE ALC INDIANA,
ASSISTED LIVING, INC. HOME AND COMMUNITY CARE, INC. INC.
DELAWARE NEVADA NEVADA
8050 8050 8050
93-1147652 88-0864255 88-0497629
11835 N.E. GLENN WIDING DRIVE 11835 N.E. GLENN WIDING DRIVE 11835 N.E. GLENN WIDING DRIVE
BUILDING E, PORTLAND, OREGON 97220 BUILDING E, PORTLAND, OREGON 97220 BUILDING E, PORTLAND, OREGON 97220
(503) 252-6233 (503) 252-6233 (503) 252-6233
----------
DREW Q. MILLER
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
11835 N.E. GLENN WIDING DRIVE
BUILDING E, PORTLAND, OREGON 97220
(503) 252-6233
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
GARY OLSON, ESQ. ROBERT KENNEDY, ESQ.
LATHAM & WATKINS LATHAM & WATKINS
633 WEST FIFTH STREET-SUITE 4000 885 THIRD AVENUE-SUITE 1000
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10022
(213) 485-1234 (212) 906-1200
----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective, depending on market
conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. | |
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. | | __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | | __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |
CALCULATION OF REGISTRATION FEE
TITLE OF SECURITIES AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED BE REGISTERED OFFERING PRICE PER UNIT (1) AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
10% Senior Secured $21,018,190 100% $21,018,190 $1,933.68
Notes due 2009 (2)
Junior Secured Notes $10,076,190 100% $10,076,190 $ 927.01
due 2012 (2)
Guarantees of the 10% N/A N/A N/A N/A
Senior Secured Notes
due 2009 and the Junior
Secured Notes due 2012(3)
New Common Stock,
par value $.01 per share 3,259,644 shares $ 3.0(4) $9,778,932 $ 899.67
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) The 10% Senior Secured Notes due 2009 and the Junior Secured Notes
due 2012 are the obligations of Assisted Living Concepts, Inc.
(3) Each of Carriage House Assisted Living, Inc., Home and Community
Care, Inc. and ALC Indiana, Inc. guarantee on an unconditional basis
the obligations of Assisted Living Concepts, Inc. under the 10%
Senior Secured Notes due 2009 and the Junior Secured Notes due 2012.
Pursuant to Rule 457(n), no additional registration fee is being
paid in respect of the guarantees. The guarantees are not traded
separately.
(4) Represents the average of the high and low prices reported on the
OTC Bulletin Board(R) as of March 26, 2002.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT WILL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT WILL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE. WE MAY
CHANGE OR AMEND THE INFORMATION WITHOUT NOTICE. WE ARE NOT OFFERING TO SELL, OR
ASKING YOU TO BUY, ANY SECURITIES. WE WILL NOT MAKE ANY OFFER TO SELL THESE
SECURITIES OR ACCEPT OFFERS TO BUY THEM UNTIL WE HAVE DELIVERED THIS PROSPECTUS
IN ITS FINAL FORM. WE ALSO WILL NOT SELL THESE SECURITIES IN ANY JURISDICTION
WHERE IT WOULD BE ILLEGAL TO OFFER OR SELL THEM, OR SOLICIT PURCHASERS, PRIOR TO
REGISTERING OR QUALIFYING THEM UNDER THAT JURISDICTION'S SECURITIES LAWS.
SUBJECT TO COMPLETION, DATED APRIL 1, 2002.
PROSPECTUS
[LOGO]
$21,018,190
10% SENIOR SECURED NOTES DUE 2009
(INTEREST PAYABLE JANUARY 1 AND JULY 1)
$10,076,190
JUNIOR SECURED NOTES DUE 2012
(INTEREST PAYABLE JANUARY 1 AND JULY 1)
3,259,644 SHARES
COMMON STOCK, PAR VALUE $0.01 PER SHARE
ASSISTED LIVING CONCEPTS, INC.
----------
This Prospectus relates to the resale of the following securities of
Assisted Living Concepts, Inc., a Nevada corporation, by the holders (the
"Selling Securityholders") identified in this Prospectus under the heading
"Selling Securityholders," of the following securities:
- $21,018,190 aggregate principal amount of 10% Senior Secured Notes
Due 2009 (the "Senior Notes");
- $10,076,190 aggregate principal amount of Junior Secured Notes Due
2012 (the "Junior Notes" and together with the Senior Notes,
collectively known as the "New Notes"); and
- 3,259,644 shares of our common stock (the "New Common Stock.")
On January 1, 2002, we issued $39,809,822 aggregate principal amount of
Senior Notes, $15,083,225 aggregate principal amount of Junior Notes and
6,431,759 shares of New Common Stock pursuant to a plan of reorganization we
filed in October 2001 under Chapter 11 of the United States Bankruptcy Code, as
amended (the "Bankruptcy Code"). Our general unsecured creditors with claims
allowed in the bankruptcy on or before December 19, 2001 (the "Cutoff Date")
received New Notes and shares of New Common Stock and our stockholders received
shares of New Common Stock. An additional $440,178 aggregate principal amount of
Senior Notes, $166,775 aggregate principal amount of Junior Notes and 68,241
shares of New Common Stock were reserved for issuance following the settlement
of general unsecured claims allowed after the Cutoff Date. The New Notes and New
Common Stock were issued, and will be issued, in reliance on an exemption from
the registration requirements of the Securities Act of 1933, as amended,
afforded by Section 1145 of Title 11 of the Bankruptcy Code. We are filing this
registration statement to enable the Selling Securityholders to resell the New
Notes and New Common Stock that they hold or that they may receive upon the
distribution of the New Notes and New Common Stock held in reserve.
INVESTING IN OUR NEW NOTES AND NEW COMMON STOCK INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 13.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is __________, 2002.
AVAILABLE INFORMATION
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
with the Exchange Act, we file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). You may inspect
and copy these reports, proxy statements and other information at the public
reference facilities of the Commission located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. You may also obtain copies of these
materials at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the
operation of the Public Reference Room can be obtained by calling the Commission
at 1-800-SEC-0330. The Commission also maintains a World Wide Web Site that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
Commission, at http://www.sec.gov.
We have filed with the Commission a registration statement (the
"Registration Statement") on Form S-1 under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the registration of the Senior
Notes, the Junior Notes and the New Common Stock (collectively, the "New
Securities") offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus or in any
document incorporated by reference herein as to the contents of any contract or
other documents referred to are not necessarily complete. In each instance, we
refer you to the copy of such documents filed as an exhibit to the Registration
Statement or such other documents, which you may obtain from the Commission as
indicated above upon payment of the fees prescribed by the Commission. Each such
statement is qualified in its entirety by such reference.
FORWARD LOOKING STATEMENTS
This registration statement contains forward looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward looking statements may be affected by risks
and uncertainties, including without limitation (i) our ability to control costs
and improve operating margins, (ii) the possibility that we will experience a
decrease in occupancy in our residences, which would adversely affect residence
revenues and operating margins, (iii) our ability to operate our residences in
compliance with evolving regulatory requirements, and (iv) the degree to which
our future operating results and financial condition may be affected by a
reduction in Medicaid reimbursement rates. In light of such risks and
uncertainties, our actual results could differ materially from such forward
looking statements. We do not undertake any obligation to publicly release any
revisions to any forward looking statements contained herein to reflect events
and circumstances occurring after the date hereof or to reflect the occurrence
of unanticipated events.
(i)
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the securities being registered hereby and
our consolidated financial statements and related notes appearing elsewhere in
this Prospectus. Because this is only a summary, you should read the rest of
this Prospectus before you invest in our Securities. Read the entire Prospectus
carefully, especially the risks described under "Risk Factors."
THE COMPANY
We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small, middle-market, rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
December 31, 2001 we had operations in 16 states.
We provide personal care and support services and make available routine
nursing services (as permitted by applicable law) designed to meet the personal
and health care needs of our residents. We believe that this combination of
residential, personal care, support and health care services provides a
cost-efficient alternative to, and affords an independent lifestyle for,
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide.
We experienced significant and rapid growth between 1994 and 1998,
primarily through the development of assisted living residences and, to a much
lesser extent, through acquisition of assisted living residences, opening our
last twenty residences in 1999. At the completion of our initial public offering
in November 1994 we had an operating base of five leased residences located in
Oregon. As of December 31, 2001, we operated 184 assisted living residences
(7,115 units) of which we owned 129 residences (5,010 units) and leased 55
residences (2,105 units). For the year ended December 31, 2001, we had an
average occupancy rate of 84.0% and an average monthly rental rate of $2,073 per
unit.
The principal elements of our business strategy are to:
- increase occupancy and improve operating efficiencies at our
residences;
- reduce overhead costs where possible;
- establish necessary financing to meet maturing obligations;
and
- increase rental and service revenue.
We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located some of our
residences in states with favorable regulatory and reimbursement climates, we
should have a stable source of residents eligible for Medicaid reimbursement to
the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income if their
private funds are depleted and they become Medicaid eligible.
Although we manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if the states operating these programs
continue to limit, or more aggressively seek limits on, reimbursement rates. See
"Risk Factors -- Risks
1
Related to our Business and the Business of our Subsidiaries -- We depend on
reimbursement by government payors and other third parties for a significant
portion of our revenues".
REORGANIZATION
On October 1, 2001, we voluntarily filed for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code. The bankruptcy court gave final
approval to the first amended joint plan of reorganization (the "Plan") on
December 28, 2001, and the Plan became effective on January 1, 2002 (the
"Effective Date").
Under the Plan, on the Effective Date, the Company issued general
unsecured creditors their pro rata shares, subject to the reserve described
below (the "Reserve"), of the following securities:
- $40.25 million principal amount of Senior Notes;
- $15.25 million principal amount of Junior Notes; and
- 6.24 million shares of New Common Stock (representing 96% of
the New Common Stock).
The New Notes are secured by 57 of our properties.
The remaining 4% of the New Common Stock, subject to the Reserve, was
issued on the Effective Date to the Company's shareholders immediately prior to
the Effective Date.
Under the Plan, 1.1% of the Senior Notes, Junior Notes and New Common
Stock that would otherwise have been issued on the Effective Date were held back
in the Reserve to cover general unsecured claims that had not been either made
or settled by the December 19, 2001 cutoff date established under the Plan. The
reserved securities will be issued once all these outstanding general unsecured
claims have been settled. If the Reserve is insufficient to cover these
outstanding general unsecured claims, we will have no further liability with
respect to these claims. If the Reserve exceeds the amount of these outstanding
general unsecured claims, the excess securities in the Reserve will be
distributed pro rata among the holders of all general unsecured claims,
including those settled prior to the cutoff date.
On the Effective Date, a new Board of Directors of the reorganized Company
consisting of seven members was established as follows: W. Andrew Adams
(Chairman), Andre Dimitriadis, Mark Holliday, Richard Ladd, Matthew Patrick,
Leonard Tannenbaum, and Wm. James Nicol, then the President and Chief Executive
Officer of the Company. Subsequent to the Effective Date, Steven L. Vick
replaced Mr. Nicol as President, Chief Executive Officer and Director.
We adopted fresh-start reporting, as of December 31, 2001, in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code (SOP 90-7). Under fresh-starting reporting, a new entity has
been deemed created for financial reporting purposes. See Note 1 to the
consolidated financial statements included in this Prospectus for additional
information.
Assisted Living Concepts, Inc. is a Nevada corporation. Our principal
executive offices are located at 11835 N.E. Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.
2
THE OFFERING
On January 1, 2002, the Effective Date of our Plan, we issued New Common
Stock to our stockholders and Senior Notes, Junior Notes and New Common Stock to
holders of general unsecured claims. The New Securities were issued in reliance
on an exemption from the registration requirements of the Securities Act,
afforded by Section 1145 of the Bankruptcy Code. As part of that offering, we
agreed to register the New Securities on behalf of the Selling Securityholders.
Under this Registration Statement, the Selling Securityholders may sell
Senior Notes, Junior Notes or shares of New Common Stock in one or more
offerings. We must use our best efforts to keep this Registration Statement
effective until January 1, 2005, or such shorter period which will terminate
when all of the New Securities have been sold pursuant to this Registration
Statement or when all of the New Securities otherwise have been sold pursuant to
Rule 144 or are otherwise freely tradable. This Prospectus provides you with a
general description of the Senior Notes, Junior Notes and the New Common Stock
that may be sold. For more detailed information, you should read the exhibits
filed with the Registration Statement of which this Prospectus is a part.
OUR 10% SENIOR SECURED NOTES
Amount Offered ................. $21,018,190 principal amount of 10%
Senior Secured Notes Due 2009, of
which $20,788,309 principal amount
were issued on January 1, 2002.
Reserve ........................ The Selling Securityholders may
acquire up to $229,881 principal
amount of the $440,178 of Senior Notes
which were reserved pending settlement
of certain unsecured claims. See
"Description of the Senior Notes--
Reserve."
Maturity Date .................. January 1, 2009.
Interest Rate .................. 10% per annum.
Interest Payment Dates ......... January 1 and July 1 of each year,
commencing July 1, 2002.
Ranking ........................ The Senior Notes are senior secured
obligations of ours and rank pari
passu in right of payment with all of
our current and future senior
indebtedness. As of December 31, 2001
(after giving effect to the Plan), we
had $40.5 million of senior
indebtedness outstanding under the
Heller Loan Agreement (as described
herein) that would have ranked pari
passu in right of payment to the
Senior Notes. The Senior Notes rank
senior to the Junior Notes and to any
future subordinated indebtedness. The
Senior Note Indenture with BNY Midwest
Trust Company governing the Senior
Notes limits our ability to take on
senior or other indebtedness.
Guarantees ..................... The Senior Notes are senior secured
obligations of the Company which are
guaranteed by Carriage House Assisted
3
Living, Inc. ("Carriage House"), Home
and Community Care, Inc. ("HCI") and
ALC Indiana, Inc. ("ALCI").
Security ....................... The Senior Notes are secured by a
first-priority lien, subject to
certain permitted liens, on certain
assisted living facilities listed
herein (collectively, the "Note
Collateral").
Mandatory Redemption of
Senior Notes by Us ............. If we receive net proceeds in excess
of $1.0 million from the sale of any
of the Note Collateral, we must
deliver such net proceeds to the
trustee, who will redeem a pro rata
portion of the Senior Notes at a
redemption price equal to 100% of the
principal amount thereof, plus accrued
and unpaid interest, if any.
Optional Redemption of
Senior Notes by Us ............. At any time, upon at least 30 days'
notice but not more than 60 days'
notice, we may redeem the Senior
Notes, in whole but not in part, at a
redemption price equal to 100% of the
principal amount thereof, plus accrued
and unpaid interest, if any.
Change in Control .............. If we experience specific kinds of
changes in control, we must offer to
repurchase the Senior Notes (if any
remain outstanding) at a repurchase
price equal to 101% of the principal
amount thereof, plus accrued and
unpaid interest, if any. If we
experience an event that triggers this
obligation, we cannot assure you that
we will have enough cash to pay the
purchase price for the Senior Notes,
or that we could do so without
violating the terms of other
agreements.
Offer to Repurchase by Us ...... If we sell certain assets other than
Note Collateral or incur certain
indebtedness, we must use the net
proceeds to offer to repurchase a pro
rata portion of the Senior Notes (if
any remain outstanding) at a
repurchase price equal to 100% of the
principal amount thereof, plus accrued
and unpaid interest, if any. We are
not required to make an offer to
repurchase Senior Notes until the net
proceeds from asset sales and debt
incurrences exceed $3.0 million,
either since January 1, 2002 (in the
case of the initial offer to
repurchase) or the date of the
preceding offer to repurchase (in the
case of any subsequent offer to
repurchase).
Use of Proceeds ................ We will not receive any proceeds from
the sale of the Senior Notes offered
hereby.
Trading ........................ The Senior Notes are not listed for
trading on any United States exchange
or the Nasdaq Stock Market and we have
no present plans to apply to list the
Senior Notes on any United States
exchange or the Nasdaq Stock Market.
4
Registration Rights We have agreed to file this
Registration Statement with respect to
the resale of the Senior Notes and to
use our best efforts to keep this
Registration Statement effective until
January 1, 2005, or such shorter
period which will terminate when all
of the Senior Notes have been sold
pursuant to this registration
statement or when all Senior Notes
otherwise have been sold pursuant to
Rule 144 or are otherwise freely
tradable.
OUR JUNIOR SECURED NOTES
Amount Offered ................. $10,076,190 principal amount of Junior
Secured Notes Due 2012, of which
$7,876,312 principal amount were
issued on January 1, 2002 and up to
$2,112,782 of additional principal
amount will be issued in connection
with the payment of non-cash interest.
Reserve ........................ The Selling Securityholders may
acquire up to $87,096 principal amount
of the $166,775 of Junior Notes which
were reserved pending settlement of
certain unsecured claims. See
"Description of the Junior Notes--
Reserve."
Maturity Date .................. January 1, 2012.
Interest Rate .................. 8% per annum, compounded semi-annually
in arrears, until the interest payment
date immediately preceding the third
anniversary of the Effective Date and
thereafter until maturity at 12% per
annum. Interest payable prior to such
date will be capitalized and added to
principal and we will not make cash
interest payments prior to that date.
Interest Payment Dates ......... January 1 and July 1 of each year,
commencing July 1, 2002.
Ranking ........................ The Junior Notes are subordinated in
right of payment to our Senior Notes
and indebtedness under the Heller Loan
Agreement (as described herein). As of
December 31, 2001 (after giving effect
to the Plan), we had $80.7 million of
senior indebtedness outstanding under
the Senior Notes and the Heller Loan
Agreement (as described herein) that
would have been senior in right of
payment to the Junior Notes. The
Junior Notes rank junior to the Senior
Notes and senior to all future
subordinated indebtedness. The Junior
Note Indenture with BNY Midwest Trust
Company governing the Junior Notes
limits our ability to take on other
indebtedness.
Guarantees ..................... The Junior Notes are secured
obligations of the Company which are
guaranteed by Carriage House, HCI and
ALCI. These guarantees are
subordinated to the Senior Note
guarantees.
Security ....................... The Junior Notes are secured by a
second-priority lien (subject only to
the first-priority lien securing the
Senior
5
Notes and certain other permitted
liens) on the Note Collateral.
Mandatory Redemption of
Junior Notes by Us ............. If we receive net proceeds in excess
of $1.0 million from the sale of any
of the Note Collateral, we must
deliver such net proceeds to the
trustee, who will redeem a pro rata
portion of the Senior Notes. If any
net proceeds remain after the Senior
Notes have been redeemed in full, the
trustee will redeem a pro rata portion
of the Junior Notes at a redemption
price equal to 100% of the principal
amount thereof, plus accrued and
unpaid interest, if any.
Optional Redemption of
Junior Notes by Us ............. At any time, upon at least 30 days'
notice but not more than 60 days'
notice, we may redeem the Junior
Notes, in whole but not in part, at a
redemption price equal to 100% of the
principal amount thereof, plus accrued
and unpaid interest, if any, provided,
that no Senior Notes remain
outstanding or that all of the
outstanding Senior Notes are redeemed
concurrently with the redemption of
the Junior Notes.
Change in Control .............. If we experience specific kinds of
changes in control, subject to the
subordination provisions described
below, we must offer to repurchase the
Junior Notes (if any remain
outstanding) at a repurchase price
equal to 101% of the principal amount
thereof, plus accrued and unpaid
interest, if any. If we experience an
event that triggers this obligation,
we cannot assure you that we will have
enough cash to pay the purchase price
for the Junior Notes, or that we could
do so without violating the terms of
other agreements.
Offer to Repurchase by Us ...... If we sell certain assets other than
Note Collateral or incur certain
indebtedness, we must use the net
proceeds to offer to repurchase a pro
rata portion of the Senior Notes. If
any net proceeds remain after we have
repurchased all of the Senior Notes,
we must offer to repurchase a pro rata
share of the Junior Notes (if any
remain outstanding) at a repurchase
price equal to 100% of the principal
amount thereof, plus accrued and
unpaid interest, if any. We are not
required to make an offer to
repurchase Junior Notes until the net
proceeds from asset sales and debt
incurrences exceed $3.0 million,
either since January 1, 2002 (in the
case of the initial offer to
repurchase) or the date of the
preceding offer to repurchase (in the
case of any subsequent offer to
repurchase).
Use of Proceeds ................ We will not receive any proceeds from
the sale of the Junior Notes offered
hereby.
6
Trading ........................ The Junior Notes are not listed for
trading on any United States exchange
or the Nasdaq Stock Market and we have
no present plans to apply to list the
Junior Notes on any United States
exchange or the Nasdaq Stock Market.
Registration Rights ............ We have agreed to file this
Registration Statement with respect to
the resale of the Junior Notes and to
use our best efforts to keep this
Registration Statement effective until
January 1, 2005, or such shorter
period which will terminate when all
of the Junior Notes have been sold
pursuant to this registration
statement or when all Junior Notes
otherwise have been sold pursuant to
Rule 144 or are otherwise freely
tradable.
OUR NEW COMMON STOCK
Amount Offered ................. 3,259,644 shares of New Common Stock,
par value $0.01 per share, of which
3,223,994 shares were issued on
January 1, 2002.
Reserve ........................ The Selling Securityholders may
acquire up to 35,560 shares of the
68,241 shares of New Common Stock,
which were reserved pending settlement
of certain unsecured claims. See
"Description of Capital Stock--
Reserve."
Use of Proceeds ................ We will not receive any proceeds from
the sale of the New Common Stock
offered hereby.
Trading ........................ The New Common Stock is not listed for
trading on any United States exchange
or the Nasdaq Stock Market but it
currently trades on The OTC Bulletin
Board(R)("OTC.BB"). We have no present
plans to apply to list the New Common
Stock on any United States exchange or
the Nasdaq Stock Market.
7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data. The consolidated statement of operations data for the years ended December
31, 1999, 2000 and 2001, as well as the consolidated balance sheet data as of
December 31, 2000 and 2001, are derived from our consolidated financial
statements included elsewhere in this Prospectus which have been audited by KPMG
LLP, independent auditors. Upon emergence from Chapter 11 proceedings, we
adopted fresh-start reporting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, Financial Reporting By
Entities in Reorganization Under the Bankruptcy Code. In connection with the
adoption of fresh-start reporting, a new entity has been deemed created for
financial reporting purposes effective December 31, 2001. Consequently, the
consolidated balance sheet data at December 31, 2001 is labeled "Successor
Company," and reflects the Plan and the principles of fresh-start reporting.
Periods presented prior to December 31, 2001 have been designated "Predecessor
Company." Note 1 to our consolidated financial statements, included elsewhere in
this Prospectus, provides a reconciliation of the Predecessor Company's
consolidated balance sheet as of December 31, 2001 to that of the Successor
Company which presents the adjustments that give effect to the reorganization
and fresh-start reporting. You should read the selected financial data below in
conjunction with our consolidated financial statements, including the related
notes, and the information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-------------------PREDECESSOR COMPANY---------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue ...................................................... $ 49,605 $ 89,384 $ 117,489 $ 139,423 $ 150,678
Operating expenses:
Residence operating expenses ............................... 31,591 57,443 81,767 95,032 103,867
Corporate general and administrative ....................... 4,050 11,099 21,178 18,365 17,119
Building rentals ........................................... 7,969 12,764 15,367 16,004 15,980
Depreciation and amortization .............................. 3,683 6,339 8,981 9,923 10,349
Class action litigation settlement ......................... -- -- -- 10,020 --
Terminated merger expense .................................. -- 1,068 228 -- --
Site abandonment costs ..................................... -- 2,377 4,912 -- --
Write-off of impaired assets and related expenses .......... -- 8,521 -- -- --
-------- -------- --------- --------- ---------
Total operating expenses ............................. 47,293 99,611 132,433 149,344 147,315
-------- -------- --------- --------- ---------
Operating income (loss) ...................................... 2,312 (10,227) (14,944) (9,921) 3,363
-------- -------- --------- --------- ---------
Other income (expense):
Interest expense ........................................... (4,946) (11,039) (15,200) (16,363) (19,465)
Interest income ............................................ 1,526 3,869 1,598 786 655
Gain (loss) on sale and disposal of assets ................. (1,250) (651) (127) 13 (88)
Loss on sale of marketable securities ...................... -- -- -- (368) --
Other income (expense), net ................................ (121) (1,174) (260) 67 30
-------- -------- --------- --------- ---------
Total other expense .................................. (4,791) (8,995) (13,989) (15,865) (18,868)
-------- -------- --------- --------- ---------
Loss before debt restructure and reorganization cost, fresh
start adjustments, extraordinary item and cumulative effect
of change in accounting principle ............................ (2,479) (19,222) (28,933) (25,786) (15,505)
Debt restructure and reorganization cost ..................... -- -- -- -- (8,581)
Fresh start adjustments ...................................... -- -- -- -- (119,320)
-------- -------- --------- --------- ---------
Loss before extraordinary item and cumulative effect of
change in accounting principle ............................... (2,479) (19,222) (28,933) (25,786) (143,406)
Extraordinary item -- gain on reorganization ................. -- -- -- -- 79,520
Cumulative effect of change in accounting principle .......... -- (1,523) -- -- --
-------- -------- --------- --------- ---------
Net loss ..................................................... $ (2,479) $(20,745) $ (28,933) $ (25,786) $ (63,886)
======== ======== ========= ========= =========
Basic and diluted net loss per common share:
Loss before extraordinary item and cumulative effect of
change in accounting principle ............................... $ (0.21) $ (1.18) $ (1.69) $ (1.51) $ (8.38)
Extraordinary item ........................................... -- -- -- -- 4.65
Cumulative effect of change in accounting principle .......... -- (0.09) -- -- --
-------- -------- --------- --------- ---------
Basic and diluted net loss per common share .................. $ (0.21) $ (1.27) $ (1.69) $ (1.51) $ (3.73)
======== ======== ========= ========= =========
Basic and diluted weighted average common shares
outstanding .................................................. 11,871 16,273 17,119 17,121 17,121(1)
======== ======== ========= ========= =========
8
- ----------
(1) 6,431,759 shares of New Common Stock of the Successor Company were issued
upon the cancellation of all shares of the Predecessor Company as of the
Effective Date, excluding 68,241 shares subject to the Reserve that will
be issued upon settlement of certain unsecured bankruptcy claims. See Note
1 to the consolidated financial statements included elsewhere herein.
SUCCESSOR
PREDECESSOR COMPANY COMPANY
------------------------------------------ ---------
AT DECEMBER 31,
-------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 63,269 $ 55,036 $ 7,606 $ 7,444 $ 6,077
Working capital (deficit) ................... 40,062 43,856 37 (15,911) (6,299)
Total assets ................................ 324,367 414,669 346,188 336,458 222,253
Long-term debt, excluding current portion ... 157,700 266,286 233,199 231,657 161,461
Shareholders' equity ........................ 132,244 119,197 89,344 63,886 32,799
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE, OCCUPANCY AND AVERAGE RENTAL DATA)
PREDECESSOR COMPANY
2000 QUARTERLY FINANCIAL DATA
-------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO
RESULTS OF OPERATIONS QTR QTR QTR QTR DATE
- --------------------------------- -------- -------- -------- -------- ---------
Revenue ......................... $ 33,132 $ 34,146 $ 35,308 $ 36,837 $ 139,423
Operating income (loss) ......... 28 434 (8,598) (1,785) (9,921)
Net loss before extraordinary
item ............................ (3,791) (3,821) (12,445) (5,729) (25,786)
Extraordinary item gain on
reorganization .................. -- -- -- -- --
Net loss ........................ $ (3,791) $ (3,821) $(12,445) $ (5,729) $ (25,786)
Basic and diluted net loss per
common share before
extraordinary item (1) .......... $ (.22) $ (.22) $ (.73) $ (.34) $ (1.51)
Extraordinary item ............. -- -- -- -- --
Basic and diluted net loss per
common share(1) ................. $ (.22) $ (.22) $ (.73) $ (.34) $ (1.51)
Basic and diluted weighted
average common shares
outstanding (2) ............... 17,121 17,121 17,121 17,121 17,121
Average monthly rental rate
per unit ...................... $ 1,947 $ 1,974 $ 2,002 $ 2,038 $ 1,991
Average occupancy rate(3) ...... 78.4% 79.8% 81.4% 83.1% 80.7%
End of period occupancy
rate(3) ....................... 79.6% 81.6% 82.6% 83.0% 83.0%
2001 QUARTERLY FINANCIAL DATA
--------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO
RESULTS OF OPERATIONS QTR QTR QTR QTR DATE
- --------------------------------- -------- -------- -------- --------- ---------
Revenue ......................... $ 36,877 $ 37,371 $ 38,009 $ 38,421 $ 150,678
Operating income (loss) ......... 328 1,318 666 1,051 3,363
Net loss before extraordinary
item ............................ (4,198) (4,611) (7,333) (127,264) (143,406)
Extraordinary item gain on
reorganization .................. -- -- -- 79,520 79,520
Net loss ........................ $ (4,198) $ (4,611) $ (7,333) $ (47,744) $ (63,886)
Basic and diluted net loss per
common share before
extraordinary item (1) .......... $ (.25) $ (.27) $ (.43) $ (7.43) $ (8.38)
Extraordinary item ............. -- -- -- 4.65 4.65
Basic and diluted net loss per
common share(1) ................. $ (.25) $ (.27) $ (.43) $ (2.78) $ (3.73)
Basic and diluted weighted
average common shares
outstanding (2) ............... 17,121 17,121 17,121 17,121 17,121
Average monthly rental rate
per unit ...................... $ 2,041 $ 2,056 $ 2,082 $ 2,112 $ 2,073
Average occupancy rate(3) ...... 83.4% 83.9% 84.3% 84.2% 84.0%
End of period occupancy
rate(3) ....................... 83.3% 84.2% 84.9% 83.7% 83.7%
- ----------
(1) Quarter net loss per share amounts may not add to the full year total due
to rounding.
(2) 6,431,759 shares of New Common Stock of the Successor Company were issued
upon the cancellation of all shares of the Predecessor Company as of the
Effective Date, excluding 68,241 shares subject to the Reserve that will
be issued upon settlement of certain unsecured bankruptcy claims. See Note
1 to the consolidated financial statements included elsewhere herein.
(3) Based upon available units.
9
USE OF PROCEEDS
The proceeds from the sale of the New Securities offered by this
Prospectus are solely for the accounts of the Selling Securityholders.
Accordingly, we will not receive any of the proceeds from sales of the New
Securities.
10
PRICE RANGE OF COMMON STOCK
Our common stock, par value $0.01 (the "Old Common Stock"), was listed on
the American Stock Exchange ("AMEX") under the symbol "ALF" until October 26,
2001. On October 26, 2001, our Old Common Stock was delisted and ceased trading
on the AMEX. On November 29, 2001, our Old Common Stock was listed and began
trading on the OTC.BB under the symbol "ALFC". The following table sets forth
the high and low closing sales prices of our Old Common Stock, as reported by
the AMEX, for the periods indicated.
1999(1) 2000 2001(2)
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
Years ended December 31:
1st Quarter .......... $14.50 $ 3.31 $ 2.38 $ 1.31 $ 0.94 $ 0.25
2nd Quarter .......... 3.31 2.88 1.50 0.63 0.49 0.06
3rd Quarter .......... -- -- 0.88 0.44 0.13 0.05
4th Quarter .......... 2.25 .81 0.63 0.19 0.09 0.01
- ----------
(1) On April 15, 1999, the AMEX halted trading in the Old Common Stock.
Trading was resumed on October 4, 1999 after a restatement related to the
years ended December 31, 1996 and 1997 and the first three fiscal quarters
of 1998 was completed.
(2) From the period from November 29, 2001 through December 31, 2001, the high
and low closing sales prices of our Old Common Stock, as reported by
OTC.BB, were $0.04 and $0.01, respectively. The OTC.BB market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
As of December 31, 2001, we had approximately 102 holders of record of our
Old Common Stock. We are unable to estimate the number of additional
shareholders whose shares are held for them in street name or nominee accounts.
Our New Common Stock, par value $0.01, is listed on the OTC.BB under the
symbol "ASLC".
As of March 1, 2002, we had approximately 33 holders of record of our New
Common Stock. We are unable to estimate the number of additional shareholders
whose shares are held for them in street name or nominee accounts.
DIVIDEND POLICY
Our current policy is to retain any earnings to finance the operations and
expansion of our business. In addition, certain outstanding indebtedness,
including the Senior Notes and the Junior Notes, and certain lease agreements
restrict the payment of cash or other dividends. It is anticipated that the
terms of future debt financing may do so as well. Therefore, the payment of any
cash or other dividends on the New Common Stock is unlikely in the foreseeable
future.
11
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth the consolidated capitalization of our
Successor Company at December 31, 2001, after giving effect to the Plan. The
capitalization table should be read in connection with our consolidated
financial statements and related notes included elsewhere in this Prospectus.
AT DECEMBER 31, 2001(1)
--------------------
Trusts deed notes, payable to the State of Oregon Housing and Community
Services Department........................................................................... $ 9,849
Variable rate multifamily revenue bonds, payable to the Washington State
Housing Finance Commission Department......................................................... 7,521
Variable rate demand revenue bonds, Series 1997, payable to the Idaho
Housing and Finance Association............................................................... 6,542
Variable rate demand revenue bonds, Series A-1 and A-2 payable to the
State of Ohio Housing Finance Agency.......................................................... 11,888
Mortgages Payable.................................................................................. 28,513
Capital Lease Obligations.......................................................................... 296
HUD Secured Mortgage through 2035.................................................................. 7,374
Heller Credit Facility through 2004................................................................ 39,222
10% Senior Secured Notes due 2009 ................................................................. 40,250
Junior Secured Notes due 2012 ..................................................................... 12,628(2)
-----------
Total long-term debt................................................................. 164,083
Less current portion............................................................................... 2,622
-----------
Total long-term debt excluding current portion....................................... 161,461
Shareholders' equity:
Preferred Stock, $0.01 par value; 3,250,000 shares authorized; none
issued and outstanding.................................................................... --
Common Stock, $0.01 par value; 20,000,000 shares authorized;
6,413,759 shares issued and outstanding................................................... 65
Additional paid-in-capital.................................................................... 32,734
-----------
Total shareholders' equity........................................................... 32,799
-----------
Total capitalization................................................................. 194,260
===========
- ----------
(1) Includes New Notes subject to the Reserve that will be issued
in connection with the settlement of certain general unsecured claims
pursuant to the Plan. See "Description of the Senior Notes -- Reserve" and
"Description of the Junior Notes -- Reserve."
(2) The Junior Secured Notes were issued at a discount of $2.6 million.
12
RISK FACTORS
Set forth are the risks that we believe are material. This Prospectus
including the risks discussed below, contains forward looking statements made
pursuant to the safe harbor provision of the Private Securities Reform Act of
1995. Forward looking statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results and future events to differ
materially from those set forth or contemplated in the forward looking
statements. Forward looking statements depend on assumptions, data or methods
which may be incorrect or imprecise.
RISKS RELATED TO THE NEW NOTES
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NEW NOTES.
We have a significant amount of indebtedness due to our issuance of the
New Notes and our incurrence of indebtedness under a loan agreement among us,
certain of our subsidiaries, Heller Healthcare Finance, Inc. and certain other
lenders party thereto (the "Heller Loan Agreement"). The following chart shows
certain important credit statistics and is presented assuming we had completed
the offering of the New Notes, the issuance of the New Common Stock and the
incurrence of the indebtedness under the Heller Loan Agreement as of the dates
or at the beginning of the periods specified below and applied the proceeds as
intended:
AT DECEMBER 31, 2001
($ IN MILLIONS)
--------------------
Total indebtedness...................................... $164.1
Stockholders' equity.................................... $32.8
Debt to equity ratio.................................... 5.0x
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001(1)
------------------ ------------------
Ratio of earnings to fixed charges: - -
- ---------
(1) Deficiency of earnings to cover fixed charges for the five years ended
December 31, 2001 is $11.6 million, $17.0 million, $31.0 million, $25.8
million and $143.4 million, respectively.
Our substantial indebtedness could have important consequences for
holders of New Notes. For example, it could:
- make it more difficult for us to satisfy our obligations with
respect to the New Notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital
expenditures and other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors
that have less debt; and
13
- limit, along with the financial and other restrictive covenants in
our indebtedness, among other things, our ability and the ability of
our subsidiaries to borrow or draw down additional funds.
Furthermore, failing to comply with those covenants could result in
an event of default which, if not cured or waived, could have a
material adverse effect on us and our subsidiaries.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR AND OUR SUBSIDIARIES' SUBSTANTIAL LEVERAGE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the Senior Note Indenture and the
Junior Note Indenture do not fully prohibit us or our subsidiaries from doing
so. In addition, the Heller Loan Agreement would permit certain additional
borrowings which would rank pari passu with the Senior Notes and the related
subsidiary guarantees, and senior to the Junior Notes and the related subsidiary
guarantees. If new debt is added to our or our subsidiaries' current debt
levels, the related risks that we and our subsidiaries now face could intensify.
TO SERVICE OUR INDEBTEDNESS AND TO PAY OUR LEASE OBLIGATIONS WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including the New Notes, to satisfy our lease obligations and to fund planned
capital expenditures will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. In addition, our ability to draw additional amounts under the Heller
Loan Agreement may depend on us meeting the financial covenants in the Heller
Loan Agreement, as well as satisfying certain other conditions to drawing
additional amounts under the facility.
Our revenues are dependent upon the ability of a retired population, which
in turn is largely dependent upon a fixed income or equity asset base, to pay
for our services.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available cash
and the amounts borrowed under the Heller Loan Agreement will be adequate to
meet our future liquidity needs for at least the next few years.
There can be no assurance, however, that our business will generate
sufficient cash flow from operations, that currently anticipated cost savings
and operating improvements will be realized on schedule or that we will satisfy
the conditions to draw additional amounts under the Heller Loan Agreement, all
of which may be necessary to enable us to pay our indebtedness, including the
New Notes, to satisfy our lease obligations and to fund our other liquidity
needs. As a result, we may need to refinance all or a portion of our
indebtedness, including the New Notes, on or before maturity. There can be no
assurance that we will be able to refinance any of our indebtedness, including
the Heller Loan Agreement and the New Notes, on commercially reasonable terms or
at all.
THE INDEBTEDNESS UNDER THE NEW NOTES AND THE RELATED SUBSIDIARY GUARANTEES IS
STRUCTURALLY SUBORDINATED TO ANY INDEBTEDNESS OF OUR NON-GUARANTOR SUBSIDIARIES.
Some but not all of our subsidiaries guarantee the New Notes. None of the
subsidiaries that is party to the Heller Loan Agreement guarantee the New Notes.
Any indebtedness, including trade payables, incurred by any of our subsidiaries
that are not subsidiary guarantors will be structurally senior to the
indebtedness under the Senior Notes, the Junior Notes and the respective
subsidiary guarantees, and the holders of any such indebtedness will have a
claim against the assets of any such non-guarantor
14
subsidiary that is prior to the claims of the holders of the Senior Notes and
the Junior Notes on those assets.
As of January 1, 2002, the New Notes are effectively junior to $84.3
million of indebtedness of non-guarantor subsidiaries, including $40.5 million
under the Heller Loan Agreement. Since January 1, 2002, we have drawn an
additional $1.1 million, and may further draw an additional $2.4 million, under
the Heller Loan Agreement.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE OFFERS
TO REDEEM NEW NOTES REQUIRED BY THE SENIOR NOTE INDENTURE AND THE JUNIOR NOTE
INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding New Notes. If we
incur new indebtedness or sell certain assets that do not secure the New Notes,
we will be required to offer to repurchase some or all of the Senior Notes and
we may be required to offer to repurchase some or all of the Junior Notes.
However, it is possible that we will not have sufficient funds at the time of
the change of control, debt incurrence or asset sale to make the required
repurchase of New Notes or that restrictions, if any, in the Heller Loan
Agreement or in our or our subsidiaries' other future debt agreements will not
allow such repurchases. See the "Description of the Senior Notes--Certain Rights
to Require Repurchase of Senior Notes by the Company" and "Description of the
Junior Notes--Certain Rights to Require Repurchase of Junior Notes by the
Company."
WE MAY NOT HAVE THE ABILITY TO REPURCHASE THE NEW NOTES UPON AN ASSET SALE OF
COLLATERAL.
If we sell certain of the collateral securing the New Notes, we will be
required to repurchase some or all of the Senior Notes and we may be required to
repurchase some or all of the Junior Notes. However, it is possible that
restrictions, if any, in the Heller Loan Agreement or our or our subsidiaries'
other future debt agreements will not allow such repurchases. See "Description
of the Senior Notes--Mandatory Redemption--Asset Sales of Note Collateral" and
"Description of the Junior Notes--Mandatory Redemption--Asset Sales of Note
Collateral."
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:
- received less than reasonably equivalent value or fair consideration
for the incurrence of such guarantee;
- was insolvent or rendered insolvent by reason of such incurrence;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
15
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets, or
- if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature, or
- it could not pay its debts as they become due.
After giving effect to the restructuring of their indebtedness described
in the Plan and other factors, we believe that each subsidiary guarantor, after
giving effect to its guarantee of the New Notes, will not be insolvent, will not
have unreasonably small capital for the business in which it is engaged and will
not have incurred debts beyond its ability to pay such debts as they mature. We
cannot predict, however, what standard a court would apply in making such
determinations or that a court would agree with their conclusions in this
regard.
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE NEW NOTES, THE NOTEHOLDERS
MAY NOT BE ABLE TO RESELL THEIR NEW NOTES.
For various reasons, including those discussed below, we are unable to
predict whether an active trading market will develop or be sustained for the
New Notes. To date, an active trading market has not developed for the New
Notes. If no active trading market develops, holders of New Notes may not be
able to resell their New Notes at their fair market value or at all.
The New Notes are a new issuance of securities with no established trading
market. We have no present plans to apply to list the New Notes on any United
States exchange or the Nasdaq Stock Market. We are not aware of any securities
firm that intends to make a market in the New Notes and any securities firm that
does act as a market-maker could cease its market-making at any time. In
addition, the liquidity of the trading market in the New Notes, and the market
price quoted for the New Notes, may be adversely affected by changes in the
overall market for debt securities and by changes in our financial performance
or prospects and our subsidiaries or in the prospects for companies in our
industry generally. While we do not anticipate that we or our securities will be
rated by any rating agency, if we or our securities are rated and are
subsequently downgraded by any rating agency, the trading price of the New Notes
may be adversely effected.
RISKS RELATED TO THE JUNIOR NOTES
THE NOTEHOLDERS' RIGHT TO RECEIVE PAYMENTS ON THE JUNIOR NOTES IS JUNIOR TO
CERTAIN OF OUR SENIOR INDEBTEDNESS, INCLUDING THE SENIOR NOTES. FURTHER, THE
JUNIOR NOTE GUARANTEES ARE JUNIOR TO OUR SUBSIDIARY GUARANTORS' SENIOR
INDEBTEDNESS, INCLUDING THE SENIOR NOTE GUARANTEES.
The Junior Notes rank behind all of our debt incurred under the Senior
Notes and the Heller Loan Agreement. In addition, the Junior Note guarantees
rank behind our subsidiary guarantors' debt incurred under the Senior Note
guarantees. As a result, upon any distribution to our creditors or the creditors
of the Junior Notes guarantors in a bankruptcy, liquidation or reorganization or
similar proceeding relating to us or our subsidiary guarantors or of their
respective property, the holders of the Senior Notes will be entitled to be paid
in full in cash before any payment may be made with respect to the Junior Notes
or the Junior Note guarantees.
16
In addition, under certain circumstances, if we default on the Senior
Notes, we and our subsidiary guarantors will be prohibited from paying amounts
due on the Junior Notes and the Junior Note guarantees or from purchasing or
otherwise retiring the Junior Notes.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or our subsidiary guarantors, holders of the Junior
Notes will participate with trade creditors and all holders of our subordinated
indebtedness and our subsidiary guarantors' subordinated indebtedness in the
assets remaining after we and our subsidiary guarantors have paid all of the
Senior Notes and the indebtedness under the Heller Loan Agreement. However,
because the Junior Note Indenture requires that amounts otherwise payable to
holders of the Junior Notes in a bankruptcy or similar proceeding be paid to
holders of the Senior Notes and the indebtedness under the Heller Loan Agreement
instead, holders of the Junior Notes may receive less, ratably, than holders of
trade payables in any such proceeding. In any of these cases, we and our
subsidiary guarantors may not have sufficient funds to pay all of our respective
creditors and holders of Junior Notes may receive less, ratably, than the
holders of Senior Notes.
As of January 1, 2002 after giving effect to the Plan, the Junior Notes
and the Junior Note guarantees were subordinated to $40.25 million of Senior
Notes and $40.5 million of indebtedness under the Heller Loan Agreement. Since
January 1, 2002, we have drawn an additional $1.1 million, and may further draw
an additional $2.4 million, under the Heller Loan Agreement.
THE RIGHTS OF THE HOLDERS OF JUNIOR NOTES TO ENFORCE REMEDIES UNDER THE
COLLATERAL DOCUMENTS ARE LIMITED AS LONG AS ANY SENIOR NOTES ARE OUTSTANDING.
The collateral documents provide holders of Junior Notes with a security
interest in certain of our and our subsidiary guarantors' assets but that
security interest is subordinated to the security interests in favor of the
holders of the Senior Notes. An intercreditor agreement provides that the
holders of the Junior Notes will only be able to cause the commencement of steps
to realize upon their junior security interest in the collateral if:
(1) the final maturity date of the Senior Notes has passed and the
Senior Note Trustee or the holders of Senior Notes have not
commenced such steps to realize upon their security interest in the
collateral within 60 days of such date; or
(2) the remaining principal amount of Senior Notes then outstanding
constitutes less than 10% of the remaining principal amount of
Junior Notes then outstanding; or
(3) such time as:
(a) holders of Junior Notes have not received interest or any
other amounts payable under the Junior Notes for a period of
181 days from the date of required payment, and
(b) the principal of the Senior Notes has not been accelerated and
the Senior Note Trustee or holders of the Senior Notes have
not commenced steps to foreclose or otherwise realize upon the
security interest of holders of the Senior Notes in the
collateral.
Until such time as the principal amount of Senior Notes outstanding is
less than the amount of Junior Notes outstanding, the holders of Senior Notes
are given the exclusive right to control all decisions relating to the
enforcement of remedies under the collateral documents.
17
After that time, the holders of a majority of the aggregate principal
amount of New Notes will control such decisions. As a result, the holders of the
Junior Notes will not be able to force a sale of the collateral securing the
Junior Notes or otherwise independently pursue the remedies of a secured
creditor under the collateral documents in most circumstances. The holders of
the Senior Notes may have interests that are different from the interests of
holders of the Junior Notes and they may elect not to pursue their remedies
under the collateral documents at a time when it would be advantageous for the
holders of the Junior Notes to do so.
RISKS RELATED TO THE NEW COMMON STOCK
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE NEW COMMON STOCK,
STOCKHOLDERS MAY NOT BE ABLE TO RESELL THEIR NEW COMMON STOCK.
For various reasons, including those discussed below, we are unable to
predict whether an active trading market will develop or be sustained for the
New Common Stock. To date, an active trading market has not developed for the
New Common Stock. If no active trading market develops, stockholders may not be
able to resell their shares of New Common Stock at their fair market value or at
all.
The shares of New Common Stock are a new issuance of securities with no
established trading market. We have no present plans to apply to list the New
Common Stock on any United States exchange or the Nasdaq Stock Market. We are
not aware of any securities firm that intends to make a market in the New Common
Stock and any securities firm that does act as a market-maker could cease its
market-making at any time. In addition, the liquidity of the trading market in
the New Common Stock, and the market price quoted for the New Common Stock, may
be adversely affected by changes in the overall market for equity securities and
by changes in our financial performance or our prospects and our subsidiaries or
in the prospects for companies in our industry generally. While we do not
anticipate that we or our securities will be rated by any rating agency, if we
or our securities are rated and are subsequently downgraded by any rating
agency, the trading price of the New Common Stock may be adversely effected.
OUR STOCK PRICE MAY BE HIGHLY VOLATILE. THE SHARE PRICE OF THE NEW COMMON STOCK
MAY DECREASE AND STOCKHOLDERS COULD LOSE SOME OR ALL OF THEIR INVESTMENT.
The price at which our Old Common Stock traded fluctuated significantly,
and the price at which the New Common Stock trades may continue to be volatile.
From January 1, 2000 through October 26, 2001, the date our Old Common Stock was
delisted, the sales price of our Old Common Stock, as reported on the AMEX,
ranged from a low of $0.02 to a high of $2.38. From January 1, 2002, the
Effective Date of our Plan, through March 27, 2002, the sales price of our New
Common Stock, quoted on the OTC.BB, ranged from a low of $0.50 to a high of
$3.30. If our share price decreases, stockholders could lose some or all of
their investment.
SUBSTANTIAL SALES OF THE NEW COMMON STOCK COULD CAUSE THE STOCK PRICE TO
DECLINE.
There were 17,120,745 shares of our Old Common Stock outstanding as of
December 31, 2001. Upon cancellation of our Old Common Stock on January 1, 2002,
we had 6,431,759 shares of New Common Stock outstanding (with an additional
68,241 shares of New Common Stock authorized for issuance and reserved to cover
certain unsecured claims that remained outstanding, which will be issued when
those claims are settled; see "Description of Capital Stock -- Reserve.")
Stockholders may seek to sell their shares of New Common Stock, and sales
of large numbers of shares in the same time period could cause the market price
of the New Common Stock to decline
18
significantly. These sales also might make it more difficult for us to sell
securities in the future at a time and price that we deem appropriate.
BECAUSE IT IS UNLIKELY THAT WE WILL PAY DIVIDENDS, STOCKHOLDERS WILL ONLY BE
ABLE TO BENEFIT FROM HOLDING NEW COMMON STOCK IF THE STOCK PRICE APPRECIATES.
We currently intend to retain any future earnings to pay principal and
interest on our indebtedness and to fund growth and, therefore, we do not expect
to pay any dividends in the foreseeable future. As a result of not collecting a
dividend, stockholders will not experience a return on their investment, unless
the price of the New Common Stock appreciates and they sell their shares of New
Common Stock.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY BE UNAVAILABLE
OR WHICH MAY RESULT IN DILUTION TO OUR STOCKHOLDERS AND RESTRICT OUR OPERATIONS.
We may seek to sell additional equity or debt securities or obtain a
credit facility in order to finance our operations, which we may not be able to
do on favorable terms or at all. Our ability to obtain additional debt and
equity financing may be limited by restrictions in the Senior Note Indenture,
the Junior Note Indenture, the Heller Loan Agreement and in our other debt
agreements. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. If additional funds are
raised through the issuance of debt securities or preferred stock, these
securities could have rights that are senior to the New Common Stock and any
debt securities could contain covenants that would restrict our and our
subsidiaries' operations.
A MAJORITY OF THE NEW COMMON STOCK IS HELD BY A SMALL NUMBER OF STOCKHOLDERS WHO
COULD HAVE INTERESTS THAT CONFLICT WITH THE INTERESTS OF THE OTHER STOCKHOLDERS.
A majority of the New Common Stock is held by a small number of
stockholders and their affiliates. This concentration of ownership gives those
stockholders, if they act together, the power to control the outcome of matters
requiring stockholder approval, including the election of directors and to
hinder or delay a change of control of the Company.
RISKS RELATED TO OUR BUSINESS AND THE BUSINESS OF OUR SUBSIDIARIES
WE ARE HIGHLY LEVERAGED; OUR LOAN AND LEASE AGREEMENTS CONTAIN FINANCIAL
COVENANTS.
We are highly leveraged. After giving effect to the Plan and the
application of fresh start reporting, we had total indebtedness, including
short-term portion, of $164.1 million and shareholders' equity of $32.8 million
as of December 31, 2001. We obtained some relief through the implementation of
our Plan but will continue to be highly leveraged (see Note 1 of the
consolidated financial statements included elsewhere herein). The degree to
which we are leveraged could have important consequences, including:
- making it difficult to satisfy our debt or lease obligations;
- increasing our vulnerability to general adverse economic and
industry conditions;
- limiting our ability to obtain additional financing;
- requiring dedication of a substantial portion of our cash flow
from operations to the payment of principal and interest on
our debt and leases, thereby reducing the availability of such
cash flow to fund working capital, capital expenditures or
other general corporate purposes;
19
- limiting our flexibility in planning for, or reacting to,
changes in our business or industry; and
- placing us at a competitive disadvantage to less leveraged
competitors.
Several of our debt instruments and leases contain financial covenants,
including debt-to-cash flow and net worth tests. In August, 2001, we received a
waiver of U.S. Bank National Association's right to declare an event of default
for our failure to meet the September 30, 2001 and December 31, 2001 quarterly
cash balance requirements and other financial ratios set forth in the amended
U.S. Bank National Association ("U.S. Bank") loan agreement. There can be no
assurance that we will be able to meet these requirements as of the end of
future quarters or that U.S. Bank will grant waivers of any such future failure
to meet these requirements.
The Company will not meet the existing financial requirements established
for the Predecessor Company on March 31, 2002, as set forth in the amended U.S.
Bank loan agreement. The Company is in the process of renegotiating these
covenants to consider the reorganization of the Company (Successor Company) with
U.S. Bank. Management believes, based on discussions with U.S. Bank that new
covenants will be established for the Successor entity to allow the Company to
maintain future compliance.
Failure to comply with any covenant constitutes an event of default, which
will allow U.S. Bank (at its discretion) to declare any amounts outstanding
under the loan documents to be due and payable. We cannot provide assurance that
we will comply in the future with the modified financial covenants included in
the agreement, or with the financial covenants set forth in our other debt
agreements and leases. If we fail to comply with one or more of the U.S. Bank
covenants or any other debt or lease covenants (after giving effect to any
applicable cure period), the lender or lessor may declare us in default of the
underlying obligation and exercise any available remedies, which may include:
- in the case of debt, declaring the entire amount of the debt
immediately due and payable;
- foreclosing on any residences or other collateral securing the
obligation; and
- in the case of a lease, terminating the lease and suing for
damages
Many of our debt instruments and leases contain "cross-default" provisions
pursuant to which a default under one obligation can cause a default under one
or more other obligations. Accordingly, if enforced, we could experience a
material adverse effect on our financial condition.
INCREASES IN UTILITY COSTS COULD REDUCE OUR PROFITABILITY.
Utility costs represent a significant percentage of our operating costs.
The cost of utilities may continue to rise. While we have not historically
included utility surcharges in the rental rates we charge to our residents, we
may do so in the future. There can be no assurance that we will be able to do
so. Increases in the costs of utilities that we are unable to pass on to our
residents could significantly reduce our profits.
WE ARE INVOLVED IN A DISPUTE WITH OUR CORPORATE LIABILITY INSURANCE CARRIER.
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our consolidated financial statements
for the years ended December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. This agreement received final court approval on November 30,
2000 and we were dismissed from the litigation with prejudice. On September 28,
2001, we made our final installment of $1.0 million on our promissory note for
the class action litigation settlement. Although we
20
were dismissed from the litigation with prejudice, a dispute which arose with
our corporate liability insurance carriers remains unresolved. At the time we
settled the class action litigation, the Company and the insurance carriers
agreed to resolve this dispute through binding arbitration, and we filed a
complaint for a declaratory judgment that we are not liable to the carriers as
claimed. The carriers counter-claimed to recover an amount capped at $4.0
million.
After filing for bankruptcy on October 1, 2001, we made a motion for
dismissal of our complaint for declaratory relief in the arbitration based upon
having filed for bankruptcy protection. An objection was filed to our motion,
and one of our insurance carriers filed a proof of claim in the amount of $4.0
million in the bankruptcy proceeding. We dispute that claim. We offered (and the
offer currently remains outstanding) to settle the dispute for $75,000 to be
paid out as a general unsecured claim in the bankruptcy process. See Notes 1 and
13 to the consolidated financial statements included elsewhere herein.
WE ARE PARTY TO OTHER LEGAL PROCEEDINGS.
Participants in the senior living and long-term care industry, including
us, are routinely subject to lawsuits and claims. Many of the persons who bring
these lawsuits and claims seek significant monetary damages, and these lawsuits
and claims often result in significant defense costs. As a result, the defense
and ultimate outcome of lawsuits and claims against us may result in higher
operating expenses. Those higher operating expenses could have a material
adverse effect on our business, financial condition, results of operations, cash
flow or liquidity.
CERTAIN OF OUR LEASES MAY BE TERMINATED AS A RESULT OF INCREASE IN CONCENTRATED
OWNERSHIP IN OUR COMMON STOCK AND UPON OCCURRENCE OF OTHER EVENTS.
Certain of our leases with LTC provide LTC with the option to exercise
certain remedies, including the termination of many of our leases with LTC, upon
a change of control under which at least 30% ownership of our common stock is
held by a party or combination of parties directly or indirectly. LTC has the
same option if the stockholders approve a plan of liquidation or the
stockholders approve of a merger or consolidation that meets certain conditions.
WE MAY BE LIABLE FOR LOSSES NOT COVERED BY OR IN EXCESS OF OUR INSURANCE.
In order to protect ourselves against the lawsuits and claims made against
us, we currently maintain insurance policies in amounts and covering risks that
are consistent with industry practice. However, as a result of poor loss
experience, a number of insurance carriers have stopped providing insurance
coverage to the long-term care industry, and those remaining have increased
premiums and deductibles substantially. While nursing homes have been primarily
affected, assisted living companies, including us, have experienced premium and
deductible increases. During our claim year ended December 31, 2000, our
professional liability insurance coverage included deductible levels of $100,000
per incident. For the claim years ending December 31, 2001 and 2002, this
deductible has been replaced with a retention level of $250,000 per incident,
except in Florida and Texas in which the retention level is $500,000 per
incident. Our professional liability insurance is on a claims-made basis. In
certain states, particularly Florida and Texas, many long-term care providers
are facing very difficult renewals. There can be no assurance that we will be
able to obtain liability insurance in the future on commercially reasonable
terms or at all. A claim against us, covered by, or in excess of, our insurance,
could have a material adverse affect on our operations, cash flows.
21
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION.
The operation of assisted living facilities and the provision of health
care services are subject to state and federal laws, and state and local
licensure, certification and inspection laws that regulate, among other matters:
- the number of licensed residences and units per residence;
- the provision of services;
- equipment;
- staffing, including professional licensing and criminal
background checks;
- operating policies and procedures;
- fire prevention measures;
- environmental matters;
- resident characteristics;
- physical design and compliance with building and safety codes;
- confidentiality of medical information;
- safe working conditions;
- family leave; and
- disposal of medical waste.
The cost of compliance with these regulations is significant. In addition,
it could adversely affect our financial condition or results of operations if a
court or regulatory tribunal were to determine we have failed to comply with any
of these laws or regulations. Because these laws and regulations are amended
from time to time, we cannot predict when and to what extent liability may
arise. See "--We must comply with laws and regulations regarding the
confidentiality of medical information," "--We must comply with restrictions
imposed by laws benefiting disabled persons", "--We may incur significant costs
and liability as a result of medical waste" and "--We may incur significant
costs related to environmental remediation or compliance."
In the ordinary course of business, we receive and have received notices
of deficiencies for failure to comply with various regulatory requirements. We
review such notices and, in most cases, will agree with the regulator upon the
steps to be taken to bring the facility into compliance with regulatory
requirements. From time to time, we may dispute the matter and sometimes will
seek a hearing if we do not agree with the regulator. In some cases or upon
repeat violations, the regulator may take one or more adverse actions against a
facility, such as:
- the imposition of fines - the Company paid $16,000 and
$15,000, respectively, in the aggregate for the years ended
December 31, 2000 and 2001;
22
- temporary stop placement of admission of new residents, or
imposition of other conditions to admission of new residents
to a facility - these applied to two residences in 2001;
- termination of a facility's Medicaid contract;
- conversion of a facility's license to provisional status; and
- suspension or revocation of a facility's license, which in
2001 included one residence in Washington against which the
state has commenced license revocation procedures. This matter
is still pending as of the date of this Prospectus.
The operation of our residences is subject to state and federal laws
prohibiting fraud by health care providers, including criminal provisions, which
prohibit filing false claims or making false statements to receive payment or
certification under Medicaid, or failing to refund overpayments or improper
payments. Violation of these criminal provisions is a felony punishable by
imprisonment and/or fines. We may be subject to fines and treble damage claims
if we violate the civil provisions which prohibit the knowing filing of a false
claim or the knowing use of false statements to obtain payment.
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against health care providers. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") and the Balanced
Budget Act of 1997 expanded the penalties for health care fraud, including
broader provisions for the exclusion of providers from the Medicaid program. We
have established policies and procedures that we believe are sufficient to
ensure that our facilities will operate in substantial compliance with these
anti-fraud and abuse requirements. While we believe that our business practices
are consistent with Medicaid criteria, those criteria are often vague and
subject to change and interpretation. Aggressive anti-fraud actions, however,
could have an adverse effect on our financial position, results of operations or
cash flows.
We are subject to regulation by the Commission. In April, 1999, we
received a preliminary inquiry from the Commission regarding the restatement of
our financial statements for the years ended December 31, 1996 and 1997 and the
first three quarters of 1998 and related matters. We provided the Commission
with information and documents in response to the inquiry, and have received no
correspondence from the Commission regarding the inquiry since March 2000. The
Commission has never alleged any violation of law in connection with the
inquiry. There can be no assurance that the Commission will not resume its
inquiry.
WE MUST COMPLY WITH LAWS AND REGULATIONS REGARDING THE CONFIDENTIALITY OF
MEDICAL INFORMATION.
In 1996, the HIPAA law created comprehensive new requirements regarding
the confidentiality of medical information that is or has been electronically
transmitted or maintained. The Department of Health and Human Services has
enacted regulations implementing the law, and we may have to significantly
change the way we maintain and transmit healthcare information for our residents
to comply with these regulations.
Although HIPAA was intended ultimately to reduce administrative expenses
and burdens faced within the health care industry, we believe the law could
initially bring about significant and, in some cases, costly changes. HHS has
released two rules to date mandating the use of new standards with respect to
certain health care transactions and health information. The first rule requires
the use of uniform standards for common health care transactions, including
health care claims information, plan eligibility, referral certification and
authorization, claims status, plan enrollment and disenrollment, payment and
remittance advice, plan premium payments and coordination of benefits.
23
Second, HHS has released new standards relating to the privacy of
individually identifiable health information. These standards not only require
our operators' compliance with rules governing the use and disclosure of
protected health information, but they also require entities to impose those
rules, by contract, on any business associate to whom such information is
disclosed. Rules governing the security of health information have been proposed
but have not yet been issued in final form.
HHS finalized the new transaction standards on August 17, 2000, and
covered entities will be required to comply with them by October 16, 2002.
Congress passed legislation in December 2001 that delays for one year (October
16, 2003) the compliance date, but only for entities that submit a compliance
plan to HHS by the original implementation deadline. The privacy standards were
issued on December 28, 2000, and, after certain delays, became effective April
14, 2001, with a compliance date of April 14, 2003. The Bush Administration and
Congress are taking a careful look at the existing regulations, but it is
uncertain whether there will be additional changes to the privacy standards or
their compliance date. With respect to the security regulation, once they are
issued in final form, affected parties will have approximately two years to be
fully compliant. Sanctions for failing to comply with HIPAA include criminal
penalties and civil sanctions.
WE MUST COMPLY WITH RESTRICTIONS IMPOSED BY LAWS BENEFITING DISABLED PERSONS.
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 that also may require us to modify existing residences to allow
disabled persons to access the residences. We believe that their residences are
either substantially in compliance with present requirements or are exempt from
them. However, if required changes cost more than anticipated, or must be made
sooner than anticipated, we would incur additional costs. Further legislation
may impose additional burdens or restrictions related to access by disabled
persons, and the costs of compliance could be substantial.
WE MAY INCUR SIGNIFICANT COSTS AND LIABILITY AS A RESULT OF MEDICAL WASTE.
Our facilities generate potentially infectious waste due to the illness or
physical condition of the residents, including blood-soaked bandages, swabs and
other medical waste products and incontinence products of those residents
diagnosed with infectious diseases. The management of potentially infectious
medical waste, including handling, storage, transportation, treatment and
disposal, is subject to regulation under federal and state laws. These laws and
regulations set forth requirements for managing medical waste, as well as
permit, record keeping, notice and reporting obligations. Any finding that we
are not in compliance with these laws and regulations could adversely affect our
business operations and financial condition. Because these laws and regulations
are amended from time to time, we cannot predict when and to what extent
liability may arise. In addition, because these environmental laws vary from
state to state, expansion of our operations to states where they do not
currently operate may subject us to additional restrictions on the manner in
which they operate their facilities.
We may be liable under some laws and regulations as an owner, operator or
an entity that arranges for the disposal of hazardous or toxic substances at a
disposal site. In that event, we may be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at the disposal
site. In connection with the ownership or operation of our properties, we could
be liable for these costs, as well as some other costs, including governmental
fines and injuries to persons or properties. As a result, any hazardous or toxic
substances which are present, with or without our knowledge, at any property
held or operated by us could have an adverse effect on our business, financial
condition or results of operations.
24
WE COULD INCUR SIGNIFICANT COSTS RELATED TO ENVIRONMENTAL REMEDIATION OR
COMPLIANCE.
We are subject to various federal, state and local environmental laws,
ordinances and regulations. Some of these laws, ordinances and regulations hold
a current or previous owner, lessee or operator of real property liable for the
cost of removal or remediation of some hazardous or toxic substances that could
be located on, in or under such property. These laws and regulations often
impose liability whether or not we knew of, or were responsible for, the
presence of the hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial. Furthermore,
there is no limit to our liability under such laws and regulations. As a result,
our liability could exceed their property's value and aggregate assets. The
presence of these substances or failure to remediate these substances properly
may also adversely affect our ability to sell or our property, or to borrow
using their property as collateral.
MANY ASSISTED LIVING MARKETS HAVE BEEN OVERBUILT.
Many assisted living markets have been overbuilt, including certain
markets in which we currently operate. In addition, the barriers to entry into
the assisted living industry are not substantial. The effects of overbuilding
include:
- it takes significantly longer for our residences and our
subsidiaries' residences to fill up,
- newly opened facilities may attract residents from some or all
of the our current facilities,
- there is pressure to lower or not increase rates paid by
residents in the our residences,
- there is increased competition for workers in already tight
labor markets, and
- our profit margins and the profit margins of our subsidiaries
are lower until vacant units in our residences are filled.
25
If we are unable to compete effectively in markets as a result of
overbuilding, we will suffer lower revenue and may suffer a loss of market
share.
Due to market conditions facing one location in Indiana, we closed the
facility, effective March 15, 2002.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES AND CONTROL LABOR
COSTS.
We compete with other providers of long-term care with respect to
attracting and retaining qualified personnel. A shortage of qualified personnel
may require us to enhance our wage and benefits packages in order to compete.
Some of the states in which we operate impose licensing requirements on
individuals serving as administrators at assisted living residences, and others
may adopt similar requirements. We also depend upon the available labor pool of
lower-wage employees. We cannot guarantee that our labor costs will not
increase, or that, if they do increase, they can be matched by corresponding
increases in revenues.
WE DEPEND ON REIMBURSEMENT BY GOVERNMENTAL PAYORS AND OTHER THIRD PARTIES FOR A
SIGNIFICANT PORTION OF OUR REVENUES.
Although revenues at a majority of our residences come primarily from
private payors, we derive a substantial portion of our revenues from
reimbursements by third-party governmental payors, including state Medicaid
waiver programs. We expect that state Medicaid waiver programs will continue to
constitute a significant source of our revenues in the future, and it is
possible that the proportionate percentage of revenue received by us from
Medicaid waiver programs will increase. There are continuing efforts by
governmental payors and by non-governmental payors, such as commercial insurance
companies and health maintenance organizations, to contain or reduce the costs
of health care by lowering reimbursement rates, increasing case management
review of services and negotiating reduced contract pricing. Also, there have
been, and we expect that there will continue to be, additional proposals to
reduce the federal and some state budget deficits by limiting Medicaid
reimbursement in general. If any of these proposals are adopted at either the
federal or the state level, it could have a material adverse effect on our
business, financial condition, results of operations and prospects. The state of
Washington recently approved legislation which would limit future increase in
rental reimbursements. The approval is preliminary and we have not yet
quantified the financial impact of such legislation. Additionally, the state of
New Jersey currently has a hold on additional beds for Medicaid residences. This
hold may impact our ability to move new Medicaid tenants into our facilities.
The following table sets forth the sources of our revenue for states where
we participate in Medicaid programs. The portion of revenues received from state
Medicaid agencies are labeled as "Medicaid State Paid Portion" while the portion
of our revenues that a Medicaid-eligible resident must pay out of his or her own
resources is labeled "Medicaid Tenant Paid Portion."
TWELVE MONTHS ENDED DECEMBER 31, 2000 TWELVE MONTHS ENDED DECEMBER 31, 2001
------------------------------------- -------------------------------------
MEDICAID PRIVATE MEDICAID PRIVATE
----------------- ------- ----------------- -------
STATE TENANT TENANT STATE TENANT TENANT
PAID PAID PAID PAID PAID PAID
PORTION PORTION PORTION PORTION PORTION PORTION
------- ------- ------- ------- ------- -------
Oregon ........ 28.8% 16.2% 55.0% 27.6% 16.2% 56.2%
Washington .... 27.8% 14.5% 57.7% 29.4% 17.4% 53.2%
Idaho ......... 7.1% 4.3% 88.6% 15.8% 9.7% 74.5%
Arizona ....... 10.4% 7.5% 82.1% 16.4% 13.7% 69.9%
New Jersey .... 15.3% 7.8% 76.9% 22.3% 5.6% 72.1%
Texas ......... 13.7% 8.0% 78.3% 15.2% 7.6% 77.2%
Nebraska ...... 8.1% 4.4% 87.5% 9.4% 5.5% 85.1%
26
In addition, although we manage the mix of private paying tenants and
Medicaid paying tenants residing in our facilities, any significant increase in
our Medicaid population could have an adverse effect on our financial position,
results of operations or cash flows, particularly if the states operating these
programs continue to limit, or more aggressively seek limits on, reimbursement
rates.
27
SELECTED FINANCIAL AND OTHER DATA
The following table presents selected historical consolidated financial
data. The consolidated statement of operations data for the years ended December
31, 1999, 2000 and 2001, as well as the consolidated balance sheet data as of
December 31, 2000 and 2001, are derived from our consolidated financial
statements included elsewhere in this Prospectus which have been audited by KPMG
LLP, independent auditors. Upon emergence from Chapter 11 proceedings, we
adopted fresh-start reporting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, Financial Reporting By
Entities in Reorganization Under the Bankruptcy Code. In connection with the
adoption of fresh-start reporting, a new entity has been deemed created for
financial reporting purposes effective December 31, 2001. Consequently, the
consolidated balance sheet data at December 31, 2001 is labeled "Successor
Company," and reflects the Plan and the principles of fresh-start reporting.
Periods presented prior to December 31, 2001 have been designated "Predecessor
Company." Note 1 to our consolidated financial statements, included elsewhere in
this Prospectus, provides a reconciliation of the Predecessor Company's
consolidated balance sheet as of December 31, 2001 to that of the Successor
Company which presents the adjustments that give effect to the reorganization
and fresh-start reporting. You should read the selected financial data below in
conjunction with our consolidated financial statements, including the related
notes, and the information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
--------------------PREDECESSOR COMPANY--------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue ....................................................... $ 49,605 $ 89,384 $ 117,489 $ 139,423 $ 150,678
Operating expenses:
Residence operating expenses ................................ 31,591 57,443 81,767 95,032 103,867
Corporate general and administrative ........................ 4,050 11,099 21,178 18,365 17,119
Building rentals ............................................ 7,969 12,764 15,367 16,004 15,980
Depreciation and amortization ............................... 3,683 6,339 8,981 9,923 10,349
Class action litigation settlement .......................... -- -- -- 10,020 --
Terminated merger expense ................................... -- 1,068 228 -- --
Site abandonment costs ...................................... -- 2,377 4,912 -- --
Write-off of impaired assets and related expenses ........... -- 8,521 -- -- --
-------- -------- --------- --------- ---------
Total operating expenses .............................. 47,293 99,611 132,433 149,344 147,315
-------- -------- --------- --------- ---------
Operating income (loss) ....................................... 2,312 (10,227) (14,944) (9,921) 3,363
-------- -------- --------- --------- ---------
Other income (expense):
Interest expense ............................................ (4,946) (11,039) (15,200) (16,363) (19,465)
Interest income ............................................. 1,526 3,869 1,598 786 655
Gain (loss) on sale and disposal of assets .................. (1,250) (651) (127) 13 (88)
Loss on sale of marketable securities ....................... -- -- -- (368) --
Other income (expense), net ................................. (121) (1,174) (260) 67 30
-------- -------- --------- --------- ---------
Total other expense ................................... (4,791) (8,995) (13,989) (15,865) (18,868)
-------- -------- --------- --------- ---------
Loss before debt restructure and reorganization cost, fresh
start adjustments, extraordinary item and cumulative effect
of change in accounting principle ............................. (2,479) (19,222) (28,933) (25,786) (15,505)
Debt restructure and reorganization cost ...................... -- -- -- -- (8,581)
Fresh start adjustments ....................................... -- -- -- -- (119,320)
-------- -------- --------- --------- ---------
Loss before extraordinary item and cumulative effect of
change in accounting principle ................................ (2,479) (19,222) (28,933) (25,786) (143,406)
Extraordinary item -- gain on reorganization .................. -- -- -- -- 79,520
Cumulative effect of change in accounting principle ........... -- (1,523) -- -- --
-------- -------- --------- --------- ---------
Net loss ...................................................... $ (2,479) $(20,745) $ (28,933) $ (25,786) $ (63,886)
======== ======== ========= ========= =========
Basic and diluted net loss per common share:
Loss before extraordinary item and cumulative effect of
change in accounting principle ................................ $ (0.21) $ (1.18) $ (1.69) $ (1.51) $ (8.38)
Extraordinary item ............................................ -- -- -- -- 4.65
Cumulative effect of change in accounting principle ........... -- (0.09) -- -- --
-------- -------- --------- --------- ---------
Basic and diluted net loss per common share ................... $ (0.21) $ (1.27) $ (1.69) $ (1.51) $ (3.73)
======== ======== ========= ========= =========
Basic and diluted weighted average common shares
outstanding ................................................... 11,871 16,273 17,119 17,121 17,121(1)
======== ======== ========= ========= =========
28
- ----------
(1) 6,431,759 shares of New Common Stock of the Successor Company were issued
upon the cancellation of all shares of the Predecessor Company as of the
Effective Date, excluding 68,241 shares subject to the Reserve that will
be issued upon settlement of certain unsecured bankruptcy claims. See Note
1 to the consolidated financial statements included elsewhere herein.
SUCCESSOR
PREDECESSOR COMPANY COMPANY
------------------------------------------ ---------
AT DECEMBER 31,
-------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 63,269 $ 55,036 $ 7,606 $ 7,444 $ 6,077
Working capital (deficit) ................. 40,062 43,856 37 (15,911) (6,299)
Total assets .............................. 324,367 414,669 346,188 336,458 222,253
Long-term debt, excluding current portion . 157,700 266,286 233,199 231,657 161,461
Shareholders' equity ...................... 132,244 119,197 89,344 63,886 32,799
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE, OCCUPANCY AND AVERAGE RENTAL DATA)
PREDECESSOR COMPANY
2000 QUARTERLY FINANCIAL DATA
------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO
RESULTS OF OPERATIONS QTR QTR QTR QTR DATE
- ----------------------------------- -------- -------- -------- -------- ---------
Revenue ........................... $ 33,132 $ 34,146 $ 35,308 $ 36,837 $ 139,423
Operating income (loss) ........... 28 434 (8,598) (1,785) (9,921)
Net loss before extraordinary
item .............................. (3,791) (3,821) (12,445) (5,729) (25,786)
Extraordinary item -- gain on
reorganization .................... -- -- -- -- --
Net loss .......................... $ (3,791) $ (3,821) $(12,445) $ (5,729) $ (25,786)
Basic and diluted net loss per
common share before
extraordinary item (1) ............ $ (.22) $ (.22) $ (.73) $ (.34) $ (1.51)
Extraordinary item -- gain on
reorganization .................... -- -- -- -- --
Basic and diluted net loss per
common share(1) ................... $ (.22) $ (.22) $ (.73) $ (.34) $ (1.51)
Basic and diluted weighted
average common shares
outstanding (2) ................. 17,121 17,121 17,121 17,121 17,121
Average monthly rental rate
per unit ........................ $ 1,947 $ 1,974 $ 2,002 $ 2,038 $ 1,991
Average occupancy rate(3) ......... 78.4% 79.8% 81.4% 83.1% 80.7%
End of period occupancy
rate(3) ......................... 79.6% 81.6% 82.6% 83.0% 83.0%
2001 QUARTERLY FINANCIAL DATA
--------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO
RESULTS OF OPERATIONS QTR QTR QTR QTR DATE
- ----------------------------------- -------- -------- -------- --------- ---------
Revenue ........................... $ 36,877 $ 37,371 $ 38,009 $ 38,421 $ 150,678
Operating income (loss) ........... 328 1,318 666 1,051 3,363
Net loss before extraordinary
item .............................. (4,198) (4,611) (7,333) (127,264) (143,406)
Extraordinary item gain on
reorganization .................... -- -- -- 79,520 79,520
Net loss .......................... $ (4,198) $ (4,611) $ (7,333) $ (47,744) $ (63,886)
Basic and diluted net loss per
common share before
extraordinary item (1) ............ $ (.25) $ (.27) $ (.43) $ (7.43) $ (8.38)
Extraordinary item -- gain on
reorganization .................... -- -- -- 4.65 4.65
Basic and diluted net loss per
common share(1) ................... $ (.25) $ (.27) $ (.43) $ (2.78) $ (3.73)
Basic and diluted weighted
average common shares
outstanding (2) ................. 17,121 17,121 17,121 17,121 17,121
Average monthly rental rate
per unit ........................ $ 2,041 $ 2,056 $ 2,082 $ 2,112 $ 2,073
Average occupancy rate(3) ......... 83.4% 83.9% 84.3% 84.2% 84.0%
End of period occupancy
rate(3) ......................... 83.3% 84.2% 84.9% 83.7% 83.7%
- ----------
(1) Quarter net loss per share amounts may not add to the full year total due
to rounding.
(2) 6,431,759 shares of New Common Stock of the Successor Company were issued
upon the cancellation of all shares of the Predecessor Company as of the
Effective Date, excluding 68,241 shares subject to the Reserve that will
be issued upon settlement of certain unsecured bankruptcy claims. See Note
1 to the consolidated financial statements included elsewhere herein.
(3) Based upon available units.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small middle-market rural and suburban
communities with a population typically ranging from 10,000 to 40,000. We
provide personal care and support services, and make available routine nursing
services (as permitted by applicable law) designed to meet the personal and
health care needs of our residents. As of December 31, 2001, we had operations
in 16 states.
We experienced significant and rapid growth between 1994 and 1998,
primarily through the development of assisted living residences and, to a lesser
extent, through the acquisition of assisted living residences. At the closing of
our initial public offering in November 1994, we had an operating base of five
leased residences (137 units) located in Oregon. We opened twenty residences
(798 units) in 1999 and no residences in 2000. As of December 31, 2001, we
operated 184 residences (7,115 units), of which we owned 129 residences (5,010
units) and leased 55 residences (2,105 units).
We derive our revenues primarily from resident fees for the delivery of
assisted living services. Resident fees typically are paid monthly by residents,
their families, state Medicaid agencies or other third parties. Resident fees
include revenue derived from a multi-tiered rate structure, which varies based
upon type of room and on the level of care provided. Resident fees are
recognized as revenues when services are provided. Our operating expenses
include:
- residence operating expenses, such as staff payroll, food,
property taxes, utilities, insurance and other direct
residence operating expenses;
- general and administrative expenses consisting of regional
management and corporate support functions such as legal,
accounting and other administrative expenses;
- building rentals; and
- depreciation and amortization.
We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located some of our
residences in states with favorable regulatory and reimbursement climates, we
should have a stable source of residents eligible for Medicaid reimbursement to
the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income when their
private funds are depleted and they become Medicaid eligible.
Although we manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if states operating these programs
continue to, or more aggressively seek, limits on reimbursement rates. See "Risk
Factors -- Risks Related to our Business and the Business of our Subsidiaries
- --We depend on reimbursement by third-party payors."
30
REORGANIZATION
On October 1, 2001, we voluntarily filed for bankruptcy protection under
Chapter 11 of the Bankruptcy Code. The bankruptcy court gave final approval to
our Plan on December 28, 2001, and the Plan became effective on the Effective
Date, January 1, 2002.
Under the Plan, on the Effective Date, the Company issued general
unsecured creditors their pro rata shares, subject to the Reserve, of the
following securities:
- $40.25 million principal amount of Senior Notes;
- $15.25 million principal amount of Junior Notes; and
- 6.24 million shares of New Common Stock (representing 96% of
the New Common Stock).
The New Notes are secured by 57 of our properties.
The remaining 4% of the New Common Stock, subject to the Reserve, was
issued on the Effective Date to the Company's shareholders immediately prior to
the Effective Date.
Under the Plan, 1.1% of the Senior Notes, Junior Notes and New Common
Stock that would otherwise have been issued on the Effective Date were held back
in the Reserve to cover general unsecured claims that had not been either made
or settled by the December 19, 2001 cutoff date established under the Plan. The
reserved securities will be issued once all these outstanding general unsecured
claims have been settled. If the Reserve is insufficient to cover these
outstanding general unsecured claims, we will have no further liability with
respect to these claims. If the Reserve exceeds the amount of these outstanding
general unsecured claims, the excess securities will be distributed pro rata
among the holders of all general unsecured claims, including those settled prior
to the cutoff date.
On the Effective Date, a new Board of Directors of the reorganized Company
consisting of seven members was established as follows: W. Andrew Adams
(Chairman), Andre Dimitriadis, Mark Holliday, Richard Ladd, Matthew Patrick,
Leonard Tannenbaum, and Wm. James Nicol, then the President and Chief Executive
Officer of the Company. Subsequent to the Effective Date, Steven L. Vick
replaced Mr. Nicol as President, Chief Executive Officer and Director.
We adopted fresh-start reporting, as of December 31, 2001, in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code (SOP 90-7). Under fresh-starting reporting, a new entity has
been deemed created for financial reporting purposes. See Note 1 to the
consolidated financial statements included in this Prospectus for additional
information.
FRESH-START REPORTING
Upon emergence from Chapter 11 proceedings, we adopted fresh-start
reporting in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7). In connection with the
adoption of fresh-start reporting, a new entity has been deemed created for
financial reporting purposes. For financial reporting purposes, we adopted the
provisions of fresh-start reporting effective December 31, 2001. Consequently,
the consolidated balance sheet and related information included in this
Prospectus at December 31, 2001 is labeled "Successor Company," and reflects the
Plan and the principles of fresh-start reporting. Periods presented prior to
December 31, 2001 have been designated "Predecessor
31
Company." For purposes of this Management's Discussion and Analysis of Financial
Condition and Results of Operations references to operating results and cash
flows for periods ended prior to December 31, 2001 refer to the operating
results and cash flows of the Predecessor Company, and references to working
capital and other balance sheet data, liquidity and prospective information
regarding future periods refer to the Successor Company.
In adopting the requirements of fresh-start reporting as of December 31,
2001, we were required to value our assets and liabilities at their estimated
fair value and eliminate our accumulated deficit at December 31, 2001. With the
assistance of financial advisors who relied upon various valuation methods
including discounted projected cash flows and other applicable ratios and
economic industry information relevant to our operations, and through
negotiations with the various creditor parties in interest, we determined our
reorganization value to be $32.8 million.
The adjustments to reflect the adoption of fresh-start reporting,
including the adjustments to record property, plant and equipment, at their fair
values, have been reflected in the consolidated balance sheet as of December 31,
2001. In addition, the Successor Company's balance sheet was further adjusted to
eliminate existing liabilities subject to compromise, associated deferred
financing costs and deferred gains, goodwill, and the consolidated shareholders'
equity. See Note 1 to the consolidated financial statements included elsewhere
herein for a reconciliation of the Predecessor Company and the Successor Company
consolidated balance sheets as of December 31, 2001.
32
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate these estimates,
including those related to bad debts, income taxes, financing operations,
contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies are more
significant to the judgments and estimates used in the preparation of our
consolidated financial statements:
Fresh-Start Reporting. Upon emerging from Chapter 11 proceedings we
adopted fresh-start reporting in accordance with SOP 90-7. For financial
reporting purposes, we were required to value our assets and liabilities at
their current fair value. With assistance of financial advisors in reliance
upon various valuation methods, including discounted projected cash flow
analysis and other applicable ratios and economic industry information relevant
to our operations and through negotiations with various creditor parties in
interest, we determined a reorganization value of $32.8 million. The
reorganization value was allocated to our assets and liabilities based upon
their fair value.
The determination of fair value of assets and liabilities required
significant estimates and judgments made by management particularly as it
related to the fair market value of our debt, operating leases and property,
plant and equipment. The fair value of our debt at December 31, 2001 was
determined based upon current effective interest rates for similar debt
instruments. The fair value of our leases and property, plant and equipment
were based on current market rentals and building values. Results may differ
under different assumptions or conditions.
Income Taxes. Historically, we have not recorded a provision for income
taxes as we had generated a loss for both financial reporting and tax purposes.
We have recorded a 100% valuation allowance for our net deferred tax assets as
we believe it is more likely than not that the benefit will not be realized.
Pursuant to SOP 90-7, the income tax benefit, if any, of any future realization
of the remaining NOL carryforwards and other deductible temporary differences
existing as of the effective date will be applied as a reduction to additional
paid-in capital.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
The following table sets forth, for the periods presented, the number of
total residences and units operated, average occupancy rates, the sources of our
revenue and operating expenses as a percentage of revenue. The portion of
revenues received from state Medicaid agencies are labeled as "Medicaid state
portion" while the portion of our revenues that a Medicaid-eligible resident
must pay out of his or her own resources is labeled "Medicaid resident portion."
YEARS ENDED DECEMBER 31, YEARS
------------------------------------------- ENDED
PERCENTAGE DECEMBER 31,
INCREASE/ INCREASE/ -------------------
2000 2001 DECREASE DECREASE 2000 2001
------ ------ --------- ---------- ----- -----
(IN MILLIONS, EXCEPT PERCENTAGES) (AS PERCENTAGE
OF REVENUE)
Revenue .................................................... $139.4 $150.7 $ 11.3 8.1% 100.0% 100.0%
Operating expenses:
Residence operating expenses ............................. 95.0 103.9 8.9 9.4% 68.1% 68.9%
Corporate general and administrative ..................... 18.4 17.2 (1.2) (6.5)% 13.2% 11.4%
Building rentals ......................................... 16.0 16.0 -- 0.0% 11.5% 10.6%
Depreciation and amortization ............................ 9.9 10.3 0.4 4.0% 7.1% 6.8%
Class action litigation settlement ....................... 10.0 -- (10.0) (100.0)% 7.2% --
------ ------ ------ ------ ----- -----
Total operating expenses ......................... 149.3 147.3 (2.0) (1.3)% 107.1% 97.7%
------ ------ ------ ------ ----- -----
Operating income (loss) .................................... (9.9) 3.4 13.3 134.3% (7.1)% 2.3%
------ ------ ------ ------ ----- -----
Other income (expense):
Interest expense ......................................... (16.4) (19.5) (3.1) 18.9% (11.8)% (12.9)%
Interest income .......................................... 0.8 0.7 (0.1) (12.5)% 0.6% 0.5%
Loss on disposal of assets ............................... -- (0.1) (0.1) (100.0)% -- (0.1)%
Loss on sale of marketable securities .................... (0.4) -- 0.4 100.0% (0.3)% --
Other income (expense), net .............................. 0.1 -- (0.1) (100.0)% -- --
------ ------ ------ ------ ----- -----
Total other expense .............................. (15.9) (18.9) (3.0) (18.9)% (11.4)% (12.5)%
------ ------ ------ ------ ----- -----
Loss before debt restructure and reorganization costs,
fresh adjustments and extraordinary item ................ (25.8) (15.5) 10.3 39.9% (18.5)% (10.3)%
------ ------ ------ ------ ----- -----
Debt restructure and reorganization costs ................ -- (8.6) (8.6) 100.0% -- (5.7)%
Fresh start adjustments .................................. -- (119.3) (119.3) 100.0% -- (79.2)%
------ ------ ------ ------ ----- -----
Loss before extraordinary item ............................. (25.8) (143.4) (117.6) 455.8% (18.5)% (95.2)%
Extraordinary item-gain on reorganization ................ -- 79.5 79.5 100.0% -- 52.7%
------ ------ ------ ------ ----- -----
Net loss .................................................. $(25.8) $(63.9) $(38.1) 147.7% (18.5)% (42.4)%
====== ====== ====== ====== ===== =====
Other Data:
YEARS ENDED DECEMBER 31,
-------------------------------
TOTAL RESIDENCES 1999 2000 2001
---------------- ------- ------- -------
Residences operated (end of period) ................... 185 185 184
Units operated (end of period) ........................ 7,148 7,149 7,115
Average occupancy rate (based on occupied units) ...... 75.1% 80.7% 84.0%
End of year occupancy rate (based on occupied units) .. 78.1% 83.0% 83.7%
Average monthly rental rate ........................... $ 1,898 $ 1,991 $ 2,073
Sources of revenue:
Medicaid state portion .............................. 10.4% 11.1% 12.5%
Medicaid resident portion ........................... 5.9% 6.2% 6.8%
Private ............................................. 83.7% 82.7% 80.7%
------- ------- -------
Total ....................................... 100.0% 100.0% 100.0%
======= ======= =======
We incurred a net loss of $63.9 million, or $3.73 per basic and diluted
share, on revenue of $150.7 million for the year ended December 31, 2001 (the
"2001 Period") as compared to a net loss of $25.8 million, or $1.51 per basic
and diluted share, on revenue of $139.4 million for the year ended December 31,
2000 (the "2000 Period"). Net loss before extraordinary gain on reorganization
was $143.4 million, or $8.38 per basic and diluted share, for the 2001 Period as
compared to a net loss of $25.8 million, or $1.51 per basic and diluted share,
for the 2000 Period.
We had certificates of occupancy for 184 residences (7,115 units) at the
end of 2001 compared to 185 residences (7,149 units) in 2000. In accordance with
the Plan, we discontinued one lease (34 units), effective December 1, 2001.
33
Revenue. Revenue was $150.7 million for the 2001 Period as compared to
$139.4 million for the 2000 Period, an increase of $11.3 million or 8.1%. The
increase in revenue was primarily attributable to a combination of an increase
in average occupancy to 84.0% and average monthly rental rate of $2,073 for the
2001 period compared to average occupancy of 80.7% and average monthly rental
rate of $1,991 for the 2000 period.
Residence Operating Expenses. Residence operating expenses were $103.9
million for the 2001 Period as compared to $95.0 million for the 2000 Period, an
increase of $8.9 million or 9.4%.
The principal elements of the increase include:
- $7.6 million related to increases in payroll costs due to
increases in occupancy, wages, benefits, and medical and
workers compensation insurance premiums;
- $1.0 million related to increased utility costs;
- $2.0 million related to increases in professional and property
liability insurance premiums and deductibles or retentions;
and
- $700,000 related to an increase in kitchen expense, including
food, as a result of increased occupancy.
These increases were offset by the following decreases:
- $1.9 million decrease in bad debt expense due to more timely
collection of aged account receivable balances;
- $600,000 decrease in property tax expense as a result of
changes in assessments and related estimates; and
- $100,000 decrease in property related repairs and maintenance.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $17.2 million for the 2001 Period as compared to $18.4
million for the 2000 Period, a decrease of $1.2 million or 6.5%. The 2000 Period
include a reduction of $900,000 related to an insurance reimbursement for legal
and professional fees incurred in prior periods in connection with the class
action litigation. Excluding the $900,000 reimbursement, corporate general and
administrative expenses for the 2000 Period were $19.3 million, compared to
$17.2 million for the 2001 Period, a decrease of $2.1 million. The principal
elements of the decrease include:
- $440,000 decrease related to reduced premiums for directors,
officers and corporate liability insurance;
- $600,000 decrease related to lower professional fees,
including financial advisory and legal;
- $200,000 decrease in communication expense due to
implementation of more efficient communications
infrastructure; and
- $180,000 decrease in payroll and related expenses due to 2000
corporate general and administrators expenses including $1.2
million of severance related pay for prior officers,
34
offset by a $1.0 million increase due to increases in wages
and benefits resulting primarily from increased employee
retention and increases in benefit rates.
Building Rentals. Building rentals were $16.0 million for both the 2001
and 2000 Periods. Building rentals for the 2001 Period include $145,000 of a
retroactive rent increase paid to one lessor during the first quarter of 2001
and exclude $200,000 of building rental expense related to 16 operating leases
on facilities repurchased in October 2001. Excluding these two items, the
increase in building rentals was due to scheduled annual rent escalators.
Depreciation and Amortization. Depreciation and amortization was $10.3
million for the 2001 Period as compared to $9.9 million for the 2000 Period, an
increase of $400,000 or 4.0%. Depreciation expense was $10.0 million and
amortization expense related to goodwill was $292,000 for the 2001 Period as
compared to $9.6 million and $292,000, respectively, for the 2000 Period. The
increase in depreciation is the result of improvements to our communications
infrastructure and the purchase of 16 previously leased residences on October
24, 2001.
Interest Expense. Interest expense was $19.5 million for the 2001 Period
as compared to $16.4 million for the 2000 Period, an increase of $3.1 million or
18.9%. The increase was related to interest incurred on our $4.0 million bridge
loan, interest incurred on HUD loans with principal of $7.9 million, interest
incurred on Heller Healthcare Finance, Inc. ("Heller") credit facility draws of
$17.0 million and $23.5 million of Heller financing in connection with the
purchase of 16 previously leased facilities. Additionally, $1.9 million of
deferred financing costs were written off to interest expense when the maturity
of the Heller credit facility changed during the fourth quarter of 2001.
Interest Income. Interest income was $655,000 for the 2001 Period as
compared to $786,000 for the 2000 Period, a decrease of $131,000. The decrease
is related to interest income earned on lower average cash balances during the
2001 Period.
Gain (Loss) on Sale of Assets. Loss on disposal of assets was $88,000 for
the 2001 Period, whereas gain on sale of assets was $13,000 for the 2000 Period,
a difference of $101,000. The loss during the 2001 Period was primarily related
to the sale of undeveloped land. The gain during the 2000 Period was related to
the sale of retired computer equipment.
Other Income (Expense). Other income was $30,000 for the 2001 Period as
compared to other income of $67,000 for the 2000 Period. Other income during the
2000 Period was primarily related to a contract to provide development services
to a third party.
Debt Restructure and Reorganization Costs. During the 2001 Period we
incurred $8.6 million of costs associated with establishing and implementing the
Plan. These costs include $7.4 million of professional fees, primarily legal,
accounting and investment advisory fees and $1.2 million of payments related to
the Plan made in accordance with employment agreements.
Fresh-Start Adjustments. Fresh-start valuation adjustments of $119.3
million were recorded pursuant to the provisions of AICPA SOP 90-7, which
require entities to record their assets and liabilities at estimated fair
values. The fresh-start valuation adjustment is principally the result of the
elimination of predecessor company goodwill and the revaluation of debt and
property, plant and equipment to estimated fair values.
Extraordinary Item -- Gain on Reorganization. During the 2001 Period, an
extraordinary gain on reorganization of $79.5 million was recorded in accordance
with the implementation of the Plan (See Note 1 to the consolidated financial
statements included elsewhere herein).
35
Net Loss. As a result of the above, net loss was $63.9 million or $3.73
per basic and diluted share for the 2001 Period, compared to a net loss of $25.8
million or $1.51 per basic and diluted share for the 2000 Period. Loss
before extraordinary gain on reorganization was $143.4 million, or $8.38 per
basic and diluted share, for the 2001 period.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Prior to 2001 we were a development company with an increasing number of
assisted living residences. Where appropriate in the following comparison of
results for fiscal 1999 and 2000, we have included separate data with respect to
Same Store Residences. Same Store Residences are defined as those residences
which were operating throughout comparable periods. There were 165 Same Store
Residences included in operating results for all of fiscal years 1999 and 2000.
YEARS ENDED DECEMBER 31, YEARS
------------------------------------------- ENDED
PERCENTAGE DECEMBER 31,
INCREASE/ INCREASE/ -------------------
1999 2000 DECREASE DECREASE 1999 2000
------ ------ --------- ---------- ----- -----
(IN MILLIONS, EXCEPT PERCENTAGES) (AS PERCENTAGE
OF REVENUE)
Revenue ..................................... $117.5 139.4 21.9 18.6% 100.0% 100.0%
Operating expenses:
Residence operating expenses .............. 81.8 95.0 13.2 16.1% 69.6% 68.1%
Corporate general and administrative ...... 21.2 18.4 (2.8) (13.2)% 18.0% 13.2%
Building rentals .......................... 15.3 16.0 0.7 4.6% 13.0% 11.5%
Depreciation and amortization ............. 9.0 9.9 0.9 10.0% 7.7% 7.1%
Terminated merger expense ................. 0.2 -- (0.2) (100.0)% -- --
Site abandonment costs .................... 4.9 -- (4.9) (100.0)% 4.2% --
Class action litigation settlement ........ -- 10.0 10.0 100.0% -- 7.2%
------ ------ ------ ------ ----- -----
Total operating expenses .......... 132.4 149.3 16.9 12.8% 112.6% 107.1%
------ ------ ------ ------ ----- -----
Operating loss .............................. (14.9) (9.9) 5.0 33.6% (12.7)% (7.1)%
------ ------ ------ ------ ----- -----
Other income (expense):
Interest expense .......................... (15.2) (16.4) (1.2) 7.9% (13.0)% (11.7)%
Interest income ........................... 1.6 0.8 (0.8) (50.0)% 1.3% 0.6%
Loss on disposal of assets ................ (0.1) -- 0.1 100.0% -- --
Loss on sale of marketable securities ..... -- (0.4) (0.4) (100.0)% -- (0.3)%
Other income (expense), net ............... (0.3) 0.1 0.4 133.3% -- --
------ ------ ------ ------ ----- -----
Total other expense ............... (14.0) (15.9) (1.9) (13.6)% (11.9)% (11.4)%
------ ------ ------ ------ ----- -----
Net loss .................................... $(28.9) $(25.8) $ 3.1 10.7% (24.6)% (18.5)%
====== ===== ====== ====== ===== =====
Other Data:
We incurred a net loss of $25.8 million, or $1.51 per basic and diluted
share, on revenue of $139.4 million for the 2000 Period as compared to a net
loss of $28.9 million, or $1.69 per basic and diluted share, on revenue of
$117.5 million for the year ended December 31, 1999 (the "1999 Period").
We had certificates of occupancy for 185 residences, all of which were
included in the operating results as of the end of both the 2000 Period and 1999
Period. Of the residences included in operating results as of the end of the
2000 Period and 1999 Period, we owned 115 residences and leased 70 residences
(all of which were operating leases).
Revenue. Revenue was $139.4 million for the 2000 Period as compared to
$117.5 million for the 1999 Period, an increase of $21.9 million or 18.6%.
The increase includes:
- $7.5 million related to the full year impact of the 20
residences (798 units) which opened during the 1999 Period;
- $14.4 million was attributable to the 165 Same Store
Residences (6,351 units).
36
Revenue from the Same Store Residences was $127.9 million for the 2000
Period as compared to $113.5 million for the 1999 Period, an increase of $14.4
million or 12.7%. The increase in revenue from Same Store Residences was
attributable to a combination of an increase in average occupancy to 83.7% and
average monthly rental rate to $1,985 for the 2000 Period as compared to average
occupancy of 77.8% and average monthly rental rate of $1,891 for these same
residences in the 1999 Period.
Residence Operating Expenses. Residence operating expenses were $95.0
million for the 2000 Period as compared to $81.8 million for the 1999 Period, an
increase of $13.2 million or 16.2%.
The increase includes:
- $4.9 million related to the full year impact of the 20
residences (798 units) which opened during the 1999 Period;
- $8.3 million was attributable to the 165 Same Store Residences
(6,351 units).
Residence operating expenses for the Same Store Residences were $85.7
million for the 2000 period as compared to $77.4 million for the 1999 Period, an
increase of $8.3 million or 10.7%.
The principal elements of the increase in Same Store Residence operating
expenses are:
- $4.2 million related to additional payroll expenses incurred
in connection with the increase in occupancy at the Same Store
Residences during the period;
- $1.4 million related to increase in real estate taxes as a
result of changes in assessments;
- $1.3 million related to provision for uncollectible rent due
to the completion of an assessment of our accounts receivable
collections process begun during the three months ended
December 31, 2000. As a result, we increased our provision for
bad debts, primarily related to private pay accounts, and
wrote off or reserved balances where the probability of
collection was low;
- $378,000 related to increase in utility costs as a result of
increase in rates and increase in usage as result of an
increase in occupancy; and
- $277,000 related to increase in maintenance expense associated
with the upkeep of our buildings.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $18.4 million for the 2000 Period as compared to $21.2
million for the 1999 Period. Our corporate general and administrative expenses
before capitalized payroll costs were $21.8 million for the 1999 Period compared
to $18.4 million for the 2000 Period, a decrease of $3.4 million. The principal
elements of the decrease include:
- $2.8 million related to decreased professional fees primarily
associated with legal, financial advisory and accounting costs
due to regulatory issues, securityholder litigation and the
restatement of our financial statements for the years ended
December 31, 1996, 1997 and the first three fiscal quarters of
1998;
- $1.2 million as a result of reimbursement of legal and
professional fees from our insurance carrier as a result of
the settlement of our litigation related to the restatement of
the financial
37
statements for the years ended December 31, 1996 and 1997 and
the first three fiscal quarters of 1998. Of the $1.2 million
in reimbursements, we incurred approximately $600,000 of the
underlying expenses during the 2000 Period and the remaining
$600,000 during the year ended December 31, 1999; and
- $1.8 million in the 1999 Period related to the final
operations of our home health business.
The decrease was offset by increases in corporate, general and
administrative expense of:
- $1.3 million related to increased network costs associated
with the development of our communications infrastructure,
including dial-up and intranet access for our remote
locations;
- $500,000 related to increased payroll costs, including
severance costs of $1.2 million relating to former officers;
and
- $700,000 related to increased premiums for our directors and
officers and liability insurance policies.
We capitalized $617,000 of payroll costs associated with the development
of new residences during the 1999 Period. Since we discontinued our development
activities during the 1999 Period, we did not capitalize any payroll costs in
the 2000 Period.
Building Rentals. Building rentals were $16.0 million for the 2000 Period
as compared to $15.4 million for the 1999 Period, an increase of $600,000 or
3.9%. This increase was primarily attributable to the additional rental expense
associated with the March 1999 amendment of 16 of our leases which were
previously accounted for as financings. The amendment eliminated our continuing
involvement in the residences in the form of a fair value purchase option. As a
result of the amendment, the leases have been reclassified as operating leases
for the last nine months of the 1999 Period and the full 2000 Period.
Depreciation and Amortization. Depreciation and amortization was $9.9
million for the 2000 Period as compared to $9.0 million for the 1999 Period, an
increase of $900,000 or 10.0%. Depreciation expense was $9.6 million and
amortization expense related to goodwill was $292,000 for the 2000 Period as
compared to $8.7 million and $294,000, respectively, for the 1999 Period. The
increase in depreciation is the result of a full year of depreciation associated
with the 20 owned residences that commenced operations during the 1999 Period.
Class Action Litigation Settlement. During the third quarter of the 2000
Period we settled the class action litigation against us related to the
restatement of our financial statements for the years ended December 31, 1996
and 1997 and the first three fiscal quarters of 1998. The total cost of this
settlement to us was $10.0 million. Accordingly, we recognized a charge of $10.0
million during the 2000 Period. We received reimbursements of approximately $1.2
million from our corporate liability insurance carriers and other parties in
relation to the settlement. The $1.2 million of reimbursements has been recorded
as a reduction of corporate, general and administrative expenses as discussed
above.
Site Abandonment Costs. In the 1999 Period, the Company wrote-off $4.9
million of capitalized cost relating to the abandonment of all remaining
development sites, with the exception of certain sites where the Company owned
the land.
Interest Expense. Interest expense was $16.4 million for the 2000 Period
as compared to $15.2 million for the 1999 Period. Interest expense before
capitalization for the 2000 Period was $16.4 million as compared to $17.2
million for the 1999 Period, a net decrease of $800,000.
38
Interest expense decreased by:
- $840,000 due to the March 1999 amendment of 16 of our
operating leases which were previously accounted for as
financings. As a result, the leases were accounted for as
operating leases, effective March 31, 1999. Accordingly, rent
expense related to such leases after the date of the
amendment, has been classified as building rentals, rather
than interest expense;
- $80,000 due to financing fees related to variable rate debt
and letter of credit renewals; and
- $95,000 due to interest expense associated with the repayment
of joint venture advances in February 1999.
This decrease was offset by an increase in interest expense of $215,000 as
a result of increases in interest rates on variable rate debt.
We capitalized $2.0 million of interest expense for the 1999 Period. There
was no capitalized interest in the 2000 Period as a result of the
discontinuation of our development activities.
Interest Income. Interest income was $786,000 for the 2000 Period as
compared to $1.6 million for the 1999 Period, a decrease of $814,000. The
decrease is related to interest income earned on lower average cash balances
during the 2000 Period.
Loss on Sale of Marketable Securities. Loss on sale of marketable
securities was $368,000 for the 2000 Period as a result of the sale of
securities with a historical cost basis of $2.0 million for proceeds of $1.6
million.
Gain (Loss) on Sale of Assets. Gain on sale of assets was $13,000 for the
2000 Period as compared to a loss of $127,000 for the 1999 Period. The gain
during the 2000 Period was related to the sale of miscellaneous equipment. The
loss during the 1999 Period was related to the disposal of leasehold
improvements associated with relocating our corporate offices in January 1999.
Other Income (Expense). Other income was $67,000 for the 2000 Period as
compared to other expense of $260,000 for the 1999 Period. Other income during
the 2000 Period was primarily related to a contract to provide development
services to a third party. Other expenses during the 1999 Period included
$170,000 of administrative fees incurred in connection with our February 1999
repurchase of the remaining joint venture partner's interest in the operations
of 17 residences.
Net Loss. As a result of the above, net loss was $25.8 million or $1.51
per basic and diluted share for the 2000 Period, compared to a net loss of $28.9
million or $1.69 loss per basic and diluted share for the 1999 Period.
39
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had a working capital deficit of $6.3 million and
unrestricted cash and equivalents of $6.1 million.
Net cash used in operating activities was $7.7 million during the year
ended December 31, 2001. The primary uses were a decrease in other current
liabilities of $8.2 million primarily due to payment of $7.8 million on our
class action litigation payable. This is offset by a $5.8 million increase in
accrued expenses due to a $1.4 million increase in accrued workers compensation
payable, an increase of $700,000 in accrued payroll due to timing, and the
nonpayment of $3.9 million of interest on the subordinated convertible
debentures which was eliminated in accordance with the Plan.
Net cash used in investing activities totaled $29.7 million during the
year ended December 31, 2001. The primary uses of cash were $23.5 million
related to the purchase of 16 previously leased facilities and purchases of
property and equipment of $2.1 million. Restricted cash increased by $4.1
million due to workers compensation deposits required by our insurance carrier
(funds will be withdrawn from this account as 2001 workers compensation claims
are incurred and paid) and due to the segregation of cash restricted for tenant
security deposits.
Net cash provided by financing activities was $36.1 million during the
year ended December 31, 2001. We received gross proceeds of $7.9 million in
connection with long-term HUD insured financing secured by three Texas
properties, $23.5 million from Heller to purchase 16 previously leased
facilities in Texas, $18.5 million in draws on our Heller line of credit and
$1.0 million on the Heller debtor-in-possession facility during the year ended
December 31, 2001. Costs associated with the closing of the HUD insured
financings and the establishment of the Heller line of credit were $300,000 and
$5.9 million, respectively. Of the $7.9 million in gross proceeds we received
from the HUD insured financing, $4.0 million was used to pay off our $4.0
million bridge loan payable, $300,000 was used for HUD insured loan closing
costs, $3.0 million was used to pay down the Heller line of credit and the
remaining proceeds were used to fund HUD escrow accounts. Principal payments on
long term debt and capital lease obligations were $4.7 million (including the
$3.0 million payment on the Heller line of credit) for the year ended December
31, 2001.
On October 1, 2001, we voluntarily filed for bankruptcy protection under
Chapter 11 of the Bankruptcy Code. The bankruptcy court gave final approval to
our Plan on December 28, 2001, and the Plan became effective on the Effective
Date, January 1, 2002.
40
Under the Plan, on the Effective Date, the Company issued general
unsecured creditors their pro rata shares, subject to the Reserve, of the
following securities:
- $40.25 million principal amount of Senior Notes;
- $15.25 million principal amount of Junior Notes; and
- 6.24 million shares of New Common Stock (representing 96% of
the New Common Stock).
The New Notes are secured by 57 of our properties.
The remaining 4% of the New Common Stock, subject to the Reserve, was
issued on the Effective Date to the Company's shareholders immediately prior to
the Effective Date.
Under the Plan, 1.1% of the Senior Notes, Junior Notes and New Common
Stock that would otherwise have been issued on the Effective Date were held back
in the Reserve to cover general unsecured claims that had not been either made
or settled by the December 19, 2001 cutoff date established under the Plan. The
reserved securities will be issued once all these outstanding general unsecured
claims have been settled. If the Reserve is insufficient to cover these
outstanding general unsecured claims, we will have no further liability with
respect to these claims. If the Reserve exceeds the amount of these outstanding
general unsecured claims, the excess securities will be distributed pro rata
among the holders of all general unsecured claims, including those settled prior
to the cutoff date.
On March 2, 2001, we entered into an agreement with Heller for a line of
credit facility up to $45.0 million (the "Existing Facility"). This line was
scheduled to mature on August 31, 2002 and would have been secured by up to 32
properties. This line carried an interest rate of 3.85% over the three-month
LIBOR rate floating monthly and required monthly interest-only payments until
maturity.
As of June 27, 2001, we amended the Existing Facility, reducing the
aggregate line of credit available from $45.0 million to $20.0 million. The
Existing Facility was scheduled to mature on September 28, 2001, which maturity
was extended to October 12, 2001 by Heller, and was secured by 26 properties.
On October 4, 2001, in connection with our bankruptcy petition, we entered
into a debtor-in-possession facility with Heller in an amount of up to $4.4
million (the "DIP Facility"). The DIP Facility carried an interest rate
calculated at 5.0% over three month LIBOR, floating monthly, and was payable
monthly in arrears. We had $1.0 million outstanding under this DIP Facility on
the Effective Date which was refinanced in the "Exit Facility" as defined below.
Concurrent with the closing of the DIP Facility, we entered into a further
amendment of the Existing Facility, which amendment, among other things,
extended the maturity of the Existing Facility to be coterminous with the DIP
Facility, amended the interest to be calculated at 5.0% over three month LIBOR,
floating monthly, payable monthly in arrears, increased the aggregate line of
credit availability from $20.0 million to $39.6 million and permitted the
financing of the acquisition by Texas ALC Partners, L.P. ("Texas ALC") of
sixteen properties previously leased by Texas ALC from the current lessor
thereunder, T and F Properties, L.P. (the "Meditrust Properties" and the
acquisition by Texas ALC, the "Meditrust Acquisition"). The purchase of the
Meditrust Properties was completed on October 24, 2001. The DIP Collateral and
the collateral for the Existing Facility (including the Meditrust Properties
when acquired) cross-collateralized both the DIP Facility and the Existing
Facility, as amended. We had $39.5 million outstanding under the Existing
Facility which was refinanced under the "Exit Facility," as defined below.
41
The DIP Facility was refinanced through the Existing Facility, as amended
by the second amendment in connection with the exit from bankruptcy (the "Exit
Facility"). The principal amount of the Exit Facility will not exceed $44.0
million and will mature on January 1, 2005. Principal will be payable monthly in
a monthly amount of $50,000 for the first year, $65,000 for the second year and
$80,000 for the last year of the Exit Facility term. Interest will be calculated
at 4.5% over three month LIBOR, floating monthly (not to be less than 8%), and
payable monthly in arrears. The Exit Facility is secured by 31 properties. At
December 31, 2001, we had $40.5 million outstanding under the Exit Facility.
Our credit agreements with U.S. Bank contain restrictive covenants which
include compliance with certain ratios. The agreements also requires us to
deposit $500,000 in cash collateral with U.S. Bank in the event certain
regulatory actions are commenced with respect to the properties securing our
obligations to U.S. Bank. U.S. Bank is required to release such deposits upon
satisfactory resolution of the regulatory action. As of the date of this filing,
no such additional deposits have been required.
In August, 2001, we received a waiver of U.S. Bank's right to declare an
event of default for our failure to meet the September 30, 2001 and December 31,
2001 cash balance requirements and other financial ratios set forth in the
amended U.S. Bank loan agreement. There can be no assurance that we will be able
to meet these requirements as of the end of future quarters or that U.S. Bank
will grant waivers of any such future failure to meet these requirements.
The Company will not meet the existing financial requirements established
for the Predecessor Company on March 31, 2002, as set forth in the amended U.S.
Bank loan agreement. The Company is in the process of renegotiating these
covenants to consider the reorganization of the Company (Successor Company) with
U.S. Bank. Management believes, based on discussions with U.S. Bank that new
covenants will be established for the Successor entity to allow the Company to
maintain future compliance.
Failure to comply with any covenant constitutes an event of default, which
will allow U.S. Bank (at its discretion) to declare any amounts outstanding
under the loan documents to be due and payable. Certain of our leases and loan
agreements contain covenants and cross-default provisions such that a default on
one of those agreements could cause us to be in default on one or more other
agreements.
Approximately $27.2 million of our indebtedness was secured by letters of
credit held by U.S. Bank as of December 31, 2001 which in some cases have
termination dates prior to the maturity of the underlying debt. As such letters
of credit expire, beginning in 2003, we will need to obtain replacement letters
of credit, post cash collateral or refinance the underlying debt. There can be
no assurance that we will be able to procure replacement letters of credit from
the same or other lending institutions on terms that are acceptable to us. In
the event that we are unable to obtain a replacement letter of credit or provide
alternate collateral prior to the expiration of any of these letters of credit,
we would be in default on the underlying debt.
We have future minimum annual lease payments over the next five years of
$13.1 million, $13.1 million, $13.3 million, $12.8 million and $12.9 million,
respectively. At December 31, 2001, we have $164.1 million of long-term
indebtedness, of which annual principal payments due over the next five years
are $2.6 million, $2.7 million, $41.1 million, $2.1 million and $2.3 million,
respectively.
Our ability to make payments on and to refinance any of our indebtedness,
to satisfy our lease obligations and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. In addition, our ability to draw
additional amounts under our Heller facility may depend on us satisfying certain
conditions to draw additional amounts under the facility.
Based upon our current level of operations, we believe that our current
cash on hand, $2.4 million of available credit under our Heller facility and
cash flow from operations are sufficient to meet our liquidity needs for the
next several years.
There can be no assurance, however, that our business will generate
sufficient cash flow from operations, that currently anticipated cost savings
and operating improvements will be realized on schedule or that we will satisfy
the conditions to draw additional amounts under the Heller facility, all of
which may be necessary to enable us to pay our indebtedness, to satisfy our
lease obligations and to fund our other liquidity needs. As a result, we may
need to refinance all or a portion of our indebtedness, on or before maturity.
There can be no assurance that we will be able to refinance any of our
indebtedness, on commercially reasonable terms or at all.
SEASONALITY
We are subject to modest effects of seasonality. During the calendar
fourth quarter holiday periods assisted living residents sometimes move out to
join family celebrations and move-ins are often deferred. The first quarter of
each calendar year usually coincides with increased illness among assisted
living residents which can result in increased costs or increases in move-outs
due to death or move-outs to skilled nursing facilities. As a result of these
factors, assisted living operations sometimes produce greater earnings in the
second and third quarters of a calendar year and lesser earnings in the first
and fourth quarters. We do not believe that this seasonality will cause
fluctuations in our revenues or operating cash flows to such an extent that we
will have difficulty paying our expenses, including rent, which does not
fluctuate seasonality.
42
INFLATION
We do not believe that inflation has materially adversely affected our
operations. We expect, however, that salary and wage increases for our skilled
staff will continue to be higher than average salary and wage increases, as is
common in the health care industry. We expect that we will be able to offset the
effects of inflation on salaries and other operating expenses by increases in
rental and service rates, subject to applicable restrictions, with respect to
services that are provided to residents eligible for Medicaid reimbursement.
RECENT ACCOUNTING PRONOUNCEMENTS
As of the Effective Date, and in accordance with the early adoption
provisions of SOP 90-7, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 141 Business Combinations ("SFAS No. 141"),
Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets ("SFAS No. 142"), Statement of Financial Accounting Standards
No. 143 Accounting for Asset Retirement Obligations ("SFAS No. 143") and
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). The adoption of
these statements had no impact on the consolidated financial statements of the
Company.
The principal provisions of SFAS No. 141 require that all business
combinations be accounted for by the purchase method of accounting and
identifiable intangible assets are to be recognized apart from goodwill.
The principal provisions of SFAS No. 142 require that goodwill and other
intangible assets deemed to have an indefinite useful life are not amortized but
rather tested annually for impairment. Under SFAS No. 142, intangible assets
that have finite useful lives will continue to be amortized over their useful
lives. SFAS No. 142 requires companies to test intangible assets that will not
be amortized for impairment at least annually by comparing the fair value of
those assets to their recorded amounts.
The principal provisions of SFAS No. 143 address financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and or normal use of the assets. The enterprise also
is to record a corresponding increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to depreciate
that cost over the life of the asset. The liability is changed at the end of
each period to reflect the passage of time (i.e., accretion expense) and changes
in the estimated future cash flows underlying the initial fair value
measurement. Because of the extensive use of estimates, most enterprises will
record a gain or loss when they settle the obligation.
The principal provisions of SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. While SFAS
No. 144 supersedes Statement of Accounting Standards No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS No. 121"), it retains many of the fundamental provisions of that
statement.
QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK AND RISK SENSITIVE
INSTRUMENTS
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. Changes in these factors could
cause fluctuations in our earnings and cash flows.
43
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not our earnings or cash flows. We do
not have an obligation to prepay any of our fixed rate debt prior to maturity,
and therefore, interest rate risk and changes in the fair market value of our
fixed rate debt will not have an impact on our earnings or cash flows until we
decide, or are required, to refinance such debt.
For variable rate debt, changes in interest rates generally do not impact
the fair market value of the debt instrument, but do affect our future earnings
and cash flows. We had variable rate debt of $66.7 million outstanding at
December 31, 2001 with a weighted average interest rate of 6.1%, of which $40.2
million has an interest rate floor of 8.0%. Assuming that our balance of
variable rate debt, excluding $40.2 million which has an interest rate floor of
8.0%, remains constant at $26.5 million, each one-percent increase in interest
rates would result in an annual increase in interest expense, and a
corresponding decrease in cash flows, of $265,000. Conversely, each one-percent
decrease in interest rates would result in an annual decrease in interest
expense, and a corresponding increase in cash flows, of $265,000. For our $40.2
million of variable rate debt which has a interest rate floor of 8.0%, each
one-percent increase in interest rates in excess of 8.0% would result in an
annual increase in interest expense, and a corresponding decrease in cash flows,
of $402,000. Conversely, each one-percent decrease at interest rates of 9.0% or
greater would result in an annual decrease in interest expense, and a
corresponding increase in cash flows, of $405,000.
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates of our long-term debt (in thousands).
DECEMBER 31, EXPECTED MATURITY DATE DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------------- 2000 2001
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE FAIR VALUE
------ ------ ------- ------ ------ ---------- -------- ------------ ------------
Long-term debt:
Fixed rate ................. $ 997 $ 802 $ 841 $ 909 $ 983 $ 41,430 $ 45,962 $44,877 $ 46,033
Average interest rate ...... 7.77% 7.77% 7.77% 7.77% 7.77% 7.77% 7.77%
Variable rate .............. $1,625 $1,860 $40,218 $1,210 $1,275 $ 20,510 $ 66,698 $27,220 $ 65,172
Average interest rate ...... 6.07% 6.07% 6.07% 6.07% 6.07% 6.07% 6.07%
------ ------ ------- ------ ------ -------- -------- ------- --------
Total long-term debt . $2,622 $2,662 $41,059 $2,119 $2,258 $ 61,940 $112,660 $72,097 $111,205
Reorganization Notes:
Senior Notes ............... $ -- $ -- $ -- $ -- $ -- $ 40,250 $ 40,250 $ -- $ 40,250
Average interest rate ...... 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Junior Notes(1) ............ $ -- $ -- $ -- $ -- $ -- $ 12,628 $ 12,628 $ -- $ 12,628
Average interest rate ...... 8.0% 8.0% 8.0% 12.0% 12.0% 12.0% 12.0%
------ ------ ------- ------ ------ -------- -------- ------- --------
Total Notes .......... $ -- $ -- $ -- $ -- $ -- $ 52,878 $ 52,878 $ -- $ 52,878
------ ------ ------- ------ ------ -------- -------- ------- --------
Total long-term debt
and Notes .......... $2,622 $2,662 $41,059 $2,119 $2,258 $114,818 $165,538 $72,097 $164,083
====== ====== ======= ====== ====== ======== ======== ======= ========
- ----------
(1) The Junior Notes were issued at a discount. The face amount of these notes
is $15.25 million and they bear interest at 8.0% for the first three
years, payable in kind, and thereafter bear interest at 12% for the
remaining term of the loan, payable semi-annually.
We are also exposed to market risks from fluctuations in interest rates
and the effects of those fluctuations on market values of our cash equivalents
and short-term investments. These investments generally consist of overnight
investments that are not significantly exposed to interest rate risk, except to
the extent that changes in interest rates will ultimately affect the amount of
interest income earned and cash flow from these investments.
We do not have any derivative financial instruments in place to manage
interest costs, but that does not mean we will not use them as a means to manage
interest rate risk in the future.
44
We do not use foreign currency exchange forward contracts or commodity
contracts and do not have foreign currency exposure.
45
BUSINESS
OVERVIEW
We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small, middle-market, rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
December 31, 2001 we had operations in 16 states.
We provide personal care and support services and make available routine
nursing services (as permitted by applicable law) designed to meet the personal
and health care needs of our residents. We believe that this combination of
residential, personal care, support and health care services provides a
cost-efficient alternative to, and affords an independent lifestyle for,
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide.
We experienced significant and rapid growth between 1994 and 1998,
primarily through the development of assisted living residences and, to a much
lesser extent, through acquisition of assisted living residences, opening our
last twenty residences in 1999. At the completion of our initial public offering
in November 1994 we had an operating base of five leased residences located in
Oregon. As of December 31, 2001, we operated 184 assisted living residences
(7,115 units) of which we owned 129 residences (5,010 units) and leased 55
residences (2,105 units). For the year ended December 31, 2001, we had an
average occupancy rate of 84.0% and an average monthly rental rate of $2,073 per
unit.
The principal elements of our business strategy are to:
- increase occupancy and improve operating efficiencies at our
residences;
- reduce overhead costs where possible;
- establish necessary financing to meet maturing obligations;
and
- increase rental and service revenue.
We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located some of our
residences in states with favorable regulatory and reimbursement climates, we
should have a stable source of residents eligible for Medicaid reimbursement to
the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income if their
private funds are depleted and they become Medicaid eligible.
Although we manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if the states operating these programs
continue to limit, or more aggressively seek limits on, reimbursement rates. See
"Risk Factors -- Risks Related to our Business and the Business of our
Subsidiaries --We depend on reimbursement by government payors and other third
parties for a significant portion of our revenues."
Assisted Living Concepts, Inc., is a Nevada corporation. Our principal
executive offices are located at 11835 NE Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.
46
REORGANIZATION
On October 1, 2001, we, and our wholly owned subsidiary, Carriage House
Assisted Living, Inc. voluntarily filed for bankruptcy protection under Chapter
11 of the Bankruptcy Code. The bankruptcy court gave final approval to the Plan
on December 28, 2001, and the Plan became effective on January 1, 2002 (the
"Effective Date").
Under the Plan, on the Effective Date, the Company issued general
unsecured creditors their pro rata shares, subject to the Reserve, of the
following securities:
- $40.25 million principal amount of Senior Notes;
- $15.25 million principal amount of Junior Notes; and
- 6.24 million shares of New Common Stock (representing 96% of
the New Common Stock).
The New Notes are secured by 57 of our properties.
The remaining 4% of the New Common Stock, subject to the Reserve, was
issued on the Effective Date to the Company's shareholders immediately prior to
the Effective Date.
Under the Plan, 1.1% of the Senior Notes, Junior Notes and New Common
Stock that would otherwise have been issued on the Effective Date were held back
as the Reserve to cover general unsecured claims that had not been either made
or settled by the December 19, 2001 cutoff date established under the Plan. The
reserved securities will be issued once all these outstanding general unsecured
claims have been settled. If the Reserve is insufficient to cover these
outstanding general unsecured claims, we will have no further liability with
respect to these claims. If the reserve exceeds the amount of these outstanding
general unsecured claims, the excess securities will be distributed pro rata
among the holders of all general unsecured claims, including those settled prior
to the cutoff date.
We adopted fresh-start reporting, as of December 31, 2001, in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code (SOP 90-7). Under fresh-starting reporting, a new entity has
been deemed created for financial reporting purposes. See Note 1 to the
consolidated financial statements included in this Prospectus for additional
information.
MANAGEMENT CHANGES
On the Effective Date, a new Board of Directors of the reorganized Company
consisting of seven members was established as follows: W. Andrew Adams
(Chairman), Andre Dimitriadis, Mark Holliday, Richard Ladd, Matthew Patrick,
Leonard Tannenbaum, and Wm. James Nicol, then the President and Chief Executive
Officer of the Company.
Subsequent to the Effective Date, Steven L. Vick replaced Wm. James Nicol
as President, Chief Executive Officer and Director. Mr. Vick joins the Company
from Alterra Healthcare Corporation where he previously served as President and
Chief Operating Officer. Prior to Alterra, Mr. Vick co-founded Sterling House
Corporation in 1991 and served as its President until its merger with Alterra in
October, 1997. Previously, he practiced as a certified public accountant
specializing in health care consulting.
47
SERVICES
Our residences offer residents a supportive, "home-like" setting and
assistance with activities of daily living. Residents are individuals who, for a
variety of reasons, cannot live alone, or elect not to do so, and do not need
the 24-hour skilled medical care provided in nursing facilities. We design
services provided to these residents to respond to their individual needs and to
improve their quality of life. This individualized assistance is available 24
hours a day, to meet both anticipated and unanticipated needs, including routine
health-related services, which are made available and are provided according to
the resident's individual needs and state regulatory requirements. Available
services include:
- General services, such as meals, laundry and housekeeping;
- Support services, such as assistance with medication,
monitoring health status, coordination of transportation; and
- Personal care, such as dressing, grooming and bathing.
We also provide or arrange access to additional services beyond basic
housing and related services, including physical therapy and pharmacy services.
Although a typical package of basic services provided to a resident
includes meals, housekeeping, laundry and personal care, we do not have a
standard service package for all residents. Instead, we are able to accommodate
the changing needs of our residents through the use of individual service plans
and flexible staffing patterns. Our multi-tiered rate structure for services is
based upon the acuity of, or level of services needed by, each resident.
Supplemental and specialized health-related services for those residents
requiring 24-hour supervision or more extensive assistance with activities of
daily living are provided by third-party providers who are reimbursed directly
by the resident or a third-party payor (such as Medicaid or long-term care
insurance). Our policy is to assess the level of need of each resident
regularly.
OPERATIONS
Each residence has an on-site administrator who is responsible for the
overall day-to-day operation of the residence, including quality of care,
marketing, social services and financial performance. The administrator is
assisted by professional and non-professional personnel, some of whom may be
independent providers or part-time personnel, including nurses, personal service
assistants, maintenance and kitchen personnel. The nursing hours vary depending
on the residents' needs. We consult with outside providers, such as registered
nurses, pharmacists, and dietitians, for purposes of medication review, menu
planning and responding to any special dietary needs of residents. Personal
service assistants who primarily are full-time employees are responsible for
personal care, dietary services, housekeeping and laundry services. Maintenance
services are performed by full and part-time employees.
We have established an infrastructure that includes 4 regional vice
presidents of operations who oversee the overall performance and finances of
each region, 18 regional directors of operations and 2 associate regional
directors of operations who oversee the day-to-day operations of up to 6 to 11
residences, and team leaders who provide peer support for either three or four
residences. We also have regional property managers who oversee the maintenance
of the residences and several regional marketing coordinators who assist with
marketing the residences. Corporate and regional personnel work with the
administrators to establish residence goals and strategies, quality assurance
oversight, development of our internal policies and procedures, government
relations, marketing and sales,
48
community relations, development and implementation of new programs, cash
management, legal support, treasury functions, and human resource management.
COMPETITION
The long-term care industry generally is highly competitive. We expect
that the assisted living business, in particular, will become even more
competitive in the future given the relatively low barriers to entry and
continuing health care cost containment pressures.
We compete with numerous other companies providing similar long-term care
alternatives. We operate in 16 states and each community in which we operate
provides a unique market. Overall, most of our markets include an assisted
living competitor offering assisted living facilities that are similar in size,
price and range of service. Our competitors include other companies that provide
adult day care in the home, higher priced assisted living centers (typically
larger facilities with more amenities), congregate care facilities where tenants
elect the services to be provided, and continuing care retirement centers on
campus-like settings.
We expect to face increased competition from new market entrants as
assisted living receives increased attention and the number of states which
include assisted living in their Medicaid programs increases. Competition will
also grow from new market entrants, including publicly and privately held
companies focusing primarily on assisted living. Nursing facilities that provide
long-term care services are also a potential source of competition for us.
Providers of assisted living residences compete for residents primarily on the
basis of quality of care, price, reputation, physical appearance of the
facilities, services offered, family preferences, physician referrals and
location. Some of our competitors operate on a not-for-profit basis or as
charitable organizations. Some of our competitors are significantly larger than
us and have, or may obtain, greater resources than ours. While we generally
believe that there is moderate competition for less expensive segments of the
private market and for Medicaid residents in small communities, we have seen an
increase in competition in certain of our markets.
We believe that many assisted living markets have been overbuilt.
Regulation and other barriers to entry into the assisted living industry are not
substantial. In addition, because the segment of the population that can afford
to pay our daily resident fee is finite, the number of new assisted living
facilities may outpace demand in some markets. The effects of such overbuilding
include (a) significantly longer fill-up periods, (b) newly opened facilities
attract residents from existing facilities, (c) pressure to lower or refrain
from increasing rates, (d) competition for workers in already tight labor
markets and (e) lower margins until excess units are absorbed. We believe that
each local market is different, and we are and will continue to react in a
variety of ways, including selective price discounting, to the specific
competitive environment that exists in each market. There can be no assurance
that we will be able to compete effectively in those markets where overbuilding
exists, or that future overbuilding in other markets where we operate our
residences will not adversely affect our operations.
FUNDING
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an "assisted living," "custodial"
or "alternative care benefit." Government payments for assisted living have been
limited. Some state and local governments offer subsidies for rent or services
for low-income elders. Others may provide subsidies in the form of additional
payments for those who receive Supplemental Security Income (SSI). Medicaid
provides coverage for certain financially or medically needy persons, regardless
of age,
49
and is funded jointly by federal, state and local governments. Medicaid
contracts for assisted living vary from state to state.
In 1981, the federal government approved a Medicaid waiver program called
Home and Community Based Care which was designed to permit states to develop
programs specific to the healthcare and housing needs of the low-income elderly
eligible for nursing home placement (a "Medicaid Waiver Program"). In 1986,
Oregon became the first state to use federal funding for licensed assisted
living services through a Medicaid Waiver Program authorized by Medicaid
Services ("CMS"), formerly the Health Care Financing Administration. Under a
Medicaid Waiver Program, states apply to CMS for a waiver to use Medicaid funds
to support community-based options for the low-income elderly who need long-term
care. These waivers permit states to reallocate a portion of Medicaid funding
for nursing facility care to other forms of care such as assisted living. In
1994, the federal government implemented new regulations which empowered states
to further expand their Medicaid Waiver Programs and eliminated restrictions on
the amount of Medicaid funding states could allocate to community-based care,
such as assisted living. A limited number of states including Oregon, New
Jersey, Texas, Arizona, Nebraska, Florida, Idaho and Washington currently have
operating Medicaid Waiver Programs that allow them to pay for assisted living
care. We participate in Medicaid programs in all of these states except Florida.
Without a Medicaid Waiver Program, states can only use federal Medicaid funds
for long-term care in nursing facilities.
During the years ended December 31, 1999, 2000 and 2001, direct payments
received from state Medicaid agencies accounted for approximately 10.4%, 11.1%
and 12.5%, respectively, of our revenue while the tenant-paid portion received
from Medicaid residents accounted for approximately 5.9%, 6.2% and 6.8%,
respectively, of our revenue during these periods. We expect in the future that
state Medicaid reimbursement programs will continue to constitute a significant
source of our revenue.
GOVERNMENT REGULATION
Our assisted living residences are subject to certain state statutes,
rules and regulations, including those which provide for licensing requirements.
In order to qualify as a state licensed facility, our residences must comply
with regulations which address, among other things, staffing, physical design,
required services and resident characteristics. As of December 31, 2001, we had
obtained licenses in Oregon, Washington, Idaho, Nebraska, Texas, Arizona, Iowa,
Louisiana, Ohio, New Jersey, Pennsylvania, Florida, Michigan, Georgia and South
Carolina. We are not currently subject to state licensure requirements in
Indiana. Our residences are also subject to various local building codes and
other ordinances, including fire safety codes. These requirements vary from
state to state and are monitored to varying degrees by state agencies.
As a provider of services under the Medicaid program in the United States,
we are subject to Medicaid fraud and abuse laws, which prohibit any bribe,
kickback, rebate or remuneration of any kind in return for the referral of
Medicaid patients, or to induce the purchasing, leasing, ordering or arranging
of any goods or services to be paid for by Medicaid. Violations of these laws
may result in civil and criminal penalties and exclusions from participation in
the Medicaid program. The Inspector General of the Department of Health and
Human Services issued "safe harbor" regulations specifying certain business
practices, which are exempt from sanctions under the fraud and abuse law.
Several states in which we operate have laws that prohibit certain direct or
indirect payments or fee-splitting arrangements between health care providers if
such arrangements are designed to induce or encourage the referral of patients
to a particular provider. We, at all times, attempt to comply with all
applicable fraud and abuse laws. There can be no assurance that administrative
or judicial interpretation of existing laws or regulations or enactments of new
laws or regulations will not have a material adverse effect on our results of
operations or financial condition.
50
Currently, the federal government does not regulate assisted living
residences as such. State standards required of assisted living providers are
less in comparison with those required of other licensed health care operators.
Current Medicaid regulations provide for comparatively flexible state control
over the licensure and regulation of assisted living residences. There can be no
assurance that federal regulations governing the operation of assisted living
residences will not be implemented in the future or that existing state
regulations will not be expanded.
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. Although we believe that our facilities are
substantially in compliance with, or are exempt from, present requirements, we
will incur additional costs if required changes involve a greater expenditure
than anticipated or must be made on a more accelerated basis than anticipated.
Further legislation may impose additional burdens or restrictions with respect
to access by disabled persons, the costs of compliance with which could be
substantial.
See "Risk Factors -- Risks Related to our Business and the Business of our
Subsidiaries -- We are subject to significant government regulation."
LIABILITY AND INSURANCE
Providing services in the senior living industry involves an inherent risk
of liability. Participants in the senior living and long-term care industry are
subject to lawsuits alleging negligence or related legal theories, many of which
may involve large claims and result in the incurrence of significant legal
defense costs. We currently maintain insurance policies to cover such risks in
amounts which we believe are in keeping with industry practice. There can be no
assurance that a claim in excess of our insurance will not be asserted. A claim
against us not covered by, or in excess of, our insurance, could have a material
adverse affect on us.
Based on poor loss experience, insurers for the long term care industry
have become increasingly wary of liability exposures. A number of insurance
carriers have stopped writing coverage to this market, and those remaining have
increased premiums and deductibles substantially. While nursing homes have been
primarily affected, assisted living companies, including us, have experienced
premium and deductible increases. During the claim year ended December 31, 2001,
our professional liability insurance coverage included retention levels of
$250,000 per incident for all states except Florida and Texas in which our
retention level is $500,000. Our professional liability insurance is on a
claims-made basis. In certain states, particularly Florida and Texas, many
long-term care providers are facing very difficult renewals. There can be no
assurance that we will be able to obtain liability insurance in the future or
that, if such insurance is available, it will be available on terms acceptable
to us.
EMPLOYEES
As of December 31, 2001 we had 3,727 employees, of whom 1,725 were
full-time employees and 2,002 were part-time employees. None of our employees
are represented by any labor union. We believe that our labor relations are
generally good.
PROPERTIES
The following chart sets forth, as of December 31, 2001, the location,
number of units, opening date, ownership status and occupancy of our residences.
51
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/01(3)
- --------- ----- ------- ------------ --------------
WEST REGION
Idaho
Burley .................. 35 08/97 Leased 94.3
Caldwell ................ 35 08/97 Leased 91.3
Garden City ............. 48 04/97 Owned 93.8
Hayden .................. 39 11/96 Leased 69.2
Idaho Falls ............. 39 01/97 Owned 82.1
Moscow .................. 35 04/97 Owned 88.6
Nampa ................... 39 02/97 Leased 82.1
Rexburg ................. 35 08/97 Owned 65.7
Twin Falls .............. 39 09/97 Owned 100.0
--- -----
Sub Total ..... 344 85.2
Oregon
Astoria ................. 28 08/96 Owned 57.1
Bend .................... 46 11/95 Owned 89.1
Brookings ............... 36 07/96 Owned 100.0
Canby ................... 25 12/90 Leased 96.0
Estacada ................ 30 01/97 Owned 100.0
Eugene .................. 47 08/97 Leased 93.6
Hood River .............. 30 10/95 Owned 80.0
Klamath Falls ........... 36 10/96 Leased 100.0
Lincoln City ............ 33 10/94 Owned 63.6
Madras .................. 27 03/91 Owned 100.0
Newberg ................. 26 10/92 Leased 84.6
Newport ................. 36 06/96 Leased 63.9
Pendleton ............... 39 04/91 Leased 97.4
Prineville .............. 30 10/95 Owned 93.3
Redmond ................. 37 03/95 Leased 97.3
Silverton ............... 30 07/95 Owned 93.3
Sutherlin ............... 30 01/97 Leased 100.0
Talent .................. 36 10/97 Owned 89.1
--- -----
Sub Total ..... 602 88.8
Washington
Battleground ............ 40 11/96 Leased 100.0
Bremerton ............... 39 05/97 Owned 94.9
Camas ................... 36 03/96 Leased 97.2
Enumclaw ................ 40 04/97 Owned 75.0
Ferndale ................ 39 10/98 Owned 87.2
Grandview ............... 36 02/96 Leased 69.4
Hoquiam ................. 40 07/97 Leased 97.5
Kelso ................... 40 08/96 Leased 92.5
Kennewick ............... 36 12/95 Leased 100.0
Port Orchard ............ 39 06/97 Owned 82.1
Port Townsend ........... 39 01/98 Owned 94.9
Spokane ................. 39 09/97 Owned 92.3
Sumner(4) ............... 48 03/98 Owned 41.7
Vancouver ............... 44 06/96 Leased 95.5
Walla Walla ............. 36 02/96 Leased 91.7
Yakima .................. 48 07/98 Owned 97.9
--- -----
Sub Total ..... 639 88.1
Arizona
Apache Junction ......... 48 03/98 Owned 56.3
Bullhead City ........... 40 08/97 Leased 97.5
52
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/01(3)
- --------- ----- ------- ------------ --------------
Lake Havasu ............. 36 04/97 Leased 97.2
Mesa .................... 50 01/98 Owned 74.0
Payson .................. 39 10/98 Owned 100.0
Peoria .................. 50 07/99 Owned 74.0
Prescott Valley ......... 39 10/98 Owned 87.2
Surprise ................ 50 10/98 Owned 86.0
Yuma .................... 48 03/98 Owned 95.8
----- -----
Sub Total ..... 400 85.3
CENTRAL REGION
Texas
Abilene ................. 38 10/96 Owned 97.4
Amarillo ................ 50 03/96 Owned 100.0
Athens .................. 38 11/95 Leased 78.9
Beaumont ................ 50 04/96 Owned 78.0
Big Springs ............. 38 05/96 Owned 97.4
Bryan ................... 30 06/96 Owned 96.7
Canyon .................. 30 06/96 Owned 100.0
Carthage ................ 30 10/95 Leased 93.3
Cleburne ................ 45 01/96 Owned 95.6
Conroe .................. 38 07/96 Leased 100.0
College Station ......... 39 10/96 Owned 87.2
Denison ................. 30 01/96 Owned 93.3
Gainesville ............. 40 01/96 Owned 97.5
Greenville .............. 41 11/95 Leased 80.5
Gun Barrel City ......... 40 10/95 Leased 92.5
Henderson ............... 30 09/96 Owned 96.7
Jacksonville ............ 39 12/95 Leased 97.4
Levelland ............... 30 01/96 Owned 100.0
Longview ................ 30 09/95 Leased 83.3
Lubbock ................. 50 07/96 Leased 82.0
Lufkin .................. 39 05/96 Leased 89.7
Marshall ................ 40 07/95 Leased 92.5
McKinney ................ 39 01/97 Owned 84.6
McKinney ................ 50 05/98 Owned 96.0
Mesquite ................ 50 07/96 Leased 92.0
Midland ................. 50 12/96 Owned 72.0
Mineral Wells ........... 30 07/96 Owned 100.0
Nacogdoches ............. 30 06/96 Owned 100.0
Orange .................. 36 03/96 Owned 83.3
Pampa ................... 36 08/96 Owned 91.7
Paris Oaks .............. 50 12/98 Owned 100.0
Plainview ............... 36 07/96 Owned 100.0
Plano ................... 64 05/98 Owned 84.4
Port Arthur ............. 50 05/96 Owned 100.0
Rowlett ................. 36 10/96 Owned 94.4
Sherman ................. 39 10/95 Leased 71.8
Sulphur Springs ......... 30 01/96 Owned 100.0
Sweetwater .............. 30 03/96 Owned 100.0
Temple .................. 40 01/97 Leased 95.0
Wichita Falls ........... 50 10/96 Leased 88.0
----- -----
Sub Total ..... 1,581 92.1
Nebraska
Beatrice ................ 39 07/97 Leased 100.0
53
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/01(3)
- --------- ----- ------- ------------ --------------
Blair ................... 30 07/98 Owned 83.3
Columbus ................ 39 06/98 Owned 94.9
Fremont ................. 39 05/98 Owned 94.9
Nebraska City ........... 30 06/98 Owned 73.3
Norfolk ................. 39 04/97 Leased 76.9
Seward .................. 30 10/98 Owned 73.3
Wahoo ................... 39 06/97 Leased 97.4
York .................... 39 05/97 Leased 97.4
--- -----
Sub Total ..... 324 87.9
Iowa
Atlantic ................ 30 09/98 Owned 53.3
Carroll ................. 35 01/99 Owned 100.0
Clarinda ................ 35 09/98 Owned 100.0
Council Bluffs .......... 50 03/99 Owned 64.0
Denison ................. 35 05/98 Leased 71.4
Sergeant Bluff .......... 39 11/99 Owned 28.2
--- -----
Sub Total ..... 224 69.5
SOUTHEAST REGION
Georgia
Rome .................... 39 08/99 Owned 71.8
Florida
Defuniak Springs ........ 39 07/99 Owned 56.4
Milton .................. 39 06/99 Owned 87.2
NW Pensacola ............ 39 06/99 Owned 33.3
Quincy .................. 39 04/99 Owned 51.3
--- -----
Sub Total ..... 156 57.1
Louisiana
Alexandria .............. 48 07/98 Owned 58.3
Bunkie .................. 39 01/99 Owned 69.2
Houma ................... 48 08/98 Owned 95.8
Ruston .................. 39 01/99 Owned 100.0
--- -----
Sub Total ..... 174 80.9
South Carolina
Aiken ................... 39 02/98 Owned 100.0
Clinton ................. 39 11/97 Leased 87.2
Goose Creek ............. 39 08/98 Leased 82.1
Greenwood ............... 39 05/98 Leased 100.0
Greer ................... 39 06/99 Owned 100.0
James Island ............ 39 08/98 Owned 82.1
North Augusta ........... 39 10/98 Owned 94.9
Port Royal .............. 39 09/98 Owned 74.4
Summerville ............. 39 02/98 Owned 92.3
--- -----
Sub Total ..... 351 90.3
EAST REGION
Indiana
Bedford ................. 39 03/98 Owned 97.4
Bloomington ............. 39 01/98 Owned 66.7
Camby ................... 39 12/98 Owned 79.5
Crawfordsville .......... 39 06/99 Owned 100.0
Elkhart ................. 39 09/97 Leased 30.8
Fort Wayne .............. 39 06/98 Owned 76.9
Franklin ................ 39 05/98 Owned 33.3
Huntington .............. 39 02/98 Owned 46.2
54
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/01(3)
- --------- ----- ------- ------------ --------------
Jeffersonville (5) ...... 39 03/99 Owned 30.8
Kendallville ............ 39 05/98 Owned 46.2
Lafayette ............... 39 11/99 Owned 69.2
LaPorte ................. 39 10/98 Owned 48.7
Logansport .............. 39 02/98 Owned 94.9
Madison ................. 39 10/97 Leased 61.5
Marion .................. 39 03/98 Owned 74.4
Muncie .................. 39 02/98 Owned 87.2
New Albany .............. 39 05/98 Owned 69.2
New Castle .............. 39 02/98 Owned 100.0
Seymour ................. 39 05/98 Owned 89.7
Shelbyville ............. 39 05/98 Owned 69.2
Warsaw .................. 39 10/97 Owned 56.4
--- -----
Sub Total ..... 819 68.0
Michigan
Coldwater ............... 39 10/99 Owned 69.2
Kalamazoo ............... 39 11/99 Owned 74.4
Three Rivers ............ 39 04/99 Owned 53.9
--- -----
Sub Total ..... 117 65.8
New Jersey
Bridgeton ............... 39 03/98 Owned 79.5
Burlington .............. 39 11/97 Owned 89.7
Egg Harbor .............. 39 04/99 Owned 87.2
Glassboro ............... 39 03/97 Leased 97.4
Millville ............... 39 05/97 Leased 92.3
Pennsville .............. 39 11/97 Owned 97.4
Rio Grande .............. 39 11/97 Owned 64.1
Vineland ................ 39 01/97 Leased 84.6
--- -----
Sub Total ..... 312 86.5
Ohio
Bellefontaine ........... 35 03/97 Owned 51.4
Bucyrus ................. 35 01/97 Owned 100.0
Cambridge ............... 39 10/97 Owned 97.4
Celina .................. 39 04/97 Owned 64.1
Defiance ................ 35 02/96 Owned 100.0
Findlay ................. 39 03/97 Owned 61.5
Fremont ................. 39 07/97 Leased 100.0
Greenville .............. 39 02/97 Owned 76.9
Hillsboro ............... 39 03/98 Owned 66.7
Kenton .................. 35 03/97 Owned 82.9
Lima .................... 39 06/97 Owned 51.3
Marion .................. 39 04/97 Owned 82.1
Newark .................. 39 10/97 Leased 97.4
Sandusky ................ 39 09/98 Owned 64.1
Tiffin .................. 35 06/97 Leased 91.4
Troy .................... 39 03/97 Leased 92.3
Wheelersburg ............ 39 09/97 Leased 66.7
Zanesville .............. 39 12/97 Owned 100.0
--- -----
Sub Total ..... 682 80.4
Pennsylvania
Butler .................. 39 12/97 Owned 97.4
Hermitage ............... 39 03/98 Owned 76.9
Indiana ................. 39 03/98 Leased 100.0
55
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/01(3)
- --------- ----- ------- ------------ --------------
Johnstown ............... 39 06/98 Owned 64.1
Latrobe ................. 39 12/97 Owned 100.0
Lower Burrell ........... 39 01/97 Owned 100.0
New Castle .............. 39 04/98 Owned 100.0
Penn Hills .............. 39 05/98 Owned 92.3
Uniontown ............... 39 06/98 Owned 74.4
----- -----
Sub Total ..... 351 89.5
----- -----
Grand Total ... 7,115 83.7%
===== ====
- ----------
(1) Reflects the date we commenced operations.
(2) As of December 31, 2001, we owned 129 residences and we leased 55
residences pursuant to long-term operating leases. Of the 129 owned
residences, 38 are subject to permanent mortgage financing, 3 are subject
to HUD mortgage financing, 31 are subject to financing with Heller
Healthcare Finance, Inc. and the remaining 57 owned properties are
collateral for the New Notes. See Notes 4, 6 and 7 to the consolidated
financial statements included elsewhere herein.
(3) Occupancy is calculated based upon occupied units at December 31, 2001.
(4) As of December 31, 2001, Sumner, Washington had received a notice of
license revocation. The notice of license revocation is still pending as
of the date of this filing.
(5) Due to market conditions, we closed this facility on March 15, 2002. This
property is one of fifty-seven properties which serve as collateral for
the New Notes. We are currently exploring disposal options of this
facility which may include selling the facility or leasing it to a third
party. If we elect to sell the property, we must first obtain permission
from BNY Midwest Trust Company, the New Notes Trustee and all proceeds
must be submitted to the trustee.
In 2001, we also leased office space for the corporate office in Portland,
Oregon and the regional offices in Dallas, Texas and Dublin, Ohio.
LEGAL PROCEEDINGS
On October 1, 2001, we voluntarily filed for bankruptcy protection under
Chapter 11 of the Bankruptcy Code. The bankruptcy court gave final approval to
our Plan on December 28, 2001, and the Plan became effective on the Effective
Date, January 1, 2002.
Under the Plan, on the Effective Date, the Company issued general
unsecured creditors their pro rata shares, subject to the Reserve, of the
following securities:
- $40.25 million principal amount of Senior Notes;
- $15.25 million principal amount of Junior Notes; and
- 6.24 million shares of New Common Stock (representing 96% of
the New Common Stock).
The New Notes are secured by 57 of our properties.
56
The remaining 4% of the New Common Stock, subject to the Reserve, was
issued on the Effective Date to the Company's shareholders immediately prior to
the Effective Date.
Under the Plan, 1.1% of the Senior Notes, Junior Notes and New Common
Stock that would otherwise have been issued on the Effective Date were held back
in the Reserve to cover general unsecured claims that had not been either made
or settled by the December 19, 2001 cutoff date established under the Plan. The
reserved securities will be issued once all these outstanding general unsecured
claims have been settled. If the Reserve is insufficient to cover these
outstanding general unsecured claims, we will have no further liability with
respect to these claims. If the Reserve exceeds the amount of these outstanding
general unsecured claims, the excess securities will be distributed pro rata
among the holders of all general unsecured claims, including those settled prior
to the cutoff date.
INSURANCE COVERAGE DISPUTE
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our consolidated financial statements
for the years ended December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. This agreement received final court approval on November 30,
2000 and we were dismissed from the litigation with prejudice. On September 28,
2001, we made our final installment of $1.0 million on our promissory note for
the class action litigation settlement. Although we were dismissed from the
litigation with prejudice, a dispute which arose with our corporate liability
insurance carriers remains unresolved. At the time we settled the class action
litigation, the Company and the insurance carriers agreed to resolve this
dispute through binding arbitration, and we filed a complaint for a declaratory
judgment that we are not liable to the carriers as claimed. The carriers
counter-claimed to recover an amount capped at $4.0 million.
After filing our bankruptcy petition on October 1, 2001, we made a motion
for dismissal of our complaint for declaratory relief in the arbitration based
upon having filed for bankruptcy protection. An objection was filed to our
motion, and one of our insurance carriers filed a proof of claim in the amount
of $4.0 million in the bankruptcy proceeding. We dispute that claim. We offered
(and the offer currently remains outstanding) to settle the dispute for $75,000
to be paid out as part of the bankruptcy process. See Notes 1 and 13 to the
consolidated financial statements included elsewhere herein.
Other Litigation
In addition to the matters referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the normal
course of business. In the aggregate, such other suits and claims should not
have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
57
MANAGEMENT
We have provided below certain information regarding our directors and
executive officers:
NAME AGE POSITION
- ---- --- --------
Steven Vick................................ 43 President, Chief Executive Officer and Director
W. Andrew Adams (2) ....................... 56 Director, Chairman of the Board of Directors
Andre Dimitriadis (1)(2) .................. 61 Director
Mark Holliday (1) ......................... 33 Director
Richard Ladd (3) .......................... 63 Director
Matthew Patrick (1)(3)..................... 42 Director
Leonard Tannenbaum (2)..................... 30 Director
Sandra Campbell............................ 55 Senior Vice President, General Counsel and Secretary
Nancy Gorshe............................... 50 Senior Vice President, Chief Operating Officer
Drew Q. Miller............................. 49 Senior Vice President, Chief Financial Officer and
Treasurer
M. Catherine Maloney....................... 39 Vice President, Controller and Chief Accounting
Officer
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Quality Assurance and Compliance Committee.
Steven Vick became our President, Chief Executive Officer and a member of
our Board of Directors on February 18, 2002. Mr. Vick previously served as
President of Alterra Healthcare Corporation ("Alterra") from January 5, 2001 to
February 15, 2002 and as the Chief Operating Officer from October 1997 to
January 2001 and a director from October 1997 to February 15, 2002. He served as
the President and a director of Sterling House Corporation ("Sterling") since he
co-founded Sterling in 1991 until subsequent to Sterling's merger with the
Alterra in October 1997. Mr. Vick previously practiced as a certified public
accountant specializing in health care consulting.
W. Andrew Adams became a member of the Board of Directors in January 2002.
He has served as President and a director of the National Health Investors, Inc.
("NHI") since its inception in 1991 and currently serves as its President, Chief
Executive Officer and Chairman of the Board. Mr. Adams has also been President
and a director of National HealthCare Corporation ("NHC"), NHI's Investment
Advisor, since 1974. He also serves in these positions for National Health
Realty, Inc. since its spin-off in late 1997. Mr. Adams serves on the Board of
Directors of Lipscomb University in Nashville, Tennessee, SunTrust Bank in
Nashville, Tennessee, and Boy Scouts of America. He received his M.B.A. from
Middle Tennessee State University. NHI owns 8.6% of our New Common Stock and
$5.0 million of our New Notes.
Andre Dimitriadis became a member of the Board of Directors in January
2002. Mr. Dimitriadis founded LTC Properties, Inc. ("LTC"), in 1992 and has been
its Chairman and Chief Executive Officer since its inception. In 2000, Mr.
Dimitriadis also assumed the position of President of LTC. Mr. Dimitriadis is
also the Chief Executive Officer and Chairman of the Board of CLC Healthcare,
Inc. (previously LTC Healthcare, Inc.) and serves on the board of Magellan
Health Services. CLC Healthcare, Inc. owns 22.4% of our New Common Stock and
$1.9 million of our New Notes and LTC owns $11.0 million of our New Notes. We
currently lease 37 properties (1,426 units) from LTC.
58
Mark Holliday became a member of the Board of Directors in January 2002.
Mr. Holliday is currently with Heartland Capital Corporation, a private hedge
fund focusing on financially distressed companies. Previously, Mr. Holliday held
the position of Financial Analyst with Continental Partners where he specialized
in restructuring advisory services. Mr. Holliday has over 10 years of
restructuring and bankruptcy related experience.
Richard C. Ladd served as Chairman of our Board of Directors from March
1999 to March 2000 and has been a director since September 1994. Since September
1994, Mr. Ladd has been the President of Ladd and Associates, a health and
social services consulting firm. He is also co-director of the National
Long-Term Care Balancing Project and was an adjunct assistant professor at the
School of Internal Medicine, University of Texas Medical Branch at Galveston,
Texas. From June 1992 to September 1994, Mr. Ladd served as the Texas
Commissioner of Health and Human Services where he oversaw the development and
implementation of a 22,000-bed Medicaid Waiver Program to be used for assisted
living and other community-based service programs. From November 1981 to June
1992, Mr. Ladd served as Administrator of the Oregon Senior and Disabled
Services Division. He is also a member of numerous professional and honorary
organizations.
Matthew Patrick became a member of the Board of Directors in January 2002.
Mr. Patrick is currently a consultant to long-term care companies on financial
strategy and organizational issues. Previously Mr. Patrick was Vice President
and Treasurer of Sun Healthcare Group, Inc., from 1998 through July, 2001. From
1993 to 1998, Mr. Patrick was Vice President of the Dallas Agency of The Sanwa
Bank, Ltd. From 1992 to 1993, Mr. Patrick served as financial consultant for
Merrill, Lynch, Pierce, Fenner and Smith, Inc.'s Private Client Group in Dallas
and from 1985 to 1990 he held various financial positions in the International
Division of National Westminster Bank, PLC.
Leonard Tannenbaum, CFA, was elected to the Board of Directors in January
2001. Mr. Tannenbaum is currently the Managing Partner at MYFM Capital LLC, an
investment banking firm. Mr. Tannenbaum currently serves on the board of
directors of the following public companies: Cortech, Inc.; New World
Coffee-Manhattan Bagel, Inc.; and General Devices, Inc. He also currently serves
on the board of Timesys, an embedded Linux company, and Transcentives.com, an
internet holding company. He formerly served on the board of Westower
Corporation. Previously, Mr. Tannenbaum was the president of the on-line auction
company CollectingNation.com, a partner in a $50 million hedge fund, an
assistant portfolio manager at Pilgrim Baxter, and an Assistant Vice President
in Merrill Lynch's small company group. Mr. Tannenbaum received both his M.B.A.
and Bachelors of Science from the Wharton School at the University of
Pennsylvania. Mr. Tannenbaum currently owns $323,875 of our New Notes.
Sandra Campbell joined us as Senior Vice President, General Counsel and
Secretary in January of 1998. Ms. Campbell has over 20 years of experience in
practicing law in real property, secured transactions and general business law.
Prior to joining us, she was a partner in the law firm of Bullivant Houser
Bailey where she was employed from April 1995 to January 1998. From January 1992
to April 1995, Ms. Campbell served as Chief Legal Counsel for First Fidelity
Thrift & Loan Association.
Nancy Gorshe joined us as Vice President of Community Relations in January
of 1998 and currently serves as Chief Operating Officer. Ms. Gorshe has over
twenty years of experience in the field of geriatric health, community and
long-term care and housing. Prior to joining us, she was President of Franciscan
ElderCare Corporation which is comprised of nursing homes, assisted living
facilities, and subacute units in nursing homes and hospitals from 1993 to 1997.
In addition, Ms. Gorshe has served as Executive Director of Providence
Elderplace, a long-term care HMO.
Drew Q. Miller joined us in March, 2000 as Senior Vice President, Chief
Financial Officer and Treasurer. Mr. Miller has over 16 years of senior finance
and accounting experience in health care
59
services. From 1996 to 2000, Mr. Miller served as Chief Executive Officer and
President of Advantage Behavior Health, Inc., a southern California-based
comprehensive behavioral management company. Prior to Advantage, he served as
Chief Operating Officer and Chief Financial Officer of Comprehensive Care
Corporation, a publicly traded company engaged in the development, delivery and
management of behavioral services.
M. Catherine Maloney joined us as Controller in June 1998, and currently
serves as Vice President, Controller, and Chief Accounting Officer. Prior to
joining us, Ms. Maloney was an Audit Manager with KPMG LLP.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers, directors and
greater than ten-percent stockholders to file with the Commission initial
reports of ownership and reports of changes in ownership of our Common Stock and
other equity securities. Such persons or entities are required by Commission
regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended December 31, 2001, each of our officers, directors
and 10% stockholders complied with all Section 16(a) filing requirements
applicable to them.
60
EXECUTIVE COMPENSATION
We have set forth in the following table information concerning the
compensation paid during the fiscal year ended December 31, 2001 to our Chief
Executive Officer and each of our four other most highly compensated executive
officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
-------------------------------------- -----------------------------
SECURITIES
OTHER UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (3) COMPENSATION
- --------------------------- ---- -------- -------- ------------ ----------- ------------
Wm. James Nicol(2) ....................... 2001 $360,000 $125,000 -- -- --
President, Chief Executive 2000 46,000 -- -- 50,000 --
Officer and Chairman
Sandra Campbell .......................... 2001 $214,000 25,000 -- -- --
Senior Vice President, 2000 195,000 -- -- 50,000 --
General Counsel and Secretary 1999 150,000 51,250 -- -- --
Drew Q. Miller(2) ........................ 2001 $209,000 20,000 -- 150,000 --
Senior Vice President, Chief 2000 145,000 -- -- 150,000 --
Financial Officer and Treasurer
Nancy Gorshe ............................. 2001 $189,000 17,500 -- -- --
Senior Vice President and 2000 150,000 12,500 -- -- --
Chief Operating Officer 1999 125,000 15,000 -- -- --
Ron W. Kerr .............................. 2001 $129,000 $ 12,500 -- -- --
Vice President, Eastern Operations 2000 101,000 4,250 -- -- --
1999 90,000 8,000 -- -- --
- ----------
(1) Excludes certain perquisites and other personal benefit amounts, such as
car allowance, which, for any executive officer did not exceed, in the
aggregate, the lesser of $50,000 or 10% of the total annual salary and
bonus for such executive.
(2) Mr. Nicol and Mr. Miller began their employment with us in November 2000
and March 2000, respectively. Mr. Nicol was appointed President and Chief
Executive Officer in November 2000.
(3) All options were cancelled, effective December 31, 2001, in accordance
with the Plan. See Note 1 to the consolidated financial statements
contained elsewhere herein.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
There were no stock option grants to any of the Named Executive Officers
during the 2001 fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
There were no options exercised in the last fiscal year and all
outstanding options were cancelled effective December 31, 2001 in accordance
with the Plan.
COMPENSATION OF DIRECTORS
Non-employee directors are compensated for services as a director and are
reimbursed for travel expenses incurred in connection with their duties as
directors. Under the terms of the 1994 Stock Option Plan, each new non-employee
director receives a non-qualified option to purchase 20,000 shares of New Common
Stock at the time he or she joins the Board of Directors. Such director options
vest with respect to one third of the amount of each grant on each of the first,
second and third anniversaries of the grant
61
date, and expire on the earlier of the seventh anniversary of the date of
vesting or one year following the director's ceasing to be a director for any
reason. All options granted under the 1994 Stock Option Plan were cancelled in
accordance with the Plan. See Note 1 to the consolidated financial statements
contained elsewhere herein.
During 2001, each non-employee director received a fee of $5,000 per
quarter for services as a director (except for the Vice Chair who received
$5,000 per month), plus, effective March 25, 2001, $2,500 for attendance
in-person, or $1,000 for attendance by telephone, at each meeting of the Board
of Directors or of any committee meeting held on a day on which the Board of
Directors did not meet. In addition, Chairs of Committees received $500 and $250
per month, respectively for attendance in-person and for attendance by telephone
at each meeting of the Board of Directors.
During 2002, non-employee directors will receive $12,000 per year, payable
quarterly, in arrears, $1,000 for attendance in-person and $500 for attendance
by telephone (unless it is purely an administrative meeting in which event there
is no compensation), at each meeting of the Board of Directors or of any
committee meeting held on a day on which the Board of Directors did not meet.
EMPLOYMENT AGREEMENTS
Set forth below are summaries of employment and consulting agreements with
certain individuals who were Named Executive Officers during 2001 and with
Steven Vick, who was appointed as President and Chief Executive Officer as of
February 18, 2002.
Steven Vick
Effective February 18, 2002, we entered into an employment agreement with
Steven Vick, providing for Mr. Vick's services as President and Chief Executive
Officer. The agreement provides for a three year term, unless terminated earlier
due to Mr. Vick's death, disability, mutual agreement or by us for "Cause" (as
defined). If employment is terminated by us during the first year of the term,
without "Cause," we must continue to pay Mr. Vick his then current salary,
bonuses and stock options pro rata, and other benefits (to the extent eligible),
as of the date of terminations, for six months following the date of
termination. Upon the termination of Mr. Vick's employment due to death or
disability, Mr. Vick's salary, bonuses and stock options pro rata, and other
benefits (to the extent eligible) continue for a period of six months following
such termination. The agreement provides for an annual salary of $275,000,
subject to annual review, scheduled bonus of $50,000 for each million dollars of
audited earnings for fiscal 2002, excluding depreciation, amortization, taxes,
any one-time gains from the sale of assets and any one-time charges. Mr. Vick's
bonus is to be paid in advance at $25,000 per quarter, commencing April 1, 2002.
If the bonus is insufficient to cover the advances, such advances shall be
applied to the following year's bonus to the extent they exceed the 2002 bonus.
Mr. Vick's bonus for fiscal years 2003 and 2004 shall be determined by the Board
of Directors and Compensation Committee of the Board, but the basis for
determining the bonus, as set forth above, may not be changed in such a way as
to reduce the amount of the bonus unless Mr. Vick received base salary and bonus
for the year in question of at least $600,000. The agreement also provides for
moving expenses for Mr. Vick to relocate to Portland, Oregon, in the amount of
up to $150,000. If, during the first year of the agreement, Mr. Vick voluntarily
resigns (excluding death or disability) or is terminated by us with cause, Mr.
Vick must reimburse us for all moving expenses paid directly to him, or on his
behalf, within 30 days. The agreement also provides that pursuant to a separate
stock option agreement, Mr. Vick will receive a non-qualified stock option to
purchase 65,000 shares of New Common Stock. The option will vest over three
years at a rate of 59.30657 shares per calendar day. The exercise price for each
share of New Common Stock will be $3.125.
62
Sandra Campbell
On December 31, 1997, we entered into an employment agreement with Sandra
Campbell providing for Ms. Campbell's services as Senior Vice President, General
Counsel and Secretary. We and Ms. Campbell agreed to amend and restate the
employment agreement in its entirety as of the Effective Date. The agreement, as
amended and restated, is automatically extended on a continuous basis. We may
terminate the amended and restated agreement at any time or Ms. Campbell may
terminate her employment without cause by providing us with not less than 45
days' advance written notice. If we terminate Ms. Campbell's employment other
than for "Death, Disability or Cause," or Ms. Campbell resigns as a result of
"Change in Control; Diminution in Duties," giving the Company 30 days' advance
written notice of such intent, she will be entitled to receive payment of her
base salary for a period of one year immediately following the date of
termination of her employment. The amended and restated agreement automatically
terminates upon Ms. Campbell's death and may terminate upon us giving Ms.
Campbell 60 days' advance written notice in event of "Disability." The amended
and restated agreement provides that Ms. Campbell's annual base salary of at
least $220,000. Ms. Campbell received $100,000 upon the effective date of the
amended and restated agreement. In addition, we and Ms. Campbell have entered
into an Officers and Directors Indemnification Agreement that provides Ms.
Campbell with the maximum amount of protection allowed under Nevada law against
liability and expenses incurred by her in any proceeding in which she is
involved due to her role as an officer to the extent that such protection is not
inconsistent with our Certificate of Incorporation or Bylaws.
Nancy Gorshe
On February 3, 1998, we entered into an employment agreement with Nancy
Gorshe providing for Ms. Gorshe's services as Vice President/Community
Relations. We and Ms. Gorshe agreed to amend and restate the employment
agreement in its entirety as of the Effective Date for Ms. Gorshe's services as
Senior Vice President of Community Relations and Chief Operating Officer. The
agreement, as amended and restated, is automatically extended on a continuous
basis. We may terminate the amended and restated agreement at any time or Ms.
Gorshe may terminate her employment without cause by providing us with not less
than 45 days' advance written notice. If we terminate Ms. Gorshe's employment
other than for "Death, Disability or Cause," or Ms. Gorshe resigns as a result
of "Change in Control; Diminution in Duties," giving the Company 30 days'
advance written notice of such intent, she will be entitled to receive payment
of her base salary for a period of one year immediately following the date of
termination of her employment. The amended and restated agreement automatically
terminates upon Ms. Gorshe's death and may terminate upon us giving Ms. Gorshe
60 days' advance written notice in event of "Disability." The amended and
restated agreement provides that Ms. Gorshe's annual base salary is at least
$200,000. Ms. Gorshe received $50,000 upon the effective date of the amended and
restated agreement. In addition, we and Ms. Gorshe have entered into an Officers
and Directors Indemnification Agreement that provides Ms. Gorshe with the
maximum amount of protection allowed under Nevada law against liability and
expenses incurred by her in any proceeding in which she is involved due to her
role as an officer to the extent that such protection is not inconsistent with
our Certificate of Incorporation or Bylaws.
Drew Q. Miller
On March 16, 2000, we entered into an employment agreement with Drew Q.
Miller providing for Mr. Miller's services as Senior Vice President, Chief
Financial Officer and Treasurer. We and Mr. Miller agreed to amend and restate
the employment agreement in its entirety as of the Effective Date for Mr.
Miller's services as Senior Vice President, Chief Financial Officer and
Treasurer. The agreement, as amended and restated, is automatically extended on
a continuous basis. We may terminate the amended and restated agreement at any
time or Mr. Miller may terminate his employment without cause by
63
providing us with not less than 45 days' advance written notice. If we terminate
Mr. Miller's employment other than for "Death, Disability or Cause," or Mr.
Miller resigns as a result of "Change in Control; Diminution in Duties," giving
the Company 30 days' advance written notice of such intent, he will be entitled
to receive payment of his base salary for a period of one year immediately
following the date of termination of his employment. The amended and restated
agreement automatically terminates upon Mr. Miller's death and may terminate
upon us giving Mr. Miller 60 days' advance written notice in event of
"Disability." The amended and restated agreement provides that Mr. Miller's
annual base salary is at least $215,000. In addition, we and Mr. Miller have
entered into an Officers and Directors Indemnification Agreement that provides
Mr. Miller with the maximum amount of protection allowed under Nevada law
against liability and expenses incurred by him in any proceeding in which he is
involved due to his role as an officer to the extent that such protection is not
inconsistent with our Certificate of Incorporation or Bylaws.
Ron W. Kerr
Effective January 1, 2001, we entered into an employment agreement with
Mr. Ron W. Kerr, providing for Mr. Kerr's services as Vice President of the
Eastern Region or in such other capacity as the Board of Directors may request,
so long as Mr. Kerr shall have the same or similar responsibilities. The
agreement provides for such services for the initial term of one year, with an
automatic rollover at the end of each year from and after the effective date for
an additional year unless terminated by us in writing within 90 days prior to
the anniversary date of the effective date of the agreement (in which event Mr.
Kerr will have one year of employment remaining until the termination of the
agreement. The agreement provides for a base salary of $130,000 per year and for
bonus eligibility under the Executive Incentive Compensation Plan. Mr. Kerr or
us may terminate the agreement without cause at any time giving 30 days' advance
written notice. In the event that we terminate Mr. Kerr's employment without
cause, Mr. Kerr will be entitled to receive $130,000. The agreement may also be
terminated without further payment due to death or disability or for cause.
Wm. James Nicol
Effective November 1, 2000, we entered into an employment agreement with
Wm. James Nicol, providing for Mr. Nicol's services as President and Chief
Executive Officer. We and Mr. Nicol agreed to amend and restate the employment
agreement in its entirety as of January 1, 2001. The amended and restated
agreement provided for such employment for a period beginning on November 1,
2001 and ending on the day after the date on which our Plan was consummated. The
amended and restated agreement provided for Mr. Nicol's annual salary of
$360,000. The amended and restated agreement provided for a "Restructuring
Approval Bonus" to be paid to Mr. Nicol in the amount of $125,000, and for a
"Restructuring Consummation Bonus" in the amount of $125,000, calculated based
upon EBITDA at September 30, 2001, to be paid upon the Effective Date of the
Plan. Mr. Nicol was paid the Restructuring Approval Bonus in 2001 and the
Restructuring Consummation Bonus in 2002. In addition, we entered into a first
amendment to the amended and restated employment agreement as of January 2, 2002
which provided that either party could terminate Mr. Nicol's employment by
providing at least 30 days prior notice. This amendment also provided that if
Mr. Nicol's employment was terminated, for any reason, he was to receive
$186,000. Mr. Nicol's agreement was terminated in 2002 and he was paid such
amount. In addition, we and Mr. Nicol entered into an Officers and Directors
Indemnification Agreement that provided Mr. Nicol with the maximum amount of
protection allowed under Nevada law against liability and expenses incurred by
him in any proceeding in which he was involved due to his role as an officer or
director to the extent that such protection is not inconsistent with our
Certificate of Incorporation or Bylaws.
64
OTHER EMPLOYMENT AGREEMENTS
We have entered into six other employment agreements with other Vice
Presidents of the Company. Each of these agreements provides comparable terms to
those of Mr. Kerr's agreement, as described above. The base salary of the
individuals covered under these agreements ranges from $110,000 to $130,000 per
year.
65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We have set forth in the following table information as of February 16, 2002
with respect to the beneficial ownership of our New Common Stock (after giving
effect to the Plan) by:
(1) each of our directors;
(2) each of the Named Executive Officers for the fiscal year ended
December 31, 2001;
(3) each other person who is known by us to own beneficially more than
5% of our shares; and
(4) our directors and executive officers as a group.
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) CLASS
- --------------------------------------- ------------ -------
W. Andrew Adams (2) ............................................. 557,214 --
Andre Dimitriadis (3) ........................................... 1,473,421 22.4%
Mark Holliday ................................................... -- --
Richard C. Ladd ................................................. -- --
Matthew Patrick ................................................. -- --
Leonard Tannenbaum .............................................. 42,732 --
Stephen Feinberg
450 Park Avenue, 28th Floor
New York, New York 10022 (4) .................................. 1,213,987 18.7%
Steven Vick ..................................................... -- --
Wm. James Nicol ................................................. -- --
Sandra Campbell ................................................. * --
Nancy Gorshe .................................................... -- --
Drew Q. Miller .................................................. -- --
Ron Kerr ........................................................ -- --
All directors and executive officers as a group (18 persons) .... 63,421 1.0%
- ----------
* Less than 1%.
(1) Except as otherwise noted above, the address of the directors and officers
is c/o Assisted Living Concepts, Inc., 11835 NE Glenn Widing Drive,
Building E, Portland, Oregon, 97220-9057.
(2) Mr. W. Andrew Adams is the President, Chief Executive Officer and Chairman
of the Board of NHI. NHI is the holder of 557,214 shares of our New Common
Stock.
(3) As reported on Schedule 13D filed with the Commission on January 15, 2002.
Mr. Andre Dimitriadis is the President, Chief Executive Officer and
Chairman of the Board of LTC and Chief Executive Officer and Chairman of
the Board of CLC Healthcare, Inc. (previously LTC Healthcare, Inc.) CLC
Healthcare, Inc. is the holder of 1,452,793 shares and Mr. Dimitriadis is
the holder of 20,628 shares of our New Common Stock.
(4) As reported on Schedule 13D filed with the Commission on January 9, 2002.
Mr. Stephen Feinberg in his capacity as the managing member of Cerberus
Associates, LLC, the general partner of Cerberus Partners, LP, and as the
investment manager for each of Cerberus International, Ltd., Cerberus
Institutional, Ltd. and certain private investment funds, possess the
power to vote the following shares of New Common Stock: 229,028 held by
Cerberus Partners, LP; 582,451 shares held by Cerberus International,
Ltd.; 219,882 shares held by Cerberus Institutional, Ltd. and 182,626
shares held in the aggregate by certain private investment funds.
66
DESCRIPTION OF THE SENIOR NOTES
You can find the definitions of certain terms used in this description
under the subheading "--Certain Definitions." In this description, the word "the
Company" refers only to Assisted Living Concepts, Inc. and not to any of its
Subsidiaries.
The Senior Notes were issued under an indenture, dated as of January 1,
2002 (the "Senior Note Indenture"), among the Company, the Subsidiary Guarantors
and BNY Midwest Trust Company, as the trustee under the Senior Note Indenture
(the "Senior Note Trustee") in a transaction that was not subject to the
registration requirements of the Securities Act.
The following description is a summary of the material provisions of the
Senior Note Indenture and the Collateral Documents. It does not restate the
Senior Note Indenture and the Collateral Documents in their entirety. We urge
you to read the Senior Note Indenture and the Collateral Documents because they,
and not this description, define the rights of the holders of the Senior Notes.
Copies of the Senior Note Indenture and certain Collateral Documents have been
filed as exhibits to this Registration Statement.
BRIEF DESCRIPTION OF THE SENIOR NOTES AND THE SENIOR NOTE GUARANTEES
THE SENIOR NOTES
The Senior Notes:
- are senior secured obligations of the Company,
- rank senior in right of payment to the Junior Notes and to all
future subordinated indebtedness of the Company,
- rank pari passu in right of payment with all current and
future senior indebtedness of the Company, including the
indebtedness under the Heller Loan Agreement,
- are secured as described under "--Security--Security for the
Senior Notes and the Senior Note Guarantees," and
- are unconditionally guaranteed by the Subsidiary Guarantors.
THE SENIOR NOTE GUARANTEES
The Senior Notes are guaranteed by each of the Company's Subsidiaries that
is a Subsidiary Guarantor. The Heller Debtor Subsidiaries will not guarantee the
Senior Notes.
Each Senior Note Guarantee:
- is a senior secured obligation of each Subsidiary Guarantor,
- ranks senior in right of payment to the Junior Note Guarantees
and to all future subordinated indebtedness of each Subsidiary
Guarantor,
- ranks pari passu in right of payment with all current and
future senior indebtedness of each Subsidiary Guarantor and
67
- is secured by the Note Collateral owned by the Subsidiary
Guarantors.
As of the date hereof, all of the Subsidiary Guarantors are "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "--Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," the Company will be permitted to designate certain of its
Subsidiaries as "Unrestricted Subsidiaries." The Company's Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants and our
Unrestricted Subsidiaries will not guarantee the Senior Notes.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes will mature on January 1, 2009. The Senior Notes will be
limited to $40.25 million aggregate principal amount (including any Senior Notes
issued after the Effective Date of the Plan, see "--Reserve") and will bear
interest payable semiannually in arrears at the per annum rate of 10.0%. The
interest payment dates will be January 1 and July 1, commencing on July 1, 2002.
The Company will pay interest on the Senior Notes to the Persons who are
registered holders of Senior Notes at the close of business on the 15th day of
the month immediately preceding each interest payment date. Principal (and
premium, if any) and interest on the Senior Notes will be payable, and transfers
thereof will be registerable, at the office or agency of the Company maintained
for such purposes, initially at the offices of the Senior Note Trustee.
METHODS OF RECEIVING PAYMENTS ON THE SENIOR NOTES
If a holder of Senior Notes has given wire transfer instructions to the
Company, the Company will pay all principal, interest and premium, if any, on
that holder's Senior Notes in accordance with those instructions. All other
payments on Senior Notes will be made at the office or agency of the paying
agent and registrar within the City and State of New York unless the Company
elects to make interest payments by check mailed to the holders of the Senior
Notes at their address set forth in the register of holders of Senior Notes.
Holders must surrender Senior Notes to a Paying Agent to collect principal
payments.
PAYING AGENT AND REGISTRAR FOR THE SENIOR NOTES
Initially, the Senior Note Trustee will act as Paying Agent and Registrar.
The Company may change any Paying Agent, Registrar or co-registrar upon prior
written notice to the Senior Note Trustee and may act in any such capacity
itself.
BOOK-ENTRY, DELIVERY AND FORM OF SENIOR NOTES
Except as described in the next paragraph, the Senior Notes were issued in
the form of one or more global senior notes (the "Global Senior Notes"). The
Global Senior Notes were deposited, or will be deposited on the Subsequent
Distribution Date, as applicable, with The Depository Trust Company ("DTC") and
registered in the name of Cede & Co., as nominee of DTC (such nominee being
referred to herein as the "Global Senior Note Holder").
Some of the Senior Notes were issued in the form of registered definitive
certificates (the "Certificated Senior Notes") and, as described below under
"--Certificated Notes ," other Senior Notes may be issued in the form of
Certificated Senior Notes. Upon the transfer of Certificated Senior Notes,
Certificated Senior Notes may, unless all of the Global Senior Notes have
previously been exchanged for Certificated Senior Notes, be exchanged for an
interest in the Global Senior Note representing the principal amount of Senior
Notes being transferred, subject to the transfer restrictions set forth in the
Senior Note Indenture.
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DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that, pursuant to procedures established
by it:
(1) upon deposit of the Global Senior Notes, DTC will credit the
accounts of Participants designated by the Company with portions of
the principal amount of the Global Senior Notes; and
(2) ownership of these interests in the Global Senior Notes will be
shown on, and the transfer of ownership of these interests will be
effected only through, records maintained by DTC (with respect to
the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interest in
the Global Senior Notes).
Prospective purchasers are advised that the laws of some States require
that certain Persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Senior Note to such Persons will be limited to such extent.
So long as the Global Senior Note Holder is the registered owner of any
Senior Notes, the Global Senior Note Holder will be considered the sole holder
under the Senior Note Indenture of any Senior Notes evidenced by the Global
Senior Notes. Beneficial owners of Senior Notes evidenced by the Global Senior
Notes will not be considered the owners or holders of the Senior Notes under the
Senior Note Indenture for any purpose, including with respect to the giving of
any directions, instructions or approvals to the Senior Note Trustee. Neither
the Company nor the Senior Note Trustee will have any responsibility or
liability for any aspect of the records of DTC or for maintaining, supervising
or reviewing any records of DTC relating to the Senior Notes.
Payments in respect of the principal of, and interest and premium, if any,
on a Global Senior Note registered in the name of the Global Senior Note Holder
on the applicable record date will be payable by the Senior Note Trustee to or
at the direction of the Global Senior Note Holder in its capacity as the
registered holder of the Senior Notes under the Senior Note Indenture. Under the
terms of the Senior Note Indenture, the Company and the Senior Note Trustee will
treat the Persons in whose names the Senior Notes, including the Global Senior
Notes, are registered as the owners of the Senior Notes for the purpose of
receiving payments and for all other purposes. Consequently, neither the
Company, the Senior Note Trustee nor any agent of the Company or the Senior Note
Trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Senior Notes or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Senior Notes; or
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(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Senior Notes (including principal
and interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of Senior
Notes will be governed by standing instructions and customary practices and will
be the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Senior Note Trustee or the Company.
Neither the Company nor the Senior Note Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Senior Notes, and the Company and the Senior Note Trustee may conclusively rely
on and will be protected in relying on instructions from DTC or its nominee for
all purposes.
CERTIFICATED NOTES
If:
(1) the Company notifies the Senior Note Trustee in writing that DTC is
no longer willing or able to act as a depository and the Company is
unable to locate a qualified successor within 90 days, or
(2) upon request to the Senior Note Trustee by any Person having a
beneficial interest in a Global Senior Note, following the
occurrence and during the continuation of a Default or Event of
Default,
then, upon surrender by the Global Senior Note Holder of its Global Senior
Notes, Senior Notes in certificated form will be issued to each Person that the
Global Senior Note Holder and DTC identify as being the beneficial owner of the
related Senior Notes. All such Certificated Senior Notes will be subject to the
legend requirements set forth in the Senior Note Indenture.
Neither the Company nor the Senior Note Trustee will be liable for any
delay by the Global Senior Note Holder or DTC in identifying the beneficial
owners of Senior Notes, and the Company and the Senior Note Trustee may
conclusively rely on, and will be protected in relying on, instructions from the
Global Senior Note Holder or DTC for all purposes.
TRANSFER AND EXCHANGE
The Senior Notes are in fully registered form without coupons in
denominations of $1,000 or any multiples thereof (except that the initial
issuance of Senior Notes to each noteholder was in a principal amount equal to
such noteholder's Pro Rata Share of its general unsecured claim(s) in the
bankruptcy proceeding multiplied by $39,809,822, the principal amount of Senior
Notes issued on the Effective Date, and Senior Notes aggregating up to $440,178
in principal amount will be subsequently issued from the Reserve on a pro rata
basis based on the relative amounts of general unsecured claims that were not
resolved as of the Effective Date). A holder may transfer or exchange Senior
Notes in accordance with the Senior Note Indenture. No service charge will be
made for any registration, transfer or exchange of Senior Notes, except for any
tax or other governmental charges that may be imposed in connection with such
registration, transfer or exchange. The Registrar need not transfer or exchange
any Senior Notes selected for redemption. Also, in the event of a partial
redemption, it need not transfer or exchange any
70
Senior Notes for a period of 15 days before selecting Senior Notes to be
redeemed. The registered holder of a Senior Note may be treated as its owner for
all purposes.
SENIOR NOTE GUARANTEES
The Senior Notes are guaranteed by each of the Subsidiary Guarantors. The
Senior Note Guarantees are joint and several obligations of the Subsidiary
Guarantors. The obligations of each Subsidiary Guarantor under its Senior Note
Guarantee are limited as necessary to prevent that Senior Note Guarantee from
constituting a fraudulent conveyance under applicable law. See "Risk
Factors--Risks Related to the New Notes--Federal and state statutes allow
courts, under specific circumstances, to void guarantees and require noteholders
to return payments received from guarantors."
The Senior Note Guarantee of a Subsidiary Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Subsidiary Guarantor
(including by way of merger or consolidation) to a Person that is
not (either before or after giving effect to such transaction) a
Subsidiary of the Company, if the sale or other disposition complies
with the provisions of the Senior Note Indenture entitled "Mandatory
Redemption--Asset Sales of Note Collateral" or "Certain Rights to
Require Repurchase of Senior Notes by the Company--Asset Sales of
Non-Note Collateral";
(2) in connection with any sale of all of the Capital Stock of a
Subsidiary Guarantor to a Person that is not (either before or after
giving effect to such transaction) a Subsidiary of the Company, if
the sale complies with the provisions of the Senior Note Indenture
entitled "Certain Rights to Require Repurchase of Senior Notes by
the Company--Asset Sales of Non-Note Collateral";
(3) if the Company designates any Restricted Subsidiary that is a
Subsidiary Guarantor as an Unrestricted Subsidiary in accordance
with the applicable provisions of the Senior Note Indenture; or
(4) at such time, if any, as that Subsidiary Guarantor ceases to be
party to any of the Collateral Documents or all of the security
interests granted by that Subsidiary Guarantor in Note Collateral
are released in accordance with the Senior Note Indenture or the
Collateral Documents.
See "--Mandatory Redemption--Asset Sales of Note Collateral" and "--Certain
Rights to Require Repurchase of Senior Notes by the Company--Asset Sales of
Non-Note Collateral".
SECURITY
SECURITY FOR THE SENIOR NOTES AND THE SENIOR NOTE GUARANTEES
The Senior Notes and the Senior Note Guarantees are secured, subject to
certain permitted liens, by a first priority security interest in 57 assisted
living facilities owned by the Company and the Subsidiary Guarantors (the "Note
Collateral").
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INTERCREDITOR ARRANGEMENTS
The Junior Notes are secured, subject to certain permitted liens, by a
second priority security interest in the Note Collateral, and the interests of
the holders of Junior Notes are subordinated to the interests of the holders of
Senior Notes. The Junior Note Trustee and holders of the Junior Notes will only
be able to cause the commencement of steps to realize upon their junior security
interest in the Note Collateral if:
(1) the final maturity date of the Senior Notes has passed and the
Senior Note Trustee or the holders of Senior Notes have not
commenced such steps within 60 days of such date;
(2) the remaining principal amount of Senior Notes then outstanding
constitutes less than 10% of the remaining principal amount of
Junior Notes then outstanding; or
(3) such time as:
(a) holders of Junior Notes have not received interest or any
other amounts payable under the Junior Notes for a period of
181 days from the date of required payment, and
(b) the principal of the Senior Notes has not been accelerated and
the Senior Note Trustee or holders of the Senior Notes have
not commenced steps to foreclose or otherwise realize upon the
security interest of holders of the Senior Notes in the Note
Collateral.
In any event, so long as the principal amount of the Senior Notes is more
than the principal amount of the Junior Notes, the holders of Senior Notes will
direct any actions and make any decisions required in connection with realizing
upon the Note Collateral. At such time as the principal amount of the Senior
Notes is less than the principal amount of the Junior Notes, the holders of more
than 50% of the aggregate principal amount of the Senior Notes and Junior Notes
then outstanding will direct any actions and make any decisions required in
connection with realizing upon the Note Collateral.
MANDATORY REDEMPTION - ASSET SALES OF NOTE COLLATERAL
The Company will be required to redeem Senior Notes prior to their final
maturity date as described below.
If on any date the Company or any Restricted Subsidiary will receive Net
Proceeds from any Asset Sale of Note Collateral, then within 10 days after the
receipt of such Net Proceeds, the Company will deliver to the Senior Note
Trustee an amount sufficient to allow the Senior Note Trustee, on behalf of the
Company, to redeem a principal amount of Senior Notes equal to such Net
Proceeds, pro rata in accordance with the outstanding principal amount of the
Senior Notes (subject to the requirements of the principal national securities
exchange, if any, on which the Senior Notes are listed), at a redemption price
equal to 100% of the principal amount thereof together with accrued and unpaid
interest on the Senior Notes. See "--Notice."
Notwithstanding the preceding paragraph, the Company will not, and will
not permit its Restricted Subsidiaries to, make an Asset Sale of assets or
rights constituting Note Collateral unless:
(1) except in the case of an Asset Sale of a Designated Asset, the
amount of the gross proceeds of such Asset Sale equals or exceeds
the total Release Price relating to the Note Collateral which is the
subject of such Asset Sale, and
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(2) the ratio of the aggregate fair market value of the Note Collateral
after giving effect to such Asset Sale to the aggregate principal
amount of the Indebtedness under the Senior Notes and the Junior
Notes, after giving effect to the mandatory redemption required by
the preceding paragraph is not less than 1.6:1.0.
For purposes of this provision, the fair market value of any property
included in the Note Collateral so released will not be less than the greater of
(1) the product of 6.5 multiplied by the EBITDA of such real property for the
period of two fiscal quarters of the Company ending immediately prior to the
date on which such Note Collateral is released multiplied by 2.0, and (2) the
product of $10,000 multiplied by the number of units in such real property.
Notwithstanding the preceding paragraphs, the Company will not be required
to redeem Senior Notes under this covenant until such time as the aggregate Net
Proceeds of all Asset Sales of Note Collateral made since (1) the date of the
Senior Note Indenture, in the case of the initial mandatory redemption of Senior
Notes, or (2) the date of the immediately preceding mandatory redemption of
Senior Notes, in the case of any subsequent mandatory redemption of Senior
Notes, equals or exceeds $1.0 million; provided that, prior to such redemption,
such Net Proceeds will be deposited in an interest bearing cash collateral
account pledged for the benefit of the holders of Senior Notes and Junior Notes.
OPTIONAL REDEMPTION
The Company may, at its option at any time, redeem all, but not less than
all, of the Senior Notes, on at least 30 days' but not more than 60 days' notice
to each holder of Senior Notes to be redeemed in cash at its registered address,
at a redemption price equal to 100% of the principal amount thereof, plus
accrued interest to the redemption date.
RELEASE OF SECURITY INTERESTS IN NOTE COLLATERAL
SALE OF NOTE COLLATERAL
In the event that any Note Collateral is sold in accordance with the
provisions of the Senior Note Indenture and the Net Proceeds of such sale are
applied to repay the Senior Notes in accordance with the terms of the covenant
entitled "Mandatory Redemption--Asset Sales of Note Collateral" contained in
this description, the Collateral Agent will release the security interests in
favor of the Collateral Agent in the Note Collateral sold; provided, that the
Collateral Agent will have received from the Company an officer's certificate
that such Net Proceeds have been or will be applied in accordance with the
Senior Note Indenture and Junior Note Indenture; provided further that, prior to
the application of such Net Proceeds, such Net Proceeds will be deposited in an
interest bearing cash collateral account pledged for the benefit of the holders
of Senior Notes and Junior Notes.
REDEMPTION OF SENIOR NOTES
In the event that the Company redeems all of the Senior Notes in
accordance with the provisions of the Senior Note Indenture, the Collateral
Agent will release the security interests in the Note Collateral securing the
Senior Notes, the Senior Note Indenture and the related Subsidiary Guarantees.
REPURCHASE OF SENIOR NOTES
In the event that the Company repurchases (other than with the proceeds of
an Asset Sale) all or some of the Senior Notes and/or Junior Notes, in each case
in accordance with the provisions of the Senior Note Indenture and/or the Junior
Note Indenture, as applicable, the Collateral Agent will release the security
73
interests in such Note Collateral as the Company will identify in writing to the
Collateral Agent, provided that:
(1) no Note Collateral will be released pursuant to this provision until
the aggregate principal amount of the Notes repurchased in
accordance with the Senior Note Indenture and the Junior Note
Indenture exceeds $10.0 million;
(2) the ratio of the aggregate fair market value of the Note Collateral
after giving effect to such release of Note Collateral to the
aggregate principal amount of the Indebtedness under the Senior
Notes and the Junior Notes after giving effect to such repurchase is
not less than 1.6:1.0; and
(3) the Collateral Agent will have received from the Company an
officer's certificate that such repurchase has been or will be
effected in accordance with the Senior Note Indenture and/or the
Junior Note Indenture, as applicable.
For purposes of this provision, the fair market value of any property
included in the Note Collateral so released will not be less than the greater of
(1) the product of 6.5 multiplied by the EBITDA of such real property for the
period of two fiscal quarters of the Company ending immediately prior to the
date on which such Note Collateral is released multiplied by 2.0, and (2) the
product of $10,000 multiplied by the number of units in such real property.
NOTICE
Notices of redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of Senior Notes
to be redeemed at its registered address, except that redemption notices may be
mailed more than 60 days prior to a redemption date if the notice is issued in
connection with a defeasance of the Senior Notes or a satisfaction and discharge
of the Senior Note Indenture. Notices of redemption may not be conditional.
On and after the redemption date, interest ceases to accrue on Senior
Notes called for redemption.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF SENIOR NOTES BY THE COMPANY
CHANGE IN CONTROL
In the event of any Change in Control of the Company occurring on or prior
to the maturity of the Senior Notes, each holder of Senior Notes will have the
right, at such holder's option, to require the Company to repurchase all or any
part of such holder's Senior Notes on the date (the "Repurchase Date") that is a
Business Day that is not more than 75 days after the date the Company gives
notice of the Change in Control at a price (the "Repurchase Price") equal to
101.0% of the principal amount thereof, together with accrued and unpaid
interest to the Repurchase Date. Not less than one Business Day prior to the
Repurchase Date, the Company will be required to deposit with the Senior Note
Trustee or a Paying Agent an amount of money sufficient to pay the Repurchase
Price of the Senior Notes that are to be repaid on the Repurchase Date.
On or before the 15th day after the occurrence of a Change in Control, the
Company is obligated to mail to all holders a notice of:
- the event constituting, and the date of, the Change in Control,
- the Repurchase Date,
74
- the date by which the repurchase right must be exercised,
- the Repurchase Price for Senior Notes, and
- the procedures that a holder of Senior Notes must follow to exercise
a repurchase right.
To exercise the repurchase right, a holder of a Senior Note must deliver,
on or before the tenth day prior to the Repurchase Date, written notice to the
Company (or an agent designated by the Company for such purpose) and to the
Senior Note Trustee of the holder's exercise of its repurchase right, together
with the certificates evidencing the Senior Notes with respect to which the
right is being duly exercised, duly endorsed for transfer.
There is no definition of the phrase "all or substantially all" as applied
to the Company's assets and used in the definition of Change in Control in the
Senior Note Indenture, and there is no clear definition of the phrase under
applicable law. As a result of the uncertainty of the meaning of this phrase, in
the event the Company were to sell a significant amount of its assets, the
holders and the Company may disagree over whether the sale gives rise to the
right of holders to require the Company to repurchase the Senior Notes. In such
event, the holders would likely not be able to require the Company to repurchase
unless and until the disagreement were resolved in favor of the holders of
Senior Notes.
In the event a Change in Control occurs and the holders exercise their
rights to require the Company to repurchase Senior Notes, the Company intends to
comply with any applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase. The
Change in Control purchase feature of the Senior Notes may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management.
INCURRENCE OF INDEBTEDNESS
In the event that the Company or any Restricted Subsidiary will receive
Net Proceeds from an incurrence of Indebtedness (other than Excluded
Indebtedness) occurring on or prior to the maturity of the Senior Notes, the
Company will offer to repurchase the Senior Notes, pro rata in accordance with
the outstanding principal amount of the Senior Notes (subject to the
requirements of the principal national securities exchange, if any, on which the
Senior Notes are listed), with such Net Proceeds, at a repurchase price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together with
accrued and unpaid interest on the Senior Notes. The repurchase date (the
"Repurchase Date") will be a Business Day that is not more than 60 days after
the date the Company gives notice of such incurrence of Indebtedness. Not less
than one Business Day prior to the Repurchase Date, the Company will be required
to deposit with the Senior Note Trustee or a Paying Agent an amount of money
sufficient to pay the Repurchase Price of the Senior Notes that are to be repaid
on the Repurchase Date.
On or before the 15th day after the incurrence of such Indebtedness, the
Company is obligated to mail to all holders a notice of:
- the event constituting, and the date of, the incurrence of
Indebtedness,
- the Repurchase Date,
- the date by which the repurchase right must be exercised,
- the Repurchase Price for Senior Notes, and
- the procedures that a holder of Senior Notes must follow to exercise
a repurchase right.
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To exercise the repurchase right, a holder of a Senior Note must deliver,
on or before the tenth day prior to the Repurchase Date, written notice to the
Company (or an agent designated by the Company for such purpose) and to the
Senior Note Trustee of the holder's exercise of its repurchase right, together
with the certificates evidencing the Senior Notes with respect to which the
right is being duly exercised, duly endorsed for transfer.
In the event an incurrence of Indebtedness occurs and the holders exercise
their rights to require the Company to repurchase Senior Notes, the Company
intends to comply with any applicable tender offer rules under the Exchange Act,
including Rules 13e-4 and 14e-1, as then in effect, with respect to any such
purchase.
Notwithstanding the preceding paragraphs, the Company will not be required
to offer to repurchase Senior Notes until such time as the aggregate Net
Proceeds of all Asset Sales of assets or rights that do not constitute Note
Collateral and the Net Proceeds of all incurrences of Indebtedness, in each case
that are required to be used to offer to repurchase Senior Notes, since (1) the
date of the Senior Note Indenture, in the case of the initial offer to
repurchase Senior Notes, or (2) the date of the immediately preceding offer to
repurchase Senior Notes, in the case of any subsequent offer to repurchase
Senior Notes, equals or exceeds $3.0 million; provided, that prior to such
repurchase, such Net Proceeds will be deposited in an interest bearing cash
collateral account pledged for the benefit of the holders of Senior Notes and
Junior Notes.
ASSET SALES OF NON-NOTE COLLATERAL
In the event that the Company or any Restricted Subsidiary will receive
Net Proceeds from an Asset Sale of assets or rights that do not constitute Note
Collateral occurring on or prior to the maturity of the Senior Notes, the
Company will offer to repurchase the Senior Notes, pro rata in accordance with
the outstanding principal amount of the Senior Notes (subject to the
requirements of the principal national securities exchange, if any, on which the
Senior Notes are listed), with such Net Proceeds, at a repurchase price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together with
accrued and unpaid interest on the Senior Notes. The repurchase date (the
"Repurchase Date") will be a Business Day that is not more than 60 days after
the date the Company gives notice of such Asset Sale. Not less than one Business
Day prior to the Repurchase Date, the Company will be required to deposit with
the Senior Note Trustee or a Paying Agent an amount of money sufficient to pay
the Repurchase Price of the Senior Notes that are to be repaid on the Repurchase
Date.
On or before the 15th day after such Asset Sale, the Company is obligated
to mail to all holders a notice of:
- the event constituting, and the date of, the Asset Sale,
- the Repurchase Date,
- the date by which the repurchase right must be exercised,
- the Repurchase Price for Senior Notes, and
- the procedures that a holder of Senior Notes must follow to exercise
a repurchase right.
To exercise the repurchase right, a holder of a Senior Note must deliver,
on or before the tenth day prior to the Repurchase Date, written notice to the
Company (or an agent designated by the Company for such purpose) and to the
Senior Note Trustee of the holder's exercise of its repurchase right, together
with the certificates evidencing the Senior Notes with respect to which the
right is being duly exercised, duly endorsed for transfer.
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In the event an Asset Sale of assets or rights that do not constitute Note
Collateral occurs and the holders exercise their rights to require the Company
to repurchase Senior Notes, the Company intends to comply with any applicable
tender offer rules under the Exchange Act, including Rules 13e-4 and 14e-1, as
then in effect, with respect to any such purchase.
Notwithstanding the preceding paragraphs, the Company will not be required
to offer to repurchase Senior Notes until such time as the aggregate Net
Proceeds of all Asset Sales of assets or rights that do not constitute Note
Collateral and the Net Proceeds of all incurrences of Indebtedness, in each case
that are required to be used to offer to repurchase Senior Notes, since (1) the
date of the Senior Note Indenture, in the case of the initial offer to
repurchase Senior Notes, or (2) the date of the immediately preceding offer to
repurchase Senior Notes, in the case of any subsequent offer to repurchase
Senior Notes, equals or exceeds $3.0 million; provided, that prior to such
repurchase, such Net Proceeds will be deposited in an interest bearing cash
collateral account pledged for the benefit of the holders of Senior Notes and
Junior Notes.
The agreements governing the Company's other indebtedness may contain
prohibitions on certain events, including events that would constitute a Change
in Control, an Asset Sale or an incurrence of Indebtedness. In addition, the
exercise by the holders of Senior Notes of their right to require the Company to
repurchase the Senior Notes upon a Change in Control, an incurrence of
Indebtedness or an Asset Sale or the redemption by the Company of the Senior
Notes upon an Asset Sale could cause a default under these other agreements,
even if the Change in Control, Asset Sale or incurrence of Indebtedness itself
does not, due to the financial effect of such repurchases on the Company.
Finally, the Company's ability to pay cash to the holders of Senior Notes upon a
repurchase may be limited by the Company's then existing financial resources.
See "Risk Factors--Risks Related to the New Notes--We may not have the ability
to raise the funds necessary to finance the offers to redeem New Notes required
by the Senior Note Indenture and the Junior Note Indenture" and "Risk
Factors--Risks Related to the New Notes--We may not have the ability to
repurchase the New Notes upon an asset sale of collateral."
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the
Company or any of its Restricted Subsidiaries) or to the direct or
indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or any Restricted Subsidiary of
the Company or payable to the Company or a Restricted Subsidiary of
the Company);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the
Company or any Restricted Subsidiary of the Company held by any
Person (other than the Company or any of its Wholly Owned Restricted
Subsidiaries);
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Senior Notes or the Senior Note
77
Guarantees, except a payment of interest or principal and premium,
if any, at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions
set forth in these clauses (1) through (4) being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment; and
(2) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described below under
the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Senior Note Indenture (excluding
Restricted Payments permitted by clauses (2), (3) and (4) of the
next succeeding paragraph), is less than the sum, without
duplication, of:
(a) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of
the first fiscal quarter commencing after the date of the
Senior Note Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus
(b) 100% of the aggregate net cash proceeds received by the
Company since the date of the Senior Note Indenture as a
contribution to its common equity capital or from the issue or
sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of convertible
or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the Company that have been
converted into or exchanged for such Equity Interests (other
than Equity Interests (or Disqualified Stock or debt
securities) sold to a Subsidiary of the Company), plus
(c) (i) to the extent that any Restricted Investment that was made
after the date of the Senior Note Indenture is sold for cash
or otherwise liquidated or repaid for cash for an amount in
excess of the initial amount of such Restricted Investment,
the sum of (x) 50% of the cash proceeds with respect to such
Restricted Investment in excess of the aggregate amount
invested in such Restricted Investment (less the cost of
disposition, if any) and (y) the aggregate amount invested in
such Restricted Investment, and (ii) to the extent that any
such Restricted Investment is sold for cash or otherwise
liquidated or repaid in cash for an amount equal to or less
than the initial amount of such Restricted Investment, the
cash return of capital with respect to such Restricted
Investment (less the cost of disposition, if any); provided
that the amount of any Net Proceeds that are applied to
repurchase the Senior Notes pursuant to the covenant entitled
"Certain Rights to Require Repurchase of Senior Notes by the
78
Company--Asset Sales of Non-Note Collateral" will be excluded
from this clause (3)(c) to the extent otherwise includible;
plus
(d) 50% of any dividends received by the Company or a Restricted
Subsidiary after the date of the Senior Note Indenture from an
Unrestricted Subsidiary of the Company, to the extent that
such dividends were not otherwise included in Consolidated Net
Income of the Company for such period, plus
(e) to the extent that any Unrestricted Subsidiary of the Company
is redesignated as a Restricted Subsidiary after the date of
the Senior Note Indenture, the lesser of (i) the fair market
value of the Company's Investment in such Subsidiary as of the
date of such redesignation or (ii) such fair market value as
of the date on which such Subsidiary was originally designated
as an Unrestricted Subsidiary.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the
dividend payment would have complied with the provisions of the
Senior Note Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any Junior Notes in exchange for, or out of the net
cash proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of, Equity Interests of the
Company (other than Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition
will be excluded from clause (3) (b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of the Company or any Restricted
Subsidiary with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its Equity Interests on a pro rata basis;
and
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company held by any member of the Company's (or
any of its Restricted Subsidiaries') management pursuant to any
management equity subscription agreement, stock option agreement or
similar agreement; provided that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests may
not exceed $250,000 in any twelve-month period.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors in good faith, whose
resolution with respect thereto will be delivered to the Senior Note Trustee.
The Board of Directors' determination must be based upon an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if the fair market value exceeds $3.0 million. Not later than the date
of making any Restricted Payment, the Company will deliver to the Senior Note
Trustee an officers' certificate stating that such Restricted Payment is
permitted
79
and setting forth the basis upon which the calculations required by this
"Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the Senior Note Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and the
Company will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock, and the Company's Subsidiaries may incur Indebtedness or issue preferred
stock, if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock or preferred stock is issued would have been at least
2.0 to 1, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been incurred
or the preferred stock or Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(2) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness represented by the Senior Notes, the Junior Notes and
the related Subsidiary Guarantees to be issued on the date of the
Senior Note Indenture and the date of the Junior Note Indenture,
respectively, or pursuant to the covenant below entitled "Additional
Subsidiary Guarantees" or the covenant entitled "Additional
Subsidiary Guarantees" in the Description of the Junior Notes;
(3) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for
the purpose of financing all or any part of the purchase price or
cost of construction or improvement of property, plant or equipment
used in the business of the Company or such Restricted Subsidiary,
in an aggregate principal amount, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (3), not to exceed
$2.5 million at any time outstanding;
(4) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness (other than intercompany Indebtedness) that was
permitted by the Senior Note Indenture to be incurred under the
first paragraph of this covenant or clauses (1), (2), (3), (4) or
(10) of this paragraph;
(5) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of
its Restricted Subsidiaries; provided, however, that:
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(a) if the Company or any Subsidiary Guarantor is the obligor on
such Indebtedness, such Indebtedness must be expressly
subordinated to the prior payment in full in cash of all
Obligations with respect to the Senior Notes, in the case of
the Company, or its Senior Note Guarantee, in the case of a
Subsidiary Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person
other than the Company or a Restricted Subsidiary of the
Company and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary of the Company will be deemed, in each
case, to constitute an incurrence of such Indebtedness by the
Company or such Subsidiary, as the case may be, that was not
permitted by this clause (5);
(6) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing
or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Senior Note
Indenture to be outstanding;
(7) the Guarantee by the Company or any of the Subsidiary Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the
Company that was permitted to be incurred by another provision of
this covenant;
(8) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the
form of additional Indebtedness with the same terms, and the payment
of dividends on Disqualified Stock in the form of additional shares
of the same class of Disqualified Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant; provided, in each such case, that the
amount thereof is included in Fixed Charges of the Company as
accrued;
(9) Indebtedness of the Company or any Restricted Subsidiary to the
extent that the Net Proceeds thereof are promptly:
(a) used to purchase Senior Notes tendered in an offer to purchase
made as a result of a Change in Control, or
(b) deposited to defease the Senior Notes as described under
"--Legal Defeasance and Covenant Defeasance,"
(10) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness (including Acquired Debt) in an aggregate
principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any Indebtedness incurred
pursuant to this clause (10), not to exceed $5.0 million; and
(11) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness
ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such
event will be deemed to constitute an incurrence of Indebtedness by
a Restricted Subsidiary of the Company that was not permitted by
this clause (11).
The Company will not incur any Indebtedness (including Permitted Debt)
that is contractually subordinated in right of payment to any other Indebtedness
of the Company unless such Indebtedness is
81
also contractually subordinated in right of payment to the Senior Notes on
substantially identical terms; provided, however, that no Indebtedness of the
Company will be deemed to be contractually subordinated in right of payment to
any other Indebtedness of the Company solely by virtue of being unsecured.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (11) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will be permitted to classify such item of Indebtedness on the date of
its incurrence, or later reclassify all or a portion of such item of
Indebtedness, in any manner that complies with this covenant.
LIENS
The Company will not, and will not permit any of its Subsidiaries to
directly or indirectly (1) create, incur, assume or suffer to exist any Lien of
any kind securing Indebtedness, Attributable Debt or trade payables on any asset
of the Company or any of its Subsidiaries now owned or hereafter acquired or on
any income or profits therefrom, or (2) assign or convey any right to receive
income therefrom, securing Indebtedness, Attributable Debt or trade payables,
except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to the Company or any Restricted Subsidiaries, or with respect to
any other interest or participation in, or measured by, its profits,
or pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities
(including, without limitation, the Heller Loan Agreement) as in
effect on the date of the Senior Note Indenture and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of those agreements,
provided that the amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are
no more restrictive, taken as a whole, with respect to such dividend
and other payment restrictions than those contained in those
agreements on the date of the Senior Note Indenture;
(2) the Senior Note Indenture, the Senior Notes and the Senior Note
Guarantees;
(3) the Junior Note Indenture, the Junior Notes and the Junior Note
Guarantees;
(4) applicable law;
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(5) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness or Capital Stock was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness,
such Indebtedness was permitted by the terms of the Senior Note
Indenture to be incurred;
(6) customary non-assignment provisions in any contract or licensing
agreement entered into in the ordinary course of business and
consistent with past practices;
(7) purchase money obligations or Capital Lease Obligations or other
mortgage financings permitted to be incurred pursuant to clause (3)
of the second paragraph under the caption "Incurrence of
Indebtedness and Issuance of Preferred Stock" that impose
restrictions on that property of the nature described in clause (3)
of the preceding paragraph;
(8) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted
Subsidiary pending its sale or other disposition;
(9) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
(10) Liens securing Indebtedness otherwise permitted to be incurred under
the provisions of the covenant described above under the caption
"--Liens" that limit the right of the debtor to dispose of the
assets subject to such Liens;
(11) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, assets sale agreements,
stock sale agreements and other similar agreements entered into in
the ordinary course of business; and
(12) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business.
MERGER, CONSOLIDATION OR THE TRANSFER OF ALL OR SUBSTANTIALLY ALL OF
THE ASSETS OF THE COMPANY
The Company may not, in a single transaction or through a series of
related transactions, consolidate with or merge into, or transfer all or
substantially all of the assets of the Company and its Restricted Subsidiaries,
taken as a whole, to, another Person in any transaction in which the Company is
not the continuing or surviving entity, unless:
(1) the resulting, surviving or transferee Person is a corporation which
assumes by supplemental indenture, in form satisfactory to the
Senior Note Trustee, all the obligations of the Company under the
Senior Notes, the Senior Note Indenture and the Registration Rights
Agreement or is a reorganization within the meaning of Section
368(a)(1)(B) of the Internal Revenue Code, and the Senior Note
Indenture remains in full force and effect;
(2) such corporation is organized and existing under the laws of the
United States, a State thereof or the District of Columbia although
it in turn may be owned by a foreign entity;
83
(3) immediately after giving effect to such transaction no Default or
Event of Default will have occurred and be continuing and the
officers' certificate referred to in the following paragraph
reflects that such officers are not aware of any such Default or
Event of Default that will have occurred and be continuing; and
(4) the Company will have delivered to the Senior Note Trustee an
officers' certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and such supplemental
indenture comply with the Senior Note Indenture.
Upon any consolidation or merger, or any transfer of all or substantially
all of the assets of the Company in accordance with the preceding paragraph:
(1) the successor corporation formed by such consolidation or into which
the Company is merged or to which such transfer is made will succeed
to, and will be substituted for, and may exercise every right and
power of, the Company under the Senior Note Indenture and the
Registration Rights Agreement with the same effect as if such
successor corporation has been named as the Company in the Senior
Note Indenture and the Registration Rights Agreement;
(2) the Company will thereupon be relieved of any further obligation or
liability thereunder or upon the Senior Notes; and
(3) the Company as the predecessor corporation may thereupon or at any
time thereafter be dissolved, wound up or liquidated.
Such successor corporation thereupon may cause to be signed, and may issue
either in its own name or in the name of Assisted Living Concepts, Inc., any or
all of the Senior Notes issuable under the Senior Note Indenture which
theretofore will not have been signed by the Company and delivered to the Senior
Note Trustee. Upon the order of such successor corporation, instead of the
Company, and subject to all the terms, conditions and limitations in the Senior
Note Indenture, the Senior Note Trustee will authenticate and will deliver any
Senior Notes which previously will have been signed and delivered by officers of
the Company to the Senior Note Trustee for authentication, and any Senior Notes
which such successor corporation thereafter will cause to be signed and
delivered to the Senior Note Trustee for that purpose. All the Senior Notes so
issued will in all respects have the same legal rank and benefit under the
Senior Note Indenture as the Senior Notes theretofore or thereafter issued in
accordance with the terms of the Senior Note Indenture as though all such Senior
Notes had been issued at the date of execution of the Senior Note Indenture.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by the Company and its
Restricted Subsidiaries in the Subsidiary properly designated will be deemed to
be an Investment made as of the time of the designation and will reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "--Restricted Payments" or Permitted
Investments, as determined by the Company. That designation will only be
permitted if the Investment would be permitted at that time and if the
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
84
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or Guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person; and
(2) the Company delivers to the Senior Note Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $1.0 million, a resolution of the Board of Directors
set forth in an officers' certificate certifying that such
Affiliate Transaction complies with this covenant and that
such Affiliate Transaction has been approved by a majority of
the disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $2.5 million, an opinion as to the fairness to the
holders of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment
banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement that is in effect on the date of the Senior
Note Indenture or that is entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted
Subsidiary;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company;
(4) sales of Equity Interests (other than Disqualified Stock) to
Affiliates of the Company;
(5) Restricted Payments that are permitted by the provisions of the
Senior Note Indenture described above under the caption
"--Restricted Payments;"
(6) advances to officers of the Company or any Restricted Subsidiary of
the Company in the ordinary course of business to provide for the
payment of reasonable expenses incurred by such Persons in the
performance of their responsibilities to the Company or such
Restricted Subsidiary or in connection with any relocation;
(7) reasonable fees and compensation (including, without limitation,
bonuses, retirement plans and securities, equity options and equity
ownership plans) paid or issued to and indemnities
85
provided on behalf of, officers, directors, employees or consultants
of the Company or any Restricted Subsidiary in the ordinary course
of business; and
(8) any other transactions expressly authorized by the Court pursuant to
the Plan.
ADDITIONAL SUBSIDIARY GUARANTEES
If the Company or any of its Restricted Subsidiaries acquires or creates
another Domestic Subsidiary that is a Restricted Subsidiary after the date of
the Senior Note Indenture or properly designates a Domestic Subsidiary as a
Restricted Subsidiary and, in each case, that Domestic Subsidiary becomes party
to one or more Collateral Documents granting a security interest in Note
Collateral in favor of the Collateral Agent, then that newly acquired or created
or designated Domestic Subsidiary will become a Subsidiary Guarantor and execute
and deliver:
(1) a supplemental indenture pursuant to which such Domestic Subsidiary
will unconditionally guarantee all of the Company's obligations
under the Senior Notes and the Senior Note Indenture on the terms
set forth in the Senior Note Indenture;
(2) any Collateral Documents necessary or reasonably requested by the
Collateral Agent to grant the Collateral Agent for the benefit of
holders of Senior Notes and Junior Notes a valid, enforceable,
perfected security interest in the Note Collateral described
therein; and
(3) an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Domestic Subsidiary and
constitutes a legally valid and binding and enforceable obligation
of such Domestic Subsidiary,
each reasonably satisfactory to the Senior Note Trustee within 10 business days
of the date on which it was acquired or created or designated.
Thereafter, such Domestic Subsidiary will be a Subsidiary Guarantor for
all purposes of the Senior Note Indenture. This covenant will not apply to any
Subsidiaries that have been properly designated as Unrestricted Subsidiaries in
accordance with the Senior Note Indenture for as long as they continue to
constitute Unrestricted Subsidiaries or to any Restricted Subsidiaries that are
not party to one or more Collateral Documents granting a security interest in
Note Collateral in favor of the Collateral Agent.
SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company or any Restricted Subsidiary may enter into a sale and leaseback
transaction if:
(1) the assets subject to such sale and leaseback transaction are Heller
Collateral and are not Note Collateral and the Net Proceeds thereof
are applied as Net Proceeds of an incurrence of Indebtedness in
accordance with the covenant entitled "--Certain Rights to Require
Repurchases of Senior Notes by the Company--Incurrence of
Indebtedness," or
(2) each of the following conditions is satisfied:
(a) the Company or that Restricted Subsidiary, as applicable,
could have (i) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback
transaction under the covenant described above under the
caption "--
86
Incurrence of Indebtedness and Issuance of Preferred Stock"
and (ii) incurred a Lien to secure such Indebtedness pursuant
to the covenant described above under the caption "--Liens;"
(b) the gross cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value, as determined in
good faith by the Board of Directors of the Company and set
forth in an officers' certificate delivered to the Senior Note
Trustee, of the property that is the subject of that sale and
leaseback transaction;
(c) the rental payments of the Company or that Restricted
Subsidiary, as applicable, under the leaseback arrangement
provide for rental payments in each 12 month period of the
lease that are substantially equal; and
(d) the transfer of assets in that sale and leaseback transaction
is permitted by, and the Company or that Restricted Subsidiary
applies the proceeds of such transaction in compliance with,
the covenant described above under the caption "--Mandatory
Redemption--Asset Sales of Note Collateral" or the covenant
described above under the caption "--Certain Rights to Require
Repurchase of Senior Notes by the Company--Asset Sales of
Non-Note Collateral," as applicable.
LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY
OWNED RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, transfer, convey, sell, lease or
otherwise dispose of any Equity Interests in any Wholly Owned Restricted
Subsidiary of the Company to any Person (other than the Company or a Wholly
Owned Restricted Subsidiary of the Company), unless:
(1) such transfer, conveyance, sale, lease or other disposition is of
all the Equity Interests in such Wholly Owned Restricted Subsidiary;
and
(2) the Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant
described above under the caption "--Certain Rights to Require
Repurchase of Senior Notes by the Company--Asset Sales of Non-Note
Collateral."
In addition, the Company will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than the Permitted Business, except to such extent
as would not be material to the Company and its Restricted Subsidiaries taken as
a whole.
MAINTENANCE OF PROPERTY
The Company will, and will cause its Restricted Subsidiaries to keep all
property and systems useful and necessary in its business or the business of any
of its Restricted Subsidiaries that is included in the
87
Note Collateral in good working order and condition, ordinary wear and tear
excepted, and supplied with all necessary equipment.
INSURANCE
The Company will, and will cause its Restricted Subsidiaries to, maintain
insurance with responsible carriers against such risks and in such amounts as is
customarily carried by similar businesses with such deductibles, retentions,
self insured amounts and coinsurance provisions as are customarily carried by
similar businesses of similar size, and will furnish to the Senior Note Trustee,
upon reasonable written request, full information as to the insurance carried.
CERTAIN NOTICES TO THE SENIOR NOTE TRUSTEE
The Company will, so long as any Senior Notes are outstanding, deliver to
the Senior Note Trustee, within 10 days of becoming aware of any Default or
Event of Default in the performance of any covenant, agreement or condition in
the Senior Note Indenture, an officer's certificate specifying such Default or
Event of Default, the period of existence thereof and what action the Company is
taking or proposes to take with respect to such Default or Event of Default.
In the event that the Junior Notes or any other Indebtedness of the
Company that is subordinated to the Senior Notes is declared due and payable
before the Stated Maturity of such Indebtedness because of the occurrence of an
event of default thereunder, the Company will give prompt notice in writing of
such happening to the Senior Note Trustee.
The Company is required to file annually with the Senior Note Trustee,
within 120 days after the end of each fiscal year of the Company, an officer's
statement as to the absence of defaults in fulfilling any of its obligations
under the Senior Note Indenture.
PAYMENT OF THE SENIOR NOTES
The Company will duly and punctually pay the principal of and premium, if
any, and interest on the Senior Notes in accordance with the terms of the Senior
Notes and the Senior Note Indenture.
MAINTENANCE OF OFFICE OR AGENCY
The Company will maintain in the Borough of Manhattan, the City of New
York, an office or agency (which may be an office of the Senior Note Trustee or
an affiliate of the Senior Note Trustee, Registrar or co-registrar) where Senior
Notes may be surrendered for registration of transfer or for exchange and where
notices and demands to or upon the Company in respect of the Senior Notes and
the Senior Note Indenture may be served. The Company will give prompt written
notice to the Senior Note Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company fails to maintain
any such required office or agency or fails to furnish the Senior Note Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the Corporate Trust Office of the Senior Note Trustee.
The Company may also from time to time designate one or more other offices
or agencies where the Senior Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission will in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, the City of New York for such purposes. The Company will give prompt
written notice to the Senior Note
88
Trustee of any such designation or rescission and of any change in the location
of any such other office or agency.
The Company will designate the Corporate Trust Office of the Senior Note
Trustee as one such office or agency of the Company in accordance with the
Senior Note Indenture.
WAIVER OF STAY, EXTENSION OR USURY LAWS
The Company will waive, to the maximum extent permitted by applicable law,
any stay or extension law or any usury law or other law that would prohibit or
forgive the Company from paying all or any portion of the principal of, premium,
if any, or interest on the Senior Notes in accordance with the Senior Note
Indenture, wherever enacted, now or at any time hereafter in force, or that may
affect the covenants or the performance of the Senior Note Indenture, and the
Company, to the maximum extent permitted by applicable law, will waive all
benefit or advantage of any such law and will not hinder, delay or impede the
execution of any power granted to the Senior Note Trustee under the Senior Note
Indenture, but will suffer and permit the execution of every such power as
though no such law had been enacted.
TAXES
The Company will pay or discharge, and will cause each of its Restricted
Subsidiaries to pay or discharge, prior to delinquency, all material taxes,
assessments, and governmental levies except such as are contested in good faith
and by appropriate proceedings or where the failure to effect such payment is
not adverse in any material respect to the holders of the Senior Notes.
CORPORATE EXISTENCE
Subject to the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Transfer of All or Substantially All of the
Assets of the Company," the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect:
(1) its corporate existence, and the corporate, partnership or other
existence of each of its Restricted Subsidiaries, in accordance with
the respective organizational documents (as the same may be amended
from time to time) of the Company or any such Restricted Subsidiary;
and
(2) the rights (charter and statutory), licenses and franchises of the
Company and its Restricted Subsidiaries; provided, however, that the
Company will not be required to preserve any such right, license or
franchise, or the corporate, partnership or other existence of any
of its Restricted Subsidiaries, if the Board of Directors will
determine that the preservation thereof is no longer desirable in
the conduct of the business of the Company and its Restricted
Subsidiaries, taken as a whole, and that the loss thereof is not
adverse in any material respect to the holders of the Senior Notes.
NO AMENDMENT TO CERTAIN PROVISIONS OF THE JUNIOR NOTE INDENTURE
Without the consent of the holders of at least a majority in aggregate
principal amount of the Senior Notes then outstanding, the Company will not
amend, modify or alter the Junior Note Indenture in any way to:
(1) increase the rate of or change the time for payment of interest on
any Junior Notes;
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(2) increase the principal or premium, if any, of, or advance the final
maturity date of, any Junior Notes;
(3) alter the redemption provisions or the price or terms at which the
Company is required to offer to purchase any Junior Notes; or
(4) amend the provisions of the Junior Note Indenture which relate to
subordination.
REPORTS
Whether or not required by the Commission, so long as any notes are
outstanding, the Company will furnish to the Senior Note Trustee and to the
holders of Senior Notes, within the time periods specified in the Commission's
rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms
10-Q and 10-K (or any successor forms) if the Company were required
to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual
financial statements by the Company's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K (or any successor forms) if the Company were
required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, whether or not required by the Commission, the Company will
file a copy of all of the information and reports referred to in clauses (1) and
(2) above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request.
MODIFICATION OF THE SENIOR NOTE INDENTURE
Under the Senior Note Indenture, with certain exceptions, the rights and
obligations of the Company with respect to the Senior Notes and the rights of
holders of the Senior Notes may only be modified by the Company and the Senior
Note Trustee with the written consent of the holders of not less than 66-2/3% in
principal amount of the outstanding Senior Notes.
However, without the consent of each holder of any Senior Note affected,
an amendment, waiver or supplement (with respect to any Senior Notes held by a
non-consenting holder) may not:
(1) reduce the principal amount of Senior Notes whose holders must
consent to an amendment, supplement or waiver;
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(2) reduce the principal of or change the fixed maturity of any Senior
Note or alter the provisions with respect to the redemption of the
Senior Notes (other than provisions relating to the covenants
described above under the captions "--Certain Rights to Require
Repurchase of Senior Notes by the Company" and "--Mandatory
Redemption--Asset Sales of Note Collateral");
(3) reduce the rate of or change the time for payment of interest on any
Senior Note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, if any, on the Senior Notes (except a
rescission of acceleration of the Senior Notes by the holders of at
least a majority in aggregate principal amount of the Senior Notes
and a waiver of the payment Default that resulted from such
acceleration);
(5) make any Senior Note payable in money other than that stated in the
Senior Notes;
(6) make any change in the provisions of the Senior Note Indenture
relating to waivers of past Defaults or the rights of holders of
Senior Notes to receive payments of principal of, or interest or
premium, if any, on the Senior Notes;
(7) waive a redemption payment with respect to any Senior Note;
(8) release any Subsidiary Guarantor from any of its obligations under
its Senior Note Guarantee or the Senior Note Indenture, except in
accordance with the terms of the Senior Note Indenture; or
(9) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of Senior
Notes, the Company, the Subsidiary Guarantors and the Senior Note Trustee may
amend or supplement the Senior Note Indenture or the Senior Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Senior Notes in addition to or in
place of Certificated Senior Notes;
(3) to provide for the assumption of the Company's obligations to
holders of Senior Notes in the case of a merger or consolidation or
sale of all or substantially all of the Company's assets; or
(4) to make any change that would provide any additional rights or
benefits to the holders of Senior Notes or that does not adversely
affect the legal rights under the Senior Note Indenture of any such
holder.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The following is a summary of certain provisions of the Senior Note
Indenture relating to Events of Default, notice and waiver.
Each of the following is an Event of Default under the Senior Note
Indenture:
(1) default in the payment of interest on the Senior Notes when due and
payable which continues for 30 days;
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(2) default in the payment of principal of (and premium, if any) on the
Senior Notes when due and payable, at maturity, upon redemption or
otherwise;
(3) failure by the Company or any of its Restricted Subsidiaries to
comply with the provisions described under the captions "--Mandatory
Redemption--Asset Sales of Note Collateral," "--Certain Rights To
Require Repurchase of Senior Notes by the Company" or "--Certain
Covenants--Merger, Consolidation or the Transfer of All or
Substantially All of the Assets of the Company;"
(4) failure to perform any other covenant of the Company or any of its
Restricted Subsidiaries contained in the Senior Note Indenture or
the Senior Notes which continues for 60 days after notice as
provided in the Senior Note Indenture;
(5) acceleration of any Indebtedness of the Company or any of the
Subsidiary Guarantors for money borrowed (including Capital Lease
Obligations but not including any indebtedness or obligation for
which recourse is limited to the property purchased) in an aggregate
principal amount in excess of $5.0 million, whether existing on the
date of the execution of the Senior Note Indenture or thereafter
created, if such Indebtedness is not paid or such acceleration is
not annulled within 10 days after notice to the Company of such
acceleration;
(6) failure by the Company or any of the Subsidiary Guarantors to pay
final non-appealable judgments (not paid or covered by insurance)
aggregating in excess of $2.0 million, which judgments are not paid,
bonded, discharged or stayed for a period of 60 days; and
(7) certain events of bankruptcy, insolvency or reorganization relating
to the Company or any of its Restricted Subsidiaries.
If an Event of Default occurs and is continuing with respect to the Senior
Notes, either the Senior Note Trustee or the holders of at least 25% in
principal amount of the then outstanding Senior Notes may declare all of the
Senior Notes to be due and payable immediately. An Event of Default other than
(1) a default in the obligation to pay principal, premium or interest on the
Senior Notes or (2) an Event of Default with respect to any covenant or
provision which cannot be modified or amended without the consent of the holders
of each outstanding Senior Note affected may be waived by the holders of a
majority in principal amount of the Senior Notes then outstanding.
The Senior Note Trustee may require indemnity reasonably satisfactory to
it before it enforces the Senior Note Indenture, the Senior Notes, the Senior
Note Guarantees or the Collateral Documents. Subject to certain limitations
specified in the Senior Note Indenture and the Collateral Documents, holders of
a majority in principal amount of the Senior Notes may direct the Senior Note
Trustee in its exercise of any trust or power. The Senior Note Trustee may
withhold from holders of the Senior Notes notice of any default if it determines
that withholding notice is in their interests, except a default in payment of
principal or interest.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator,
agent or stockholder of the Company, any Subsidiary Guarantor or any Heller
Debtor Subsidiary, as such, will have any liability for any obligations of the
Company, the Subsidiary Guarantors or the Heller Debtor Subsidiaries under the
Senior Notes, the Senior Note Indenture, the Senior Note Guarantees, the
Collateral Documents or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder of Senior Notes by accepting a
Senior Note waives and releases all such liability. The waiver and release are
part
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of the consideration for issuance of the Senior Notes. The waiver may not be
effective to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes and all
obligations of the Subsidiary Guarantors discharged with respect to their Senior
Note Guarantees ("Legal Defeasance") except for:
(1) the rights of holders of outstanding Senior Notes to receive
payments in respect of the principal of, or interest or premium, if
any, on such Senior Notes when such payments are due from the trust
referred to below;
(2) the Company's obligations with respect to the Senior Notes
concerning issuing temporary Senior Notes, mutilated, destroyed,
lost or stolen Senior Notes and the maintenance of an office or
agency for payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Senior Note
Trustee, and the Company's and the Subsidiary Guarantors'
obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Senior Note Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and the Subsidiary Guarantors released with
respect to certain covenants that are described in the Senior Note Indenture
("Covenant Defeasance") and thereafter any omission to comply with those
covenants will not constitute a Default or Event of Default with respect to the
Senior Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "--Events of Default, Notice and Waiver" will no longer
constitute an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Senior Note Trustee,
in trust, for the benefit of the holders of the Senior Notes, cash
in United States dollars, non-callable Government Securities, or a
combination of cash in United States dollars and non-callable
Government Securities, in amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium, if
any, on the outstanding Senior Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Company
must specify whether the Senior Notes are being defeased to maturity
or to a particular redemption date;
(2) in the case of Legal Defeasance, the Company has delivered to the
Senior Note Trustee an opinion of counsel reasonably acceptable to
the Senior Note Trustee confirming that (a) the Company has received
from, or there has been published by, the Internal Revenue Service a
ruling or (b) since the date of the Senior Note Indenture, there has
been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such opinion of counsel
will confirm that, the holders of the outstanding Senior Notes will
not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred;
93
(3) in the case of Covenant Defeasance, the Company has delivered to the
Senior Note Trustee an opinion of counsel reasonably acceptable to
the Senior Note Trustee confirming that the holders of the
outstanding Senior Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(4) no Default or Event of Default will have occurred and be continuing
either: (a) on the date of that deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied
to that deposit), or (b) in the case of Legal Defeasance, insofar as
Events of Default of the type specified in clause (7) of the section
above under the caption "Events of Default, Notice and Waiver" are
concerned, at any time in the period ending on the 91st day after
the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Senior Note Indenture or the
Junior Note Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(6) the Company must deliver to the Senior Note Trustee an officers'
certificate stating that the deposit was not made by the Company
with the intent of preferring the holders of Senior Notes over the
other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or
others;
(7) the Company must deliver to the Senior Note Trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with;
(8) in the case of Legal Defeasance, the Company must deliver to the
Senior Note Trustee an opinion of counsel to the effect that,
assuming no intervening bankruptcy of the Company or any of the
Subsidiary Guarantors between the date of deposit and the 91st day
following the deposit and assuming that no holder of Senior Notes is
an "insider" of the Company under applicable bankruptcy law, after
the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights
generally; and
(9) no order or judgment will prohibit the application by the Senior
Note Trustee of the funds deposited to effect Legal Defeasance or
Covenant Defeasance.
Insofar as Events of Default of the type specified in clauses (3), (4) or (5) of
the section above under the caption "Events of Default, Notice and Waiver" are
concerned, if any such event occurs at any time in the period ending on the 91st
day after the date of deposit which would constitute an Event of Default had
Legal Defeasance or Covenant Defeasance not occurred, then the obligations of
the Company and the Subsidiary Guarantors under the Senior Note Indenture, the
Senior Notes and the Senior Note Guarantees will be revived and reinstated as
though no such deposit had occurred.
MARKETABILITY
At present there is no public market for the Senior Notes, and the Company
is not able to predict whether a market will develop. The Company has no present
plans to apply to list the Senior Notes on any United States exchange or the
Nasdaq Stock Market. See "Risk Factors--Risks Related to the New
94
Notes--If an active trading market does not develop for the New Notes, the
noteholders may not be able to resell their New Notes."
GOVERNING LAW
The Senior Note Indenture, the Senior Notes and the Senior Note Guarantees
are governed by and construed in accordance with the laws of the State of New
York.
SATISFACTION AND DISCHARGE
The Senior Note Indenture will be discharged and will cease to be of
further effect as to all Senior Notes issued thereunder, when:
(1) either:
(a) all Senior Notes that have been authenticated and delivered,
except lost, stolen or destroyed notes that have been replaced
or paid and notes for whose payment money has been deposited
in trust and thereafter repaid to the Company, have been
delivered to the Senior Note Trustee for cancellation; or
(b) all Senior Notes that have not been delivered to the Senior
Note Trustee for cancellation have become due and payable by
reason of the mailing of a notice of redemption or otherwise
or will become due and payable within one year and the Company
or any Subsidiary Guarantor has irrevocably deposited or
caused to be deposited with the Senior Note Trustee as trust
funds in trust solely for the benefit of the holders of Senior
Notes, cash in United States dollars, non-callable Government
Securities, or a combination of cash in United States dollars
and non-callable Government Securities, in amounts as will be
sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire indebtedness on the
Senior Notes not delivered to the Senior Note Trustee for
cancellation for principal, premium, if any, and accrued
interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the
date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Company or any
Subsidiary Guarantor is a party or by which the Company or any
Subsidiary Guarantor is bound;
(3) the Company or any Subsidiary Guarantor has paid or caused to be
paid all sums payable by it under the Senior Note Indenture; and
(4) the Company has delivered irrevocable instructions to the Senior
Note Trustee under the Senior Note Indenture to apply the deposited
money toward the payment of the Senior Notes at maturity or the
redemption date, as the case may be.
In addition, the Company must deliver an officers' certificate and an opinion of
counsel to the Senior Note Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
CONCERNING THE SENIOR NOTE TRUSTEE
If the Senior Note Trustee becomes a creditor of the Company or any
Subsidiary Guarantor, the Senior Note Indenture limits its right to obtain
payment of claims in certain cases, or to realize on certain
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property received in respect of any such claim as security or otherwise. The
Senior Note Trustee will be permitted to engage in other transactions; however,
if it acquires any conflicting interest it must eliminate such conflict within
90 days, or apply to the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Senior Note
Trustee, subject to certain exceptions. The Senior Note Indenture provides that
in case an Event of Default occurs and is continuing, the Senior Note Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Senior Note Trustee will be under no obligation to exercise any of its rights or
powers under the Senior Note Indenture at the request of any holder of Senior
Notes, unless such holder has offered to the Senior Note Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
REGISTRATION RIGHTS
The Company and the Selling Securityholders entered into the Registration
Rights Agreement on January 1, 2002. See "Registration Rights Agreement."
RESERVE
Not all of the New Common Stock, the Senior Notes and the Junior Notes
were issued on the Effective Date. This is because the total amount of the
general unsecured claims under the Plan was not known on the Effective Date,
either because certain of those claims were disputed claims or because those
claims were not made by their holders on or before December 19, 2001 (the
"Cutoff Date"). As a result, the Company reserved 68,241 shares of New Common
Stock, $440,178 in principal amount of Senior Notes and the $166,775 in
principal amount of Junior Notes (collectively, the "Reserve") from the initial
issuance on the Effective Date. The initial distribution with respect to general
unsecured claims was made only to the holders of general unsecured claims that
were allowed prior to the Cutoff Date (the "Original Claimholders"). Once the
total amount of the allowed general unsecured claims has been determined, the
Reserve will be distributed pro rata among the holders of general unsecured
claims allowed before or after the Cutoff Date (the date of this distribution,
the "Subsequent Distribution Date").
If the Reserve is insufficient to cover general unsecured claims allowed
after the Cutoff Date, the Company and its subsidiaries will have no further
liability with respect to those general unsecured claims and the holders of
those claims will receive proportionately lower distributions of shares of New
Common Stock, Senior Notes and Junior Notes than the Original Claimholders.
If the Reserve exceeds the distributions necessary to cover general
unsecured claims allowed after the Cutoff Date, the additional securities
remaining in the Reserve will be distributed among all holders of general
unsecured claims so as to ensure that each holder of an allowed general
unsecured claim receives, in the aggregate, its pro rata share of the New Common
Stock, the Senior Notes and the Junior Notes. In this case, the Original
Claimholders received distributions of securities on the Effective Date and they
will also receive distributions on the Subsequent Distribution Date.
Furthermore, if no general unsecured claims are allowed after the Cutoff Date,
the Reserve will be distributed pro rata solely among the Original Claimholders
and the Selling Securityholders will receive 35,560 shares of New Common Stock,
$229,881 in principal amount of Senior Notes and $87,096 in principal amount of
Junior Notes.
The right of the Original Claimholders to receive additional securities
from the Reserve on the Subsequent Distribution Date will be nontransferable.
Subject to compliance with applicable securities
96
laws, any additional securities issued to the Original Claimholders will be
freely transferable upon issuance.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Senior Note
Indenture. Reference is made to the Senior Note Indenture for a full disclosure
of all such terms, as well as any other capitalized terms used herein for which
no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging
with or into, or becoming a Subsidiary of, such specified Person;
and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.
"ALCI" means ALC Indiana, Inc., a Nevada corporation.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition by the Company or
any of its Restricted Subsidiaries of any assets or rights whether
or not constituting Note Collateral; provided that the sale,
conveyance or other disposition of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Senior Note
Indenture described above under the caption "--Certain Rights To
Require Repurchase of Senior Notes by the Company--Change in
Control" and/or the provisions described above under the caption
"--Certain Covenants--Merger, Consolidation or Transfer of All or
Substantially All of the Assets of the Company" and not by the
provisions described above under the caption "--Mandatory
Redemption--Asset Sales of Note Collateral" or under the caption
"Certain Rights to Require Repurchase of Senior Notes by the
Company--Asset Sales of Non-Note Collateral;" and
(2) the issuance of Equity Interests in any of the Company's Restricted
Subsidiaries or the sale by the Company or any of its Restricted
Subsidiaries of Equity Interests in any of their Subsidiaries.
Notwithstanding the preceding, the following items will not be
deemed to be Asset Sales:
(1) a transfer of assets between or among the Company and the Subsidiary
Guarantors, between or among any Heller Debtor Subsidiaries or
between or among any Unrestricted Subsidiaries;
97
(2) an issuance of Equity Interests by a Subsidiary of the Company to
the Company or a Restricted Subsidiary; (3) the sale or lease of
equipment, inventory, accounts receivable or other assets in the
ordinary course of business;
(4) the sale or other disposition of cash or Cash Equivalents; and
(5) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction means
the product of 8.0 multiplied by the aggregate net rental payments payable by
the lessee in respect of the lease for the 12 month period commencing on the
first date of the month in which such sale and leaseback transaction takes
place.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means any and all shares or other equivalents (however
designated) of capital stock, including all common stock and all preferred
stock, in the case of a corporation, or partnership interests or other
equivalents (however designated) in the case of a partnership or common shares
of beneficial interest or other equivalents (however designated) in the case of
a trust.
"Carriage House" means Carriage House Assisted Living, Inc., a Delaware
corporation.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the
United States government (provided that the full faith and credit of
the United States is pledged in support of those securities) having
maturities of not more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight
bank deposits, in each case, with any lender party as of January 1,
2002 to the Heller Loan Agreement or with any domestic commercial
bank having capital and surplus in excess of $500.0 million and a
Thomson Bank Watch Rating of "B" or better;
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(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in
each case maturing within six months after the date of acquisition;
and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5)
of this definition.
"Change in Control" means the occurrence of any of the following:
(1) the sale of all or substantially all of the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to any Person or
related group of Persons;
(2) the consummation of any consolidation or merger of the Company:
(a) in which the Company is not the continuing or surviving
corporation, other than a consolidation or merger:
(i) with a wholly-owned Subsidiary of the Company in which
all of the common stock of the Company outstanding
immediately prior to the effectiveness thereof is
changed into or exchanged for the same consideration),
or
(ii) in which the stockholders of the Company immediately
prior to the consummation of such consolidation or
merger own greater than 50% of the total voting power of
all classes of capital shares of the continuing or
surviving corporation immediately following the
consummation of such consolidation or merger; or
(b) pursuant to which the shares of common stock of the Company
are converted into cash, securities, or other property, unless
the stockholders of the Company immediately prior to the
consummation of such consolidation or merger own greater than
50% of the total voting power of all classes of capital shares
of the continuing or surviving corporation immediately
following the consummation of such consolidation or merger;
(3) the acquisition by any Person individually or any Persons (in each
case other than an Excluded Person or Excluded Persons) acting
together that would constitute a "group" for purposes of Section
13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), together with any affiliates thereof, of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of
greater than 50% of the total voting power of all classes of capital
shares of the Company entitled to vote generally in the election of
directors of the Company; or
(4) the first day on which a majority of members of the Board of
Directors of the Company are not Continuing Directors.
Notwithstanding clause (1) of the definition of "Change in Control," a
Change in Control will not be deemed to have occurred as a result of a
transaction in which either:
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(1) the holders of the shares of common stock of the Company immediately
prior to the sale of all or substantially all of the Company's
assets have, directly or indirectly, at least a majority of the
shares of common stock of the corporation to which such assets were
sold immediately after such asset sale; or
(2) the holders of the shares of common stock of the Company immediately
prior to the consolidation or merger have, directly or indirectly,
at least a majority of the shares of common stock of the continuing
or surviving corporation immediately after such consolidation or
merger.
Notwithstanding clause (3) of the definition of "Change in Control," a
Change in Control will not be deemed to have occurred solely by virtue of any of
the following Persons filing or becoming obligated to file a report under or in
response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or
report) under the Exchange Act disclosing beneficial ownership by it of shares
or securities of the Company, of greater than 50% of the total voting power
referred to in clause (3) of the foregoing definition or otherwise:
(1) the Company;
(2) any Subsidiary;
(3) any employee share purchase plan, share option plan, or other share
incentive plan or program;
(4) retirement plan or automatic dividend reinvestment plan; or
(5) any substantially similar plan of the Company or any Subsidiary or
any Person holding securities of the Company for or pursuant to the
terms of any such employee benefit plan.
"Collateral Documents" means all agreements, instruments, documents,
pledges or filings that evidence, perfect, set forth or limit the security
interest of the Collateral Agent in the Note Collateral.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale or the disposition of any securities by such
Person or any of its Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Subsidiaries, in each case
to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of
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letter of credit or bankers' acceptance financings, and net of the
effect of all payments made or received pursuant to Hedging
Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash
expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for
such period to the extent that such depreciation, amortization and
other non-cash expenses were deducted in computing such Consolidated
Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business,
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the preceding, the provisions for taxes based on the
income or profits of, and the depreciation and amortization and other non-cash
expenses of, a Restricted Subsidiary of the Company will be added to
Consolidated Net Income to compute Consolidated Cash Flow of the Company only to
the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Company by that Restricted Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is accounted for by
the equity method of accounting will be included only to the extent
of the amount of dividends or distributions paid in cash to the
specified Person or a Wholly Owned Restricted Subsidiary of the
Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is
not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or
its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition
will be excluded;
(4) the cumulative effect of a change in accounting principles will be
excluded; and
(5) the Net Income (but not loss) of any Unrestricted Subsidiary will be
excluded, whether or not distributed to the specific Person or one
of its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
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(1) was a member of such Board of Directors on the date of the Senior
Note Indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the facilities under the Heller Loan Agreement) or commercial paper
facilities, in each case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"Designated Assets" means, collectively, the following properties owned by
the Company or one of its Restricted Subsidiaries:
(1) Magnolia House, Sabal House, Forsyth House and Stanley House, each
of which is located in the State of Florida;
(2) Wisdom House, which is located in the State of Georgia;
(3) Floyd House, which is located in the State of Iowa; and
(4) Bennett House, Chapman House, Jennings House, Monroe House and York
House, each of which is located in the State of Indiana.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on or prior to the date that
is 91 days after the date on which the Senior Notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require the
Company to repurchase such Capital Stock upon the occurrence of a change in
control or an asset sale will not constitute Disqualified Stock if the terms of
such Capital Stock provide that the Company may not repurchase or redeem any
such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption
"--Certain Covenants--Restricted Payments."
"Domestic Subsidiary" means any Restricted Subsidiary of the Company that
was formed under the laws of the United States or any state of the United States
or the District of Columbia or that guarantees or otherwise provides direct
credit support for any Indebtedness of the Company.
"EBITDA" for any period for a particular assisted living facility means
the Net Income for such period attributable to that facility of the entity
owning such facility plus the following to the extent deducted in calculating
such Net Income:
(1) income tax expense;
(2) the consolidated interest expense of the entity that owns such
facility or, if such entity owns more than one facility or has
subsidiaries or other assets, the proportion of consolidated
102
interest expense equal to the proportion of the fair market value of
the assets of such entity represented by such facility;
(3) depreciation expense related to such facility;
(4) amortization expense related to such facility; and
(5) any management fee paid with respect to such facility to the Company
or any wholly owned Subsidiary of the Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excluded Indebtedness" means, collectively:
(1) Indebtedness under the Heller Loan Agreement;
(2) Indebtedness permitted to be incurred under clauses (3) and (10) of
the second paragraph of the covenant entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," and
(3) Permitted Refinancing Indebtedness of the Indebtedness described in
clauses (1) and (2) above incurred under clause (4) of the second
paragraph of the covenant entitled "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock."
"Excluded Person" means any Person who is a holder of more than 5% of all
classes of capital shares of the Company as of January 1, 2002.
"Existing Indebtedness" means up to $118.0 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (including, for
purposes of this definition, Indebtedness under the Heller Loan Agreement but
excluding Indebtedness under the Senior Note Indenture and the Junior Note
Indenture) in existence on the date of the Senior Note Indenture, until such
amounts are repaid.
"Fixed Charges" means, with respect to any specified Person for any
period, the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including,
without limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net of the effect of all payments made or
received pursuant to Hedging Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries, whether or not such Guarantee or Lien is called upon;
plus
103
(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred stock of such
Person or any of its Restricted Subsidiaries, other than dividends
on Equity Interests payable solely in Equity Interests of the
Company (other than Disqualified Stock) or to the Company or a
Restricted Subsidiary of the Company, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus
the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the specified
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment, repurchase or redemption
of Indebtedness, or such issuance, repurchase or redemption of preferred stock,
and the use of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date will be
given pro forma effect as if they had occurred on the first day of
the four-quarter reference period and Consolidated Cash Flow for
such reference period will be calculated on a pro forma basis in
accordance with Regulation S-X under the Securities Act, but without
giving effect to clause (3) of the proviso set forth in the
definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded, but
only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the specified Person or any of
its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of
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a pledge of assets or through letters of credit or reimbursement agreements in
respect thereof, of all or any part of any Indebtedness.
"HCI" means Home and Community Care, Inc., a Delaware corporation.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates entered into in the ordinary
course of business, and consistent with past practice.
"Heller" means Heller Healthcare Finance, Inc.
"Heller Loan Agreement" means the Loan Agreement, dated as of February 20,
2001, among Heller and certain Subsidiaries of the Company, as amended by First
Amendment to Loan Documents, dated as of June 29, 2001, among Heller, the
Company and certain Subsidiaries of the Company, as further amended by Second
Amendment to Loan Documents, dated as of October 3, 2001, among Heller, the
Company and certain Subsidiaries of the Company.
"Heller Collateral" means all property, now owned or hereafter acquired,
of the Company and its Subsidiaries that, pursuant to the collateral documents
entered into pursuant to the Heller Loan Agreement, is subject to a security
interest in favor of the lenders under the Heller Loan Agreement or a
representative on their behalf.
"Heller Debtor Subsidiary" means any Subsidiary of the Company that:
(1) is a party to the Heller Loan Agreement, and
(2) grants a security interest pursuant to the second paragraph of the
provision captioned "--Security" in one or more assisted living
properties to secure the Obligations of the Company under the Senior
Note Indenture, the Senior Notes and the Collateral Documents to
which the Company is party.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
105
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount;
(2) the principal amount of the Indebtedness, together with any interest
on the Indebtedness that is more than 30 days past due, in the case
of any other Indebtedness;
(3) in the case of a Guarantee of Indebtedness, the maximum amount of
the Indebtedness guaranteed under such Guarantee; and
(4) in the case of Indebtedness of others secured by a Lien on any asset
of the specified Person, the fair market value of the asset(s)
subject to such Lien.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of the Company such that, after
giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Company, the Company will be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Equity Interests of such Subsidiary not sold or disposed of in an amount
determined as provided in the final paragraph of the covenant described above
under the caption "--Certain Covenants--Restricted Payments." The acquisition by
the Company or any Subsidiary of the Company of a Person that holds an
Investment in a third Person will be deemed to be an Investment by the Company
or such Subsidiary in such third Person in an amount equal to the fair market
value of the Investment held by the acquired Person in such third Person in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Certain Covenants--Restricted Payments."
"Junior Note Guarantees" means the Guarantees given by the Subsidiary
Guarantors in respect of the obligations under the Junior Note Indenture.
"Junior Note Indenture" means the indenture, dated as of the date of the
Senior Note Indenture, to be executed by the Company, the Subsidiary Guarantors
and the Junior Note Trustee.
"Junior Note Trustee" means the indenture trustee agreed upon between the
Company and the Informal Bondholders' Committee in its capacity as trustee under
the Junior Note Indenture.
"Junior Notes" means those notes issued pursuant to the Junior Note
Indenture.
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"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a)
any Asset Sale; or (b) the disposition of any securities by such
Person or any of its Restricted Subsidiaries or the extinguishment
of any Indebtedness of such Person or any of its Restricted
Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means:
(1) with respect to any Asset Sale, the aggregate cash proceeds received
by the Company or any of its Restricted Subsidiaries in respect of
any Asset Sale (including, without limitation, any cash received
upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to
such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result of the Asset Sale, taxes
paid or payable as a result of the Asset Sale, in each case, after
taking into account any available tax credits or deductions and any
tax sharing arrangements and amounts required to be applied (whether
pursuant to a mandatory redemption, offer to repurchase or
otherwise) to repay Indebtedness (including the Indebtedness in
respect of the Heller Loan Agreement) secured by a security interest
on the asset or assets that were the subject of such Asset Sale, and
any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP; and
(2) with respect to any incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness, the aggregate cash proceeds
received by the Company or any of its Restricted Subsidiaries in
respect of any incurrence of Indebtedness, net of the direct costs
relating to such incurrence, including, without limitation, legal,
accounting and investment banking fees, and sales commissions, and
amounts required to be applied (whether pursuant to a mandatory
redemption, an offer to repurchase or otherwise) to refinance,
replace, defease or refund any then existing Indebtedness (other
than the Junior Notes and the Junior Note Guarantees) secured by a
security interest on an asset of the Company or any Restricted
Subsidiary, if the net proceeds of such new Indebtedness are used to
refinance, replace, defease or refund such existing Indebtedness.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable as a guarantor
or otherwise, or (c) constitutes the lender;
107
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action
against an Unrestricted Subsidiary) would permit upon notice, lapse
of time or both any holder of any other Indebtedness (other than the
Senior Notes or the Junior Notes or the Heller Loan Agreement) of
the Company or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment of the
Indebtedness to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any
of its Restricted Subsidiaries.
"Note Collateral" means all property, now owned or hereafter acquired, of
the Company, the Subsidiary Guarantors and the Heller Debtor Subsidiaries that,
pursuant to the Collateral Documents, is subject to a security interest in favor
of the Collateral Agent.
"Obligations" means any principal, interest, premium, if any, penalties,
fees, indemnifications, reimbursements, damages and other liabilities payable
under the documentation governing any Indebtedness.
"Permitted Business" means:
(1) the assisted living residence business, including nursing
facilities, long-term care facilities or other facilities used or
useful in the provision of healthcare services;
(2) the provision of personal care and support (including nursing)
services in connection with the assisted living residence business;
and
(3) any business that is ancillary to any of the foregoing, including,
without limitation, rehabilitation programs, therapies,
pharmaceutical services, participation in provider service
organizations, health care information services business,
distribution of medical supplies, geriatric care and home healthcare
or other businesses which provide ancillary services to residents in
long-term and specialty healthcare facilities.
"Permitted Investments" means:
(1) any Investment in the Company or in a Restricted Subsidiary of the
Company;
(2) any Investment in cash or Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of the Company; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, the Company or a Restricted
Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenants described above under the captions
"--Mandatory Redemption--Asset Sales of Note Collateral" and
"Certain Rights to Require Repurchase of Senior Notes by the
Company--Asset Sales of Non-Note Collateral;"
108
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(6) any Investments received in compromise of obligations of such
Persons incurred in the ordinary course of trade creditors or
customers that were incurred in the ordinary course of business,
including pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of any trade creditor
or customer;
(7) Hedging Obligations;
(8) Investments represented by accounts receivable created or acquired
in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms;
(9) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility and worker's compensation,
performance and other similar deposits; and
(10) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and
without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause
(10) that are at the time outstanding not to exceed $5.0 million.
"Permitted Liens" means:
(1) Liens created, or intended to be created, under the Collateral
Documents;
(2) Liens on assets of the Company or any Restricted Subsidiary securing
Indebtedness and other Obligations under Credit Facilities that are
permitted by the terms of the Senior Note Indenture to be incurred;
(3) Liens in favor of the Company, the Subsidiary Guarantors or the
Heller Debtor Subsidiaries;
(4) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with the Company or any
Restricted Subsidiary of the Company; provided that such Liens were
in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of
the Person merged into or consolidated with the Company or the
Restricted Subsidiary;
(5) Liens on property existing at the time of acquisition of such
property by the Company or any Restricted Subsidiary of the Company,
provided that such Liens were in existence prior to the
contemplation of such acquisition;
(6) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like
nature incurred in the ordinary course of business;
(7) Liens on assets or rights which are not Note Collateral and which
secure:
(a) Indebtedness permitted by clause (3) or clause (10) of the
second paragraph of the covenant entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" or
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(b) Indebtedness permitted under any clause of such covenant so
long as the Senior Notes are repaid in full with the proceeds
of, and concurrently with the incurrence of, such
Indebtedness;
(8) Liens existing on the date of the Senior Note Indenture;
(9) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision
as is required in conformity with GAAP has been made therefor;
(10) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations
that are not Indebtedness that do not exceed $1.0 million at any one
time outstanding;
(11) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries;
(12) statutory Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens arising in the
ordinary course of business and with respect to amounts not yet
delinquent for a period of more than 90 days or which are being
contested in good faith; provided that a reserve or other
appropriate provision as will be required by GAAP will have been
made therefor;
(13) easements, rights-of-way, restrictions, zoning, minor defects or
irregularities in title and other similar charges or encumbrances
not interfering in any material respect with the business or assets
of the Company and its Restricted Subsidiaries, taken as a whole,
incurred in the ordinary course of business;
(14) Liens arising by reason of any judgment not constituting an Event of
Default under the Senior Note Indenture; provided that:
(a) such Liens are being contested in good faith by appropriate
proceedings, and
(b) such Liens are adequately bonded or adequate reserves have
been established on the books of the Company in accordance
with GAAP;
(15) Uniform Commercial Code financing statements filed for precautionary
purposes in connection with any true lease of property leased by the
Company or any of its Restricted Subsidiaries; provided that any
such financing statement does not cover any property other than the
property subject to such lease and the proceeds thereof; and
(16) renewals or refundings of any Liens referred to in clauses (1), (2),
(4), (5), (7), (8) and (11) above; provided that:
(a) such new Liens will be limited to all or part of the same
property that secured the original Liens (plus improvements to
or on such property); and
(b) the principal amount of the Indebtedness secured by such Liens
at such time is not increased to any amount greater than the
sum of (i) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses
(1), (2),
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(4), (5), (7), (8) and (11) above immediately prior to such
renewal or refunding, and (ii) an amount necessary to pay any
fees and expenses, including premiums, related to such
renewals or refundings.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any Restricted Subsidiaries (other
than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness
extended, refinanced, renewed, replaced, defeased or refunded (plus
all accrued interest on the Indebtedness and the amount of all
expenses and premiums incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the
Senior Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Senior Notes on terms at
least as favorable to the holders of the Senior Notes as those
contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary which is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government (or any agency, instrumentality or
political subdivision thereof).
"Pro Rata Share" means, with respect to any distribution on account of an
allowed claim or interest, a proportionate share, so that the ratio of the
consideration distributed on account of an allowed claim or interest in a class
to the amount of such allowed claim or interest is the same as the ratio of the
amount of the consideration distributed on account of all allowed claims or
interests in such class to the amount of all allowed claims or interests in such
class.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as January 1, 2002, by and among the Company and the other parties named
on the signature pages thereof, as such agreement may be amended, modified or
supplemented from time to time.
"Release Price" means, with respect to any Asset Sale of a property, the
greater of (1) the product of 6.5 multiplied by the EBITDA of such property for
the period of two fiscal quarters of the Company ending immediately prior to the
date of such Asset Sale multiplied by 2.0, and (2) the product of $10,000
multiplied by the number of units in such property.
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Note Guarantee" means the Guarantee executed by each Subsidiary
Guarantor pursuant to the Senior Note Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees of the
corporation, association or other business entity is at the time
owned or controlled, directly or indirectly, by that Person or one
or more of the other Subsidiaries of that Person (or a combination
thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or
more Subsidiaries of that Person (or any combination thereof).
"Subsidiary Guarantors" means each of:
(1) Carriage House,
(2) HCI,
(3) ALCI, and
(4) any other Restricted Subsidiary of the Company that executes a
Senior Note Guarantee in accordance with the terms of the Senior
Note Indenture.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
resolution of the Board of Directors, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the
Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to
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maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries;
(5) has at least one director on its Board of Directors that is not a
director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer that
is not a director or executive officer of the Company or any of its
Restricted Subsidiaries; provided that if such Unrestricted
Subsidiary fails to have at least one such director, such
Unrestricted Subsidiary will not cease to be an Unrestricted
Subsidiary solely because of its failure to have at least one such
director so long as such Unrestricted Subsidiary is using its
commercially reasonable efforts to appoint at least one such
director; and
(6) does not own any Capital Stock of, or own or hold any Lien on any
property of, the Company or any Restricted Subsidiary.
Any designation of a Subsidiary of the Company as an Unrestricted
Subsidiary will be evidenced to the Senior Note Trustee by filing with the
Senior Note Trustee a certified copy of the resolution of the Board of Directors
giving effect to such designation and an officers' certificate certifying that
such designation complied with the preceding conditions and was permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
preceding requirements as an Unrestricted Subsidiary, it will thereafter cease
to be an Unrestricted Subsidiary for purposes of the Senior Note Indenture and
any Indebtedness of such Subsidiary will be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date and, if such Indebtedness
is not permitted to be incurred as of such date under the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," the Company will be in default of such covenant. The Board
of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation will be
deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation will only be permitted if (1) such Indebtedness is permitted under
the covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or
other required payments of principal, including payment at final
maturity, in respect of the Indebtedness, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
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"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
will at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person.
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DESCRIPTION OF THE JUNIOR NOTES
You can find the definitions of certain terms used in this description
under the subheading "--Certain Definitions." In this description, the word "the
Company" refers only to Assisted Living Concepts, Inc. and not to any of its
Subsidiaries.
The Junior Notes were issued under an indenture, dated as of January 1,
2002 (the "Junior Note Indenture"), among the Company, the Subsidiary Guarantors
and BNY Midwest Trust Company, as the trustee under the Senior Note Indenture
(the "Junior Note Trustee") in a transaction that was not subject to the
registration requirements of the Securities Act.
The following description is a summary of the material provisions of the
Junior Note Indenture and the Collateral Documents. It does not restate the
Junior Note Indenture and the Collateral Documents in their entirety. We urge
you to read the Junior Note Indenture and the Collateral Documents because they,
and not this description, define the rights of the holders of the Junior Notes.
Copies of the Junior Note Indenture and certain Collateral Documents have been
filed as exhibits to this Registration Statement.
BRIEF DESCRIPTION OF THE JUNIOR NOTES AND THE JUNIOR NOTE GUARANTEES
THE JUNIOR NOTES
The Junior Notes:
- are junior secured obligations of the Company,
- are subordinated in right of payment to all current and future
Senior Indebtedness of the Company, including the Senior Notes,
- rank pari passu in right of payment with all current and future
senior indebtedness of the Company (other than Senior Indebtedness),
- rank senior in right of payment to all future subordinated
indebtedness of the Company,
- are secured, as described under "--Security--Security for the Junior
Notes and the Junior Note Guarantees," and
- are unconditionally guaranteed by the Subsidiary Guarantors.
THE JUNIOR NOTE GUARANTEES
The Junior Notes are guaranteed by each of the Company's Subsidiaries that
is a Subsidiary Guarantor. The Heller Debtor Subsidiaries will not guarantee the
Junior Notes.
Each Junior Note Guarantee:
- is a secured obligation of each Subsidiary Guarantor,
- is subordinated in right of payment to all current and future Senior
Indebtedness of the Subsidiary Guarantors, including the Senior Note
Guarantees,
- ranks pari passu in right of payment with all current and future
senior Indebtedness of each Subsidiary Guarantor (other than Senior
Indebtedness of the Subsidiary Guarantors),
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- ranks senior in right of payment to all future subordinated
indebtedness of each Subsidiary Guarantor, and
- is secured by the Note Collateral owned by the Subsidiary
Guarantors.
As of December 31, 2001 (after giving effect to the Plan), the Company and
the Subsidiary Guarantors have total senior borrowings, including the Senior
Notes and the Heller Loan Agreement, of approximately $80.7 million. As
indicated above and as discussed in detail below under the caption
"Subordination," payments on the Junior Notes and under the Junior Note
Guarantees will be subordinated to the payment of Senior Indebtedness.
As of the date hereof, all of our Subsidiary Guarantors are "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "--Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," the Company will be permitted to designate certain of its
Subsidiaries as "Unrestricted Subsidiaries." The Company's Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants and our
Unrestricted Subsidiaries will not guarantee the Junior Notes.
PRINCIPAL, MATURITY AND INTEREST
The Junior Notes will mature on January 1, 2012. Excluding additional
principal amount which will be issued in connection with the payment of non-cash
interest, the Junior Notes will be limited to $15.25 million aggregate principal
amount (including any Junior Notes issued after the Effective Date of the Plan,
see "--Reserve") and will bear interest payable semiannually in arrears. Until
the interest payment date immediately the third anniversary of the Effective
Date, interest on the Junior Notes will be paid by capitalizing and adding it to
the principal amount of the Junior Notes at a rate of 8.0% per annum, compounded
semi-annually in arrears. From and after the interest payment date immediately
preceding the third anniversary of the Effective Date, interest on the Junior
Notes will accrue at a rate of 12.0% per annum and will be payable in cash
semi-annually in arrears. The interest payment dates will be January 1 and July
1, commencing on July 1, 2002. The Company will pay interest on the Junior Notes
to the Persons who are registered holders of Junior Notes at the close of
business on the 15th day of the month immediately preceding each interest
payment date. Principal (and premium, if any) and interest on the Junior Notes
will be payable, and transfers thereof will be registerable, at the office or
agency of the Company maintained for such purposes, initially at the offices of
the Junior Note Trustee.
METHODS OF RECEIVING PAYMENTS ON THE JUNIOR NOTES
If a holder of Junior Notes has given wire transfer instructions to the
Company, the Company will pay all principal, interest and premium, if any, on
that holder's Junior Notes in accordance with those instructions. All other
payments on Junior Notes will be made at the office or agency of the paying
agent and registrar within the City and State of New York unless the Company
elects to make interest payments by check mailed to the holders of the Junior
Notes at their address set forth in the register of holders of Junior Notes.
Holders must surrender Junior Notes to a Paying Agent to collect principal
payments.
PAYING AGENT AND REGISTRAR FOR THE JUNIOR NOTES
Initially, the Junior Note Trustee will act as Paying Agent and Registrar.
The Company may change any Paying Agent, Registrar or co-registrar upon prior
written notice to the Junior Note Trustee and may act in any such capacity
itself.
BOOK-ENTRY, DELIVERY AND FORM OF JUNIOR NOTES
Except as described in the next paragraph, the Junior Notes were issued in
the form of one or more global junior notes (the "Global Junior Notes"). The
Global Junior Notes were deposited, or will
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be deposited on the Subsequent Distribution Date, as applicable, with The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee of DTC (such nominee being referred to herein as the "Global Junior Note
Holder").
Some of the Junior Notes were issued in the form of registered definitive
certificates (the "Certificated Junior Notes") and, as described below under
"--Certificated Notes ," other Junior Notes may be issued in the form of
Certificated Junior Notes. Upon the transfer of Certificated Junior Notes,
Certificated Junior Notes may, unless all of the Global Junior Notes have
previously been exchanged for Certificated Junior Notes, be exchanged for an
interest in the Global Junior Note representing the principal amount of Junior
Notes being transferred, subject to the transfer restrictions set forth in the
Junior Note Indenture.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that, pursuant to procedures established
by it:
(1) upon deposit of the Global Junior Notes, DTC will credit the
accounts of Participants designated by the Company with portions of
the principal amount of the Global Junior Notes; and
(2) ownership of these interests in the Global Junior Notes will be
shown on, and the transfer of ownership of these interests will be
effected only through, records maintained by DTC (with respect to
the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interest in
the Global Junior Notes).
Prospective purchasers are advised that the laws of some States require
that certain Persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Junior Note to such Persons will be limited to such extent.
So long as the Global Junior Note Holder is the registered owner of any
Junior Notes, the Global Junior Note Holder will be considered the sole holder
under the Junior Note Indenture of any Junior Notes evidenced by the Global
Junior Notes. Beneficial owners of Junior Notes evidenced by the Global Junior
Notes will not be considered the owners or holders of the Junior Notes under the
Junior Note Indenture for any purpose, including with respect to the giving of
any directions, instructions or approvals to the Junior Note Trustee. Neither
the Company nor the Junior Note Trustee will have any responsibility or
liability for any aspect of the records of DTC or for maintaining, supervising
or reviewing any records of DTC relating to the Junior Notes.
Payments in respect of the principal of, and interest and premium, if any,
on a Global Junior Note registered in the name of the Global Junior Note Holder
on the applicable record date will be payable by the Junior Note Trustee to or
at the direction of the Global Junior Note Holder in its capacity as the
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registered holder of the Junior Notes under the Junior Note Indenture. Under the
terms of the Junior Note Indenture, the Company and the Junior Note Trustee will
treat the Persons in whose names the Junior Notes, including the Global Junior
Notes, are registered as the owners of the Junior Notes for the purpose of
receiving payments and for all other purposes. Consequently, neither the
Company, the Junior Note Trustee nor any agent of the Company or the Junior Note
Trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Junior Notes or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Junior Notes; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Junior Notes (including principal
and interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of Junior
Notes will be governed by standing instructions and customary practices and will
be the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Junior Note Trustee or the Company.
Neither the Company nor the Junior Note Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Junior Notes, and the Company and the Junior Note Trustee may conclusively rely
on and will be protected in relying on instructions from DTC or its nominee for
all purposes.
CERTIFICATED NOTES
If:
(1) the Company notifies the Junior Note Trustee in writing that DTC is
no longer willing or able to act as a depository and the Company is
unable to locate a qualified successor within 90 days, or
(2) upon request to the Junior Note Trustee by any Person having a
beneficial interest in a Global Junior Note, following the
occurrence and during the continuation of a Default or Event of
Default,
then, upon surrender by the Global Junior Note Holder of its Global Junior
Notes, Junior Notes in certificated form will be issued to each Person that the
Global Junior Note Holder and DTC identify as being the beneficial owner of the
related Junior Notes. All such Certificated Junior Notes will be subject to the
legend requirements set forth in the Junior Note Indenture.
Neither the Company nor the Junior Note Trustee will be liable for any
delay by the Global Junior Note Holder or DTC in identifying the beneficial
owners of Junior Notes, and the Company and the Junior Note Trustee may
conclusively rely on, and will be protected in relying on, instructions from the
Global Junior Note Holder or DTC for all purposes.
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TRANSFER AND EXCHANGE
The Junior Notes are in fully registered form without coupons in
denominations of $1,000 (before giving effect to the capitalization of interest
through the interest payment date immediately prior to the third anniversary of
the Effective Date) or any multiples thereof (except that the initial issuance
of Junior Notes to each noteholder was in a principal amount equal to such
noteholder's Pro Rata Share of its general unsecured claim(s) in the bankruptcy
proceeding multiplied by $15,083,225, the principal amount of Junior Notes
issued on the Effective Date, and Junior Notes aggregating up to $166,775 in
principal amount may be subsequently issued from the Reserve on a pro rata basis
based on the relative amounts of general unsecured claims that were not resolved
as of the Effective Date). A holder may transfer or exchange Junior Notes in
accordance with the Junior Note Indenture. No service charge will be made for
any registration, transfer or exchange of Junior Notes, except for any tax or
other governmental charges that may be imposed in connection with such
registration, transfer or exchange. The Registrar need not transfer or exchange
any Junior Notes selected for redemption. Also, in the event of a partial
redemption, it need not transfer or exchange any Junior Notes for a period of 15
days before selecting Junior Notes to be redeemed. The registered holder of a
Junior Note may be treated as its owner for all purposes.
JUNIOR NOTE GUARANTEES
The Junior Notes are guaranteed by each of the Subsidiary Guarantors. The
Junior Note Guarantees are joint and several obligations of the Subsidiary
Guarantors. Each Junior Note Guarantee is subordinated to the prior payment in
full of all Senior Indebtedness of that Subsidiary Guarantor. The obligations of
each Subsidiary Guarantor under its Junior Note Guarantee is limited as
necessary to prevent that Junior Note Guarantee from constituting a fraudulent
conveyance under applicable law. See "Risk Factors--Risks Related to the New
Notes--Federal and state statutes allow courts, under specific circumstances, to
void guarantees and require noteholders to return payments received from
guarantors."
The Junior Note Guarantee of a Subsidiary Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Subsidiary Guarantor
(including by way of merger or consolidation) to a Person that is
not (either before or after giving effect to such transaction) a
Subsidiary of the Company, if the sale or other disposition complies
with the provisions of the Junior Note Indenture entitled "Mandatory
Redemption--Asset Sales of Note Collateral" or "Certain Rights to
Require Repurchase of Junior Notes by the Company--Asset Sales of
Non-Note Collateral;"
(2) in connection with any sale of all of the Capital Stock of a
Subsidiary Guarantor to a Person that is not (either before or after
giving effect to such transaction) a Subsidiary of the Company, if
the sale complies with the provisions of the Junior Note Indenture
entitled "Certain Rights to Require Repurchase of Junior Notes by
the Company--Asset Sales of Non-Note Collateral;"
(3) if the Company designates any Restricted Subsidiary that is a
Subsidiary Guarantor as an Unrestricted Subsidiary in accordance
with the applicable provisions of the Junior Note Indenture; or
(4) at such time, if any, as that Subsidiary Guarantor ceases to be
party to any of the Collateral Documents or all of the security
interests granted by that Subsidiary Guarantor in Note Collateral
are released in accordance with the Junior Note Indenture or the
Collateral Documents.
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See "--Mandatory Redemption--Asset Sales of Note Collateral" and "--Certain
Rights to Require Repurchase of Junior Notes by the Company--Asset Sales of
Non-Note Collateral."
SECURITY
SECURITY FOR THE JUNIOR NOTES AND THE JUNIOR NOTE GUARANTEES
The Junior Notes and the Junior Note Guarantees are secured, subject to certain
permitted liens, by a second priority security interest in 57 assisted living
facilities owned by the Company and the Subsidiary Guarantors (the "Note
Collateral").
INTERCREDITOR ARRANGEMENTS
The Junior Notes are secured, subject to certain permitted liens, by a
second priority security interest in the Note Collateral, and the interests of
the holders of Junior Notes are subordinated to the interests of the holders of
Senior Notes. The Junior Note Trustee and holders of the Junior Notes will only
be able to cause the commencement of steps to realize upon their junior security
interest in the Note Collateral if:
(1) the final maturity date of the Senior Notes has passed and the
Senior Note Trustee or the holders of Senior Notes have not
commenced such steps within 60 days of such date;
(2) the remaining principal amount of Senior Notes then outstanding
constitutes less than 10% of the remaining principal amount of
Junior Notes then outstanding; or
(3) such time as:
(a) holders of Junior Notes have not received interest or any
other amounts payable under the Junior Notes for a period of
181 days from the date of required payment, and
(b) the principal of the Senior Notes has not been accelerated and
the Senior Note Trustee or holders of the Senior Notes have
not commenced steps to foreclose or otherwise realize upon the
security interest of holders of the Senior Notes in the Note
Collateral.
In any event, so long as the principal amount of the Senior Notes is more
than the principal amount of the Junior Notes, the holders of Senior Notes will
direct any actions and make any decisions required in connection with realizing
upon the Note Collateral. At such time as the principal amount of the Senior
Notes is less than the principal amount of the Junior Notes, the holders of more
than 50% of the aggregate principal amount of the Senior Notes and Junior Notes
then outstanding will direct any actions and make any decisions required in
connection with realizing upon the Note Collateral.
MANDATORY REDEMPTION--ASSET SALES OF NOTE COLLATERAL
The Company will be required to redeem Junior Notes prior to their final
maturity date as described below.
If on any date the Company or any Restricted Subsidiary will receive Net
Proceeds from any Asset Sale of Note Collateral, then within 10 days after the
receipt of such Net Proceeds, the Company, subject to the subordination
provisions described below under the caption "Subordination Provisions," will
deliver to the Junior Note Trustee an amount sufficient to allow the Junior Note
Trustee, on behalf of the
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Company, to redeem a principal amount of the Junior Notes equal to such Net
Proceeds, pro rata in accordance with the outstanding principal amount of the
Junior Notes (subject to the requirements of the principal national securities
exchange, if any, on which the Junior Notes are listed), at a redemption price
equal to 100% of the principal amount thereof together with accrued and unpaid
interest on the Junior Notes. See "--Notice."
Notwithstanding the preceding paragraph, the Company will not, and will
not permit its Restricted Subsidiaries to, make an Asset Sale of assets or
rights constituting Note Collateral unless:
(1) except in the case of an Asset Sale of a Designated Asset, the
amount of the gross proceeds of such Asset Sale equals or exceeds
the total Release Price relating to the Note Collateral which is the
subject of such Asset Sale, and
(2) the ratio of the aggregate fair market value of the Note Collateral
after giving effect to such Asset Sale to the aggregate principal
amount of the Indebtedness under the Senior Notes and the Junior
Notes, after giving effect to the mandatory redemption required by
the preceding paragraph is not less than 1.6:1.0.
Notwithstanding the preceding paragraphs, the Company will not be required
to redeem Junior Notes under this covenant until such time as the aggregate Net
Proceeds of all Asset Sales of Note Collateral made that are required to be used
to redeem Junior Notes since (1) the date of the Junior Note Indenture, in the
case of the initial mandatory redemption of Junior Notes, or (2) the date of the
immediately preceding mandatory redemption of Junior Notes, in the case of any
subsequent mandatory redemption of Junior Notes, equals or exceeds $1.0 million;
provided that, prior to such redemption, such Net Proceeds will be deposited in
an interest bearing cash collateral account pledged for the benefit of holders
of Senior Notes and Junior Notes.
OPTIONAL REDEMPTION
The Company may, at its option at any time, redeem all, but not less than
all, of the Junior Notes, on at least 30 days' but not more than 60 days' notice
to each holder of Junior Notes to be redeemed in cash at its registered address,
at a redemption price equal to 100% of the principal amount thereof, plus
accrued interest to the redemption date; provided that such optional redemption
will only be permitted if no Senior Notes remain outstanding or if, concurrently
with the redemption of such Junior Notes, the Company redeems all Senior Notes
then outstanding.
RELEASE OF SECURITY INTERESTS IN NOTE COLLATERAL
SALE OF NOTE COLLATERAL
In the event that any Note Collateral is sold in accordance with the
provisions of the Junior Note Indenture and the Net Proceeds of such sale are
applied to repay the Junior Notes in accordance with the terms of the covenant
entitled "Mandatory Redemption--Asset Sales of Note Collateral" contained in
this description, the Collateral Agent will release the security interests in
favor of the Collateral Agent in the Note Collateral sold; provided, that the
Collateral Agent will have received from the Company an officer's certificate
that such Net Proceeds have been or will be applied in accordance with the
Senior Note Indenture and the Junior Note Indenture; provided further that,
prior to the application of such Net Proceeds, such Net Proceeds will be
deposited in an interest bearing cash collateral account pledged for the benefit
of holders of Senior Notes and Junior Notes.
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REDEMPTION OF JUNIOR NOTES
In the event that the Company redeems all of the Junior Notes in
accordance with the provisions of the Junior Note Indenture, the Collateral
Agent will release the security interests in the Note Collateral securing the
Junior Notes, the Junior Note Indenture and the related Subsidiary Guarantees.
REPURCHASE OF JUNIOR NOTES
In the event that the Company repurchases (other than with the proceeds of
an Asset Sale) all or some of the Senior Notes and/or Junior Notes, in each case
in accordance with the provisions of the Senior Note Indenture and/or the Junior
Note Indenture, as applicable, the Collateral Agent will release the security
interests in such Note Collateral as the Company will identify in writing to the
Collateral Agent, provided that:
(1) no Note Collateral will be released pursuant to this provision until
the aggregate principal amount of the Notes repurchased in
accordance with the Senior Note Indenture and the Junior Note
Indenture exceeds $10.0 million;
(2) the ratio of the aggregate fair market value of the Note Collateral
after giving effect to such release of Note Collateral to the
aggregate principal amount of the Indebtedness under the Senior
Notes and the Junior Notes after giving effect to such repurchase is
not less than 1.6:1.0; and
(3) the Collateral Agent will have received from the Company an
officer's certificate that such repurchase has been or will be
effected in accordance with the Senior Note Indenture and/or the
Junior Note Indenture, as applicable.
For purposes of this provision, the fair market value of any real property
included in the Note Collateral so released will not be less than the greater of
(1) product of 6.5 multiplied by the EBITDA of such real property for the period
of two fiscal quarters of the Company ending immediately prior to the date on
which such Note Collateral is released multiplied by 2.0, and (2) the product of
$10,000 multiplied by the number of units in such real property.
NOTICE
Notices of redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of Junior Notes
to be redeemed at its registered address, except that redemption notices may be
mailed more than 60 days prior to a redemption date if the notice is issued in
connection with a defeasance of the Junior Notes or a satisfaction and discharge
of the Junior Note Indenture. Notices of redemption may not be conditional.
On and after the redemption date, interest ceases to accrue on Junior
Notes called for redemption.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF JUNIOR NOTES BY THE COMPANY
CHANGE IN CONTROL
In the event of any Change in Control of the Company occurring after the
date of issuance of the Junior Notes and on or prior to maturity, subject to the
subordination provisions described below under the caption "--Subordination
Provisions," each holder of Junior Notes will have the right, at such holder's
option, to require the Company to repurchase all or any part of such holder's
Junior Notes on the
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date (the "Repurchase Date") that is a Business Day that is not more than 60
days after the date the Company gives notice of the Change in Control at a price
(the "Repurchase Price") equal to 101.0% of the principal amount thereof,
together with accrued and unpaid interest to the Repurchase Date. Not less than
one Business Day prior to the Repurchase Date, the Company will be required to
deposit with the Junior Note Trustee or a Paying Agent an amount of money
sufficient to pay the Repurchase Price of the Junior Notes that are to be repaid
on the Repurchase Date.
On or before the 15th day after the last date on which, in accordance with
the Senior Note Indenture, holders of Senior Notes are permitted to deliver
written notice of exercise of their right to require the Company to repurchase
Senior Notes upon a Change in Control, the Company is obligated to mail to all
holders a notice of:
- the event constituting, and the date of, the Change in Control,
- the Repurchase Date,
- the date by which the repurchase right must be exercised,
- the Repurchase Price for Junior Notes, and
- the procedures that a holder of Junior Notes must follow to exercise
a repurchase right.
To exercise the repurchase right, a holder of a Junior Note must deliver,
on or before the tenth day prior to the Repurchase Date, written notice to the
Company (or an agent designated by the Company for such purpose) and to the
Junior Note Trustee of the holder's exercise of its repurchase right, together
with the certificates evidencing the Junior Notes with respect to which the
right is being duly exercised, duly endorsed for transfer.
Prior to complying with any of the provisions of this "Change in Control"
covenant, but in any event within 90 days following a Change in Control, the
Company will either (1) repay all outstanding Senior Indebtedness (other than
the Senior Notes) and offer to repurchase all outstanding Senior Notes in
accordance with the terms of the Senior Note Indenture or (2) obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Indebtedness to permit the repurchase of the Junior Notes required by this
covenant.
There is no definition of the phrase "all or substantially all" as applied
to the Company's assets and used in the definition of Change in Control in the
Junior Note Indenture, and there is no clear definition of the phrase under
applicable law. As a result of the uncertainty of the meaning of this phrase, in
the event the Company were to sell a significant amount of its assets, the
holders and the Company may disagree over whether the sale gives rise to the
right of holders to require the Company to repurchase the Junior Notes. In such
event, the holders would likely not be able to require the Company to repurchase
unless and until the disagreement were resolved in favor of the holders of
Junior Notes.
In the event a Change in Control occurs and the holders exercise their
rights to require the Company to repurchase Junior Notes, the Company intends to
comply with any applicable tender offer rules under the Exchange Act, including
Rules 13e-4 and 14e-1, as then in effect, with respect to any such purchase. The
Change in Control purchase feature of the Junior Notes may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management.
INCURRENCE OF INDEBTEDNESS
In the event that the Company or any Restricted Subsidiary will receive
Net Proceeds from an incurrence of Indebtedness (other than Excluded
Indebtedness) occurring after the date of issuance of the
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Junior Notes and on or prior to maturity, the Company, subject to the
subordination provisions described below under the caption "Subordination
Provisions," will offer to repurchase the Junior Notes, pro rata in accordance
with the outstanding principal amount of the Junior Notes (subject to the
requirements of the principal national securities exchange, if any, on which the
Junior Notes are listed), with such Net Proceeds, at a repurchase price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together with
accrued and unpaid interest on the Junior Notes. The repurchase date (the
"Repurchase Date") will be a Business Day that is not more than 60 days after
the date the Company gives notice of such incurrence of Indebtedness. Not less
than one Business Day prior to the Repurchase Date, the Company will be required
to deposit with the Junior Note Trustee or a Paying Agent an amount of money
sufficient to pay the Repurchase Price of the Junior Notes that are to be repaid
on the Repurchase Date.
On or before the 15th day after the last date on which, in accordance with
the Senior Note Indenture, holders of Senior Notes are permitted to deliver
written notice of exercise of their right to require the Company to repurchase
Senior Notes upon an incurrence of Indebtedness, the Company is obligated to
mail to all holders a notice of:
- the event constituting, and the date of, the incurrence of
Indebtedness,
- the Repurchase Date,
- the date by which the repurchase right must be exercised,
- the Repurchase Price for Junior Notes, and
- the procedures that a holder of Junior Notes must follow to exercise
a repurchase right.
To exercise the repurchase right, a holder of a Junior Note must deliver,
on or before the tenth day prior to the Repurchase Date, written notice to the
Company (or an agent designated by the Company for such purpose) and to the
Junior Note Trustee of the holder's exercise of its repurchase right, together
with the certificates evidencing the Junior Notes with respect to which the
right is being duly exercised, duly endorsed for transfer.
In the event an incurrence of Indebtedness occurs and the holders exercise
their rights to require the Company to repurchase Junior Notes, the Company
intends to comply with any applicable tender offer rules under the Exchange Act,
including Rules 13e-4 and 14e-1, as then in effect, with respect to any such
purchase.
Notwithstanding the preceding paragraphs, the Company will not be required
to offer to repurchase Junior Notes until such time as the aggregate Net
Proceeds of all Asset Sales of assets or rights that do not constitute Note
Collateral and the Net Proceeds of all incurrences of Indebtedness, in each case
that are required to be used to offer to repurchase Senior Notes or Junior
Notes, since (1) the date of the Junior Note Indenture, in the case of the
initial offer to repurchase Junior Notes, or (2) the date of the immediately
preceding offer to repurchase Junior Notes, in the case of any subsequent offer
to repurchase Junior Notes, equals or exceeds $3.0 million; provided, that prior
to such repurchase, such Net Proceeds will be deposited in an interest bearing
cash collateral account pledged for the benefit of holders of Senior Notes and
Junior Notes.
ASSET SALES OF NON-NOTE COLLATERAL
In the event that the Company or any Restricted Subsidiary will receive
Net Proceeds from an Asset Sale of assets or rights that do not constitute Note
Collateral occurring after the date of issuance of the Junior Notes and on or
prior to maturity, the Company, subject to the subordination provisions
described below under the caption "Subordination Provisions," will offer to
repurchase the Junior Notes, pro rata in
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accordance with the outstanding principal amount of the Junior Notes (subject to
the requirements of the principal national securities exchange, if any, on which
the Junior Notes are listed), with such Net Proceeds, at a repurchase price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together with
accrued and unpaid interest on the Junior Notes. The repurchase date (the
"Repurchase Date") will be a Business Day that is not more than 60 days after
the date the Company gives notice of such Asset Sale. Not less than one Business
Day prior to the Repurchase Date, the Company will be required to deposit with
the Junior Note Trustee or a Paying Agent an amount of money sufficient to pay
the Repurchase Price of the Junior Notes that are to be repaid on the Repurchase
Date.
On or before the 15th day after the last date on which, in accordance with
the Senior Note Indenture, holders of the Senior Notes are permitted to deliver
written notice of their exercise right to require the Company to repurchase
Senior Notes upon such Asset Sale, the Company is obligated to mail to all
holders a notice of:
- the event constituting, and the date of, the Asset Sale,
- the Repurchase Date,
- the date by which the repurchase right must be exercised,
- the Repurchase Price for Junior Notes, and
- the procedures that a holder of Junior Notes must follow to exercise
a repurchase right.
To exercise the repurchase right, a holder of a Junior Note must deliver,
on or before the tenth day prior to the Repurchase Date, written notice to the
Company (or an agent designated by the Company for such purpose) and to the
Junior Note Trustee of the holder's exercise of its repurchase right, together
with the certificates evidencing the Junior Notes with respect to which the
right is being duly exercised, duly endorsed for transfer.
In the event an Asset Sale of assets or rights that do not constitute Note
Collateral occurs and the holders exercise their rights to require the Company
to repurchase Junior Notes, the Company intends to comply with any applicable
tender offer rules under the Exchange Act, including Rules 13e-4 and 14e-1, as
then in effect, with respect to any such purchase.
Notwithstanding the preceding paragraphs, the Company will not be required
to offer to repurchase Junior Notes until such time as the aggregate Net
Proceeds of all Asset Sales of assets or rights that do not constitute Note
Collateral and the Net Proceeds of all incurrences of Indebtedness, in each case
that are required to be used to offer to repurchase Junior Notes or Junior
Notes, since (1) the date of the Junior Note Indenture, in the case of the
initial offer to repurchase Junior Notes, or (2) the date of the immediately
preceding offer to repurchase Junior Notes, in the case of any subsequent offer
to repurchase Junior Notes, equals or exceeds $3.0 million; provided, that prior
to such repurchase, such Net Proceeds will be deposited in an interest bearing
cash collateral account pledged for the benefit of the holders of Senior Notes
and Junior Notes.
The agreements governing the Company's other indebtedness may contain
prohibitions on certain events, including events that would constitute a Change
in Control, an Asset Sale or an incurrence of Indebtedness. In addition, the
exercise by the holders of Junior Notes of their right to require the Company to
repurchase the Junior Notes upon a Change in Control, an incurrence of
Indebtedness or an Asset Sale, or the redemption by the Company of the Junior
Notes upon an Asset Sale could cause a default under these other agreements,
even if the Change in Control, Asset Sale or incurrence of Indebtedness itself
does not, due to the financial effect of such repurchases on the Company.
Finally, the Company's ability to pay cash to the holders of Junior Notes upon a
repurchase may be limited by the
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Company's then existing financial resources. See "Risk Factors--Risks Related to
the New Notes--We may not have the ability to raise the funds necessary to
finance the offers to redeem New Notes required by the Senior Note Indenture and
the Junior Note Indenture" and "Risk Factors--Risks Related to the New Notes--We
may not have the ability to repurchase the New Notes upon an asset sale of
collateral."
SUBORDINATION PROVISIONS
The payment of principal, interest and premium, if any, on the Junior
Notes and the payment of any amounts under the Junior Note Guarantees will be
subordinated to the prior payment in full of all Senior Indebtedness, including
Senior Indebtedness incurred after the date of the Junior Note Indenture.
The holders of Senior Indebtedness will be entitled to receive payment in
full of all Obligations due in respect of Senior Indebtedness (including
interest after the commencement of any bankruptcy proceeding at the rate
specified in the applicable Senior Indebtedness) before the holders of Junior
Notes will be entitled to receive any payment with respect to the Junior Notes
or the Junior Note Guarantees (in each case, except that holders of Junior Notes
may receive and retain Permitted Junior Securities and payments made from the
trust described under "--Legal Defeasance and Covenant Defeasance"), in the
event of any distribution to creditors of the Company or any Subsidiary
Guarantor:
(1) in a liquidation or dissolution of the Company or that Subsidiary
Guarantor;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property or that
Subsidiary Guarantor or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of the Company's or that Subsidiary Guarantor's
assets and liabilities.
The Company also may not make any payment in respect of the Junior Notes
and the Subsidiary Guarantors may not make any payment in respect of the Junior
Note Guarantees (in each case, except in Permitted Junior Securities or from the
trust described under "--Legal Defeasance and Covenant Defeasance") if:
(1) a payment default on Senior Indebtedness occurs and is continuing
beyond any applicable grace period; or
(2) any other default occurs and is continuing on any series of Senior
Indebtedness that permits holders of that series of Senior
Indebtedness to accelerate its maturity and the Junior Note Trustee
receives a notice of such default (a "Payment Blockage Notice") from
the Company or the holders of any Senior Indebtedness.
Payments on the Junior Notes and the Junior Note Guarantees may and will
be resumed:
(1) in the case of a payment default, upon the date on which such
default is cured or waived; and
(2) in the case of a nonpayment default, upon the earlier of the date on
which such nonpayment default is cured or waived or 181 days after
the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Senior Indebtedness has been
accelerated.
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No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the delivery of the immediately prior
Payment Blockage Notice; and
(2) all scheduled payments of principal, interest and premium, if any,
on the Junior Notes that have come due have been paid in full in
cash.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Junior Note Trustee will be, or
be made, the basis for a subsequent Payment Blockage Notice unless such default
has been cured or waived for a period of not less than 90 days.
If the Junior Note Trustee or any holder of the Junior Notes receives a
payment in respect of the Junior Notes or under a Junior Note Guarantee (in each
case, except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") when:
(1) the payment is prohibited by these subordination provisions; and
(2) the Junior Note Trustee or the holder of the Junior Notes has actual
knowledge that the payment is prohibited;
the Junior Note Trustee or the holder of the Junior Notes, as the case may be,
will hold the payment in trust for the benefit of the holders of Senior
Indebtedness. Upon the proper written request of the holders of Senior
Indebtedness, the Junior Note Trustee or the holder of the Junior Notes, as the
case may be, will deliver the amounts in trust to the holders of Senior
Indebtedness or their proper representative.
The Company must promptly notify holders of Senior Indebtedness if payment
of the Junior Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of the Company, holders of Junior
Notes may recover less ratably than creditors of the Company who are holders of
Senior Indebtedness. See "Risk Factors--Risks Related to the Junior Notes--The
noteholders' right to receive payments on the Junior Notes is junior to certain
of our senior indebtedness, including the Senior Notes. Further, the Junior Note
Guarantees will be junior to certain of our subsidiary guarantors' senior
indebtedness, including the Senior Note guarantees."
The agreements governing the Company's other indebtedness may contain
prohibitions on certain events, including events that would constitute a Change
in Control, an Asset Sale or an incurrence of Indebtedness. In addition, the
exercise by the holders of Junior Notes of their right to require the Company to
repurchase the Junior Notes upon a Change in Control or an incurrence of
Indebtedness or an Asset Sale of assets or rights that do not constitute Note
Collateral or Heller Collateral, or redemption by the Company of the Junior
Notes upon an Asset Sale could cause a default under these other agreements,
even if the Change in Control, Asset Sale of Note Collateral or incurrence of
Indebtedness itself does not, due to the financial effect of such repurchases on
the Company. Finally, the Company's ability to pay cash to the holders of Junior
Notes upon a repurchase may be limited by the Company's then existing financial
resources. See "Risk Factors--Risks Related to the New Notes--We may not have
the ability to raise the funds necessary to finance the offers to redeem New
Notes required by the Senior Note Indenture and the Junior Note Indenture" and
"Risk Factors--Risks Related to the New Notes--We may not have the ability to
repurchase the New Notes upon an asset sale of collateral."
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CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the
Company or any of its Restricted Subsidiaries) or to the direct or
indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or any Restricted Subsidiary of
the Company or payable to the Company or a Restricted Subsidiary of
the Company);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the
Company or any Restricted Subsidiary of the Company held by any
Person (other than the Company or any of its Wholly Owned Restricted
Subsidiaries);
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Junior Notes or the Junior Note Guarantees,
except a payment of interest or principal and premium, if any, at
the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions
set forth in these clauses (1) through (4) being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment; and
(2) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described below under
the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Junior Note Indenture (excluding
Restricted Payments permitted by clauses (2), (3) and (4) of the
next succeeding paragraph), is less than the sum, without
duplication, of:
(a) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of
the first fiscal quarter commencing after the date of the
Junior Note Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus
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(b) 100% of the aggregate net cash proceeds received by the
Company since the date of the Junior Note Indenture as a
contribution to its common equity capital or from the issue or
sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of convertible
or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the Company that have been
converted into or exchanged for such Equity Interests (other
than Equity Interests (or Disqualified Stock or debt
securities) sold to a Subsidiary of the Company), plus
(c) (i) to the extent that any Restricted Investment that was made
after the date of the Junior Note Indenture is sold for cash
or otherwise liquidated or repaid for cash for an amount in
excess of the initial amount of such Restricted Investment,
the sum of (x) 50% of the cash proceeds with respect to such
Restricted Investment in excess of the aggregate amount
invested in such Restricted Investment (less the cost of
disposition, if any) and (y) the aggregate amount invested in
such Restricted Investment, and (ii) to the extent that any
such Restricted Investment is sold for cash or otherwise
liquidated or repaid in cash for an amount equal to or less
than the initial amount of such Restricted Investment, the
cash return of capital with respect to such Restricted
Investment (less the cost of disposition, if any); provided
that the amount of any Net Proceeds that are applied to
repurchase the Junior Notes pursuant to the covenant entitled
"Certain Rights to Require Repurchase of Junior Notes by the
Company--Asset Sales of Non-Note Collateral" will be excluded
from this clause (3)(c) to the extent otherwise includible;
plus
(d) 50% of any dividends received by the Company or a Restricted
Subsidiary after the date of the Junior Note Indenture from an
Unrestricted Subsidiary of the Company, to the extent that
such dividends were not otherwise included in Consolidated Net
Income of the Company for such period, plus
(e) to the extent that any Unrestricted Subsidiary of the Company
is redesignated as a Restricted Subsidiary after the date of
the Junior Note Indenture, the lesser of (i) the fair market
value of the Company's Investment in such Subsidiary as of the
date of such redesignation or (ii) such fair market value as
of the date on which such Subsidiary was originally designated
as an Unrestricted Subsidiary.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the
dividend payment would have complied with the provisions of the
Junior Note Indenture;
(2) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of the Company or any Restricted
Subsidiary with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(3) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its Equity Interests on a pro rata basis;
and
(4) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company held by any member of the Company's (or
any of its Restricted Subsidiaries') management pursuant to any
management
129
equity subscription agreement, stock option agreement or similar
agreement; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests may not
exceed $250,000 in any twelve-month period.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors in good faith whose
resolution with respect thereto will be delivered to the Junior Note Trustee.
The Board of Directors' determination must be based upon an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if the fair market value exceeds $3.0 million. Not later than the date
of making any Restricted Payment, the Company will deliver to the Junior Note
Trustee an officers' certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the Junior Note Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and the
Company will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock, and the Company's Subsidiaries may incur Indebtedness or issue preferred
stock, if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock or preferred stock is issued would have been at least
2.0 to 1, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been incurred
or the preferred stock or Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(2) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness represented by the Senior Notes, the Junior Notes and
the related Subsidiary Guarantees to be issued on the date of the
Senior Note Indenture and the date of the Junior Note Indenture,
respectively, or pursuant to the covenant below entitled "Additional
Subsidiary Guarantees" or the covenant entitled "Additional
Subsidiary Guarantees" in the Description of the Senior Notes;
(3) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for
the purpose of financing all or any part of the purchase price or
cost of construction or improvement of property, plant or equipment
used in the business of the Company or such Restricted Subsidiary,
in an aggregate principal amount, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (3), not to exceed
$2.5 million at any time outstanding;
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(4) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness (other than intercompany Indebtedness) that was
permitted by the Junior Note Indenture to be incurred under the
first paragraph of this covenant or clauses (1), (2), (3), (4) or
(10) of this paragraph;
(5) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of
its Restricted Subsidiaries; provided, however, that:
(a) if the Company or any Subsidiary Guarantor is the obligor on
such Indebtedness, such Indebtedness must be expressly
subordinated to the prior payment in full in cash of all
Obligations with respect to the Junior Notes, in the case of
the Company, or its Junior Note Guarantee, in the case of a
Subsidiary Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person
other than the Company or a Restricted Subsidiary of the
Company and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary of the Company will be deemed, in each
case, to constitute an incurrence of such Indebtedness by the
Company or such Subsidiary, as the case may be, that was not
permitted by this clause (5);
(6) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing
or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Junior Note
Indenture to be outstanding;
(7) the Guarantee by the Company or any of the Subsidiary Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the
Company that was permitted to be incurred by another provision of
this covenant;
(8) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the
form of additional Indebtedness with the same terms, and the payment
of dividends on Disqualified Stock in the form of additional shares
of the same class of Disqualified Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant; provided, in each such case, that the
amount thereof is included in Fixed Charges of the Company as
accrued;
(9) Indebtedness of the Company or any Restricted Subsidiary to the
extent that the Net Proceeds thereof are promptly:
(a) used to purchase Junior Notes tendered in an offer to purchase
made as a result of a Change in Control, or
(b) deposited to defease the Junior Notes as described under
"--Legal Defeasance and Covenant Defeasance,"
(10) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness (including Acquired Debt) in an aggregate
principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness
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incurred to refund, refinance or replace any Indebtedness incurred
pursuant to this clause (10), not to exceed $5.0 million; and
(11) (the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness
ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such
event will be deemed to constitute an incurrence of Indebtedness by
a Restricted Subsidiary of the Company that was not permitted by
this clause (11).
The Company will not incur any Indebtedness (including Permitted Debt)
that is contractually subordinated in right of payment to any other Indebtedness
of the Company unless such Indebtedness is also contractually subordinated in
right of payment to the Junior Notes on substantially identical terms; provided,
however, that no Indebtedness of the Company will be deemed to be contractually
subordinated in right of payment to any other Indebtedness of the Company solely
by virtue of being unsecured.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (11) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will be permitted to classify such item of Indebtedness on the date of
its incurrence, or later reclassify all or a portion of such item of
Indebtedness, in any manner that complies with this covenant.
NO SENIOR SUBORDINATED DEBT
The Company will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Indebtedness of the Company and senior in any respect in
right of payment to the Junior Notes. No Subsidiary Guarantor will incur,
create, issue, assume, guarantee or otherwise become liable for any Indebtedness
that is subordinate or junior in right of payment to the Senior Indebtedness of
such Subsidiary Guarantor and senior in any respect in right of payment to such
Subsidiary Guarantor's Junior Note Guarantee.
LIENS
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly (1) create, incur, assume or suffer to exist any Lien of
any kind securing Indebtedness, Attributable Debt or trade payables on any asset
of the Company or any of its Subsidiaries now owned or hereafter acquired, or on
any income or profits therefrom, or (2) assign or convey any right to receive
income therefrom, securing Indebtedness, Attributable Debt or trade payables,
except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to the Company or any Restricted Subsidiaries, or with respect to
any other interest or participation in, or measured by, its profits,
or pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
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(3) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities
(including, without limitation, the Heller Loan Agreement) as in
effect on the date of the Junior Note Indenture and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of those agreements,
provided that the amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are
no more restrictive, taken as a whole, with respect to such dividend
and other payment restrictions than those contained in those
agreements on the date of the Junior Note Indenture;
(2) the Senior Note Indenture, the Senior Notes and the Senior Note
Guarantees;
(3) the Junior Note Indenture, the Junior Notes and the Junior Note
Guarantees;
(4) applicable law;
(5) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness or Capital Stock was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness,
such Indebtedness was permitted by the terms of the Junior Note
Indenture to be incurred;
(6) customary non-assignment provisions in any contract or licensing
agreement entered into in the ordinary course of business and
consistent with past practices;
(7) purchase money obligations or Capital Lease Obligations or other
mortgage financings permitted to be incurred pursuant to clause (3)
of the second paragraph under the caption "Incurrence of
Indebtedness and Issuance of Preferred Stock" that impose
restrictions on that property of the nature described in clause (3)
of the preceding paragraph;
(8) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted
Subsidiary pending its sale or other disposition;
(9) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
(10) Liens securing Indebtedness otherwise permitted to be incurred under
the provisions of the covenant described above under the caption
"--Liens" that limit the right of the debtor to dispose of the
assets subject to such Liens;
(11) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, assets sale agreements,
stock sale agreements and other similar agreements entered into in
the ordinary course of business; and
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(12) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business.
MERGER, CONSOLIDATION OR THE TRANSFER OF ALL OR SUBSTANTIALLY ALL OF
THE ASSETS OF THE COMPANY
The Company may not, in a single transaction or through a series of
related transactions consolidate with or merge into, or transfer all or
substantially all of the assets of the Company and its Restricted Subsidiaries,
taken as a whole, to, another Person in any transaction in which the Company is
not the continuing or surviving entity, unless:
(1) the resulting, surviving or transferee Person is a corporation which
assumes by supplemental indenture, in form satisfactory to the
Junior Note Trustee, all the obligations of the Company under the
Junior Notes, the Junior Note Indenture and the Registration Rights
Agreement or is a reorganization within the meaning of Section
368(a)(1)(B) of the Internal Revenue Code, and the Junior Note
Indenture remains in full force and effect;
(2) such corporation is organized and existing under the laws of the
United States, a State thereof or the District of Columbia although
it in turn may be owned by a foreign entity;
(3) immediately after giving effect to such transaction no Default or
Event of Default will have occurred and be continuing and the
officers' certificate referred to in the following paragraph
reflects that such officers are not aware of any such Default or
Event of Default that will have occurred and be continuing; and
(4) the Company will have delivered to the Junior Note Trustee an
officers' certificate, and an opinion of counsel, each stating that
such consolidation, merger or transfer and such supplemental
indenture comply with the Junior Note Indenture.
Upon any consolidation or merger, or any transfer of all or substantially
all of the assets of the Company in accordance with the preceding paragraph:
(1) the successor corporation formed by such consolidation or into which
the Company is merged or to which such transfer is made will succeed
to, and will be substituted for, and may exercise every right and
power of, the Company under the Junior Note Indenture and the
Registration Rights Agreement with the same effect as if such
successor corporation has been named as the Company in the Junior
Note Indenture and the Registration Rights Agreement;
(2) the Company will thereupon be relieved of any further obligation or
liability thereunder or upon the Junior Notes; and
(3) the Company as the predecessor corporation may thereupon or at any
time thereafter be dissolved, wound up or liquidated.
Such successor corporation thereupon may cause to be signed, and may issue
either in its own name or in the name of Assisted Living Concepts, Inc., any or
all of the Junior Notes issuable under the Junior Note Indenture which
theretofore will not have been signed by the Company and delivered to the Junior
Note Trustee. Upon the order of such successor corporation, instead of the
Company, and subject to all the terms, conditions and limitations in the Junior
Note Indenture, the Junior Note Trustee will authenticate and will deliver any
Junior Notes which previously will have been signed and delivered by officers of
the Company to the Junior Note Trustee for authentication, and any Junior Notes
which such
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successor corporation thereafter will cause to be signed and delivered to the
Junior Note Trustee for that purpose. All the Junior Notes so issued will in all
respects have the same legal rank and benefit under the Junior Note Indenture as
the Junior Notes theretofore or thereafter issued in accordance with the terms
of the Junior Note Indenture as though all such Junior Notes had been issued at
the date of execution of the Junior Note Indenture.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by the Company and its
Restricted Subsidiaries in the Subsidiary properly designated will be deemed to
be an Investment made as of the time of the designation and will reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "--Restricted Payments" or Permitted
Investments, as determined by the Company. That designation will only be
permitted if the Investment would be permitted at that time and if the
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or Guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person; and
(2) the Company delivers to the Junior Note Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $1.0 million, a resolution of the Board of Directors
set forth in an officers' certificate certifying that such
Affiliate Transaction complies with this covenant and that
such Affiliate Transaction has been approved by a majority of
the disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $2.5 million, an opinion as to the fairness to the
holders of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment
banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement that is in effect on the date of the Junior
Note Indenture or that is entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted
Subsidiary;
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(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company;
(4) sales of Equity Interests (other than Disqualified Stock) to
Affiliates of the Company;
(5) Restricted Payments that are permitted by the provisions of the
Junior Note Indenture described above under the caption
"--Restricted Payments;"
(6) advances to officers of the Company or any Restricted Subsidiary of
the Company in the ordinary course of business to provide for the
payment of reasonable expenses incurred by such Persons in the
performance of their responsibilities to the Company or such
Restricted Subsidiary or in connection with any relocation;
(7) reasonable fees and compensation (including, without limitation,
bonuses, retirement plans and securities, equity options and equity
ownership plans) paid or issued to and indemnities provided on
behalf of, officers, directors, employees or consultants of the
Company or any Restricted Subsidiary in the ordinary course of
business; and
(8) any other transactions expressly authorized by the Court pursuant to
the Plan.
ADDITIONAL SUBSIDIARY GUARANTEES
If the Company or any of its Restricted Subsidiaries acquires or creates
another Domestic Subsidiary that is a Restricted Subsidiary after the date of
the Junior Note Indenture or properly designates a Domestic Subsidiary as a
Restricted Subsidiary and, in each case, that Domestic Subsidiary becomes party
to one or more Collateral Documents granting a security interest in Note
Collateral in favor of the Collateral Agent, then that newly acquired or created
or designated Domestic Subsidiary will become a Subsidiary Guarantor and execute
and deliver:
(1) a supplemental indenture pursuant to which such Domestic Subsidiary
will unconditionally guarantee all of the Company's obligations
under the Junior Notes and the Junior Note Indenture on the terms
set forth in the Junior Note Indenture;
(2) any Collateral Documents necessary or reasonably requested by the
Collateral Agent to grant the Collateral Agent for the benefit of
holders of Senior Notes and Junior Notes a valid, enforceable,
perfected security interest in the Note Collateral described
therein; and
(3) an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Domestic Subsidiary and
constitutes a legally valid and binding and enforceable obligation
of such Domestic Subsidiary,
each reasonably satisfactory to the Junior Note Trustee within 10 business days
of the date on which it was acquired or created or designated.
Thereafter, such Domestic Subsidiary will be a Subsidiary Guarantor for
all purposes of the Junior Note Indenture. This covenant will not apply to any
Subsidiaries that have been properly designated as Unrestricted Subsidiaries in
accordance with the Junior Note Indenture for as long as they continue to
constitute Unrestricted Subsidiaries or to any Restricted Subsidiaries that are
not party to one or more Collateral Documents granting a security interest in
Note Collateral in favor of the Collateral Agent.
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SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company or any Restricted Subsidiary may enter into a sale and leaseback
transaction if:
(1) the assets subject to such sale and leaseback transaction are Heller
Collateral and are not Note Collateral and the Net Proceeds thereof
are applied as Net Proceeds of an incurrence of Indebtedness in
accordance with the covenant entitled "--Certain Rights to Require
Repurchase of Junior Notes by the Company--Incurrence of
Indebtedness," or
(2) each of the following conditions is satisfied:
(a) the Company or that Restricted Subsidiary, as applicable,
could have (i) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback
transaction under the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock" and (ii) incurred a Lien to secure such
Indebtedness pursuant to the covenant described above under
the caption "--Liens;"
(b) the gross cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value, as determined in
good faith by the Board of Directors of the Company and set
forth in an officers' certificate delivered to the Junior Note
Trustee, of the property that is the subject of that sale and
leaseback transaction;
(c) the rental payments of the Company or that Restricted
Subsidiary, as applicable, under the leaseback arrangement
provide for rental payments in each 12 month period of the
lease that are substantially equal; and
(d) the transfer of assets in that sale and leaseback transaction
is permitted by, and the Company or that Restricted Subsidiary
applies the proceeds of such transaction in compliance with,
the covenant described above under the caption "--Mandatory
Redemption--Asset Sales of Note Collateral" or the covenant
described above under the caption "--Certain Rights to Require
Repurchase of Junior Notes by the Company--Asset Sales of
Non-Note Collateral," as applicable.
LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY
OWNED RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly transfer, convey, sell, lease or
otherwise dispose of any Equity Interests in any Wholly Owned Restricted
Subsidiary of the Company to any Person (other than the Company or a Wholly
Owned Restricted Subsidiary of the Company), unless:
(1) such transfer, conveyance, sale, lease or other disposition is of
all the Equity Interests in such Wholly Owned Restricted Subsidiary;
and
(2) the Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant
described above under the caption "Certain Rights to Require
Repurchase of Junior Notes by the Company--Asset Sales of Non-Note
Collateral."
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In addition, the Company will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than the Permitted Business, except to such extent
as would not be material to the Company and its Restricted Subsidiaries taken as
a whole.
MAINTENANCE OF PROPERTY
The Company will, and will cause its Restricted Subsidiaries to keep all
property and systems useful and necessary in its business or the business of any
of its Restricted Subsidiaries that is included in the Note Collateral in good
working order and condition, ordinary wear and tear excepted and supplied with
all necessary equipment.
INSURANCE
The Company will, and will cause its Restricted Subsidiaries to, maintain
insurance with responsible carriers against such risks and in such amounts as is
customarily carried by similar businesses with such deductibles, retentions,
self insured amounts and coinsurance provisions as are customarily carried by
similar businesses of similar size, and will furnish to the Junior Note Trustee,
upon reasonable written request, full information as to the insurance carried.
CERTAIN NOTICES TO THE JUNIOR NOTE TRUSTEE
The Company will, so long as any Junior Notes are outstanding, deliver to
the Junior Note Trustee, within 10 days of becoming aware of any Default or
Event of Default in the performance of any covenant, agreement or condition in
the Junior Note Indenture, an officer's certificate specifying such Default or
Event of Default, the period of existence thereof and what action the Company is
taking or proposes to take with respect to such Default or Event of Default.
In the event that any Indebtedness of the Company that is subordinated to
the Junior Notes is declared due and payable before the Stated Maturity of such
Indebtedness because of the occurrence of an event of default thereunder, the
Company will give prompt notice in writing of such happening to the Junior Note
Trustee.
The Company is required to file annually with the Junior Note Trustee,
within 120 days after the end of each fiscal year of the Company, an officer's
statement as to the absence of defaults in fulfilling any of its obligations
under the Junior Note Indenture.
PAYMENT OF THE JUNIOR NOTES
The Company will duly and punctually pay the principal of and premium, if
any, and interest on the Junior Notes in accordance with the terms of the Junior
Notes and the Junior Note Indenture.
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MAINTENANCE OF OFFICE OR AGENCY
The Company will maintain in the Borough of Manhattan, the City of New
York, an office or agency (which may be an office of the Junior Note Trustee or
an affiliate of the Junior Note Trustee, Registrar or co-registrar) where Junior
Notes may be surrendered for registration of transfer or for exchange and where
notices and demands to or upon the Company in respect of the Junior Notes and
the Junior Note Indenture may be served. The Company will give prompt written
notice to the Junior Note Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company fails to maintain
any such required office or agency or fails to furnish the Junior Note Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the Corporate Trust Office of the Junior Note Trustee.
The Company may also from time to time designate one or more other offices
or agencies where the Junior Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission will in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, the City of New York for such purposes. The Company will give prompt
written notice to the Junior Note Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
The Company will designate the Corporate Trust Office of the Junior
Note Trustee as one such office or agency of the Company in accordance with the
Junior Note Indenture.
WAIVER OF STAY, EXTENSION OR USURY LAWS
The Company will waive, to the maximum extent permitted by applicable law,
any stay or extension law or any usury law or other law that would prohibit or
forgive the Company from paying all or any portion of the principal of, premium,
if any, or interest on the Junior Notes in accordance with the Junior Note
Indenture, wherever enacted, now or at any time hereafter in force, or that may
affect the covenants or the performance of the Junior Note Indenture, and the
Company, to the maximum extent permitted by applicable law, will waive all
benefit or advantage of any such law and will not hinder, delay or impede the
execution of any power granted to the Junior Note Trustee under the Junior Note
Indenture, but will suffer and permit the execution of every such power as
though no such law had been enacted.
TAXES
The Company will pay or discharge, and will cause each of its Restricted
Subsidiaries to pay or discharge, prior to delinquency, all material taxes,
assessments, and governmental levies except such as are contested in good faith
and by appropriate proceedings or where the failure to effect such payment is
not adverse in any material respect to the holders of the Junior Notes.
CORPORATE EXISTENCE
Subject to the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Transfer of All or Substantially All of the
Assets of the Company," the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect:
(1) its corporate existence, and the corporate, partnership or other
existence of each of its Restricted Subsidiaries, in accordance with
the respective organizational documents (as the same may be amended
from time to time) of the Company or any such Restricted Subsidiary,
and
139
(2) the rights (charter and statutory), licenses and franchises of the
Company and its Restricted Subsidiaries; provided, however, that the
Company will not be required to preserve any such right, license or
franchise, or the corporate, partnership or other existence of any
of its Restricted Subsidiaries, if the Board of Directors will
determine that the preservation thereof is no longer desirable in
the conduct of the business of the Company and its Restricted
Subsidiaries, taken as a whole, and that the loss thereof is not
adverse in any material respect to the holders of the Junior Notes.
NO AMENDMENT TO CERTAIN PROVISIONS OF THE JUNIOR NOTE INDENTURE
Without the consent of the holders of at least a majority in aggregate
principal amount of the Senior Notes then outstanding, the Company will not
amend, modify or alter the Junior Note Indenture in any way to:
(1) increase the rate of or change the time for payment of interest on
any Junior Notes;
(2) increase the principal or premium, if any, of, or advance the final
maturity date of, any Junior Notes;
(3) alter the redemption provisions or the price or terms at which the
Company is required to offer to purchase any Junior Notes; or
(4) amend the provisions of the Junior Note Indenture which relate to
subordination.
REPORTS
Whether or not required by the Commission, so long as any notes are
outstanding, the Company will furnish to the Junior Note Trustee and to the
holders of Junior Notes, within the time periods specified in the Commission's
rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms
10-Q and 10-K (or any successor forms) if the Company were required
to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual
financial statements by the Company's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K (or any successor forms) if the Company were
required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, whether or not required by the Commission, the Company will
file a copy of all of the information and reports referred to in clauses (1) and
(2) above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the
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Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request.
MODIFICATION OF THE JUNIOR NOTE INDENTURE
Under the Junior Note Indenture, with certain exceptions, the rights and
obligations of the Company with respect to the Junior Notes and the rights of
holders of the Junior Notes may only be modified by the Company and the Junior
Note Trustee with the written consent of the holders of not less than 66-2/3% in
principal amount of the outstanding Junior Notes.
However, without the consent of each holder of any Junior Note affected,
an amendment, waiver or supplement (with respect to any Junior Notes held by a
non-consenting holder) may not:
(1) reduce the principal amount of Junior Notes whose holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any Junior
Note or alter the provisions with respect to the redemption of the
Junior Notes (other than provisions relating to the covenants
described above under the captions "--Certain Rights to Require
Repurchase of Junior Notes by the Company" and "--Mandatory
Redemption--Asset Sales of Note Collateral");
(3) reduce the rate of or change the time for payment of interest on any
Junior Note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, if any, on the Junior Notes (except a
rescission of acceleration of the Junior Notes by the holders of at
least a majority in aggregate principal amount of the Junior Notes
and a waiver of the payment Default that resulted from such
acceleration);
(5) make any Junior Note payable in money other than that stated in the
Junior Notes;
(6) make any change in the provisions of the Junior Note Indenture
relating to waivers of past Defaults or the rights of holders of a
Junior Notes to receive payments of principal of, or interest or
premium, if any, on the Junior Notes;
(7) waive a redemption payment with respect to any Junior Note;
(8) release any Subsidiary Guarantor from any of its obligations under
its Junior Note Guarantee or the Junior Note Indenture, except in
accordance with the terms of the Junior Note Indenture; or
(9) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the Junior
Note Indenture relating to subordination that adversely affects the rights of
the holders of the Junior Notes will require the consent of the holders of 100%
in aggregate principal amount of Junior Notes then outstanding.
Notwithstanding the preceding, without the consent of any holder of Junior
Notes, the Company, the Subsidiary Guarantors and the Junior Note Trustee may
amend or supplement the Junior Note Indenture or the Junior Notes:
141
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Junior Notes in addition to or in
place of Certificated Junior Notes;
(3) to provide for the assumption of the Company's obligations to
holders of Junior Notes in the case of a merger or consolidation or
sale of all or substantially all of the Company's assets; or
(4) to make any change that would provide any additional rights or
benefits to the holders of Junior Notes or that does not adversely
affect the legal rights under the Junior Note Indenture of any such
holder.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The following is a summary of certain provisions of the Junior Note
Indenture relating to Events of Default, notice and waiver.
Each of the following is an Event of Default under the Junior Note
Indenture:
(1) default in the payment of interest on the Junior Notes when due and
payable which continues for 30 days whether or not prohibited by the
subordination provisions of the Junior Note Indenture;
(2) default in the payment of principal of (and premium, if any) on the
Junior Notes when due and payable, at maturity, upon redemption or
otherwise whether or not prohibited by the subordination provisions
of the Junior Note Indenture;
(3) failure by the Company or any of its Restricted Subsidiaries to
comply with the provisions described under the captions "--Mandatory
Redemption--Asset Sales of Note Collateral," "--Certain Rights To
Require Repurchase of Junior Notes by the Company" or "--Certain
Covenants--Merger, Consolidation or the Transfer of All or
Substantially All of the Assets of the Company;"
(4) failure to perform any other covenant of the Company or any of its
Restricted Subsidiaries contained in the Junior Note Indenture or
the Junior Notes which continues for 60 days after notice as
provided in the Junior Note Indenture;
(5) acceleration of any Indebtedness of the Company or any of the
Subsidiary Guarantors for money borrowed (including Capital Lease
Obligations but not including any indebtedness or obligation for
which recourse is limited to the property purchased) in an aggregate
principal amount in excess of $5.0 million, whether existing on the
date of the execution of the Junior Note Indenture or thereafter
created, if such Indebtedness is not paid or such acceleration is
not annulled within 10 days after notice to the Company of such
acceleration;
(6) failure by the Company or any of the Subsidiary Guarantors to pay
final non-appealable judgments (not paid or covered by insurance)
aggregating in excess of $2.0 million, which judgments are not paid,
bonded, discharged or stayed for a period of 60 days; and
(7) certain events of bankruptcy, insolvency or reorganization relating
to the Company or any of its Restricted Subsidiaries.
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If an Event of Default occurs and is continuing with respect to the Junior
Notes, either the Junior Note Trustee or the holders of at least 25% in
principal amount of the then outstanding Junior Notes may declare all of the
Junior Notes to be due and payable immediately. An Event of Default other than
(1) a default in the obligation to pay principal, premium or interest on the
Junior Notes or (2) an Event of Default with respect to any covenant or
provision which cannot be modified or amended without the consent of the holders
of each outstanding Junior Note affected may be waived by the holders of a
majority in principal amount of the Junior Notes then outstanding.
The Junior Note Trustee may require indemnity reasonably satisfactory to
it before it enforces the Junior Note Indenture, the Junior Notes, the Junior
Note Guarantees or the Collateral Documents. Subject to certain limitations
specified in the Junior Note Indenture and the Collateral Documents, holders of
a majority in principal amount of the Junior Notes may direct the Junior Note
Trustee in its exercise of any trust or power. The Junior Note Trustee may
withhold from holders of the Junior Notes notice of any default if it determines
that withholding notice is in their interests, except a default in payment of
principal or interest.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator,
agent or stockholder of the Company, any Subsidiary Guarantor or any Heller
Debtor Subsidiary, as such, will have any liability for any obligations of the
Company, the Subsidiary Guarantors or the Heller Debtor Subsidiaries under the
Junior Notes, the Junior Note Indenture, the Junior Note Guarantees, the
Collateral Documents or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder of Junior Notes by accepting a
Junior Note waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Junior Notes. The waiver may not
be effective to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Junior Notes and all
obligations of the Subsidiary Guarantors discharged with respect to their Junior
Note Guarantees ("Legal Defeasance") except for:
(1) the rights of holders of outstanding Junior Notes to receive
payments in respect of the principal of, or interest or premium, if
any, on such Junior Notes when such payments are due from the trust
referred to below;
(2) the Company's obligations with respect to the Junior Notes
concerning issuing temporary Junior Notes, mutilated, destroyed,
lost or stolen Junior Notes and the maintenance of an office or
agency for payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Junior Note
Trustee, and the Company's and the Subsidiary Guarantors'
obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Junior Note Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and the Subsidiary Guarantors released with
respect to certain covenants that are described in the Junior Note Indenture
("Covenant Defeasance") and thereafter any omission to comply with those
covenants will not constitute a Default or Event of Default with respect to the
Junior Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership,
143
rehabilitation and insolvency events) described under "--Events of Default,
Notice and Waiver" will no longer constitute an Event of Default with respect to
the Junior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Junior Note Trustee,
in trust, for the benefit of the holders of the Junior Notes, cash
in United States dollars, non-callable Government Securities, or a
combination of cash in United States dollars and non-callable
Government Securities, in amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium, if
any, on the outstanding Junior Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Company
must specify whether the Junior Notes are being defeased to maturity
or to a particular redemption date;
(2) in the case of Legal Defeasance, the Company has delivered to the
Junior Note Trustee an opinion of counsel reasonably acceptable to
the Junior Note Trustee confirming that (a) the Company has received
from, or there has been published by, the Internal Revenue Service a
ruling or (b) since the date of the Junior Note Indenture, there has
been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such opinion of counsel
will confirm that, the holders of the outstanding Junior Notes will
not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, the Company has delivered to the
Junior Note Trustee an opinion of counsel reasonably acceptable to
the Junior Note Trustee confirming that the holders of the
outstanding Junior Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(4) no Default or Event of Default will have occurred and be continuing
either: (A) on the date of that deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied
to that deposit), or (B) in the case of Legal Defeasance, insofar as
Events of Default of the type specified in clause (7) of the section
above under the caption "Events of Default, Notice and Waiver" are
concerned, at any time in the period ending on the 91st day after
the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Senior Note Indenture or the
Junior Note Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(6) the Company must deliver to the Junior Note Trustee an officers'
certificate stating that the deposit was not made by the Company
with the intent of preferring the holders of Junior Notes over the
other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or
others;
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(7) the Company must deliver to the Junior Note Trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with;
(8) in the case of Legal Defeasance, the Company must deliver to the
Junior Note Trustee an opinion of counsel to the effect that,
assuming no intervening bankruptcy of the Company or any of the
Subsidiary Guarantors between the date of deposit and the 91st day
following the deposit and assuming that no holder of Junior Notes is
an "insider" of the Company under applicable bankruptcy law, after
the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights
generally; and
(9) no order or judgment will prohibit the application by the Junior
Note Trustee of the funds deposited to effect Legal Defeasance or
Covenant Defeasance.
Insofar as Events of Default of the type specified in clauses (3), (4) or (5) of
the section above under the caption "Events of Default, Notice and Waiver" are
concerned, if any such event occurs at any time in the period ending on the 91st
day after the date of deposit which would constitute an Event of Default had
Legal Defeasance or Covenant Defeasance not occurred, then the obligations of
the Company and the Subsidiary Guarantors under the Junior Note Indenture, the
Junior Notes and the Junior Note Guarantees will be revived and reinstated as
though no such deposit had occurred.
MARKETABILITY
At present there is no public market for the Junior Notes, and the Company
is not able to predict whether a market will develop. The Company has no present
plans to apply to list the Junior Notes on any United States exchange or the
Nasdaq Market. See "Risk Factors--Risks Related to the New Notes--If an active
trading market does not develop for the New Notes, the noteholders may not be
able to resell their New Notes."
GOVERNING LAW
The Junior Note Indenture, the Junior Notes and the Junior Note Guarantees
are governed by and construed in accordance with the laws of the State of New
York.
SATISFACTION AND DISCHARGE
The Junior Note Indenture will be discharged and will cease to be of
further effect as to all Junior Notes issued thereunder, when:
(1) either:
(a) all Junior Notes that have been authenticated and delivered,
except lost, stolen or destroyed notes that have been replaced
or paid and notes for whose payment money has been deposited
in trust and thereafter repaid to the Company, have been
delivered to the Junior Note Trustee for cancellation; or
(b) all Junior Notes that have not been delivered to the Junior
Note Trustee for cancellation have become due and payable by
reason of the mailing of a notice of redemption or otherwise
or will become due and payable within one year and the
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Company or any Subsidiary Guarantor has irrevocably deposited
or caused to be deposited with the Junior Note Trustee as
trust funds in trust solely for the benefit of the holders of
Junior Notes, cash in United States dollars, non-callable
Government Securities, or a combination of cash in United
States dollars and non-callable Government Securities, in
amounts as will be sufficient without consideration of any
reinvestment of interest, to pay and discharge the entire
indebtedness on the Junior Notes not delivered to the Junior
Note Trustee for cancellation for principal, premium, if any,
and accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the
date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Company or any
Subsidiary Guarantor is a party or by which the Company or any
Subsidiary Guarantor is bound;
(3) the Company or any Subsidiary Guarantor has paid or caused to be
paid all sums payable by it under the Junior Note Indenture; and
(4) the Company has delivered irrevocable instructions to the Junior
Note Trustee under the Junior Note Indenture to apply the deposited
money toward the payment of the Junior Notes at maturity or the
redemption date, as the case may be.
In addition, the Company must deliver an officers' certificate and an opinion of
counsel to the Junior Note Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
CONCERNING THE JUNIOR NOTE TRUSTEE
If the Junior Note Trustee becomes a creditor of the Company or any
Subsidiary Guarantor, the Junior Note Indenture limits its right to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise. The Junior Note Trustee
will be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, or apply to
the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
Junior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Junior Note
Trustee, subject to certain exceptions. The Junior Note Indenture provides that
in case an Event of Default occurs and is continuing, the Junior Note Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Junior Note Trustee will be under no obligation to exercise any of its rights or
powers under the Junior Note Indenture at the request of any holder of Junior
Notes, unless such holder has offered to the Junior Note Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
REGISTRATION RIGHTS
The Company and the Selling Securityholders entered into the Registration
Rights Agreement on January 1, 2002. See "Registration Rights Agreement."
RESERVE
Not all of the New Common Stock, the Senior Notes and the Junior Notes
were issued on the Effective Date. This is because the total amount of the
general unsecured claims under the Plan was not
146
known on the Effective Date, either because certain of those claims were
disputed claims or because those claims were not made by their holders on or
before December 19, 2001 (the "Cutoff Date"). As a result, the Company reserved
68,241 shares of New Common Stock, $440,178 in principal amount of Senior Notes
and the $166,775 in principal amount of Junior Notes (collectively, the
"Reserve") from the initial issuance on the Effective Date. The initial
distribution with respect to general unsecured claims was made only to the
holders of general unsecured claims that were allowed prior to the Cutoff Date
(the "Original Claimholders"). Once the total amount of the allowed general
unsecured claims has been determined, the Reserve will be distributed pro rata
among the holders of general unsecured claims allowed before or after the Cutoff
Date (the date of this distribution, the "Subsequent Distribution Date").
If the Reserve is insufficient to cover general unsecured claims allowed
after the Cutoff Date, the Company and its subsidiaries will have no further
liability with respect to those general unsecured claims and the holders of
those claims will receive proportionately lower distributions of shares of New
Common Stock, Senior Notes and Junior Notes than the Original Claimholders.
If the Reserve exceeds the distributions necessary to cover general
unsecured claims allowed after the Cutoff Date, the additional securities
remaining in the Reserve will be distributed among all holders of general
unsecured claims so as to ensure that each holder of an allowed general
unsecured claim receives, in the aggregate, its pro rata share of the New Common
Stock, the Senior Notes and the Junior Notes. In this case, the Original
Claimholders received distributions of securities on the Effective Date and they
will also receive distributions on the Subsequent Distribution Date.
Furthermore, if no general unsecured claims are allowed after the Cutoff Date,
the Reserve will be distributed pro rata solely among the Original Claimholders
and the Selling Securityholders will receive will receive 35,560 shares of New
Common Stock, $229,881 in principal amount of Senior Notes and $87,096 in
principal amount of Junior Notes.
The right of the Original Claimholders to receive additional securities
from the Reserve on the Subsequent Distribution Date will be nontransferable.
Subject to compliance with applicable securities laws, any additional securities
issued to the Original Claimholders will be freely transferable upon issuance.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Junior Note
Indenture. Reference is made to the Junior Note Indenture for a full disclosure
of all such terms, as well as any other capitalized terms used herein for which
no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging
with or into, or becoming a Subsidiary of, such specified Person;
and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10%
147
or more of the Voting Stock of a Person will be deemed to be control. For
purposes of this definition, the terms "controlling," "controlled by" and "under
common control with" have correlative meanings.
"ALCI" means ALC Indiana, Inc., a Nevada corporation.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition by the Company or
any of its Restricted Subsidiaries of any assets or rights whether
or not constituting Note Collateral; provided that the sale,
conveyance or other disposition of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Junior Note
Indenture described above under the caption "--Certain Rights to
Require Repurchase of Junior Notes by the Company--Change in
Control" and/or the provisions described above under the caption
"--Certain Covenants--Merger, Consolidation or Transfer of All or
Substantially All of the Assets of the Company" and not by the
provisions described above under the caption "--Mandatory
Redemption--Asset Sales of Note Collateral" or under the caption
"Certain Rights to Require Repurchase of Junior Notes by the
Company--Asset Sales of Non-Note Collateral;"
(2) the issuance of Equity Interests in any of the Company's Restricted
Subsidiaries or the sale by the Company or any of its Restricted
Subsidiaries of Equity Interests in any of their Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to
be Asset Sales:
(1) a transfer of assets between or among the Company and the Subsidiary
Guarantors, between or among any Heller Debtor Subsidiaries or
between or among any Unrestricted Subsidiaries;
(2) an issuance of Equity Interests by a Subsidiary of the Company to
the Company or a Restricted Subsidiary;
(3) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(4) the sale or other disposition of cash or Cash Equivalents; and
(5) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction means
the product of 8.0 multiplied by the aggregate net rental payments payable by
the lessee in respect of the lease for the 12 month period commencing on the
first date of the month in which such sale and leaseback transaction takes
place.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the general
partner of the partnership; and
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(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means any and all shares or other equivalents (however
designated) of capital stock, including all common stock and all preferred
stock, in the case of a corporation, or partnership interests or other
equivalents (however designated) in the case of a partnership or common shares
of beneficial interest or other equivalents (however designated) in the case of
a trust.
"Carriage House" means Carriage House Assisted Living, Inc., a Delaware
corporation.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the
United States government (provided that the full faith and credit of
the United States is pledged in support of those securities) having
maturities of not more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight
bank deposits, in each case, with any lender party as of January 1,
2002 to the Heller Loan Agreement or with any domestic commercial
bank having capital and surplus in excess of $500.0 million and a
Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in
each case maturing within six months after the date of acquisition;
and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5)
of this definition.
"Change in Control" means the occurrence of any of the following:
(1) the sale of all or substantially all of the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to any Person or
related group of Persons;
(2) the consummation of any consolidation or merger of the Company:
(a) in which the Company is not the continuing or surviving
corporation, other than a consolidation or merger:
149
(i) with a wholly-owned Subsidiary of the Company in which
all of the common stock of the Company outstanding
immediately prior to the effectiveness thereof is
changed into or exchanged for the same consideration),
or
(ii) in which the stockholders of the Company immediately
prior to the consummation of such consolidation or
merger own greater than 50% of the total voting power of
all classes of capital shares of the continuing or
surviving corporation immediately following the
consummation of such consolidation or merger; or
(b) pursuant to which the shares of common stock of the Company
are converted into cash, securities, or other property, unless
the stockholders of the Company immediately prior to the
consummation of such consolidation or merger own greater than
50% of the total voting power of all classes of capital shares
of the continuing or surviving corporation immediately
following the consummation of such consolidation or merger,
(3) the acquisition by any Person individually or any Persons (in each
case other than an Excluded Person or Excluded Persons) acting
together that would constitute a "group" for purposes of Section
13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), together with any affiliates thereof, of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of
greater than 50% of the total voting power of all classes of capital
shares of the Company entitled to vote generally in the election of
directors of the Company; or
(4) the first day on which a majority of members of the Board of
Directors of the Company are not Continuing Directors.
Notwithstanding clause (1) of the definition of "Change in Control", a
Change in Control will not be deemed to have occurred as a result of a
transaction in which either:
(1) the holders of the shares of common stock of the Company immediately
prior to the sale of all or substantially all of the Company's
assets have, directly or indirectly, at least a majority of the
shares of common stock of the corporation to which such assets were
sold immediately after such asset sale; or
(2) the holders of the shares of common stock of the Company immediately
prior to the consolidation or merger have, directly or indirectly,
at least a majority of the shares of common stock of the continuing
or surviving corporation immediately after such consolidation or
merger.
Notwithstanding clause (3) of the definition of "Change in Control", a
Change in Control will not be deemed to have occurred solely by virtue of any of
the following Persons filing or becoming obligated to file a report under or in
response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or
report) under the Exchange Act disclosing beneficial ownership by it of shares
or securities of the Company, of greater than 50% of the total voting power
referred to in clause (3) of the foregoing definition or otherwise:
(1) the Company;
(2) any Subsidiary;
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(3) any employee share purchase plan, share option plan, or other share
incentive plan or program;
(4) retirement plan or automatic dividend reinvestment plan; or
(5) any substantially similar plan of the Company or any Subsidiary or
any Person holding securities of the Company for or pursuant to the
terms of any such employee benefit plan.
"Collateral Documents" means all agreements, instruments, documents,
pledges or filings that evidence, perfect, set forth or limit the security
interest of the Collateral Agent in the Note Collateral.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale or the disposition of any securities by such
Person or any of its Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Subsidiaries, in each case
to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance
financings, and net of the effect of all payments made or received
pursuant to Hedging Obligations), to the extent that any such
expense was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash
expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for
such period to the extent that such depreciation, amortization and
other non-cash expenses were deducted in computing such Consolidated
Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business,
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the preceding, the provisions for taxes based on the
income or profits of, and the depreciation and amortization and other non-cash
expenses of, a Restricted Subsidiary of the Company will be added to
Consolidated Net Income to compute Consolidated Cash Flow of the Company only to
the extent that a corresponding amount would be permitted at the date of
determination to be dividended
151
to the Company by that Restricted Subsidiary without prior governmental approval
(that has not been obtained), and without direct or indirect restriction
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is accounted for by
the equity method of accounting will be included only to the extent
of the amount of dividends or distributions paid in cash to the
specified Person or a Wholly Owned Restricted Subsidiary of the
Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is
not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or
its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition
will be excluded;
(4) the cumulative effect of a change in accounting principles will be
excluded; and
(5) the Net Income (but not loss) of any Unrestricted Subsidiary will be
excluded, whether or not distributed to the specific Person or one
of its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the Junior
Note Indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the facilities under the Heller Loan Agreement) or commercial paper
facilities, in each case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"Designated Assets" means, collectively, the following properties owned by
the Company or one of its Restricted Subsidiaries:
(1) Magnolia House, Sabal House, Forsyth House and Stanley House, each
of which is located in the State of Florida;
(2) Wisdom House, which is located in the State of Georgia;
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(3) Floyd House, which is located in the State of Iowa; and
(4) Bennett House, Chapman House, Jennings House, Monroe House and York
House, each of which is located in the State of Indiana.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on or prior to the date that
is 91 days after the date on which the Junior Notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require the
Company to repurchase such Capital Stock upon the occurrence of a change in
control or an asset sale will not constitute Disqualified Stock if the terms of
such Capital Stock provide that the Company may not repurchase or redeem any
such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption
"--Certain Covenants--Restricted Payments."
"Domestic Subsidiary" means any Restricted Subsidiary of the Company that
was formed under the laws of the United States or any state of the United States
or the District of Columbia or that guarantees or otherwise provides direct
credit support for any Indebtedness of the Company.
"EBITDA" for any period for a particular assisted living facility means
the Net Income for such period attributable to that facility of the entity
owning such facility plus the following to the extent deducted in calculating
such Net Income:
(1) income tax expense;
(2) the consolidated interest expense of the entity that owns such
facility or, if such entity owns more than one facility or has
subsidiaries or other assets, the proportion of consolidated
interest expense equal to the proportion of the fair market value of
the assets of such entity represented by such facility;
(3) depreciation expense related to such facility;
(4) amortization expense related to such facility; and
(5) any management fee paid with respect to such facility to the Company
or any wholly owned Subsidiary of the Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excluded Indebtedness" means, collectively:
(1) Indebtedness under the Heller Loan Agreement;
(2) Indebtedness permitted to be incurred under clauses (3) and (10) of
the second paragraph of the covenant entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock", and
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(3) Permitted Refinancing Indebtedness of the Indebtedness described in
clauses (1) and (2) above incurred under clause (4) of the second
paragraph of the covenant entitled "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock."
"Excluded Person" means any Person who is a holder of more than 5% of all
classes of capital shares of the Company as of January 1, 2002.
"Existing Indebtedness" means up to $118.0 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (including, for
purposes of this definition, Indebtedness under the Heller Loan Agreement but
excluding Indebtedness under the Senior Note Indenture and the Junior Note
Indenture) in existence on the date of the Junior Note Indenture, until such
amounts are repaid.
"Fixed Charges" means, with respect to any specified Person for any
period, the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including,
without limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net of the effect of all payments made or
received pursuant to Hedging Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries, whether or not such Guarantee or Lien is called upon;
plus
(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred stock of such
Person or any of its Restricted Subsidiaries, other than dividends
on Equity Interests payable solely in Equity Interests of the
Company (other than Disqualified Stock) or to the Company or a
Restricted Subsidiary of the Company, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus
the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the specified
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment, repurchase or redemption
of Indebtedness, or such issuance, repurchase or redemption of preferred stock,
and the use of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period.
154
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date will be
given pro forma effect as if they had occurred on the first day of
the four-quarter reference period and Consolidated Cash Flow for
such reference period will be calculated on a pro forma basis in
accordance with Regulation S-X under the Securities Act, but without
giving effect to clause (3) of the proviso set forth in the
definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded, but
only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the specified Person or any of
its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"HCI" means Home and Community Care, Inc., a Delaware corporation.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates entered into in the ordinary
course of business, and consistent with past practice.
"Heller" means Heller Healthcare Finance, Inc.
"Heller Collateral" means all property, now owned or hereafter acquired,
of the Company and its Subsidiaries that, pursuant to the collateral documents
entered into pursuant to the Heller Loan Agreement, is subject to a security
interest in favor of the lenders under the Heller Loan Agreement or a
representative on their behalf.
155
"Heller Debtor Subsidiary" means any Subsidiary of the Company that:
(1) is a party to the Heller Loan Agreement, and
(2) grants a security interest pursuant to the second paragraph of the
provision captioned "--Security" in one or more assisted living
properties to secure the Obligations of the Company under the Junior
Note Indenture, the Junior Notes and the Collateral Documents to
which the Company is party.
"Heller Loan Agreement" means the Loan Agreement, dated as of February 20,
2001, among Heller and certain Subsidiaries of the Company, as amended by First
Amendment to Loan Documents, dated as of June 29, 2001, among Heller, the
Company and certain Subsidiaries of the Company, as further amended by Second
Amendment to Loan Documents, dated as of October 3, 2001, among Heller, the
Company and certain Subsidiaries of the Company.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount;
(2) the principal amount of the Indebtedness, together with any interest
on the Indebtedness that is more than 30 days past due, in the case
of any other Indebtedness;
(3) in the case of a Guarantee of Indebtedness, the maximum amount of
the Indebtedness guaranteed under such Guarantee; and
(4) in the case of Indebtedness of others secured by a Lien on any asset
of the specified Person, the fair market value of the asset(s)
subject to such Lien.
156
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of the Company such that, after
giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Company, the Company will be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Equity Interests of such Subsidiary not sold or disposed of in an amount
determined as provided in the final paragraph of the covenant described above
under the caption "--Certain Covenants--Restricted Payments." The acquisition by
the Company or any Subsidiary of the Company of a Person that holds an
Investment in a third Person will be deemed to be an Investment by the Company
or such Subsidiary in such third Person in an amount equal to the fair market
value of the Investment held by the acquired Person in such third Person in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Certain Covenants--Restricted Payments."
"Junior Note Guarantees" means the Guarantees given by the Subsidiary
Guarantors in respect of the obligations under the Junior Note Indenture.
"Junior Note Indenture" means the indenture, dated as of the date of the
Senior Note Indenture, to be executed by the Company, the Subsidiary Guarantors
and the Junior Note Trustee.
"Junior Note Trustee" means the indenture trustee agreed upon between the
Company and the Informal Bondholders' Committee, in its capacity as trustee
under the Junior Note Indenture.
"Junior Notes" means those notes issued pursuant to the Junior Note
Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a)
any Asset Sale; or (b) the disposition of any securities by such
Person or any of its Restricted Subsidiaries or the extinguishment
of any Indebtedness of such Person or any of its Restricted
Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
157
"Net Proceeds" means:
(1) with respect to any Asset Sale, the aggregate cash proceeds received
by the Company or any of its Restricted Subsidiaries in respect of
any Asset Sale (including, without limitation, any cash received
upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to
such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result of the Asset Sale, taxes
paid or payable as a result of the Asset Sale, in each case, after
taking into account any available tax credits or deductions and any
tax sharing arrangements, amounts required to be applied (whether
pursuant to a mandatory redemption, offer to repurchase or
otherwise) to repay Indebtedness secured by a security interest on
the asset or assets that were the subject of such Asset Sale,
including amounts required to be applied under the Senior Note
Indenture to the repayment or repurchase of Senior Notes and amounts
required to be applied to the repayment of Indebtedness under the
Heller Loan Agreement and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance
with GAAP; and
(2) with respect to any incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness, the aggregate cash proceeds
received by the Company or any of its Restricted Subsidiaries in
respect of any incurrence of Indebtedness, net of the direct costs
relating to such incurrence, including, without limitation, legal,
accounting and investment banking fees, and sales commissions,
amounts required to be applied (whether pursuant to a mandatory
redemption, an offer to repurchase or otherwise) under the Senior
Note Indenture to the repayment of the Senior Notes in accordance
with the covenant in the Description of the Senior Notes attached to
the Disclosure Statement under the caption "--Certain Rights to
Repurchase of Senior Notes by the Company--Incurrence of
Indebtedness," and amounts required to be applied (whether pursuant
to a mandatory redemption, an offer to repurchase or otherwise) to
refinance, replace, defease or refund any then existing Indebtedness
secured by a security interest on an asset of the Company or any
Restricted Subsidiary, if the net proceeds of such new Indebtedness
are used to refinance, replace, defease or refund such existing
Indebtedness.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable as a guarantor
or otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action
against an Unrestricted Subsidiary) would permit upon notice, lapse
of time or both any holder of any other Indebtedness (other than the
Senior Notes or the Junior Notes or the Heller Loan Agreement) of
the Company or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment of the
Indebtedness to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any
of its Restricted Subsidiaries.
158
"Note Collateral" means all property, now owned or hereafter acquired, of
the Company, the Subsidiary Guarantors and the Heller Debtor Subsidiaries that,
pursuant to the Collateral Documents, is subject to a security interest in favor
of the Collateral Agent.
"Obligations" means any principal, interest, premium, if any, penalties,
fees, indemnifications, reimbursements, damages and other liabilities payable
under the documentation governing any Indebtedness.
"Permitted Business" means:
(1) the assisted living residence business, including nursing
facilities, long-term care facilities or other facilities used or
useful in the provision of healthcare services;
(2) the provision of personal care and support (including nursing)
services in connection with the assisted living residence business;
and
(3) any business that is ancillary to any of the foregoing, including,
without limitation, rehabilitation programs, therapies,
pharmaceutical services, participation in provider service
organizations, health care information services business,
distribution of medical supplies, geriatric care and home healthcare
or other businesses which provide ancillary services to residents in
long-term and specialty healthcare facilities.
"Permitted Investments" means:
(1) any Investment in the Company or in a Restricted Subsidiary of the
Company;
(2) any Investment in cash or Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of the Company; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, the Company or a Restricted
Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenants described above under the captions
"--Mandatory Redemption--Asset Sales of Note Collateral" and
"Certain Rights to Require Repurchase of Junior Notes by the
Company--Asset Sales of Non-Note Collateral";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(6) any Investments received in compromise of obligations of such
Persons incurred in the ordinary course of trade creditors or
customers that were incurred in the ordinary course of business,
including pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of any trade creditor
or customer;
(7) Hedging Obligations;
159
(8) Investments represented by accounts receivable created or acquired
in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms;
(9) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility and worker's compensation,
performance and other similar deposits; and
(10) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and
without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause
(10) that are at the time outstanding not to exceed $5.0 million.
"Permitted Junior Securities" means:
(1) Equity Interests in the Company or any Subsidiary Guarantor; or
(2) debt securities that are subordinated to all Senior Indebtedness and
any debt securities issued in exchange for Senior Indebtedness to
substantially the same extent as, or to a greater extent than, the
Junior Notes and the Junior Note Guarantees are subordinated to
Senior Indebtedness under the Junior Note Indenture.
"Permitted Liens" means:
(1) Liens created, or intended to be created, under the Collateral
Documents;
(2) Liens on assets of the Company or any Restricted Subsidiary securing
Indebtedness and other Obligations under Credit Facilities that are
permitted by the terms of the Junior Note Indenture to be incurred;
(3) Liens in favor of the Company, the Subsidiary Guarantors or the
Heller Debtor Subsidiaries;
(4) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with the Company or any
Restricted Subsidiary of the Company; provided that such Liens were
in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of
the Person merged into or consolidated with the Company or the
Restricted Subsidiary;
(5) Liens on property existing at the time of acquisition of such
property by the Company or any Restricted Subsidiary of the Company,
provided that such Liens were in existence prior to the
contemplation of such acquisition;
(6) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like
nature incurred in the ordinary course of business;
(7) Liens on assets or rights which are not Note Collateral and which
secure:
(a) Indebtedness permitted by clause (3) or clause (10) of the
second paragraph of the covenant entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock"; or
160
(b) Indebtedness permitted under any clause of such covenant so
long as the Senior Notes are repaid in full with the proceeds
of, and concurrently with the incurrence of, such
Indebtedness;
(8) Liens existing on the date of the Junior Note Indenture;
(9) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision
as is required in conformity with GAAP has been made therefor;
(10) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations
that are not Indebtedness that do not exceed $1.0 million at any one
time outstanding;
(11) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries;
(12) statutory Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens arising in the
ordinary course of business and with respect to amounts not yet
delinquent for a period of more than 90 days or which are being
contested in good faith; provided that a reserve or other
appropriate provision as will be required by GAAP will have been
made therefor;
(13) easements, rights-of-way, restrictions, zoning, minor defects or
irregularities in title and other similar charges or encumbrances
not interfering in any material respect with the business or assets
of the Company and its Restricted Subsidiaries, taken as a whole,
incurred in the ordinary course of business;
(14) Liens arising by reason of any judgment not constituting an Event of
Default under the Junior Note Indenture; provided that:
(a) such Liens are being contested in good faith by appropriate
proceedings, and
(b) such Liens are adequately bonded or adequate reserves have
been established on the books of the Company in accordance
with GAAP;
(15) Uniform Commercial Code financing statements filed for precautionary
purposes in connection with any true lease of property leased by the
Company or any of its Restricted Subsidiaries; provided that any
such financing statement does not cover any property other than the
property subject to such lease and the proceeds thereof; and
(16) renewals or refundings of any Liens referred to in clauses (1), (2),
(4), (5), (7), (8) and (11) above; provided that:
(a) such new Liens will be limited to all or part of the same
property that secured the original Liens (plus improvements to
or on such property); and
(b) the principal amount of the Indebtedness secured by such Liens
at such time is not increased to any amount greater than the
sum of (i) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses
(1), (2),
161
(4), (5), (7), (8) and (11) above immediately prior to such
renewal or refunding, and (ii) an amount necessary to pay any
fees and expenses, including premiums, related to such
renewals or refundings.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any Restricted Subsidiaries (other
than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness
extended, refinanced, renewed, replaced, defeased or refunded (plus
all accrued interest on the Indebtedness and the amount of all
expenses and premiums incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the
Junior Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Junior Notes on terms at
least as favorable to the holders of the Junior Notes as those
contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary which is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government (or any agency, instrumentality or
political subdivision thereof).
"Pro Rata Share" means, with respect to any distribution on account of an
allowed claim or interest, a proportionate share, so that the ratio of the
consideration distributed on account of an allowed claim or interest in a class
to the amount of such allowed claim or interest is the same as the ratio of the
amount of the consideration distributed on account of all allowed claims or
interests in such class to the amount of all allowed claims or interests in such
class.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of January 1, 2002, by and among the Company and the other parties
named on the signature pages thereof, as such agreement may be amended, modified
or supplemented from time to time.
"Release Price" means, with respect to any Asset Sale of a property, the
greater of (1) the product of 6.5 multiplied by the EBITDA of such property for
the period of two fiscal quarters of the Company ending immediately prior to the
date of such Asset Sale multiplied by 2.0, and (2) the product of $10,000
multiplied by the number of units in such property.
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Indebtedness" means:
(1) the Senior Notes issued pursuant to the Senior Note Indenture and
the Senior Note Guarantees;
(2) the Indebtedness under the Heller Loan Agreement and any Guarantees
of that Indebtedness given by any Subsidiary Guarantor;
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior
Indebtedness will not include:
(1) any liability for federal, state, local or other taxes owed or owing
by the Company;
(2) any intercompany Indebtedness of the Company or any of its
Subsidiaries to the Company or any of its Affiliates;
(3) any trade payables; or
(4) the portion of any Indebtedness that is incurred in violation of the
Junior Note Indenture.
"Senior Notes" means those notes issued pursuant to the Senior Note
Indenture.
"Senior Note Guarantee" means the Guarantee executed by each Subsidiary
Guarantor pursuant to the Senior Note Indenture.
"Senior Note Indenture" means that indenture, dated as of the date of the
Junior Note Indenture, to be executed by the Company, the Subsidiary Guarantors
and the Senior Note Trustee.
"Senior Note Trustee" means the indenture trustee agreed upon between the
Company and the Informal Bondholders' Committee, in its capacity as trustee
under the Senior Note Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees of the
corporation, association or other business entity is at the time
owned or controlled, directly or indirectly, by that Person or one
or more of the other Subsidiaries of that Person (or a combination
thereof); and
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(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or
more Subsidiaries of that Person (or any combination thereof).
"Subsidiary Guarantors" means each of:
(3) Carriage House,
(4) HCI,
(5) ALCI, and
(6) any other Restricted Subsidiary of the Company that executes a
Junior Note Guarantee in accordance with the terms of the Junior
Note Indenture.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
resolution of the Board of Directors, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the
Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries;
(5) has at least one director on its Board of Directors that is not a
director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer that
is not a director or executive officer of the Company or any of its
Restricted Subsidiaries; provided that if such Unrestricted
Subsidiary fails to have at least one such director, such
Unrestricted Subsidiary will not cease to be an Unrestricted
Subsidiary solely because of its failure to have at least one such
director so long as such Unrestricted Subsidiary is using its
commercially reasonable efforts to appoint at least one such
director; and
(6) does not own any Capital Stock of, or own or hold any Lien on any
property of, the Company or any Restricted Subsidiary.
Any designation of a Subsidiary of the Company as an Unrestricted
Subsidiary will be evidenced to the Junior Note Trustee by filing with the
Junior Note Trustee a certified copy of the resolution of the Board of Directors
giving effect to such designation and an officers' certificate certifying that
such designation complied with the preceding conditions and was permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted
164
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for
purposes of the Junior Note Indenture and any Indebtedness of such Subsidiary
will be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company will be in default of such covenant. The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation will be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation will only be
permitted if (1) such Indebtedness is permitted under the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period; and (2) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or
other required payments of principal, including payment at final
maturity, in respect of the Indebtedness, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
will at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person.
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DESCRIPTION OF CAPITAL STOCK
You can find the definitions of certain terms used in this description
under the subheading "--Certain Definitions." Capitalized terms used in this
description that are not otherwise defined under the subheading "Certain
Definitions" have the meanings attributable to them in the Plan. In this
description, the word "the Company" refers only to Assisted Living Concepts,
Inc. and not to any of its subsidiaries.
The following is a brief description of the material terms of the capital
stock of the Company. The summary of the terms of the capital stock of the
Company set forth below does not purport to be complete and is subject to and
qualified in its entirety by reference to the Restated Company Articles and the
Company Bylaws. The Company urges you to read the Restated Company Articles and
the Company Bylaws because they, and not this description, define the rights of
the holders of the Company's capital stock. Copies of the Restated Company
Articles and the Company Bylaws have been filed as exhibits to this Registration
Statement.
GENERAL
As of January 1, 2002, our Restated Company Articles, became effective,
authorizing 20,000,000 shares of New Common Stock, par value $0.01 per share,
and 3,250,000 shares of Preferred Stock, par value $0.01 per share. As of
January 1, 2002, the Company had 6,431,759 shares of New Common Stock issued and
outstanding and 3,250,000 shares of classified but not issued and outstanding
shares of Preferred Stock. In addition, the Company has authorized the issuance
of 68,241 shares of New Common Stock which are subject to the Reserve. The
shares will be issued in connection with the settlement of certain general
unsecured claims pursuant to the Plan. See "--Reserve."
NEW COMMON STOCK
As of January 1, 2002, all of the shares of Old Common Stock issued and
outstanding or held in treasury were cancelled and retired and, pursuant to the
Plan, shares of New Common Stock were issued to Company stockholders and to
holders of general unsecured claims.
Each holder of New Common Stock is entitled to one vote for each share of
New Common Stock owned of record on all matters voted upon by stockholders. All
action to be taken by stockholders requires the approval of a majority of the
shares of New Common Stock. Cumulative voting of the shares of New Common Stock
is prohibited. Accordingly, the holders of a majority of the voting power of the
shares voting for the election of directors can elect all of the directors if
they choose to do so. The New Common Stock bears no preemptive rights, and is
not subject to redemption, sinking fund or conversion provisions. The shares of
New Common Stock are fully paid and non-assessable.
Holders of New Common Stock are entitled to receive dividends if, as and
when declared by the Company's Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation rights of any Preferred Stock
that may be issued (and subject to any dividend restriction contained in any
debt agreement to which the Company is currently or may in the future become a
party). Any dividends declared by the Board of Directors will be distributed pro
rata in accordance with the number of shares of New Common Stock held by each
stockholder.
The Company's New Common Stock currently trades on the OTC.BB. We have no
plans to apply to list the New Common Stock on any United States exchange or the
Nasdaq Stock Market. See "Risk Factors - Risks Related to the New Common Stock -
If an active trading market does not develop for the
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New Common Stock, stockholders may not be able to resell their New Common
Stock." The transfer agent and registrar for the New Common Stock is American
Stock Transfer & Trust Company.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time by the Board of
Directors of the Company, without stockholder approval, in such series and with
such preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions, as may be fixed
by the Board of Directors when designating any such series. The Company's Board
of Directors has authority to classify or reclassify authorized but unissued
shares of Preferred Stock by setting or changing the preferences, conversion and
other rights, voting powers, restrictions and limitations as to dividends,
qualifications and terms and conditions of redemption of stock.
The Preferred Stock and the variety of characteristics that the Board of
Directors may assign to it offers the Company flexibility in financing and
acquisition transactions. An issuance of Preferred Stock could dilute the book
value or adversely affect the relative voting power of the New Common Stock. The
issuance of Preferred Stock could be used to enable the holder of that Preferred
Stock to block a financing or acquisition transaction. Although the Board of
Directors is required when issuing such shares of Preferred Stock to act based
on its judgment as to the best interests of all of the stockholders of the
Company, the Board of Directors could act in a manner which would discourage or
prevent a transaction some stockholders might believe is in the Company's best
interests or in which stockholders could or would receive a premium over the
market price for their shares of New Common Stock.
RESERVE
Not all of the New Common Stock, the Senior Notes and the Junior Notes
were issued on the Effective Date. This is because the total amount of the
general unsecured claims under the Plan was not known on the Effective Date,
either because certain of those claims were disputed claims or because those
claims were not made by their holders on or before December 19, 2001 (the
"Cutoff Date"). As a result, the Company reserved 68,241 shares of New Common
Stock, $440,178 in principal amount of Senior Notes and the $166,775 in
principal amount of Junior Notes (collectively, the "Reserve") from the initial
issuance on the Effective Date. The initial distribution with respect to general
unsecured claims was made only to the holders of general unsecured claims that
were allowed prior to the Cutoff Date (the "Original Claimholders"). Once the
total amount of the allowed general unsecured claims has been determined, the
Reserve will be distributed pro rata among the holders of general unsecured
claims allowed before or after the Cutoff Date (the date of this distribution,
the "Subsequent Distribution Date").
If the Reserve is insufficient to cover general unsecured claims allowed
after the Cutoff Date, the Company and its subsidiaries will have no further
liability with respect to those general unsecured claims and the holders of
those claims will receive proportionately lower distributions of shares of New
Common Stock, Senior Notes and Junior Notes than the Original Claimholders.
If the Reserve exceeds the distributions necessary to cover general
unsecured claims allowed after the Cutoff Date, the additional securities
remaining in the Reserve will be distributed among all holders of general
unsecured claims so as to ensure that each holder of an allowed general
unsecured claim receives, in the aggregate, its pro rata share of the New Common
Stock, the Senior Notes and the Junior Notes. In this case, the Original
Claimholders received distributions of securities on the Effective Date and they
will also receive distributions on the Subsequent Distribution Date.
Furthermore, if no general unsecured claims are allowed after the Cutoff Date,
the Reserve will be distributed pro rata solely among the Original Claimholders
and the Selling Securityholders will receive will receive 35,560 shares of New
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Common Stock, $229,881 in principal amount of Senior Notes and $87,096 in
principal amount of Junior Notes.
The right of the Original Claimholders to receive additional securities
from the Reserve on the Subsequent Distribution Date will be nontransferable.
Subject to compliance with applicable securities laws, any additional securities
issued to the Original Claimholders will be freely transferable upon issuance.
CERTAIN DEFINITIONS
"Company Bylaws" means the Bylaws of the Company currently in effect.
"Restated Company Articles" means the Amended and Restated Articles of
Incorporation of the Company, effective on January 1, 2002.
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REGISTRATION RIGHTS AGREEMENT
The following description is a summary of the material provisions of the
Registration Rights Agreement. It does not restate that agreement in its
entirety. We urge holders of New Securities to read the Registration Rights
Agreement in its entirety because it, and not this description, defines the
registration rights of the Selling Securityholders. See "Available Information."
The Company and the Selling Securityholders entered into the Registration
Rights Agreement on January 1, 2002. Pursuant to the Registration Rights
Agreement, the Company filed this Registration Statement with respect to the New
Notes and the New Common Stock held by Selling Securityholders and the Company
must use its best efforts to keep this Registration Statement effective until
January 1, 2005, or such shorter period which will terminate when all of the New
Securities have been sold pursuant to this Registration Statement or when all of
the New Securities otherwise have been sold pursuant to Rule 144 or are
otherwise freely tradable. Furthermore, in the Registration Rights Agreement,
the Company granted the Selling Securityholders certain demand registration
rights and piggyback registration rights. For instance, after July 1, 2002 any
Selling Securityholder or Securityholders may, subject to certain limitations,
require the Company to file a registration statement with respect to some or all
of the New Securities held by such Selling Securityholder or Securityholders
(subject to minimum threshold requirements); provided, that no more than two
demands may be made. In the event of a demand registration, the non-requesting
Selling Securityholders and the Company would enjoy "piggy-back" rights with
respect to such demand registration, allowing them to participate in the
registration on the same terms and conditions as the initiating Selling
Securityholder or Securityholders; provided that, if marketing factors require a
limitation on the number of shares offered, the shares being offered by the
piggy-backing stockholders would be reduced.
Subject to certain limitations, the Company will bear all of its own
expenses, and certain expenses incurred by the Selling Securityholders
(including reasonable fees and disbursements of counsel), in connection with any
registration of New Securities pursuant to the Registration Rights Agreement. In
addition, the Company will indemnify the Selling Securityholders for certain
liabilities, including liabilities under the Securities Act, in connection with
any demand registration. Each Selling Securityholder has agreed to indemnify the
Company against certain losses arising out of information furnished by that
Selling Securityholder in writing for inclusion in any such registration
statement.
Selling Securityholders are required to deliver certain information to be
used in connection with any registration statement required to be filed under
the Securities Act pursuant to the Registration Rights Agreement and to comply
with certain other provisions of the Registration Rights Agreement in order to
have their Senior Notes, Junior Notes or New Common Stock included in that
registration statement. In addition, pursuant to the Registration Rights
Agreement, if requested by the Company, none of the Selling Securityholders can
effect a sale or distribution of New Securities during the fourteen days prior
to and the 180 days after a Company registered offering, except as part of such
registered offering.
Holders of New Securities that are not Selling Securityholders are not
parties to the Registration Rights Agreement and will not have any of the rights
or obligations of Selling Securityholders under the Registration Rights
Agreement.
No prediction can be made as to the effect, if any, that future sales of
notes and/or shares, or the availability of notes and/or shares for future sale,
will have on the market price of the New Securities prevailing from time to
time. Sales of substantial amounts of New Securities (including shares issued
upon the exercise of the outstanding stock options), or the perception that such
sales could occur, could adversely affect the prevailing market prices for the
New Securities.
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SHARES ELIGIBLE FOR FUTURE SALE
As of January 1, 2002, of the 20,000,000 authorized shares of New Common
Stock, 6,431,759 shares were outstanding.
The 6,431,759 shares of New Common Stock issued pursuant to the Plan were
issued, and any additional shares of New Common Stock to be issued by the
Company pursuant to the Plan on a Subsequent Distribution Date will be issued,
pursuant to the exemption from the registration requirements of the Securities
Act (and of any state or local laws) provided by Section 1145(a)(1) of the
Bankruptcy Code. All shares of New Common Stock issued pursuant to the Plan of
Reorganization may be resold by the holders thereof without registration unless,
as more fully described below, any such holder is deemed to be an "underwriter"
with respect to such securities, as defined in Section 1145(b)(1) of the
Bankruptcy Code. Generally, Section 1145(b)(1) defines an "underwriter" as any
person who:
(a) purchases a claim against, interest in, or claim for an administrative
expense in the case concerning, the debtor, if such purchase is with a
view to distribution of any security received or to be received in
exchange for such claim or interest;
(b) offers to sell securities offered or sold under the plan for the
holders of such securities;
(c) offers to buy securities offered or sold under the plan from the
holders of such securities, if such offer to buy is made with a view to
distribution of such securities and under an agreement made in connection
with the plan, with the consummation of the plan or with the offer or sale
of securities under the plan; or
(d) is an "issuer" as such term is used in Section 2(11) of the Securities
Act with respect to the securities.
Although the definition of the term "issuer" appears in Section 2(4) of
the Securities Act, the reference (contained in Section 1145(b)(1)(D) of the
Bankruptcy Code) to Section 2(11) of the Securities Act purports to include as
"underwriters" all persons who directly or indirectly, through one or more
intermediaries, control, are controlled by or are under common control with, an
issuer of securities. "Control" (as such term is defined in Rule 405 of
Regulation C under the Securities Act) means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a person, whether through the ownership of voting securities, by contract, or
otherwise.
The holders of New Common Stock named in the section of this Prospectus
entitles "Selling Security-holders" who, due to various factors including the
magnitude of their holdings as of the Effective Date, may be deemed to be
"underwriters" pursuant to Section 1145(b) of the Bankruptcy Code, are parties
with the Company to the Registration Rights Agreement, affording them certain
demand and piggyback registration and other rights, all as more fully set forth
therein and as described below. These shareholders have agreed not to sell their
shares for 180 days after the date hereof, except pursuant to the Registration
Statement.
Up to 325,000 shares of New Common Stock reserved for issuance upon
exercise of outstanding options will become eligible for resale under Rule 144
under the Securities Act (in compliance with the resale volume limitations of
Rule 144) one year subsequent to the date or dates that the holders of such
options exercise the same. These volume limitations will apply only if and as
long as the holders of these shares are "affiliates" of the Company for purposes
of Rule 144. In general, under Rule 144 under the Securities Act as currently in
effect, a person (or persons whose shares must be aggregated), including a
person who may be deemed an "affiliate" of the Company, who has beneficially
owned "restricted
170
securities" for at least one year, may sell within any three month period that
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the New Common Stock or the reported average weekly trading volume of
the then outstanding shares of New Common Stock for the four weeks preceding
each such sale. The sales under Rule 144 also are subject to certain manner of
sale restrictions and notice requirements and to the availability of current
public information about the Company. Subsequent to this offering, however, the
Company intends to file a registration statement on Form S-8 with respect to the
77,000 shares of New Common Stock reserved for issuance upon exercise of
outstanding options and the 248,000 shares of New Common Stock reserved for
issuance pursuant to future option grants.
REGISTRATION RIGHTS
The Company and the Selling Securityholders entered into the Registration
Rights Agreement on January 1, 2002. See "Registration Rights Agreement."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal material United States federal
income tax consequences of the purchase, ownership and disposition of the New
Notes to beneficial owners of New Notes who are United States Holders (as
defined below) and the principal material United States federal income and
estate tax consequences of the purchase, ownership and disposition of the New
Notes and New Common Stock to beneficial owners of New Notes and New Common
Stock who are Foreign Holders (as defined below). This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Tax Code"), Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect on the
date hereof and all of which are subject to change possibly with retroactive
effect, or different interpretations. This discussion is further limited to
persons who purchase the New Notes and New Common Stock offered pursuant to the
Registration Statement and hold the New Notes and New Common Stock as capital
assets, within the meaning of section 1221 of the Tax Code. This discussion does
not address the tax consequences to persons who hold the New Notes through a
partnership or similar pass-through entity. Moreover, this discussion is for
general information only and does not address all of the tax consequences that
may be relevant to particular initial purchasers of Notes in light of their
personal circumstances or to certain types of initial purchasers (such as
certain financial institutions, insurance companies, tax-exempt entities,
dealers in securities, former United States citizens and long-term residents or
persons who have hedged the risk of owning a Note) or the effect of any
applicable state, local or foreign tax laws.
YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NEW NOTES
AND NEW COMMON STOCK, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a person that is,
for United States federal income tax purposes:
- a citizen or resident of the United States;
- a corporation or other entity (other than a partnership) created or
organized in or under the laws of the United States or any political
subdivision thereof;
- an estate the income of which is subject to United States federal
income taxation regardless of source; or
- a trust if (i) a United States court is able to exercise primary
supervision over the administration of the trust and one or more
United States persons have authority to control all substantial
decisions of the trust or (ii) the trust has elected to be treated
as a United States Holder pursuant to applicable Treasury
regulations.
Payment of Stated Interest on Senior Notes. Stated interest paid or
accrued on the Senior Notes will constitute "qualified stated interest" (as
defined below under "--Original Issue Discount") and will be taxable to a United
States Holder as ordinary income in accordance with the holder's method of
accounting for United States federal income tax purposes.
Original Issue Discount. The Junior Notes will have original issue
discount ("OID") for United States federal income tax purposes, and accordingly
United States Holders of Junior Notes will be subject
172
to special rules relating to the accrual of income for tax purposes. United
States Holders of Junior Notes generally must include OID in gross income for
United States federal income tax purposes on an annual basis under a constant
yield accrual method regardless of their regular method of tax accounting. As a
result, United States Holders of Junior Notes will include OID in income in
advance of the receipt of cash attributable to such income. However, United
States Holders of the Junior Notes generally will not be required to include
separately in income cash payments received on such Notes, even if denominated
as interest, to the extent such payments constitute payments of previously
accrued OID.
The Junior Notes will be treated as issued with OID equal to the excess of
a Junior Note's "stated redemption price at maturity" over its issue price. The
stated redemption price at maturity of a Junior Note is the total of all
payments on the Junior Note that are not payments of "qualified stated
interest." A qualified stated interest payment is a payment of stated interest
unconditionally payable, in cash or property (other than our debt instruments),
at least annually at a single fixed rate during the entire term of the note that
appropriately takes into account the length of intervals between payments.
Stated interest on the Junior Notes will not be treated as qualified stated
interest, because the Junior Notes provide that interest payable on the Junior
Notes prior to January 1, 2005 will be capitalized and added to principal, and
no cash payments of interest on the Junior Notes will be made prior to that
date. The issue price of a Junior Note is its stated principal amount.
The amount of OID includible in income by a United States Holder of a
Junior Note is the sum of the "daily portions" of OID with respect to the Note
for each day during the taxable year or portion thereof in which such United
States Holder holds such Note ("accrued OID"). A daily portion is determined by
allocating to each day in any "accrual period" a pro-rata portion of the OID
that accrued in such period. The "accrual period" of an obligation may be of any
length and may vary in length over the term of the obligation, provided that
each accrual period is no longer than one year and each scheduled payment of
principal or interest occurs either on the first or last day of an accrual
period. The amount of OID that accrues with respect to any accrual period is the
excess of (i) the product of the obligation's adjusted issue price at the
beginning of such accrual period and its yield to maturity, determined on the
basis of compounding at the close of each accrual period and properly adjusted
for the length of such period, over (ii) the amount of qualified stated interest
allocable to such accrual period. The "adjusted issue price" of an obligation at
the start of any accrual period is equal to its issue price, increased by the
accrued OID for each prior accrual period and reduced by any prior payments made
on such obligation (other than payments of qualified stated interest).
Market Discount and Premium. United States Holders of New Notes may be
affected by the market discount and premium rules under the Tax Code, which are
discussed below.
Market Discount. The Tax Code generally requires United States Holders of
"market discount bonds" to treat as ordinary income any gain realized on the
disposition of such bonds (including in certain non-recognition transactions,
such as a gift) to the extent of the market discount accrued during the United
States Holder's period of ownership. A "market discount bond" is a debt
instrument purchased at a market discount subject to a statutorily-defined de
minimis exception. For this purpose, a purchase at a market discount includes a
purchase at or after the original issue at a price below the stated redemption
price at maturity of the debt instrument, or, in the case of a debt instrument
issued with OID, at a price below its "adjusted issue price". The market
discount rules also provide that a United States Holder who acquires a debt
instrument at a market discount (and who does not elect to (a) treat all
interest thereon as OID or (b) include such market discount in income on a
current basis) may be required to defer a portion of any interest expense that
may otherwise be deductible on any
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indebtedness incurred or maintained to purchase or carry such debt instrument
until the United States Holder disposes of the debt instrument in a taxable
transaction.
A United States Holder of a debt instrument acquired at a market discount
may elect to include the market discount in income as the discount accrues,
either on a straight line basis, or, if elected, on a constant interest rate
basis. The current inclusion election, once made, applies to all market discount
obligations acquired by such United States Holder on or after the first day of
the first taxable year to which the election applies, and may not be revoked
without the consent of the Internal Revenue Service ("IRS"). If a United States
Holder of a market discount bond elects to include market discount in income on
a current basis, the foregoing rules with respect to the recognition of ordinary
income on a sale or other disposition of such bond and the deferral of interest
deductions on indebtedness related to such bond would not apply. Additionally, a
United States Holder's basis in a market discount bond would be increased by
amounts of market discount on the bond included in income pursuant to the
current inclusion election.
Premium and Acquisition Premium. Generally, if the tax basis of an
obligation held as a capital asset exceeds the sum of all amounts payable on the
obligation after the date of acquisition (other than payments of qualified
stated interest), the obligation will be considered to have "amortizable bond
premium" equal in amount to the excess, and a United States Holder of such an
obligation generally will not be required to include any OID in income.
Generally, where an obligation is not redeemable prior to maturity, a United
States Holder may elect to amortize the premium on the obligation as an offset
to qualified stated interest income, using a constant yield method similar to
that described below under "Constant Yield Election," over the remaining term of
the obligation. If an obligation may be redeemed by the issuer prior to maturity
(as is the case with the New Notes), the premium is calculated assuming the
issuer will exercise or not exercise its redemption rights in a manner that
maximizes the United States Holder's yield. A United States Holder who elects to
amortize bond premium must reduce the United States Holder's tax basis in the
note by the amount of the premium used to offset qualified stated interest
income as set forth above. An election to amortize bond premium applies to all
taxable debt obligations then owned and thereafter acquired by the United States
Holder and may be revoked only with the consent of the Service.
If a United States Holder acquires an obligation issued with OID at an
"acquisition premium," the amount of OID that the United States Holder includes
in gross income is reduced to reflect the acquisition premium. An obligation is
acquired at an acquisition premium if its adjusted tax basis, immediately after
its acquisition, is (a) less than or equal to the sum of all amounts payable on
the obligation after the date of acquisition (other than payments of qualified
stated interest) and (b) greater than the obligation's adjusted issue price.
If an obligation is acquired at an acquisition premium, the United States
Holder reduces the amount of OID that otherwise would be included in income
during an accrual period by an amount equal to (i) the amount of OID otherwise
includible in income multiplied by (ii) a fraction, the numerator of which is
the excess of the adjusted tax basis of the obligation immediately after its
acquisition by the United States Holder over the adjusted issue price of the
note and the denominator of which is the excess of the sum of all amounts
payable on the obligation after the date of acquisition (other than payments of
qualified stated interest) over the obligation's adjusted issue price.
As an alternative to reducing the amount of OID that otherwise would be
included in income by this fraction, the United States Holder may elect to
compute OID accruals by treating the acquisition of the obligation as an
acquisition at original issuance and applying the constant yield method
described below under "Constant Yield Election."
Constant Yield Election. A United States Holder of New Notes, subject to
certain limitations, may elect to include in gross income all interest that
accrues on a New Note, including any stated interest, acquisition discount, OID,
market discount, de minimis OID, de minimis market discount and unstated
interest (as adjusted by amortizable bond premium and acquisition premium), by
using the constant yield
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method. This election for an obligation with amortizable bond premium will
result in a deemed election to amortize bond premium for all debt instruments
owned and later acquired by the United States Holder with amortizable bond
premium and may be revoked only with the permission of the Service. Similarly,
this election for an obligation with market discount will result in a deemed
election to accrue market discount in income currently for the note and for all
other debt instruments acquired by the United States Holder with market discount
on or after the first day of the taxable year to which the election first
applies, and may be revoked only with the permission of the Service. A United
States Holder's tax basis in an obligation will be increased by each accrual of
the amounts treated as OID under the constant yield election described in this
paragraph.
Sale, Exchange or Retirement of the New Notes. In general, a United
States Holder of a New Note will recognize gain or loss upon the sale,
retirement or other taxable disposition of the New Note in an amount equal to
the difference between (i) the amount of cash and the fair market value of
property received in exchange for the New Note (except to the extent
attributable to the payment of accrued but unpaid interest, which generally will
be taxable to a United States Holder as ordinary income) and (ii) the United
States Holder's adjusted tax basis in the New Note. Any gain or loss recognized
on the sale, retirement or other taxable disposition of a New Note generally
will be long-term capital gain or loss (subject to the market discount rules
discussed under "--Market Discount and Premium--Market Discount" above) if, at
the time of the disposition, the United States Holder's holding period for the
Note is more than one year. The deduction of capital losses is subject to
certain limitations. United States Holders of New Notes should consult their tax
advisors regarding the treatment of capital gains and losses.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to certain payments ("reportable
payments") of principal and interest on a New Note, and to proceeds of the sale
or redemption of a New Note before maturity. We or our paying agent, as the case
may be, will be required to withhold a backup withholding tax from any
reportable payment if, among other things, a United States Holder fails to
furnish his taxpayer identification number (social security or employer
identification number), certify that such number is correct, certify that such
holder is not subject to backup withholding or otherwise comply with the
applicable requirements of the backup withholding rules. Certain United States
Holders, including all corporations, are not subject to backup withholding and
information reporting requirements for payments made in respect of the New
Notes. Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a reportable payment to a United States Holder
will be allowed as a credit against such United States Holder's United States
federal income tax and may entitle the holder to a refund, provided that the
required information is furnished to the Internal Revenue Service ("IRS").
The amount of any reportable payments, including interest, made to the
record United States Holders of New Notes (other than to holders which are
exempt recipients) and the amount of tax withheld, if any, with respect to such
payments will be reported to such United States Holders and to the IRS for each
calendar year.
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a person (other than a
partnership or an entity treated as a partnership for United States federal
income tax purposes) that is, for United States federal income tax purposes,
neither a United States Holder, as defined above, nor a former United States
citizen or long-term resident, as defined in section 877 of the Tax Code.
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New Notes
Payment of Interest on New Notes. In general, payments of interest
(whether the interest is qualified stated interest or OID) received by a Foreign
Holder on a New Note will not be subject to United States federal income tax
withholding at a 30% rate (or lower rate under an applicable income tax treaty)
if the interest is not effectively connected with a United States trade or
business of the Foreign Holder and the Foreign Holder:
- does not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock entitled to vote;
- is not a controlled foreign corporation related to us;
- is not a bank receiving interest described in section 881(c)(3)(A)
of the Tax Code; and
- provides appropriate certification as to its foreign status.
A Foreign Holder can generally meet the certification requirement
described above by providing a properly executed Form W-8BEN or appropriate
substitute form to us, or our paying agent. If the Foreign Holder holds the New
Notes through a financial institution or other agent acting on the Foreign
Holder's behalf, the Foreign Holder may be required to provide appropriate
documentation to the agent. The Foreign Holder's agent will then generally be
required to provide appropriate certifications to us or our paying agent, either
directly or through other intermediaries. Special certification rules apply to
foreign partnerships, estates and trusts, and in certain circumstances
certifications as to foreign status of partners, trust owners or beneficiaries
may have to be provided to us or our paying agent.
If a Foreign Holder does not qualify for an exemption under these rules,
interest on the New Notes may be subject to withholding tax at the rate of 30%,
or such lower rate as may be prescribed under an applicable income tax treaty.
If interest on the New Notes is effectively connected with a United States trade
or business of a Foreign Holder, and, if an income tax treaty applies, is
attributable to a United States "permanent establishment" (or, if the Foreign
Holder is an individual, a "fixed base") of the Foreign Holder, the interest
would not be subject to the 30% withholding tax so long as the Foreign Holder
provides the Company or its agent an adequate certification, currently on Form
W-8ECI, but such interest would be subject to United States federal income tax
on a net income basis at the rates applicable to United States persons
generally. In addition, if a Foreign Holder is a foreign corporation and the
interest is effectively connected with a United States trade or business of the
Foreign Holder (and, if an income tax treaty applies, is attributable to a
"permanent establishment" of the Foreign Holder), the Foreign Holder may also be
subject to a "branch profits" tax at the rate of 30% (or lower applicable treaty
rate).
Sale, Exchange or Retirement of New Notes. A Foreign Holder generally will
not be subject to United States federal income tax (and generally no tax will be
withheld) on any amount which constitutes capital gain upon the sale, retirement
or other taxable disposition of New Notes, unless:
- the Foreign Holder's gain on disposition of the New Notes is
effectively connected with a United States trade or business of the
Foreign Holder (and, if an income tax treaty applies, is
attributable to a United States permanent establishment (or, if the
Foreign Holder is an individual, a "fixed base" in the United
States) of the Foreign Holder); or
- the Foreign Holder is an individual and is present in the United
States for 183 or more days in the taxable year within which the
disposition takes place and certain other requirements are met.
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If a Foreign Holder's gain on a disposition of New Notes is effectively
connected with a United States trade or business of the Foreign Holder (and, if
an income tax treaty applies, is attributable to a United States permanent
establishment or fixed base of the Foreign Holder, as applicable), the payment
of the sales proceeds with respect to the New Notes would be subject to United
States federal income tax on a net income basis at the rates applicable to
United States person generally. In addition, Foreign Persons that are foreign
corporations may be subject to the branch profits tax described above under
"--Payment of Interest on New Notes." An individual Foreign Holder meeting the
"presence" test described in the second clause above will be subject to a flat
30% tax (or lower treaty rate) on the gain derived from the sale of New Notes,
which may be offset by United States source capital losses (even though the
individual is not considered a resident of the United States).
Federal Estate Taxes. Subject to applicable estate tax treaty
provisions, New Notes held at the time of death (or New Notes transferred before
death but subject to certain retained rights or powers) by an individual who at
the time of death is a Foreign Holder will not be included in such Foreign
Holder's gross estate for United States federal estate tax purposes provided
that the individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to vote or hold
the New Notes in connection with a United States trade or business.
New Common Stock
Dividends. Dividends paid to a Foreign Holder of New Common Stock
generally will be subject to withholding of United States federal income tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty. However, dividends that are effectively connected with a United States
trade or business of the Foreign Holder and, where a tax treaty applies, are
attributable to a United States permanent establishment or fixed base, as
applicable, of the Foreign Holder, are not subject to withholding tax, but
instead are subject to United States federal income tax on a net income basis at
the rates applicable to United States persons generally, provided the Foreign
Holder provides a properly executed IRS Form W-8ECI and other requirements are
satisfied. Any such effectively connected dividends received by a foreign
corporation may be subject to the branch profits tax as described above under
"--New Notes--Payment of Interest on New Notes."
Disposition of New Common Stock. A Foreign Holder generally will not
be subject to United States federal income tax with respect to gain recognized
on a sale or other disposition of New Common Stock unless:
- the gain is effectively connected with a United States trade or
business of the Foreign Holder, and, where a tax treaty applies, is
attributable to a United States permanent establishment or fixed
base, as applicable, of the Foreign Holder;
- in the case of a Foreign Holder who is an individual, the Foreign
Holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other
conditions are met; or
- we are or have been a "U.S. real property holding corporation" for
United States federal income tax purposes.
A Foreign Holder whose gain on disposition of the New Common Stock is
effectively connected as described in the first clause above will be subject to
United States federal income tax with respect to such effectively connected gain
on a net income basis at the rates applicable to United States persons generally
and, if it is a corporation, may be subject to the branch profits tax as
described under "--New Notes--Payment of Interest on New Notes." An individual
Foreign Holder meeting the "presence" test described in the second clause above
will be subject to a flat 30% tax (or lower treaty rate) on the gain derived
from
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the sale, which may be offset by United States source capital losses (even
though the individual is not considered a resident of the United States).
Generally, a corporation is a U.S. real property holding corporation if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
and its other assets used or held for use in a trade or business. We believe we
are currently a "U.S. real property holding corporation" for United States
federal income tax purposes. However, because the determination of U.S. real
property holding corporation status is based upon the composition of our assets
from time to time and there are uncertainties in the application of certain
relevant rules, our status as a U.S. real property holding corporation may
change in the future.
The tax relating to the disposition of stock in a U.S. real property
holding corporation does not apply to a Foreign Holder whose holdings, actual
and constructive, of our New Common Stock at all times during a specified period
amount to 5% or less of our New Common Stock, provided that the New Common Stock
is regularly traded on an established securities market. We believe the New
Common Stock will be treated as regularly traded on an established securities
market for purposes of the foregoing exception. If any gain on the disposition
of our New Common Stock by a Foreign Holder were taxable because of our status
as a U.S. real property holding corporation, the buyer of the New Common Stock
would be required to withhold a tax equal to 10% of the amount realized on the
sale of the New Common Stock. Foreign Holders that acquire our New Common Stock
are advised to consult their tax advisors as to the applicability to them of the
rules relating to the taxation of dispositions of stock in U.S. real property
holding corporations based on their particular circumstances.
Federal Estate Tax. New Common Stock held by an individual Foreign
Holder at the time of the Foreign Holder's death will be included in the Foreign
Holder's gross estate for United States federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
Treaty Benefits. Foreign Holders claiming treaty benefits under an
applicable income tax treaty must provide a properly executed IRS Form W-8BEN
claiming such benefits, and may be required to obtain a United States taxpayer
identification number and provide certain other information to claim such
benefits. A Foreign Holder of New Notes or New Common Stock eligible for a
reduced rate of United States withholding tax under an income tax treaty may
obtain a refund of any excess amounts withheld by filing an appropriate claim
for refund with the IRS.
Backup Withholding and Information Reporting
No backup withholding or information reporting will generally be required
with respect to interest paid to a Foreign Holder of New Notes if the beneficial
owner of the New Notes provides a properly executed IRS Form W-8BEN or otherwise
establishes an exemption, provided the payor does not have actual knowledge or
reason to know that the beneficial owner is a United States person. We must
report annually to a Foreign Holder of New Common Stock and to the IRS the
amount of dividends paid on our New Common Stock, regardless of whether backup
withholding is required. Dividends on New Common Stock paid to a Foreign Holder
of New Common Stock generally will be exempt from backup withholding if the
Foreign Holder provides a properly executed IRS Form W-8BEN or otherwise
establishes an exemption, provided the payor does not have actual knowledge or
reason to know that the beneficial owner is a United States person.
Information reporting requirements and backup withholding will not apply
with to any payment of the proceeds of the sale of New Notes or New Common Stock
effected outside of the United States by a foreign office of a "broker," as
defined in applicable treasury regulations, provided that such broker is not:
- a United States person, as defined in the Tax Code;
- a controlled foreign corporation for United States federal income
tax purposes;
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- a foreign partnership engaged in the conduct of a United States
trade or business;
- a foreign partnership that, at any time during its taxable year, has
50% or more of its income or capital interests owned by United
States persons; or
- a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the
United States.
Payment of the proceeds of any sale of New Notes or New Common Stock
effected outside the United States by a foreign office of any other broker will
not be subject to backup withholding or information reporting if such broker has
documentary evidence in its records that the beneficial owner is a Foreign
Holder and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption. Payment of the proceeds of any sale of New Notes or
New Common Stock effected by the United States office of a broker will be
subject to information reporting and backup withholding, unless the beneficial
owner of the New Note or New Common Stock provides a properly executed IRS Form
W-8BEN or otherwise establishes an exemption from back-up withholding.
Foreign Holders of New Notes or New Common Stock should consult their tax
advisors regarding the application of information reporting and backup
withholding to their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining the exemption, if available. Backup
withholding is not an additional tax. Any amounts withheld from payments to a
Foreign Holder under the backup withholding rules will be allowed as a refund or
a credit against the Foreign Holder's federal income tax liability, provided
that the required information is furnished to the IRS.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following describes certain of our long-term indebtedness which is
secured by certain of our residences that do not secure the New Notes:
TRUST DEED NOTES
We issued Trust Deed Notes payable to the State of Oregon Housing and
Community Services Department in 1989, 1993 and 1995 which are secured by
buildings, land, furniture and fixtures of six Oregon residences. The notes are
payable through 2028 in monthly installments including interest at effective
annual rates ranging from 7.375% to 9.0%.
VARIABLE RATE REVENUE BONDS
In November 1996, we obtained $8.5 million in Variable Rate Multifamily
Revenue Bonds with the Washington State Housing Finance Commission Department
and as of December 31, 2001 these bonds were secured by an $8.7 million letter
of credit issued by U.S. Bank and by buildings, land, furniture and fixtures of
five Washington residences. We have promised to reimburse U.S. Bank for any
draws on the letter of credit. The letter of credit expires in 2003. The bonds
had a weighted average annual interest rate of 3.16% during 2001.
In July 1997, we obtained $7.35 million Variable Rate Demand Housing
Revenue Bonds, Series 1997 with the State of Idaho Housing and Finance
Association and as of December 31, 2001 the bonds were secured by a $7.5 million
letter of credit issued by U.S. Bank and by buildings, land, furniture and
fixtures of four Idaho residences. We have promised to reimburse U.S. Bank for
any draws on the letter of credit. The letter of credit expires in 2004. The
bonds had a weighted average annual interest rate of 3.15% during 2001.
In July 1998, we obtained $12.7 million in Variable Rate Demand Housing
Revenue Bonds with the State of Ohio Housing Finance Agency ("OHFA") and
$530,000 in Taxable Variable Rate Demand Housing Revenue Bonds with OHFA. The
bonds are due July 2018 and are secured by a $13.5 million letter of credit
issued by U.S. Bank and by buildings, land, furniture and fixtures of seven Ohio
residences. We have promised to reimburse U.S. Bank for any draws on the letter
of credit. The letter of credit expires in 2005. The bonds had a weighted
average annual interest rate of 3.02% during 2001. As of December 31, 2001, our
obligations to reimburse U.S. Bank under these letters of credit were
collectively secured by $4.3 million of cash collateral.
MORTGAGE FINANCING
In April 1998, we obtained $14.6 million in mortgage financing from
Transatlantic Capital Company, LLC ("Transatlantic") at a fixed interest rate of
7.73% and secured by buildings, land, furniture and fixtures of seven Texas
residences. The financing terms include payments of principal and interest
calculated on a 25-year amortization schedule, with monthly payments of $110,000
commencing June 1, 1998 and a balloon payment of $11.8 million due at maturity
in May 2008.
In July 1998, we obtained $6.6 million in mortgage financing from
Transatlantic at a fixed interest rate of 7.58% per annum and secured by
buildings, land, furniture and fixtures of three Oregon residences. The
financing terms include payments of principal and interest calculated on a
25-year amortization schedule, with monthly payments of $49,000 commencing
September 1, 1998 and a balloon payment of $5.3 million due at maturity in
August 2008.
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In November 1998, we obtained $8.75 million in mortgage financing from
Transatlantic at a fixed interest rate of 8.65% per annum and secured by
buildings, land, furniture and fixtures of three New Jersey residences. The
financing terms include payments of principal and interest calculated on a
25-year amortization schedule, with monthly payments of $71,000 commencing
January 1, 1999 and a balloon payment of $7.2 million due at maturity in
December 2008.
HUD FINANCING
On June 14, 2001, we entered into two loan agreements for $1.8 million and
$2.7 million, and on July 19, 2001, we entered into a loan agreement for $3.0
million, with Red Mortgage Capital, Inc. ("Red Mortgage") for long-term HUD
insured financing. Each loan is secured by buildings, land, furniture and
fixtures of one Texas residence and the loans mature between July 1, 2036 and
August 1, 2036 and collectively require monthly principal and interest payments
of $50,000. The loans bear fixed annual interest rates between 7.40% and 7.55%.
Of the $7.5 million in proceeds, approximately $4.0 million was used to pay off
bridge financing provided by Red Mortgage, approximately $350,000 was used for
loan closing costs, approximately $3.0 million was used to pay down the Heller
line of credit and the remaining proceeds were used to fund escrow accounts.
HELLER FINANCING
Prior to the Effective Date
On March 2, 2001, certain of our subsidiaries who are not guaranteeing the
New Notes (the "Borrower Subsidiaries") entered into an agreement with Heller
for a line of credit facility up to $45.0 million (the "Existing Facility"),
which we guaranteed. The Existing Facility was scheduled to mature on August 31,
2002 and was secured by 16 properties owned by the Borrower Subsidiaries. The
Existing Facility carried an interest rate of 3.85% over the three-month LIBOR
rate floating monthly and required monthly interest-only payments until
maturity.
On June 27, 2001, the Borrower Subsidiaries amended the Existing Facility,
reducing the aggregate line of credit available from $45.0 million to $20.0
million. The Existing Facility, as so amended, was scheduled to mature on
September 28, 2001. The maturity was extended to October 12, 2001 by Heller. The
Existing Facility was secured by an additional 10 properties owned by the
Borrower Subsidiaries.
On October 3, 2001, we and our subsidiary Carriage House entered into a
debtor-in-possession facility with Heller (the "DIP Facility"). The DIP Facility
provided draws of up to $4.4 million and supplemented our cash position while we
were in bankruptcy. The DIP Facility was secured by eight of our properties and
a pledge of certain intercompany notes and the stock of the Borrower
Subsidiaries and Carriage House (collectively, the "DIP Collateral"). The DIP
Facility matured upon our emergence from bankruptcy on the Effective Date and
was refinanced by the Exit Facility described below.
Concurrent with the closing of the DIP Facility, the Company and the
Borrower Subsidiaries entered into a further amendment of the Existing Facility
(the "Second Amendment"), which amendment, among other things, extended the
maturity of the Existing Facility to be coterminous with the DIP Facility,
amended the annual interest to be calculated at 5.0% over three month LIBOR,
floating monthly, payable monthly in arrears, and permitted the financing of the
acquisition by our subsidiary, Texas ALC Partners, L.P. ("Texas ALC"), of
sixteen properties then leased by Texas ALC from the then lessor of those
properties, T and F Properties, L.P. (the "Meditrust Properties"). The purchase
of the Meditrust Properties was completed on October 24, 2001. The Meditrust
Properties secure the Existing Facility. The DIP Collateral and the collateral
for the Existing Facility (including the Meditrust Properties)
cross-
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collateralized both the DIP Facility and the Existing Facility, as amended. None
of this collateral secures the Senior Notes or the Junior Notes.
After the Effective Date
Upon our exit from bankruptcy on the Effective Date, the DIP Facility was
refinanced through the Existing Facility, as amended by the Second Amendment
(the "Exit Facility"). The available amount of the Exit Facility is $44.0
million, of which $40.5 million was outstanding as of December 31, 2001. The
Exit Facility will mature on December 31, 2004. Principal will be payable
monthly in a monthly amount of $50,000 for the first year, $65,000 for the
second year and $80,000 for the last year of the Exit Facility term. Annual
interest will be calculated at 4.5% over three month LIBOR, floating monthly
(not to be less than 8%), and payable monthly in arrears. On the Effective Date,
Heller released its liens on one property from the original 16 properties as
well as its liens on the 10 additional properties granted to it on June 27,
2001. These 11 properties, plus an additional 46 properties, now secure the New
Notes. On the Effective Date, Heller also released its liens on the DIP
Collateral. The Exit Facility is currently secured by 31 properties (including
the Meditrust Properties) owned by the Borrower Subsidiaries (including Texas
ALC). We will remain liable for the entire amount of the Exit Facility as a
guarantor.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2001, we entered into a consulting agreement with Richard C. Ladd, who
is currently a member of our Board of Directors. The agreement provides for Mr.
Ladd to provide consultation services to us on the advisability of establishing
a committee on quality improvement, its membership and charter. The initial
contract was for a period of 4 months, which was amended to a month-to-month
basis. Assisted Living Concepts, Inc. or Mr. Ladd may terminate the contract at
any time by the terminating party providing at least 30-days prior written
notice to the other party of their intention to terminate the contract. Mr. Ladd
is reimbursed at the rate of $150 per hour, not to exceed $2,500 for any one
month. We paid Mr. Ladd $8,090 for such services during the year ended December
31, 2001. Additionally, we have allowed Mr. Ladd and his spouse to participate
in our health insurance programs. We paid premiums on their behalf of $7,900
during the year ended December 31, 2001.
At December 31, 2001, the Compensation Committee was comprised of John
Gibbons (Chair), Jill Krueger and Leonard Tannenbaum. Currently, the
Compensation Committee is comprised of Leonard Tannenbaum (Chair), W. Andrew
Adams, and Andre Dimitriadis.
In December 2000, we entered into an agreement with MYFM Capital, LLC
("MYFM") under which the we could establish a line of credit with BET Associates
LP ("BET") as lender, providing for loans of up to $10.0 million. In early 2001,
we terminated the agreement and paid MYFM $50,000 in connection with such
termination. Bruce E. Toll, who is the beneficial owner of 832,960 of our common
shares, and was a member of our Board of Directors from January 2001 to January
1, 2002, is the sole member of BRU Holdings Company, Inc., LLC, which is the
sole general partner of BET. Leonard Tannenbaum is the Managing Partner of MYFM
Capital, LLC, the son-in-law of Mr. Toll, a 10% limited partner of BET, and
served on our Board of Directors during 2001.
W. Andrew Adams became a member of the Board of Directors in January 2002.
Mr. Adams currently serves as President, Chief Executive Officer and Chairman of
the Board of Directors of NHI. NHI owns 557,214 shares of our New Common Stock
and $5.0 million of our New Notes.
Andre Dimitriadis, who has served on our Board of Directors since January
2002, is the President, Chief Executive Officer and Chairman of the Board of LTC
and is Chief Executive Office and Chairman of the Board of CLC Healthcare, Inc.
(previously LTC Healthcare, Inc.). LTC owns $11.0 million of our New Notes and
CLC Healthcare, Inc. owns 22.4% of our common stock and $1.9 million of our New
Notes. We currently lease 37 properties (1,426 units) from LTC. During 2001, we
paid LTC approximately $12.5 million for building rent. In accordance with our
Plan, effective January 1, 2002, we entered into a Master Lease Agreement with
LTC under which 16 leases were consolidated. This Master Lease Agreement
provides for aggregate rent reductions of $875,000 per year and restructures the
provision related to minimum rent increases for the 16 properties for the
initial remaining term. As a result of the change in future annual rent
increases, as to the 16 properties under the Master Lease Agreement, we are
required to account for rent expense related to such leases on a straight-line
basis. In exchange for the rent reduction, LTC filed a claim in the bankruptcy
proceeding to which we did not object in the amount of $2,500,000. The claim was
approved by the Court and entitled LTC to $590,694 of Senior Secured Notes,
$223,803 of Junior Secured Notes and 91,576 shares of common stock. Prior to the
issuance of any common stock to LTC, LTC entered into an agreement with
Healthcare Holdings, Inc., a wholly owned subsidiary of CLC Healthcare, Inc. to
allow it to purchase LTC's right to receive the common stock. The Master Lease
Agreement also provides LTC with the option to exercise certain remedies,
including the termination of the Master Lease Agreement and certain other LTC
leases due to cross-default rights, upon a change of control under which at
least 30% ownership of our common stock is held by a party, or combination of
parties directly or indirectly. LTC has the same option if the stockholders
approve a plan of liquidation, or the stockholders approve a merger or
consolidation meeting
183
certain conditions. At the same time that we entered into the Master Lease
Agreement, we also amended 16 other leases with LTC under which the renewal
rights of certain of those leases are tied together differently than previously
with certain other leases.
We entered into a month-to-month contract for long distance services with
TMC Communications in 2001. John Gibbons, who served on our Board of Directors
during 2001, owns 50% of TMC. During 2001, we paid TMC Communications $32,700.
We have contracted with Learning.Net for training resources. John Gibbons,
who served on our Board of Directors during 2001, owns 12% of Learning.Net.
During 2001, we paid Learning.Net $25,700 for software licensing fees and
training courses.
On January 1, 2002 we entered into a Registration Rights Agreement with
LTC, CLC Healthcare, Inc. (formerly LTC Healthcare, Inc.), NHI and Cerberus
Capital Management, L.P., which requires us to register the resale of securities
acquired by these entities in connection with our Plan. Andre Dimitriadis is
President, Chief Executive Officer and Chairman of the Board of LTC and Chief
Executive Officer and Chairman of the Board of CLC Healthcare, Inc. and W.
Andrew Adams is President, Chief Executive Officer and Chairman of the Board of
NHI. See "Registration Rights Agreement."
184
SELLING SECURITYHOLDERS
The New Securities being offered were acquired on January 1, 2002 by the
Selling Securityholders in connection with a plan of reorganization under
Chapter 11 of the United States Bankruptcy Code, or may be acquired by the
Selling Security holders either from the Reserve or, in the ease of the Junior
Notes, through the payment of non-cash interest.
The following table sets forth the following information:
- the names of the Selling Securityholders; and
- the amount of Senior Notes and Junior Notes and number of shares of
New Common Stock held by each of them as of the date of this
Prospectus.
All of the Senior Notes, Junior Notes and New Common Stock held or
acquired as described above by each such person may be offered pursuant to this
Prospectus. The information in the table has been prepared based upon
information furnished to us by or on behalf of the Selling Securityholders.
We cannot provide an estimate as to the amount of Senior Notes, Junior
Notes or New Common Stock that will be held by the Selling Securityholders after
completion of this offering. This is because the Selling Securityholders may
offer all or some of the New Securities which they hold pursuant to this
offering. Furthermore, there are currently no agreements, arrangements or
understandings with respect to the sale of any of the New Securities that will
be held by the Selling Securityholders after completion of this offering. See
"Plan of Distribution."
PRINCIPAL PRINCIPAL NUMBER OF
AMOUNT OF AMOUNT OF SHARES OF NEW
SENIOR NOTES JUNIOR NOTES COMMON
NAME HELD HELD STOCK HELD
---- ------------ ------------ -------------
LTC Properties, Inc. $8,074,120 $3,870,760 0
CLC Healthcare, Inc. 1,397,260 669,850 1,468,857
National Health Investors, Inc. 3,633,960 1,742,130 563,376
Cerberus Capital Management, L.P. 7,912,850 3,793,450 1,227,411
As part of the Plan, W. Andrew Adams, of National Health Investors, Inc.,
and Andre Dimitriadis, of Healthcare Holdings, Inc., were appointed to the
Company's Board of Directors. Furthermore, Mr. Adams currently serves as
Chairman of the Company's Board of Directors. You should also refer to the
section of this Prospectus entitled "Certain Relationships and Related
Transactions" for additional information.
185
PLAN OF DISTRIBUTION
We will not receive any of the proceeds from this offering. We have been
advised by the Selling Securityholders that they may sell all or a portion of
the Senior Notes, Junior Notes or shares of New Common Stock offered from time
to time through the facilities of any national securities exchange or United
States automated interdealer quotation system of a registered national
securities association, on which any of the Senior Notes, Junior Notes or shares
of New Common Stock are then listed, admitted to unlisted trading privileges or
included for quotation on terms to be determined at the times of such sales. The
Selling Securityholders may also make private sales, including "block
transfers," directly or through a broker or brokers. Alternatively, any of the
Selling Securityholders may from time to time offer the Senior Notes, Junior
Notes or shares of New Common Stock through underwriters, dealers or agents. The
underwriters may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Securityholders and the purchasers
of the Senior Notes, Junior Notes or shares of New Common Stock.
To the extent required, the aggregate principal amount of New Notes and
number of shares of New Common Stock to be sold, the names of the Selling
Securityholders, the purchase price, the name of any such agent, dealer or
underwriter and any applicable commissions with respect to a particular offer
will be set forth in an accompanying prospectus supplement. The aggregate
proceeds to the Selling Securityholders from the sale of the New Notes and New
Common Stock offered will be the purchase price of such New Notes and New Common
Stock less any underwriting discounts, commissions or concessions. There is no
assurance that the Selling Securityholders will sell any or all of the Senior
Notes, Junior Notes or shares of New Common Stock offered.
The Selling Securityholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with these
transactions, broker-dealers or other financial institutions may engage in short
sales of the New Notes or the New Common Stock in the course of hedging
positions they assume with Selling Securityholders. The Selling Securityholders
may also enter into options or other transactions with broker-dealers or other
financial institutions which require delivery to these broker-dealers or other
financial institutions of New Notes and shares of New Common Stock offered by
this Prospectus, which New Notes and shares of New Common Stock these
broker-dealers or other financial institutions may resell pursuant to this
Prospectus (as amended or supplemented to reflect such transaction).
The New Notes and the New Common Stock may be sold from time to time in
one or more transactions at fixed offering prices, which may be changed, or at
varying prices determined at the time of sale or at negotiated prices. These
prices will be determined by the holders of the securities or by agreement
between such holders and underwriters or dealers who may receive fees or
commissions in connection therewith.
The New Notes and the New Common Stock are new securities with no
established trading market. We have no plans to apply to list the New Notes or
the New Common Stock on any United States exchange or the Nasdaq Stock Market,
and there can be no assurance that an active market for the New Notes or the New
Common Stock will develop.
The New Notes and the New Common Stock have not been registered for resale
under the securities laws of any state. Under the securities laws of certain
states, the New Notes and the New Common Stock may be sold in such states only
through registered or licensed brokers or dealers.
186
The Selling Securityholders and any broker-dealers, agents or underwriters
that participate with the Selling Securityholders in the distribution of the New
Notes or the New Common Stock may be deemed to be "underwriters" within the
meaning of the Securities Act. In such cases any commissions received by the
broker-dealers, agents or underwriters and any profit on the resale of the New
Notes or the New Common Stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Selling Securityholders
have agreed to indemnify the Company against certain losses arising out of
information furnished by that Selling Securityholder in writing for inclusion in
any such registration statement and they may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of the
New Notes and/or shares of New Common Stock against certain liabilities,
including liabilities arising under the Securities Act.
We will pay all expenses incident to the offering and sale of the New
Notes or the New Common Stock pursuant to the Registration Rights Agreement
other than underwriting discounts and selling commissions and fees and we will
indemnify the Selling Securityholders for certain liabilities, including
liabilities under the Securities Act, in connection with any demand
registration.
LEGAL MATTERS
Latham & Watkins, Los Angeles, California and New York, New York and
Schreck Brignone Godfrey, Las Vegas, Nevada have passed upon certain legal
matters with respect to the New Notes and the New Common Stock being offered.
EXPERTS
The consolidated financial statements and schedule of Assisted Living
Concepts, Inc., as of December 31, 2000 and for each of the years in the
three-year period ended December 31, 2001 (Predecessor Company), and the
consolidated balance sheet of Assisted Living Concepts, Inc. and subsidiaries as
of December 31, 2001 (Successor Company), have been included herein and in the
Prospectus in reliance upon the reports of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The audit report covering the December 31, 2001 consolidated balance
sheet (Successor Company) reflects a change in ownership through fresh start
reporting and therefore is not comparable to prior periods.
187
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
FINANCIAL STATEMENTS:
Independent Auditors' Report.......................................................................... F-2
Consolidated Balance Sheets, December 31, 2000 (Predecessor Company) and 2001 (Successor Company)..... F-3
Consolidated Statements of Operations and Consolidated Statements of Comprehensive Loss, Years
Ended December 31, 1999, 2000 and 2001 (Predecessor Company)........................................ F-4
Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1999, 2000 and
2001(Predecessor Company)............................................................................. F-5
Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 2000 and 2001 (Predecessor
Company) ............................................................................................. F-6
Notes to Consolidated Financial Statements............................................................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Assisted
Living Concepts, Inc. and subsidiaries as of December 31, 2001 (Successor
Company) and the accompanying consolidated balance sheet of Assisted Living
Concepts, Inc. and subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, comprehensive loss, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2001 (Predecessor Company). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Assisted
Living Concepts Inc. and subsidiaries as of December 31, 2001 and the financial
position of the Predecessor Company as of December 31, 2000 and the results of
the Predecessor Company's operations and cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 1 to the consolidated financial statements, on
January 1, 2002 the Company consummated a Joint Plan of Reorganization (the
Plan) which had been confirmed by the United States Bankruptcy Court. The Plan
resulted in a change of ownership of the Predecessor Company and, accordingly,
effective December 31, 2001 the Company accounted for the change in ownership
through fresh-start reporting. As a result, the consolidated information prior
to December 31, 2001 is presented on a different cost basis than that as of
December 31, 2001 and, therefore, is not comparable.
/s/ KPMG LLP
Portland, Oregon
March 25, 2002
F-2
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
PREDECESSOR SUCCESSOR
COMPANY COMPANY
DECEMBER 31,
------------------------
2000 2001
--------- --------
Current assets:
Cash and cash equivalents ......................................................... $ 7,444 $ 6,077
Cash held for tenant security deposits ............................................ 2,445 --
Cash restricted for tenant security deposits ...................................... -- 2,415
Accounts receivable, net of allowance for doubtful accounts of $1,399 at 2000 ..... 2,448 2,328
Prepaid insurance ................................................................. 1,765 160
Prepaid expenses .................................................................. 1,042 823
Cash restricted for workers compensation claims ................................... 1,072 2,825
Other current assets .............................................................. 2,729 3,862
--------- --------
Total current assets ...................................................... 18,945 18,490
Restricted cash ..................................................................... 5,394 5,349
Property and equipment, net ......................................................... 298,744 196,548
Goodwill, net ....................................................................... 4,785 --
Other assets, net ................................................................... 8,590 1,866
--------- --------
Total assets .............................................................. $ 336,458 $222,253
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 2,708 1,450
Accrued real estate taxes ......................................................... 4,835 4,523
Accrued interest expense .......................................................... 1,937 666
Accrued payroll expense ........................................................... 4,017 4,561
Other accrued expenses ............................................................ 4,229 7,163
Bridge loan payable ............................................................... 4,000 --
Class action litigation settlement payable ........................................ 7,765 --
Tenant security deposits .......................................................... 2,484 2,471
Related party payable ............................................................. 626 --
Other current liabilities ......................................................... 565 652
Current portion of unfavorable lease adjustment ................................... -- 681
Current portion of long-term debt and capital lease obligation .................... 1,690 2,622
--------- --------
Total current liabilities ................................................. 34,856 24,789
Other liabilities ................................................................... 6,059 89
Unfavorable lease adjustment ........................................................ -- 3,115
Long-term debt and capital lease obligation, net of current portion ................. 70,407 161,461
Convertible subordinated debentures ................................................. 161,250 --
--------- --------
Total liabilities ......................................................... 272,572 189,454
--------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, Predecessor Company $.01 par value; 1,000,000 shares
authorized; none issued or outstanding ......................................... -- --
Preferred stock, Successor Company $.01 par value; 3,250,000 shares authorized;
none issued or outstanding ..................................................... -- --
Common Stock, Predecessor Company $.01 par value; 80,000,000 shares authorized;
issued and outstanding 17,120,745 shares at December 31, 2000 and 2001 ......... 171 --
Common Stock, Successor Company $.01 par value; 20,000,000 shares authorized;
issued and outstanding 6,431,759 shares at December 31, 2001 (68,241 shares
to be issued upon settlement of pending claims) ................................ -- 65
Additional paid-in capital ........................................................ 144,451 32,734
Fair market value in excess of historical cost of acquired
net assets attributable to related party transactions ........................... (239) --
Accumulated deficit ............................................................... (80,497) --
--------- --------
Total shareholders' equity ................................................ 63,886 32,799
--------- --------
Total liabilities and shareholders' equity ................................ $ 336,458 $222,253
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR COMPANY
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 2000 2001
--------- --------- ---------
Revenue ............................................................. $ 117,489 $ 139,423 $ 150,678
Operating expenses:
Residence operating expenses ...................................... 81,767 95,032 103,867
Corporate general and administrative .............................. 21,178 18,365 17,119
Building rentals .................................................. 15,367 16,004 15,980
Depreciation and amortization ..................................... 8,981 9,923 10,349
Class action litigation settlement ................................ -- 10,020 --
Terminated merger expense ......................................... 228 -- --
Site abandonment costs ............................................ 4,912 -- --
--------- --------- ---------
Total operating expenses .................................. 132,433 149,344 147,315
--------- --------- ---------
Operating income (loss) ............................................. (14,944) (9,921) 3,363
--------- --------- ---------
Other income (expense):
Interest expense .................................................. (15,200) (16,363) (19,465)
Interest income ................................................... 1,598 786 655
Gain (loss) on sale and disposal of assets ........................ (127) 13 (88)
Loss on sale of marketable securities ............................. -- (368) --
Other income (expense), net ....................................... (260) 67 30
--------- --------- ---------
Total other expense ....................................... (13,989) (15,865) (18,868)
--------- --------- ---------
Loss before debt restructure and reorganization cost, fresh start
adjustments and extraordinary item ............................. (28,933) (25,786) (15,505)
Debt restructure and reorganization cost ............................ -- -- (8,581)
Fresh start adjustments ............................................. -- -- (119,320)
--------- --------- ---------
Loss before extraordinary item ...................................... (28,933) (25,786) (143,406)
Extraordinary item - gain on reorganization ......................... -- -- 79,520
--------- --------- ---------
Net loss ............................................................ $ (28,933) $ (25,786) $ (63,886)
========= ========= =========
Basic and diluted net loss per common share:
Loss before extraordinary item .................................... $ (1.69) $ (1.51) $ (8.38)
Extraordinary item ................................................ -- -- 4.65
--------- --------- ---------
Basic and diluted net loss per common share ......................... $ (1.69) $ (1.51) $ (3.73)
========= ========= =========
Basic and diluted weighted average common shares outstanding ........ 17,119 17,121 17,121
========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
PREDECESSOR COMPANY
YEARS ENDED DECEMBER 31,
----------------------------------
1999 2000 2001
-------- -------- --------
Net loss ........................................................ $(28,933) $(25,786) $(63,886)
Other comprehensive loss:
Unrealized loss on investments ................................ (320) -- --
Reclassification adjustment for loss included in net loss ..... -- 320 --
-------- -------- --------
Comprehensive loss .............................................. $(29,253) $(25,466) $(63,886)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL UNEARNED
------------------- PAID-IN COMPENSATION
SHARES AMOUNT CAPITAL EXPENSE
------- ------ ---------- ------------
Balance at December 31, 1998, Predecessor
Company ................................. 17,344 $ 173 $ 148,533 $(3,492)
Exercise of employee stock options ...... 27 -- 158 --
Compensation expense earned on restricted
Stock ................................. -- -- -- 180
Retirement of restricted stock .......... (250) (2) (4,248) 3,312
Unrealized loss on marketable securities -- -- -- --
Net loss ................................ -- -- -- --
------- ----- --------- -------
Balance at December 31, 1999, Predecessor
Company ................................. 17,121 171 144,443 --
Compensation expense on issuance of
consultant options .................... -- -- 8 --
Reclassification adjustment for loss
included in net loss .................. -- -- -- --
Net loss ................................ -- -- -- --
------- ----- --------- -------
Balance at December 31, 2000, Predecessor
Company ................................. 17,121 171 144,451 --
Net loss ................................ -- -- -- --
------- ----- --------- -------
Balance at December 31, 2001, Predecessor
Company ................................. 17,121 171 144,451 --
======= ===== ========= =======
Fresh start reclassifications ........... (17,121) (171) (144,451) --
Issuance of common stock ................ 6,500 65 32,734 --
Balance at December 31, 2001, Successor ------- ----- --------- -------
Company ................................. 6,500 $ 65 $ 32,734 $ --
======= ===== ========= =======
FAIR MARKET
VALUE IN ACCUMULATED
EXCESS OF OTHER TOTAL
HISTORICAL COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
COST LOSS DEFICIT EQUITY
----------- ------------- ----------- -------------
Balance at December 31, 1998, Predecessor
Company ................................. $(239) $ -- $ (25,778) $ 119,197
Exercise of employee stock options ...... -- -- -- 158
Compensation expense earned on restricted
Stock ................................. -- -- -- 180
Retirement of restricted stock .......... -- -- -- (938)
Unrealized loss on marketable securities -- (320) -- (320)
Net loss ................................ -- -- (28,933) (28,933)
----- ----- --------- ---------
Balance at December 31, 1999, Predecessor
Company ................................. (239) (320) (54,711) 89,344
Compensation expense on issuance of
consultant options .................... -- -- -- 8
Reclassification adjustment for loss
included in net loss .................. -- 320 -- 320
Net loss ................................ -- -- (25,786) (25,786)
----- ----- --------- ---------
Balance at December 31, 2000, Predecessor
Company ................................. (239) -- (80,497) 63,886
Net loss ................................ -- -- (63,886) (63,886)
----- ----- --------- ---------
Balance at December 31, 2001, Predecessor
Company ................................. (239) -- (144,383) (--)
===== ===== ========= =========
Fresh start reclassifications ........... 239 -- 144,383 (--)
Issuance of common stock ................ -- -- -- 32,799
Balance at December 31, 2001, Successor ----- ----- --------- ---------
Company ................................. $ -- $ -- $ -- $ 32,799
===== ===== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR COMPANY
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 2000 2001
-------- -------- ---------
OPERATING ACTIVITIES:
Net loss ............................................................ $(28,933) $(25,786) $ (63,886)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 8,981 9,923 10,349
Provision for doubtful accounts ................................... 883 1,932 (61)
Site abandonment costs ............................................ 4,912 -- --
Amortization of deferred financing fees ........................... 1,999 1,613 3,708
Extraordinary gain on reorganization .............................. -- -- (79,520)
Fresh start adjustments ........................................... -- -- 119,320
Loss on the sale of marketable securities ......................... -- 368 --
Loss (gain) on sale of assets ..................................... 127 (13) 88
Compensation expense earned on restricted stock ................... 180 -- --
Compensation expense on issuance of consultant options ............ -- 8 --
Changes in assets and liabilities:
Accounts receivable ............................................... 175 (311) 181
Prepaid expenses .................................................. 44 (1,859) 1,815
Other current assets .............................................. 953 690 1,252
Other assets ...................................................... (1,435) (17) 3,193
Accounts payable .................................................. (304) 1,390 (1,258)
Accrued expenses .................................................. 245 3,809 5,846
Other current liabilities ......................................... (2,271) 8,854 (8,165)
Other liabilities ................................................. 2,545 99 (589)
-------- -------- ---------
Net cash provided by (used in) operating activities ......... (11,899) 700 (7,727)
-------- -------- ---------
INVESTING ACTIVITIES:
Sale of marketable securities, available for sale ................... 2,000 1,632 --
Restricted cash ..................................................... (7,555) 1,089 (4,123)
Proceeds from sale of property and equipment ........................ 19 14 --
Purchases of property and equipment ................................. (27,824) (3,543) (2,094)
Acquisition of properties ........................................... -- -- (23,500)
-------- -------- ---------
Net cash used in investing activities ....................... (33,360) (808) (29,717)
-------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from (payments on) bridge loan ............................. -- 4,000 (4,000)
Proceeds from long-term debt ........................................ -- -- 49,924
Proceeds from DIP facility .......................................... -- -- 1,000
Payments on long-term debt and capital lease obligation ............. (1,491) (1,609) (4,692)
Proceeds from issuance of common stock, net ......................... 158 -- --
Debt issuance costs of offerings and long-term debt ................. -- -- (6,155)
Retirement of restricted stock ...................................... (838) -- --
-------- -------- ---------
Net cash provided by (used in) financing activities ......... (2,171) 2,391 36,077
-------- -------- ---------
Net (decrease) increase in cash and cash equivalents ................ (47,430) 2,283 (1,367)
Cash and cash equivalents, beginning of year ........................ 52,591 5,161 7,444
-------- -------- ---------
Cash and cash equivalents, end of year .............................. $ 5,161 $ 7,444 $ 6,077
======== ======== =========
Supplemental disclosure of cash flow information:
Cash payments for interest ........................................ $ 15,528 $ 14,945 $ 11,181
Cash payments for income taxes .................................... $ -- $ -- $ --
Non-cash transactions:
Decrease in construction payable and property and equipment ....... $ (5,864) $ (1,078) --
Purchase of equipment with capital lease obligation ............... -- 263 --
Unrealized loss on investment ..................................... (320) -- --
Amendment of leases and removal of related assets ................. 29,492 -- --
Retirement of restricted stock .................................... 3,412 -- --
Amendment of leases and removal of related debt ................... 31,488 -- --
Elimination of deferred gain on purchase of leased properties...... -- -- $ 1,786
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Assisted Living Concepts, Inc. ("the Company") owns, leases and operates
assisted living residences which provide housing to older persons who need help
with the activities of daily living such as bathing and dressing. The Company
provides personal care and support services and makes available routine health
care services, as permitted by applicable law, designed to meet the needs of its
residents.
REORGANIZATION
On October 1, 2001, Assisted Living Concepts, Inc. (the "Company"), and
its wholly owned subsidiary, Carriage House Assisted Living, Inc. ("Carriage
House", and together with the Company, the "Debtors") each filed a voluntary
petition under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware in
Wilmington (the "Court"), case nos. 01-10674 and 01-10670, respectively, which
are being jointly administered. The Court gave final approval to the first
amended joint plan of reorganization, (the "Plan") on December 28, 2001.
On January 1, 2002 (the "Effective Date") the Debtors emerged from the
proceedings under Chapter 11 of the Bankruptcy Code. The Plan authorized the
issuance as of the Effective Date (subject to the Reserve described below) of
$40.25 million aggregate principal amount of seven-year secured notes (the "New
Senior Secured Notes"), bearing interest at 10% per annum, payable semi-annually
in arrears, and $15.25 million aggregate principal amount of ten-year secured
notes (the "New Junior Secured Notes" and collectively with the New Senior
Secured Notes, the "New Notes"), bearing interest payable in additional New
Junior Secured Notes for three years at 8% per annum and thereafter payable in
cash at 12% per annum, payable semi-annually in arrears, and (c) 6,500,000
shares of new common stock, par value $0.01 (the "New Common Stock") of the
reorganized Company, of which 4% was issued to shareholders of the Predecessor
Company.
At the Effective Date, the new Board of Directors of the reorganized
Company consists of seven members as follows: Leonard Tannenbaum, Andre
Dimitriadis, W. Andrew Adams (Chairman), Matthew Patrick, Mark Holliday, Richard
Ladd and Wm. James Nicol, then the President and Chief Executive Officer of the
Company. Subsequent to the Effective Date, Steven L. Vick replaced Mr. Nicol as
President, Chief Executive Officer and Director.
The Company held back from the initial issuance of New Common Stock and
New Notes on the Effective Date, $440,178 of New Senior Secured Notes, $166,775
of New Junior Secured Notes and 68,241 shares of New Common Stock (collectively,
the "Reserve") to be issued to holders of general unsecured claims at a later
date. The total amount of, and the identities of all of the holders of, the
general unsecured claims were not known as of the Effective Date, either because
they were disputed or they were not made by their holders prior to December 19,
2001, the cutoff date for calculating the Reserve (the "Cutoff Date"). Once the
total amount and the identities of the holders of those claims are determined,
the shares of New Common Stock and the New Notes held in the Reserve will be
distributed pro rata among the holders of those claims (the date of this
distribution, the "Subsequent Distribution Date").
If the Reserve is insufficient to cover the general unsecured claims
allowed after the Cutoff Date, the Company and its subsidiaries will have no
further liability with respect to those general unsecured claims and the holders
of those claims will receive proportionately lower distributions of shares of
New Common Stock and New Notes than the holders of general unsecured claims
allowed prior to the Cutoff
F-7
Date. If the Reserve exceeds the distributions necessary to cover the general
unsecured claims allowed after the Cutoff Date, the additional securities
remaining in the Reserve will be distributed among all holders of the general
unsecured claims so as to ensure that each holder of a general unsecured claim
receives, in the aggregate, its pro rata share of the New Common Stock and the
New Notes. In this case, the holders of the general unsecured claims allowed
prior to the Cutoff Date will receive distributions of securities both on the
Effective Date and on the Subsequent Distribution Date.
As a result of the consummation of the Plan, the Company recognized an
extraordinary gain on reorganization as follows (in thousands):
YEAR ENDED
DECEMBER 31,
------------
2001
----
Liabilities subject to compromise:
Subordinated convertible debentures $161,250
Accrued interest on subordinated convertible debentures 3,914
Employee separation agreement 152
Accrued interest on mortgage loans discharged 43
Discharge of two mortgage loans 5,855
--------
Total liabilities subject to compromise $171,214
Less:
Value of new Senior Secured Notes 40,250
Value of new Junior Secured Notes 12,628
Carrying value of deferred financing fees of discharged debts 1,026
Carrying value of property conveyed in satisfaction of debt 4,957
Carrying value of assets related to rejected lease 34
Value of Successor Company's common stock 32,799
--------
Extraordinary gain on reorganization $ 79,520
========
FRESH START REPORTING
Upon emergence from Chapter 11 proceedings, the Company adopted
fresh-start reporting in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, Financial Reporting By Entities
in Reorganization Under the Bankruptcy Code (SOP 90-7). In connection with the
adoption of fresh-start reporting, a new entity has been deemed created for
financial reporting purposes. For financial reporting purposes, the Company
adopted the provisions of fresh-start reporting effective December 31, 2001.
Consequently, the consolidated balance sheet and related information at December
31, 2001 is labeled Successor Company, and reflects the Plan and the principles
of fresh-start reporting. Periods presented prior to December 31, 2001 have been
designated Predecessor Company.
In adopting the requirements of fresh-start reporting as of December 31,
2001, the Company was required to value its assets and liabilities at fair value
and eliminate its accumulated deficit as of December 31, 2001. A $32.8 million
reorganization value was determined by the Company with the assistance of
financial advisors in reliance upon various valuation methods, including
discounted projected cash flow analysis and other applicable ratios and economic
industry information relevant to the operation of the Company and through
negotiations with various creditor parties in interest.
F-8
The following reconciliation of the Predecessor Company's consolidated
balance sheet as of December 31, 2001 to that of the Successor Company was
prepared to present the adjustments that give effect to the reorganization and
fresh-start reporting.
The adjustments entitled Reorganization reflect the consummation of the
Plan, including the elimination of existing liabilities subject to compromise,
assets conveyed to a lender and reflect the reorganization value of the
Successor Company.
F-9
The adjustments entitled Fresh-Start Adjustments reflect the adoption of
fresh start reporting, including the elimination of goodwill and adjustments to
record property, plant and equipment and other long-term assets and liabilities,
at their fair values. Management estimated the fair value of its assets and
liabilities by utilizing commonly used discounted cash flow valuation methods.
(in thousands)
PREDECESSOR FRESH-START SUCCESSOR
COMPANY REORGANIZATION ADJUSTMENTS RECLASSIFICATIONS COMPANY
------- -------------- ----------- ----------------- -------
Assets:
Cash and cash equivalents ...................... $ 6,077 $ -- $ -- $ -- $ 6,077
Cash restricted for tenant security deposits ... 2,415 -- -- -- 2,415
Accounts receivable, net ....................... 2,328 -- -- -- 2,328
Prepaid insurance .............................. 160 -- -- -- 160
Prepaid expenses ............................... 832 (9) -- 823
Cash restricted for workers' compensation
claims ...................................... 2,825 -- -- -- 2,825
Other current assets ........................... 3,870 (8) -- 3,862
--------- --------- --------- --------- --------
Total current assets ................... 18,507 (17) 18,490
--------- --------- --------- --------- --------
Restricted cash .................................. 5,349 -- -- -- 5,349
Property and equipment, net ...................... 312,459 (4,980) (110,931) -- 196,548
Goodwill, net .................................... 4,493 -- (4,493) -- --
Other assets, net ................................ 8,030 (1,026) (5,138) -- 1,866
--------- --------- --------- --------- --------
Total assets ........................... $ 348,838 $ (6,023) $(120,562) $ -- $222,253
========= ========= ========= ========= ========
Current liabilities:
Accounts payable ............................... $ 1,450 $ -- $ -- $ -- $ 1,450
Accrued real estate taxes ...................... 4,517 (6) 12 -- 4,523
Accrued interest expense ....................... 4,623 (3,957) -- -- 666
Accrued payroll expense ........................ 4,561 -- -- -- 4,561
Other accrued expenses ......................... 7,163 -- -- -- 7,163
Tenant security deposits ....................... 2,471 -- -- -- 2,471
Other current liabilities ...................... 804 (152) -- -- 652
Current portion of unfavorable lease
adjustment .................................... -- -- 681 -- 681
Current portion of long-term debt and
capital lease obligations ..................... 2,622 -- -- 2,622
--------- --------- --------- --------- --------
Total current liabilities .............. 28,211 (4,115) 693 -- 24,789
--------- --------- --------- --------- --------
Other liabilities ................................ 3,684 (3,595) -- 89
Unfavorable lease adjustment ..................... -- -- 3,115 -- 3,115
Long-term debt and capital lease
obligations, net of current portion ........... 115,893 47,023 (1,455) -- 161,461
Convertible subordinated debentures .............. 161,250 (161,250) -- -- --
--------- --------- --------- --------- --------
Total liabilities ...................... 309,038 (118,342) (1,242) -- 189,454
--------- --------- --------- --------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, ............................... -- -- -- -- --
Common Stock, .................................. 171 65 -- (171) 65
Additional paid-in capital ..................... 144,451 32,734 -- (144,451) 32,734
Fair market value in excess of historical
cost of acquired net assets .................. (239) -- -- 239 --
Accumulated deficit ............................ (104,583) 79,520 (119,320) 144,383 --
--------- --------- --------- --------- --------
Total shareholders' equity ............. 39,800 112,319 (119,320) -- 32,799
--------- --------- --------- --------- --------
Total liabilities and shareholders'
equity ............................... $ 348,838 $ (6,023) $(120,562) $ -- $222,253
========= ========= ========= ========= ========
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Predecessor Company as of December 31, 2000 and for the three years ended
December 31, 2001, and the Successor Company at December 31, 2001. All
significant intercompany balances and transactions have been eliminated in
consolidation.
F-10
FACTORS AFFECTING COMPARABILITY OF FINANCIAL INFORMATION
The amounts recorded in the consolidated balance sheet of the Predecessor
Company were materially changed with the implementation of fresh-start
reporting. Consequently, the consolidated balance sheet of the Successor Company
is generally not comparable to that of the Predecessor Company, principally due
to the adjustment of property, plant and equipment, deferred financing costs,
deferred gains, goodwill, long-term debt and leases to estimated fair value, the
discharge of liabilities subject to compromise and the recapitalization of the
Company. The Company recorded an extraordinary gain of $79.5 million from the
restructuring of its debt in accordance with the provisions of the Plan.
Fresh-start valuation adjustments of $119.3 million were made to reduce the net
assets and liabilities of the Successor Company to fair value as of December 31,
2001.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents of $4.6 million and $1.0 million at December 31, 2000 and
2001, respectively, consist of highly liquid investments with maturities of
three months or less at the date of purchase. The Company's investments in
marketable securities are classified as available for sale. These investments
are stated at fair value with any unrealized gains or losses included as
accumulated other comprehensive loss in shareholders' equity. Interest income is
recognized when earned.
LEASES
The Company determines the classification of its leases as either
operating or capital at their inception. The Company re-evaluates such
classification whenever circumstances or events occur that require the
reevaluation of the leases.
The Company accounts for arrangements entered into under sale and
leaseback agreements pursuant to Statement of Financial Accounting Standards
(SFAS) No. 98, "Accounting for Leases." For transactions that qualify as sales
and operating leases, a sale is recognized and the asset is removed from the
books. For transactions that qualify as sales and capital leases, the sale is
recognized, but the asset remains on the books and a capital lease obligation is
recorded. Transactions that do not qualify for sales treatment are treated as
financing transactions. In the case of financing transactions, the asset remains
on the books and a finance obligation is recorded as part of long-term debt.
Losses on sale and leaseback agreements are recognized at the time of the
transaction absent indication that the sales price is not representative of fair
value. Gains are deferred and recognized on a straight-line basis over the
initial term of the lease. In accordance with fresh-start reporting, such gains
were eliminated from the Predecessor Company's books as of the Effective date.
All of the Company's leases contain various provisions for annual
increases in rent, or rent escalators. Certain of these leases contain rent
escalators with future minimum annual rent increases that are not considered
contingent rents. The total amount of the rent payments under such leases with
non-contingent rent escalators is being charged to expense on the straight-line
method over the term of the leases. The Company records a deferred credit,
included in other liabilities, to reflect the excess of rent expense over cash
payments. This deferred credit is reduced in the later years of the lease term
as the cash payments exceed the rent expense. Other liabilities of the
Predecessor Company included $1.9 million and $1.8 million of such amounts at
December 31, 2000 and 2001, respectively. In accordance with fresh-start
reporting, the Predecessor Company's deferred credit was eliminated as of the
Effective Date. However, lease expense for those leases with non-contingent rent
escalators from the Effective Date forward will continue to be charged to
expense on the straight-line method over the remaining term of the leases. (See
Note 5).
F-11
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation is computed
over the assets' estimated useful lives on the straight-line basis as follows:
<Caption>
Predecessor Company Successor Company
------------------- -----------------
Buildings and building improvements .... 40 years 35 to 40 years
Furniture and equipment ................ 3 to 7 years 3 to 7 years
Equipment under capital lease is recorded at the net present value of the
future minimum lease payments at the inception of the lease. Amortization of
equipment under capital lease is provided using the straight-line method over
the shorter of the life of the lease or the estimated useful life.
As of the Effective Date, the Successor Company adjusted its property,
plant and equipment to estimated fair value in conjunction with the
implementation of fresh-start reporting. The Successor Company maintains the
same policies concerning transactions affecting property and equipment.
Asset impairment is analyzed on assets to be held and used by the rental
demand by market to determine if future cash flows (undiscounted and without
interest charges) are less than the carrying amount of the asset. If an
impairment is determined to have occurred, an impairment loss is recognized to
the extent the assets carrying amount exceeds its fair value. Assets the Company
intends to dispose of are reported at the lower of (i) fair carrying amount or
(ii) fair value less the cost to sell. The Company has not recognized any
impairment losses on property through the year ended December 31, 2001.
Maintenance and repairs are charged to expense as incurred, and
significant betterments and improvements are capitalized.
GOODWILL
Goodwill of the Predecessor Company consisted of costs in excess of the
fair value of the net assets acquired in purchase transactions as of the date of
acquisition have been recorded as goodwill and was being amortized over periods
ranging between 15 and 20 years on a straight-line basis. In accordance with
fresh-start reporting, the Predecessor Company's goodwill was eliminated as of
the Effective Date.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $1,429,000, $840,000
and $828,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
DEFERRED FINANCING COSTS
Financing costs related to the issuance of debt are capitalized as other
assets and amortized to interest expense over the term of the related debt using
the straight-line method, which approximates the effective interest method. As
of the Effective Date, approximately $3.8 million of net deferred financing fees
associated with the debts that were discharged as a result of the Plan were
eliminated as reorganization and fresh-start adjustments.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amounts of the existing assets and liabilities and
their respective tax bases (temporary differences). Deferred tax assets are
reduced by a valuation
F-12
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
UNFAVORABLE LEASES
As of the Effective Date, the Successor Company revalued its leases in
conjunction with the implementation of fresh-start reporting. At December 31,
2001, an unfavorable lease credit of $3,796,000 was established and is included
in the consolidated balance sheet of the Successor Company. Amortization of
unfavorable leases is computed using the straight-line method over the
life of the respective leases.
REVENUE RECOGNITION
Revenue is recognized when services are rendered and consists of
residents' fees for basic housing and support services and fees associated with
additional services such as routine health care and personalized assistance on a
fee for service basis. The collectibility of the accounts receivable is assessed
periodically and a provision for doubtful accounts is recorded as considered
necessary.
CLASSIFICATION OF EXPENSES
Residence operating expenses exclude all expenses associated with
corporate or support functions which have been classified as corporate general
and administrative expense.
NET LOSS PER COMMON SHARE
Basic earnings per share (EPS) is calculated using net loss attributable
to common shares divided by the weighted average number of common shares
outstanding for the period. Diluted EPS is calculated in periods with net income
using income attributable to common shares considering the effects of dilutive
potential common shares divided by the weighted average number of common shares
and dilutive potential common shares outstanding for the period.
Pursuant to fresh-start accounting, common stock was adjusted to reflect
the capitalization of the Successor Company in accordance with the Plan.
Vested options to purchase 983,000, 477,000 and 880,000 shares of common
stock were outstanding during the years ended December 31, 1999, 2000 and 2001,
respectively. These options were excluded from the respective computations of
diluted loss per share, as their inclusion would be antidilutive. All
outstanding options were cancelled upon the Effective Date of the Plan.
Also excluded from the computations of diluted loss per share, for the
years ended December 31, 1999, 2000 and 2001 were, 6,685,789 shares of common
stock issuable upon conversion of the Company's convertible subordinated
debentures (see Note 1) as their inclusion would be antidilutive. These
convertible subordinated debentures were eliminated upon the Effective Date of
the Plan.
F-13
SEGMENT REPORTING
Financial Accounting Standards Board Statement (FASB) of Financial
Accounting Standards (SFAS) No. 131, Disclosure about Segments of an Enterprise
and Related Information requires public enterprises to report certain
information about their operating segments in a complete set of financial
statements to shareholders. It also requires reporting of certain
enterprise-wide information about the Company's products and services, its
activities in different geographic areas, and its reliance on major customers.
The basis for determining the Company's operating segments is the manner in
which management operates the business. The Company has no foreign operations
and no customers which provide over 10 percent of gross revenue. The Company
reviews operating results at the residence level; it also meets the aggregation
criteria in order to report the results as one business segment.
USE OF ESTIMATES
The Company has made certain estimates and assumptions relating to the
reporting of assets and liabilities, and the disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses during the
reporting period to prepare these financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates.
WORKERS COMPENSATION
The Company utilizes third-party insurance for losses and liabilities
associated with workers compensation claims subject to deductible levels of
$250,000 per occurrence. Losses up to this deductible level are accrued based
upon the Company's estimates of the aggregate liability for claims incurred
based on Company experience.
PROFESSIONAL LIABILITY
The Company utilizes third-party insurance for losses and liabilities
associated with professional liability claims subject to deductible levels of
$100,000 per occurrence for the year ended December 31, 2000 and retention
levels of $250,000 for all states except Florida and Texas, where the retention
levels are $500,000 per occurrence, for the year ended December 31, 2001. Losses
up to these deductible and retention levels are accrued based upon the Company's
estimates of the aggregate liability for claims incurred based on Company
experience.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' financial
statements to conform to the current year's presentation. Such reclassifications
had no effect on previously reported net loss or shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2001 the carrying amount of the Successor Company's assets
and liabilities are presented at fair value because of the implementation of SOP
90-7. At December 31, 2000 the carrying amount of the Predecessor Company's cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximates fair value because of the short-term nature of the
accounts and/or because they are invested in accounts earning market rates of
interest. At December 31, 2000 the carrying amount of the Predecessor Company's
long-term debt approximates fair value as the interest rates approximate the
current rates available to the Predecessor Company. The following table sets
forth the
F-14
carrying amount and approximate fair value (based on quoted market values) of
the Predecessor Company's subordinated debentures as of December 31, 2000 (in
thousands):
2000
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- -------
6% Debentures .......... $86,250 $36,225
5.625% Debentures ...... 75,000 29,250
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25 issued in March 2000, to
account for its fixed plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employees
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
The Company accounts for stock and stock options issued to non-employees
in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
(EITF) consensus on Issue No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
Predecessor Company
The Amended and Restated 1994 Employee Stock Option Plan (the "1994 Plan")
combined an incentive and nonqualified stock option plan, a stock appreciation
rights ("SAR") plan and a stock award plan (including restricted stock). The
1994 Plan was a long-term incentive compensation plan and is designed to provide
a competitive and balanced incentive and reward program for participants.
The Company's Non-Executive Employee Equity Participation Plan (the
"Non-Officer Plan") was a non-qualified stock option plan intended as a
long-term incentive compensation plan designed to provide a competitive and
balanced incentive and reward program for participants.
Upon implementation of the Plan, all options under the 1994 Plan and
Non-Officer Plan were cancelled.
CONCENTRATION OF CREDIT RISK
The Company depends on the economies of Texas, Indiana, Oregon, Ohio and
Washington and to some extent, on the continued funding of State Medicaid waiver
programs in some of those states. As of
F-15
December 31, 2001, 21.6% of the Company's properties were in Texas, 11.4% in
Indiana, 10.3% in Oregon, 9.7% in Ohio and 8.6% in Washington. Adverse changes
in general economic factors affecting the respective health care industries or
laws and regulator environment in each of these states, including Medicaid
reimbursement rates, could have a material adverse effect on the Company's
financial condition and results of operations.
State Medicaid reimbursement programs constitute a significant source of
revenue for the Company. During the years ended December 31, 1999, 2000 and
2001, direct payments received from state Medicaid agencies accounted for
approximately 10.4%, 11.1%, and 12.5% respectively, of the Company's revenue
while the tenant paid portion received from Medicaid residents accounted for
approximately 5.9%, 6.2% and 6.8%, respectively, of the Company's revenue during
these periods. The Company expects in the future that State Medicaid
reimbursement programs will constitute a significant source of revenue for the
Company.
2. CASH
The Company's cash and cash equivalents consist of the following (in
thousands):
PREDECESSOR COMPANY SUCCESSOR COMPANY
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
Cash $2,863 $5,022
Cash equivalents 4,581 1,055
------ ------
Total cash and cash equivalents $7,444 $6,077
====== ======
3. LONG-TERM RESTRICTED CASH
Long-term restricted cash consists of the following:
PREDECESSOR COMPANY SUCCESSOR COMPANY
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
Cash held for loan agreements with U.S. Bank National
Association ("U.S. Bank") $4,354 $4,338
Cash held in accordance with lease agreements 1,001 970
State regulated restricted tenant security deposits 39 41
------ ------
Total long-term restricted cash $5,394 $5,349
====== ======
4. CASH HELD FOR TENANT SECURITY DEPOSITS AND CASH RESTRICTED FOR TENANT
SECURITY DEPOSITS
At December 31, 2000, cash held for tenant security deposits was a general
unrestricted asset of the Company. During 2001, the Company borrowed $2.5
million on its credit facility with Heller Healthcare Finance, Inc., and, in
accordance with the agreement, established a restricted cash account for funds
held for tenant security deposits with such proceeds. (See note 7).
5. LEASES
A summary of leases that the Company has entered into is as follows:
F-16
NUMBER OF
SALE AND NUMBER OF UNITS
NUMBER LEASEBACK SALE AND UNDER
OF LEASED RESIDENCES TOTAL LEASEBACK LEASES
RESIDENCES ACCOUNTED FOR NUMBER OF RESIDENCES UNITS UNDER ACCOUNTED
("OREGON AS OPERATING OPERATING ACCOUNTED FOR OPERATING FOR AS
LEASES") LEASES LEASES AS FINANCINGS LEASES FINANCINGS
---------- ------------- --------- ------------- ----------- ----------
Leases at December 31, 1998 ............. 6 48 54 16 2,047 573
Lease expansions during 1999 ....... -- -- -- -- 13 --
Leases modified and reclassified
during 1999 ...................... -- 16 16 (16) 573 (573)
--- --- --- --- ----- ----
Leases at December 31, 1999 ............. 6 64 70 -- 2,633 --
Lease expansions during 2000 ....... -- -- -- -- 1 --
--- --- --- --- ----- ----
Leases at December 31, 2000 ............. 6 64 70 -- 2,634 --
Leases entered into in during 2001 . -- 2 2 -- 78 --
Lease terminations during 2001 ..... (1) -- (1) -- (34) --
Leased facilities purchased during
2001 ............................... (16) (16) -- (573)
--- --- --- --- ----- ----
Leases at December 31, 2001 ............ 5 50 55 -- 2,105 --
=== === === === ===== ====
The Company has five Oregon leases (the "Oregon Leases") where the lessor
in each case obtained funding through the sale of bonds issued by the state of
Oregon, Housing and Community Services Department ("OHCS"). In connection with
the Oregon Leases, the Company entered into "Lease Approval Agreements" with
OHCS and the lessor, pursuant to which the Company is obligated to comply with
the terms and conditions of certain regulatory agreements to which the lessor is
a party (See Note 7). The leases, which have fixed terms of 10 years, have been
accounted for as operating leases. Aggregate deposits on these residences as of
December 31, 2000 and 2001 were $126,000 and $90,000, respectively, which are
reflected in other assets. The Company previously had six Oregon Leases and
terminated one of these leases effective December 1, 2001 in accordance with the
Plan. The lessor of this property filed a claim against the Company in the
bankruptcy proceedings regarding the early termination of this lease. The claim
was approved by the Court and resulted in the issuance of $90,502 of Senior
Notes, $34,290 of Junior Notes and 14,031 shares of common stock to this lessor.
In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases.
In June 1999, the Company amended all of its 37 leases with LTC. These
amendments included provisions to restructure future minimum annual rent
increases, or "rent escalators," that were not deemed to be contingent rents.
Because of the rent escalators, prior to the amendments, the Company accounted
for rent expense related to such leases on a straight-line basis. From the date
of the amendment forward, the Company has accounted for the amended leases on a
contractual cash payment basis and amortizes the deferred rent balance, at the
date of the amendment, over the remaining initial term of the lease. Those
amendments also redefined the lease renewal option with respect to certain
leases and provided the lessor with the option to declare an event of default in
the event of a change of control of under certain circumstances. In addition,
the amendments also provide the Company with the ability, subject to certain
conditions, to sublease or assign its leases with respect to two Washington
residences. (See Note 9).
In accordance with the Company's Plan, effective January 1, 2002, the
Company entered into a Master Lease Agreement with LTC under which 16 leases
were consolidated. This Master Lease Agreement provides for aggregate rent
reductions of $875,000 per year and restructures the provision related to
minimum rent increases for the 16 properties for the initial remaining term. As
a result of the change in future annual rent increases as to the 16 properties
under the Master Lease Agreement, the Company is required to account for rent
expense on a straight-line basis. In exchange for the rent reduction, LTC filed
a claim in the bankruptcy proceeding (to which the Company did not object) in
the amount of $2,500,000. The claim was approved by the Court and entitled LTC
to $590,694 of Senior Secured Notes, $223,803 of Junior Secured Notes and 91,576
shares of common stock. Prior to the issuance of any common stock to LTC, LTC
entered into an agreement with Healthcare Holdings, Inc., a wholly owned
subsidiary of CLC Healthcare, Inc. to allow it to purchase LTC's right to
receive the
F-17
common stock. The Master Lease Agreement also provides LTC with the option to
exercise certain remedies, including the termination of the Master Lease
Agreement and certain other LTC leases due to cross-default rights, upon a
change of control under which at least 30% ownership of the Company's common
stock is held by a party or combination of parties directly or indirectly. LTC
has the same option if the stockholders approve a plan of liquidation or the
stockholders approve a merger or consolidation meeting certain conditions. At
the same time that the Company entered into the Master Lease Agreement, they
also amended 16 other leases with LTC under which the renewal rights of certain
of those leases are tied together differently than previously with certain other
leases.
Certain of the Company's leases and loan agreements contain covenants and
cross-default provisions such that a default on one of those instruments could
cause the Company to be in default on one or more other instruments. Pursuant to
certain lease agreements, the Company restricted $1.0 million of cash balances
as additional collateral (see Note 3). The Company did not meet certain
financial covenants at December 31, 2001 but has subsequently received a waiver
of the right to declare an event of default (see Note 7).
In October 2001, the Company repurchased 16 previously leased properties
from one lessor. These properties were purchased with funds borrowed from Heller
Healthcare Finance, Inc. ("Heller") (see Notes 1 and 7).
On January 1, 2002 the Company emerged from the proceedings under Chapter
11 of the Bankruptcy Code. The Company's Plan of reorganization included the
Company conveying two facilities to one lender in satisfaction of $5.9 million
of debt. The Company then leased these two properties, one in South Carolina and
one in Pennsylvania, from this lender under a new Master Lease, incorporating
two existing leases as well. Terms under the Master Lease on the South Carolina
facility conveyed to the lender effective January 1, 2002, include monthly
payments in the amount of $19,000, $20,000, $21,000 and $21,667 for the years
ended December 31, 2002, 2003, 2004 and all years thereafter until the end of
the lease term, respectively. Terms under the Master Lease for the Pennsylvania
facility conveyed effective January 1, 2002, include monthly payments of $22,330
increasing to $23,780 over the next four years, expiring in 2006. The Company's
Plan of reorganization also included the amendment of two existing leases with
the same lender. Such leases were amended under the Master Lease to provide base
rental rates of $2,000 per month with rent escalation clauses based upon revenue
levels with rental rates not to exceed $22,000 per month, expiring in 2006.
As of December 31, 2001, future minimum annual lease payments under
operating leases are as follows (in thousands):
2002 ...................................... $ 13,070
2003 ...................................... 13,053
2004 ...................................... 13,290
2005 ...................................... 12,842
2006 ...................................... 12,894
Thereafter ................................ 48,813
--------
$113,962
========
6. PROPERTY AND EQUIPMENT
As of December 31, 2000 and 2001, property and equipment, stated at cost
for the Predecessor Company and fair value for the Successor Company, consist of
the following (in thousands):
F-18
PREDECESSOR SUCCESSOR
COMPANY COMPANY
2000 2001
----------- ---------
Land .............................................. $ 21,378 $ 22,997
Buildings and building improvements ............... 287,178 168,845
Equipment ......................................... 7,149 2,053
Furniture ......................................... 8,638 2,653
-------- --------
Total property and equipment ............ 324,343 196,548
Less accumulated depreciation and amortization .... 25,599 --
-------- --------
Property and equipment -- net ........... $298,744 $196,548
======== ========
As of the Effective Date, the Successor Company adjusted its property,
plant and equipment to estimated fair value in conjunction with the
implementation of fresh-start reporting. The Successor Company maintains the
same policies concerning transactions affecting property and equipment.
Land, buildings and certain furniture and equipment relating to 41
residences serve as collateral for long-term debt, 57 residences serve as
collateral for the Senior and Junior Secured Notes (See Note 7) and 31
residences serve as collateral for Heller financings. (See Note 7).
Depreciation and amortization expense was $8.7 million, $9.6 million and
$10.1 million, for the years ended December 31, 1999, 2000 and 2001,
respectively.
7. LONG-TERM DEBT
As of December 31, 2000 and 2001, long-term debt consists of the following
(in thousands):
PREDECESSOR SUCCESSOR COMPANY SUCCESSOR COMPANY
COMPANY (CARRYING AMOUNT) (PRINCIPLE AMOUNT)
2000 2001 2001
----------- ----------------- -----------------
Trust Deed Notes, payable to the State of Oregon Housing and
Community Services Department (OHCS) through 2028 ..................... $ 9,890 $ 9,849 $ 9,741
Variable Rate Multifamily Revenue Bonds, payable to the
Washington State Housing Finance Commission Department through 2028 ... 7,900 7,521 7,605
Variable Rate Demand Revenue Bonds, Series 1997 payable to
the Idaho Housing and Finance Association through 2017 ................ 6,875 6,542 6,615
Variable Rate Demand Revenue Bonds, Series A-1 and A-2
payable to the State of Ohio Housing Finance Agency through 2018 ...... 12,445 11,888 12,020
Housing and Urban Development Insured Mortgages due 2035 ................ -- 7,374 7,457
Senior Secured Notes due 2009 ........................................... -- 40,250 40,250
Junior Secured Notes due 2012 ........................................... -- 12,628 12,628
Mortgages payable due 2008 .............................................. 34,775 28,513 28,463
Heller Healthcare Finance, Inc. Credit Facility due 2005 ................ -- 39,222 40,458
Capital lease obligations due 2002 ...................................... 212 296 301
------- ---------- ----------
Total long-term debt .................................................... $72,097 164,083 $ 165,538
Less current portion .................................................... 1,690 2,622 ==========
------- ----------
Long-term debt .......................................................... $70,407 $ 161,461
======= ==========
The Trust Deed Notes payable to OHCS are secured by buildings, land,
furniture and fixtures of six Oregon residences. The notes are payable in
monthly installments including interest at effective rates ranging from 7.375%
to 9.0%.
The Variable Rate Multifamily Revenue Bonds are payable to the Washington
State Housing Finance Commission Department and at December 31, 2001 were
secured by an $8.7 million letter of credit and
F-19
by buildings, land, furniture and fixtures of the five Washington residences.
The letter of credit expires in 2003. The bonds had a weighted average interest
rate of 3.16% during 2001.
The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to
the State of Idaho Housing and Finance Association and at December 31, 2001 were
secured by a $7.5 million letter of credit and by buildings, land, furniture and
fixtures of four Idaho residences. The letter of credit expires in 2004. The
bonds had a weighted average interest rate of 3.15% during 2001.
The Variable Rate Demand Housing Revenue Bonds with the State of Ohio
Housing Finance Agency ("OHFA") are due July 2018 and are secured by a $13.5
million letter of credit and by buildings, land, furniture and fixtures of seven
Ohio residences. The letter of credit expires in 2005. The bonds had a weighted
average interest rate of 3.02% during 2001.
At December 31, 2001, mortgage loans includes three fixed rate loans
secured by seven Texas residences, three Oregon residences and three New Jersey
residences. These loans collectively require monthly principal and interest
payments of $230,000, with balloon payments of $11.8 million, $5.3 million and
$7.2 million due at maturity in May 2008, August 2008 and September 2008,
respectively. These loans bear fixed annual interest rates between 7.58% to
8.79%.
At December 31, 2000, mortgage loans also included a $5.9 million mortgage
loan at a fixed annual interest rate of 8.79%, secured by one Pennsylvania
residence and one South Carolina residence. In accordance with the Company's
Plan of reorganization, the Company conveyed two facilities to this lender in
satisfaction of the $5.9 million of debt. The Company continues to operate these
residences under operating leases with the same lender. (See Notes 1 and 5).
Housing and Urban Development ("HUD") Insured mortgages include three
separate loan agreements entered into in 2001. These are fixed rate mortgages,
each of which is secured by one facility in Texas. These loans mature between
July 1, 2036 and August 1, 2036 and collectively require monthly principal and
interest payments of $50,000. The loans bear fixed annual interest rates between
7.40% and 7.55%.
Heller Healthcare Finance, Inc. ("Heller") credit facility is a secured
line of credit up to $44.0 million. This is a variable rate credit facility,
secured by 31 facilities. This credit facility matures in January 2005 and
required monthly principal payments of $50,000 for 2002, $65,000 for 2003 and
$80,000 for 2004. The interest on the credit facility is calculated at 4.5% over
three month LIBOR, floating monthly (not to be less than 8%), and is payable
monthly in arrears at December 31, 2001, the Company had $40.5 million
outstanding under this credit facility. The long-term debt schedule above
reflects an adjustment of $1.3 million to state this debt at its fair value of
$39.2 million at December 31, 2001. The Company made an additional draw of $1.1
million on its Heller credit facility in January 2002.
On January 1, 2002 the Debtors emerged from the proceedings under Chapter
11 of the Bankruptcy Code. The Company's Plan of reorganization included the
issuance of $40.25 million aggregate principal amount of seven-year secured
notes (the "New Senior Secured Notes"), bearing interest at 10% per annum,
payable semi-annually in arrears, and $15.25 million aggregate principal amount
of ten-year secured notes (the "New Junior Secured Notes" and collectively with
the New Senior Secured Notes, the "New Notes"), bearing interest payable in
additional New Junior Secured Notes for three years at 8% per annum and
thereafter payable in cash at 12% per annum, payable semi-annually in arrears.
The New Junior Secured Notes were issued at a discount of $2.6 million. The
discount will be amortized over the life of the New Junior Secured Notes using
the effective interest method. The New Notes are secured by 57 properties. (See
Note 1).
Of the $55.5 million outstanding in New Notes, $18.2 million is payable to
related parties. (See Note 9).
F-20
As of the Effective Date, the Successor Company revalued its long-term
debt in conjunction with the implementation of fresh-start reporting. At
December 31, 2001, an adjustment of $3.1 million was recorded to reduce
long-term debt to its fair market value. Amortization of this adjustment is
computed using the straight-line method over the individual loan life.
As of December 31, 2001, the following annual principal payments are
required (in thousands):
2002 ............................................. $ 2,622
2003 ............................................. 2,662
2004 ............................................. 41,059
2005 ............................................. 2,119
2006 ............................................. 2,258
Thereafter ....................................... 114,818
--------
Total .................................. $165,538
Fresh start adjustment............................ (1,455)
--------
$164,083
========
The Company's credit agreements with U.S. Bank contain restrictive
covenants which include compliance with certain financial ratios. Pursuant to
amendments to these credit agreements, the Company has provided additional cash
collateral in exchange for the waivers of certain possible defaults related to
the delivery of financial statements and compliance with financial covenants,
including an amendment to certain financial covenants. The amendments also
provides for the release of the additional collateral upon the achievement of
specified performance targets, provided that the Company is in compliance with
the other terms of the loan agreements. The Predecessor Company has achieved
certain of these specified targets during previous years and currently has $4.3
million in additional cash collateral deposits outstanding with U.S. Bank.
In August, 2001, the Company received a waiver of U.S. Bank's right to
declare an event of default for the Company's failure to meet the June 30, 2001,
September 30, 2001 and probable failure to meet the December 31, 2001 cash
balance requirements and other financial ratios set forth in the amended U.S.
Bank loan agreement. There can be no assurance that the Company will be able to
meet these requirements as of the end of future quarters or that U.S. Bank will
grant waivers of any such future failure to meet these requirements.
The Company will not meet the existing financial requirements established
for the Predecessor Company on March 31, 2002, as set forth in the amended U.S.
Bank loan agreement. The Company is in the process of renegotiating these
covenants to consider the reorganization of the Company (Successor Company) with
U.S. Bank. Management believes, based on discussions with U.S. Bank that new
covenants will be established for the Successor entity to allow the Company to
maintain future compliance.
In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. Under the terms of the OHCS debt agreements, the Company
is required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases and the six OHCS loans,
which as of December 31, 2000 and 2001 was $422,000 and $363,000, respectively,
and is reflected in other assets in the accompanying financial statements. In
addition, for the six OHCS loans in the Company's name, a contingency escrow
account is required. This account had a balance of $172,000 and $136,000,
respectively, as of December 31, 2000 and 2001, and is reflected in other
current assets. Distribution of any assets or income of any kind by the Company
is limited to once per year after all reserve and loan payments have been made,
and only after receipt of written authorization from OHCS.
F-21
As of December 31, 2000 and 2001, the Company was restricted from
distributing $278,000 and $322,000 respectively, of income, in accordance with
the terms of the loan agreements and Lease Approval Agreements with OHCS.
As a further condition of the debt agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status of
the bonds, the Company is required to lease at least 20% of the units of the
projects to low or moderate income persons as defined in Section 142(d) of the
Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the Company must also comply.
Non-compliance with these restrictions may result in an event of default and
cause acceleration of the scheduled repayment.
8. INCOME TAXES
The Company incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1999, 2000, and 2001 and, as such,
there was no current or deferred tax provision allocated to the loss before
extraordinary gain on reorganization or to the extraordinary gain on
reorganization.
The provision for income taxes differs from the amount of loss determined
by applying the applicable U.S. statutory federal rate to loss before
extraordinary gain on reorganization as a result of the following items at
December 31:
PREDECESSOR COMPANY
1999 2000 2001
----- ----- ---------
Statutory federal tax rate ................. (34.0)% (34.0)% (34.0)%
Non deductible goodwill .................... 0.3% 0.3% 1.0%
Losses for which no benefit is provided .... 33.6% 26.9% 30.9%
Class action litigation settlement ......... --% 6.6% --%
Reorganization cost ........................ --% --% 2.1%
Other ...................................... 0.1% 0.2% --%
----- ----- -----
Effective tax rate ......................... --% --% --%
===== ===== =====
An analysis of the significant components of deferred tax assets and
liabilities, consists of the following as of December 31 (in thousands):
PREDECESSOR SUCCESSOR
COMPANY COMPANY
2000 2001
----------- ---------
Deferred tax assets:
Property and equipment, primarily due to depreciation and fresh start
adjustments ......................................................... $ -- $ 37,277
Net operating loss carryforward ......................................... 27,846 4,060
Investment in joint venture operations .................................. 1,741 1,608
Deferred gain on sale and leaseback transactions ........................ 1,480 --
Other ................................................................... 3,470 3,360
-------- --------
Total deferred tax assets ....................................... 34,537 46,305
Valuation allowance ....................................................... (25,530) (45,433)
Deferred tax liabilities:
Property and equipment, primarily due to depreciation ................... (8,210) --
Other ................................................................... (797) (872)
-------- --------
Total deferred tax liabilities .................................. (9,007) (872)
-------- --------
Net deferred tax asset (liability) ...................................... $ -- $ --
======== =========
F-22
The valuation allowance for deferred tax assets as of December 31, 2000
and 2001 was $25.5 million and $45.4 million, respectively. The increase in the
total valuation allowance for the years ended December 31, 1999, 2000 and 2001
was $10.5 million, $6.1 million, and $19.9 million, respectively.
As a result of acquisitions, the Company acquired net operating loss
carryforwards for federal and state tax purposes approximating $311,000 which
are available to offset future taxable income, if any, through 2011. The future
use of these net operating loss carryforwards is subject to certain limitations
under the Internal Revenue Code and therefore, the Company has established a
valuation allowance of $117,500 to offset the deferred tax asset related to the
loss carryforwards. Additionally, any tax benefit realized from the use of
approximately $100,000 of the acquired operating loss carryforwards will be
applied to reduce goodwill. Following the consummation of the Plan, the Company
has approximately $93.5 million of Net Operating Loss (NOL) carryforwards which
will expire between 2009 and 2022. These NOLs have been reduced to $10.7 million
as a result of the discharge and cancellation of various prepetition liabilities
under the Plan. The reduction of the NOLs will be effective on January 1, 2003.
The NOLs remaining after the application of the cancellation of
indebtedness provisions are subject to certain provisions of the Internal
Revenue Code which restricts the utilization of the losses. In addition, any net
unrealized built-in losses resulting from the excess of tax basis over the
carrying value of the Company's assets (primarily property and equipment) as of
the Effective Date, which are recognized within five years are also subject to
these provisions. Section 382 of the Internal Revenue Code imposes limitations
on the utilization of the loss carryforwards and built-in losses after certain
changes of ownership of a loss company. The Company is deemed to be a loss
company for these purposes. Under these provisions, the Company's ability to
utilize these loss carryforwards and built-in losses in the future will
generally be subject to an annual limitation of approximately $1.6 million.
There can be no assurances that the Company will be able to utilize these
NOLs or built-in losses and therefore management has established a 100 percent
valuation allowance to offset the associated net deferred tax asset.
Pursuant to SOP 90-7, the income tax benefit, if any, of any future
realization of the remaining NOL carryforwards and other deductible temporary
differences existing as of the Effective Date will be applied as a reduction to
additional paid-in capital.
9. RELATED PARTY TRANSACTIONS
Assisted Living Facilities, Inc.
The Company leases six residences from Assisted Living Facilities, Inc.
The spouse of the Company's former president and chief executive officer owns a
25% interest in Assisted Living Facilities, Inc. For the years ended December
31, 1999 and 2000, the Company incurred lease rental expense of $1.3 million.
Assisted Living Facilities, Inc., is no longer considered a related party since
the resignation of the former president and chief executive officer on October
19, 2000.
National Health Investors, Inc.
W. Andrew Adams, who has been a member of the Company's Board of Directors
and its Chair since January 2002, is the President, Chief Executive Officer and
Chairman of the Board of Directors of National Health Investors, Inc. ("NHI").
NHI currently owns 557,214 shares of the Company's common stock and $5.0 million
of the Company's New Notes.
F-23
LTC Properties, Inc. and CLC Healthcare, Inc.
Andre Dimitriadis, who has been a member of the Company's Board of
Directors and the Chair of its Audit Committee since January 2002, is the
President, Chief Executive Officer and Chairman of the Board of LTC Properties,
Inc. ("LTC") and is the Chief Executive Officer and Chairman of the Board of CLC
Healthcare, Inc. (previously LTC Healthcare, Inc.). LTC owns $11.0 million of
the Company's New Notes and CLC Healthcare, Inc. owns 22.4% of the Company's
common stock and $1.9 million of the Company's New Notes (see Note 7). The
Company currently leases 37 properties (1,426 units) from LTC. (See Note 5).
The Company incurred annual lease expense of $8.9 million, $8.8 million
and $9.0 million for the years ended December 31, 1999, 2000 and 2001,
respectively, pursuant to these leases.
In June 1999, the Company amended all of its 37 LTC leases. These
amendments restructured provisions related to future minimum annual rent
increases, or "rent escalators," which prior to the amendments required the
Company to account for rent expense related to such leases on a straight-line
basis. From the date of the amendment forward, the Company is accounting for the
amended leases on a contractual cash payment basis and amortizing the deferred
rent balance as of the date of the amendment over the remaining initial term of
the leases. Those amendments also redefined the lease renewal option with
respect to certain leases and provided the lessor with the option to declare an
event of default in the event of a 30% change of control under certain
circumstances. In addition, the amendments provide the Company with the ability,
subject to certain conditions, to sublease or assign its leases with respect to
two Washington residences.
In accordance with our Plan, effective January 1, 2002, we entered into a
Master Lease Agreement with LTC under which 16 leases were consolidated. This
Master Lease Agreement provides for aggregate rent reductions of $875,000 per
year and restructures the provision related to minimum rent increases for the 16
properties for the initial remaining term. As a result of the change in future
annual rent increases as to the 16 properties under the Master Lease Agreement,
we are required to account for rent expense on a straight-line basis. In
exchange for the rent reduction, LTC filed a claim in the bankruptcy proceeding
(to which we did not object) in the amount of $2,500,000. The claim was approved
by the Court and entitled LTC to $590,694 of Senior Secured Notes, $223,803 of
Junior Secured Notes and 91,576 shares of common stock. Prior to the issuance of
any common stock to LTC, LTC entered into an agreement with Healthcare Holdings,
Inc., a wholly owned subsidiary of CLC Healthcare, Inc. to allow it to purchase
LTC's right to receive the common stock. The Master Lease Agreement also
provides LTC with the option to exercise certain remedies, including the
termination of the Master Lease Agreement and certain other LTC leases due to
cross-default rights, upon a change of control under which at least 30%
ownership of our common stock is held by a party or combination of parties
directly or indirectly. LTC has the same option if the stockholders approve a
plan of liquidation or the stockholders approve a merger or consolidation
meeting certain conditions. At the same time that we entered into the Master
Lease Agreement, we also amended 16 other leases with LTC under which the
renewal rights of certain of those leases are tied together differently than
previously with certain other leases.
MYFM Capital, LLC and BET Associates
In December 2000, the Company entered into an agreement with MYFM Capital,
LLC ("MYFM") under which the Company could establish a line of credit with BET
Associates LP ("BET") as lender, providing for loans of up to $10.0 million.
Subsequent to December 31, 2001, the Company terminated the agreement and paid
MYFM $50,000 in connection with such termination. Bruce E. Toll, who is the
beneficial owner of 3.1 million of the Company's common shares, and a member of
the Company's
F-24
Board of Directors from January 16, 2001 to January 1, 2002, is the sole member
of BRU Holdings Company, Inc., LLC, which is the sole general partner of BET.
Leonard Tannenbaum is the Managing Partner of MYFM Capital, LLC, the son-in-law
of Mr. Toll, a 10% limited partner of BET, and is a current member of the
Company's Board of Directors. In addition, Mr. Tannenbaum currently owns
$323,875 of the Company's New Notes.
TMC Communications and Learning.Net
The Company entered into a month to month contract for long distance
services with TMC Communications in 2001. John Gibbons, who served as a director
of the Company during 2001 owns 50% of TMC. During 2001, the Company paid TMC
Communications $32,700.
The Company contracted with Learning.Net for training resources. John
Gibbons, who served as a director of the Company during 2001 owns 12% of
Learning.Net. During 2001, the Company paid Learning.Net $25,700 for software
licensing fees and training courses.
Agreement with Richard C. Ladd
In 2001, the Company entered into an agreement with Richard C. Ladd, who
is currently a member of the Company's Board of Directors. The agreement
provides for Mr. Ladd to provide consultation services to the Company on the
advisability of establishing a committee on quality improvement, its membership
and charter. The initial contract was for a period of 4 months, which was
amended to provide services on a month-to-month basis. The Company or Mr. Ladd
may terminate the contract at any time by the terminating party providing at
least 30-days prior written notice to the other party of their intention to
terminate the contract. Mr. Ladd is reimbursed at the rate of $150 per hour, not
to exceed $2,500 for any one month. The Company paid Mr. Ladd $8,090 for such
services for the year ended December 31, 2001. Additionally, the Company has
allowed Mr. Ladd and his spouse to participate in its health insurance programs.
The Company paid premiums on their behalf of $7,900 during the year ended
December 31, 2001.
10. STOCK OPTION PLANS AND RESTRICTED STOCK
Predecessor Company
Prior to January 1, 2002, the effective date of the Company's Plan of
reorganization, the Company had two Stock Option Plans (the "Option Plans")
which provided for the issuance of incentive and non-qualified stock options and
restricted stock. Except for the Board of Directors administering the options of
the non-employee Directors, the Option Plans were administered by the
Compensation Committee of the Board of Directors which established the terms and
provisions of options granted under the Option Plans, not otherwise provided
under the Option Plans. Incentive options could be granted only to officers or
other full-time employees of the Company, while non-qualified options could be
granted to directors, officers or other employees of the Company, or consultants
who provide services to the Company.
The Amended and Restated 1994 Stock Option Plan combined an incentive and
nonqualified stock option plan, a stock appreciation rights ("SAR") plan and a
stock award plan (including restricted stock). The 1994 Plan was a long-term
incentive compensation plan and was designed to provide a competitive and
balanced incentive and reward program for participants.
Under the Amended and Restated 1994 Stock Option Plan (the "1994 Plan"),
the Company could grant options or award restricted stock to its employees,
consultants and other key persons for up to 2,208,000 shares of common stock.
The exercise price of each option equaled the market price of the
F-25
Company's stock on the date of grant. Each option expired on the date specified
in the option agreement, but not later than the tenth anniversary of the date on
which the option was granted. Options typically vested three years from the date
of issuance and typically were exercisable within seven years from the date of
vesting. Each option was exercisable in equal installments as designated by the
Compensation Committee or the Board at the option price designated by the
Compensation Committee or the Board, as applicable; however, incentive options
could not be less than the fair market value of the common stock on the date of
grant. All options were nontransferable and subject to adjustment upon changes
in the Company's capitalization. The Board of Directors, at its option, could
discontinue or amend the 1994 Plan at any time, provided that certain conditions
were satisfied.
Under the Non-Executive Employee Equity Participation Plan of Assisted
Living Concepts, Inc. (the "Non-Officer Plan") the Company could grant
consultants and non-executives up to 1,000,000 shares of Common Stock pursuant
to non-qualified options granted under the Non-Officer Plan. Officers, directors
and significant employees of the Company were not eligible to participate in the
Non-Officer Plan.
Following is the per share weighted-average fair value of each option
grant as estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions. There were no options
granted during 2001 and all options were cancelled effective December 31, 2001
in accordance with the Company's Plan of reorganization, therefore the following
table excludes any data related to 2001.
PREDECESSOR
COMPANY
DECEMBER 31,
1999 2000
----- -----
Expected dividend yield ...... -- --
Expected volatility .......... 73.70% 98.57%
Risk-free interest rate ...... 6.14% 5.26%
Expected life (in years) ..... 3 3
The Company applies APB Opinion No. 25 in accounting for its Option Plans,
and accordingly, no compensation cost has been recognized for its stock options
issued to employees in the financial statements as all options were issued at
fair value on the date of the grant. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been reduced to the pro forma amounts
indicated below: (in thousands except per share data)
PREDECESSOR COMPANY
YEAR ENDING DECEMBER 31
1999 2000
---------- ----------
Net loss as reported ....................................... $ (28,933) $ (25,786)
Net loss pro forma ......................................... $ (31,772) $ (27,586)
Basic and diluted net loss per common share as reported .... $ (1.69) $ (1.51)
Basic and diluted net loss per common share pro forma ...... $ (1.86) $ (1.61)
Pro forma net loss reflects only options granted after 1995. Therefore,
the full impact of calculating compensation costs for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the option's vesting period of three
F-26
years and compensation cost for options granted prior to January 1, 1996 is not
considered. The resulting pro forma compensation costs may not be representative
of that expected in the future years.
There were no options granted during 2001 and all options were cancelled
effective December 31, 2001 in accordance with the Company's Plan of
reorganization, therefore the following table excludes any data related to 2001.
A summary of the status of the Company's stock options as of December 31,
1999 and 2000 and changes during the years ended on those dates is
presented below:
PREDECESSOR COMPANY
1999 2000
------------------------ -------------------------
WEIGHTED- WEIGHTED-
1999 AVERAGE 2000 AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
----------- --------- ------------ ---------
Options at beginning of the year ............. 1,867,169 $12.07 1,744,420 $ 9.78
Granted ...................................... 460,250 3.71 1,038,850 1.34
Exercised .................................... (26,934) 5.83 -- --
Canceled ..................................... (556,065) 12.65 (1,309,372) 10.21
---------- -----------
Options at end of the year ................... 1,744,420 $ 9.78 1,473,898 $ 3.38
========== ===========
Options exercisable at end of year ........... 982,973 476,686
Weighted-average fair value of options
granted during the year .................... $ 2.52 $ 1.32
At December 31, 2001 the Predecessor Company cancelled 1,473,898 options
with a weighted-average exercise price of $3.38 each. The Successor Company had
no options outstanding at December 31, 2001.
In October 1997, the Company awarded 250,000 shares of non-voting
restricted stock to two key executive officers. At the time of the grant the
Company's common stock had a fair market value of $17.00 per share. No cash
consideration was paid for such shares by the recipients. Such shares vested in
three equal annual installments, commencing on the fourth anniversary of grant.
The Company recorded unearned compensation expense of $4.3 million in connection
with the issuance of the restricted stock as of the date of the grant. This
unearned compensation expense was reflected as a separate component of
shareholders' equity to be amortized as compensation expense over the seven year
vesting period. The Company recorded $608,000 and $180,000 of compensation
expense with respect to such award for the years ended December 31, 1998 and
1999, respectively. The Company recorded the issuance of the restricted stock in
1998 upon issuance. During the first quarter of 1999, the Company retired the
250,000 shares of restricted stock upon payment to the two key executives of
$750,000 and $187,500 (the latter of which was reduced to $87,500 to reflect
repayment of a $100,000 bonus paid in 1998 to one of the key executives) in
consideration for the forfeiture of their interest in the 250,000 shares of
restricted stock.
In November 2000, the Board of Directors, at the recommendation of the
Compensation Committee, approved an offer (the "Offer") to holders of options
under both the 1994 Stock Option Plan and the Non-Officer Plan. The Company
agreed to make lump sum payments of $250 to each option holder that agreed to
the cancellation of all of his options having an exercise price of $5.00 or
greater ("Eligible Options"), except that certain executive officers, directors,
and consultants were asked to agree to the cancellation of their Eligible
Options without any payment. The Company completed the Offer in December 2000,
paying approximately $17,000 for the cancellation of options covering the
issuance of 596,103 shares of common stock.
11. WORKERS COMPENSATION
The Company utilizes third-party insurance for losses and liabilities
associated with workers compensation claims subject to deductible levels of
$250,000 per occurrence for all claims incurred beginning January 1, 2000.
Claims incurred prior to January 1, 2000 were fully insured. Losses up to this
deductible level are accrued based upon the Company's estimates of the aggregate
liability for claims incurred based on Company experience. At December 31, 2000
and 2001, other current liabilities includes reserves for workers compensation
claims payable of approximately $1.0 million and $2.5 million, respectively.
F-27
In addition, the Company maintains cash deposits as required by the
insurance carrier. At December 31, 2001, such deposits were $1.1 million and
$2.8 million, respectively. These deposits are utilized to pay claims as costs
are incurred.
12. PROFESSIONAL LIABILITY
The Company utilizes third-party insurance for losses and liabilities
associated with professional liability claims subject to deductible levels of
$100,000 per occurrence for the year ended December 31, 2000 and retention
levels of $250,000 for all states except Florida and Texas, where the retention
levels are $500,000 per occurrence, for the year ended December 31, 2001. Losses
up to these deductible and retention levels are accrued based upon the Company's
estimates of the aggregate liability for claims incurred based on Company
experience. At December 31, 2000 and 2001, other current liabilities includes
reserves for professional liability claims payable of approximately $485,000 and
$1.0 million, respectively.
13. LEGAL PROCEEDINGS
Insurance Coverage Dispute
In September, 2000, the Company reached an agreement to settle the class
action litigation relating to the restatement of its consolidated financial
statements for the years ended December 31, 1996 and 1997 and the first three
fiscal quarters of 1998. This agreement received final court approval on
November 30, 2000 and the Company was dismissed from the litigation with
prejudice. On September 28, 2001, the Company made its final installment of $1.0
million on its promissory note for the class action litigation settlement.
Although the Company was dismissed from the litigation with prejudice, a dispute
which arose with its corporate liability insurance carriers remains unresolved.
At the time the Company settled the class action litigation, the Company and the
insurance carriers agreed to resolve this dispute through binding arbitration,
and the Company filed a complaint for a declaratory judgment that it was not
liable to the carriers as claimed. The carriers counter-claimed to recover an
amount capped at $4.0 million.
After filing for bankruptcy on October 1, 2001, the Company made a motion
for dismissal of its complaint for declaratory relief in the arbitration based
upon having filed for bankruptcy protection. An objection was filed to its
motion, and one of its insurance carriers filed a proof of claim in the amount
of $4.0 million in the bankruptcy proceeding. The Company disputes that claim.
The Company offered (and the offer currently remains outstanding) to settle the
dispute for $75,000 to be paid out as a general unsecured claim in the
bankruptcy process. (See Note 1).
In addition to the matter referred to in the immediately preceding
paragraphs, the Company is involved in various lawsuits and claims arising in
the normal course of business. In the aggregate, such other suits and claims
should not have a material adverse effect on the Company's financial condition,
results of operations, cash flow and liquidity.
14. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Savings Plan ("the Savings Plan") which is a
defined contribution plan covering employees of Assisted Living Concepts, Inc.
who have one year of service and are age 21 or older. Each year participants may
contribute up to 15% of pre-tax annual compensation and 100% of any Employer
paid cash bonus (not to exceed $10,500), as defined in the Savings Plan. ALC may
provide matching contributions as determined annually by ALC's Board of
Directors. Contributions are subject to certain limitations. The Company has not
made any contributions to this Savings Plan.
F-28
The Company has a Severance Pay Plan for Administrators, Associate
Administrators, and Corporate and Regional Office Operations Employees ("the
Severance Plan"). The Severance Plan was amended, effective January 1, 2001.
This Severance Plan covers certain eligible employees and provides that under
specific conditions employees may receive up to 6 months annual base salary as
severance pay, depending upon their length of service with the Company and other
factors that are defined in the Severance Plan. During the years ended December
31, 1999 and 2001, the Company paid out benefits of $19,000 and $3,000,
respectively, under this plan. No such benefits were paid during the year ended
December 31, 2000.
15. SUBSEQUENT EVENT
2002 Incentive Award Plan
On March 6, 2002, the Company adopted the 2002 Incentive Award Plan of
Assisted Living Concepts, Inc., ("the 2002 Plan"). The 2002 Plan consists of two
plans, one pertaining solely to the grant of incentive stock options and one
pertaining to the grant of other incentive awards. The 2002 Plan is intended to
obtain, retain services of, and provide incentive for, directors, key employees
and consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of the Company stock
and/or rights which recognize such growth, development and financial success.
The 2002 Plan provides for the Company to grant options to its eligible
employees, consultants and independent directors. The aggregate number of shares
which may be issued upon exercise of options or other awards under the 2002 Plan
shall not exceed 325,000, which, on March 6, 2002, subject to shareholder
approval, the Company's Board of Directors increased by an additional 325,000.
The exercise price and vesting period of each option shall be set by the
Company's Compensation Committee of its Board of Directors, but the exercise
price may not be less than the deemed fair value of the Company's stock on the
date of grant. Each option shall expire on the date specified in the option
agreement, but not later than the tenth anniversary of the date on which the
option was granted. The Board of Directors, at its option, may discontinue or
amend the 2002 Plan at any time, provided that certain conditions are satisfied.
F-29
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY SELLING SECURITYHOLDER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER WILL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
----------
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION .................................................. (i)
FORWARD LOOKING STATEMENTS ............................................. (i)
PROSPECTUS SUMMARY ..................................................... 1
USE OF PROCEEDS ........................................................ 10
PRICE RANGE OF COMMON STOCK ............................................ 11
DIVIDEND POLICY ........................................................ 11
CAPITALIZATION ......................................................... 12
RISK FACTORS ........................................................... 13
SELECTED FINANCIAL AND OTHER DATA ...................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ........................................... 30
BUSINESS ............................................................... 46
MANAGEMENT ............................................................. 58
EXECUTIVE COMPENSATION ................................................. 61
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ......... 66
DESCRIPTION OF THE SENIOR NOTES ........................................ 67
DESCRIPTION OF THE JUNIOR NOTES ........................................ 115
DESCRIPTION OF CAPITAL STOCK ........................................... 166
REGISTRATION RIGHTS AGREEMENT .......................................... 169
SHARES ELIGIBLE FOR FUTURE SALE ........................................ 170
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS ................ 172
DESCRIPTION OF CERTAIN INDEBTEDNESS .................................... 180
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................... 183
SELLING SECURITYHOLDERS ................................................ 185
PLAN OF DISTRIBUTION ................................................... 186
LEGAL MATTERS .......................................................... 187
EXPERTS ................................................................ 187
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
================================================================================
================================================================================
$21,018,190
10% SENIOR SECURED NOTES DUE 2009
$10,076,190
JUNIOR SECURED NOTES DUE 2012
3,259,644 SHARES
COMMON STOCK
ASSISTED LIVING
CONCEPTS, INC.
-------------------
P R O S P E C T U S
-------------------
_______________, 2002
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with
the issuance and distribution of the securities being registered hereunder.
Except for the SEC registration fee, all amounts are estimates.
SEC Registration Fee ............................... $ 3,760.36
Printing Expenses .................................. 30,000
Legal Fees and Expenses ............................ 50,000
Accounting Fees and Expenses ....................... 150,000
Registrar and Transfer Agent Fees and Expenses ..... 17,500
Miscellaneous Expenses ............................. 15,375
Total .................................. $266,635.36
All of the costs identified above will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Company's Articles of Incorporation and the Nevada General
Corporation Laws a director or officer of the Company will not be personally
liable to the Company or its stockholders for damages for any breach of
fiduciary duty as a director or officer, except for liability for (i) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law, or (ii) the payment of distributions in violation of Nevada Revised
Statutes 78.300. In addition and under certain circumstances, Nevada Revised
Statutes 78.751 and the Company's By-Laws, provide for the indemnification of
the Company's officers, directors, employees, and agents against liabilities
which they may incur in such capacities. A summary of the circumstances in which
such indemnification is provided for is contained herein, but that description
is qualified in its entirety by reference to the Nevada Revised Statutes and the
Company's By-Laws.
In general, any officer, director, employee or agent will be indemnified
against expenses including attorneys' fees, fines, settlements, or judgments
which were actually and reasonably incurred in connection with a legal
proceeding, other than one brought by or on behalf of the Company, to which he
or she was a party as a result of such relationship, if he or she acted in good
faith, and in the manner he or she believed to be in or not opposed to the
Company's best interest and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his or her conduct was unlawful. If the
action or suit is brought by or on behalf of the Company, the person to be
indemnified must have acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the Company's best interest. No
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the Company or for
amounts paid in settlement to the Company, unless and only to the extent that
the court in which the action or suit was brought or other court of competent
jurisdiction, determines upon application that in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses which such court will deem proper.
II-1
Any indemnification under the previous paragraphs, unless ordered by a
court or advanced as provided in the next paragraph, must be made by the Company
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made (1) by the stockholders, (2) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the act, suit or proceeding, (3) if a majority vote of a
quorum of directors who were not parties to the act, suit or proceeding so
orders, by independent legal counsel in a written opinion or (4) if a quorum
consisting of directors who were not parties to the act, suit or proceeding
cannot be obtained, by independent legal counsel in a written opinion. To the
extent that a director, officer, employee or agent of the Company has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in the previous paragraph, or in defense of any claim,
issue or matter therein, he or she must be indemnified by the Company against
expenses, including attorneys' fees, actually and reasonably incurred by him or
her in connection with the defense.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding must be paid by the Company as they are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the Company
as authorized by the By-Laws. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate.
The indemnification and advancement of expenses authorized in or ordered
by a court as provided in the foregoing paragraphs do not exclude any other
rights to which a person seeking indemnification or advancement of expenses may
be entitled under the Articles of Incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either an action in
his official capacity or an action in another capacity while holding his office,
except that indemnification, unless ordered by a court as described in the third
preceding paragraph or for advancement of expenses made as described in the next
preceding paragraph, may not be made to or on behalf of any director or officer
if a final adjudication establishes that his or her acts or omissions involved
intentional misconduct, fraud or a knowing violation of the law and was material
to the cause of action. If a claim for indemnification or payment of expenses
under the Company's By-Laws is not paid in full within ninety (90) days after a
written claim therefor has been received by the Company, the claimant may file
suit to recover the unpaid amount of such claim, and if successful in whole or
in part, will be entitled to be paid the expense of prosecuting such claim. In
any such action, the Company will have the burden of proving that the claimant
was not entitled to the requested indemnification or payment of expenses under
applicable law.
The Board of Directors may authorize, by a vote of a majority of a quorum
of the Board of Directors, the Company to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her status
as such, whether or not the Company would have the power to indemnify him or her
against such liability under the provisions of the By-Laws. The Board of
Directors may authorize the Company to enter into a contract with any person who
is or was a director, officer, employee or agent of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another partnership, joint venture, trust or other enterprise providing for
indemnification rights equivalent to or, if the Board of Directors so
determines, greater than those provided for in the By-Laws.
II-2
The Company has also purchased insurance for its directors and officers
for certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company. In addition, the Company
has entered into agreements with certain present and former officers and
directors pursuant to which the Company will indemnify such officers and
directors from losses incurred in connection with their service to the Company,
to the maximum extent permissible by applicable law.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES.
We issued $39,809,822 aggregate principal amount of Senior Notes,
$15,083,225 aggregate principal amount of Junior Notes and 6,171,759 shares of
New Common Stock as of January 1, 2002 pursuant to a plan of reorganization
under Chapter 11 of the United States Bankruptcy Code.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
EXHIBIT
NO. DESCRIPTION
2.1 First Amended Joint Plan of Reorganization of the Debtors dated October
30, 2001 (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K dated October 30, 2001).
3.1 Articles of Incorporation of the Company (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on Form
S-1, File No. 33-83938, and as amended by the Company's Certificate
Pursuant to NRS 78.207, filed on November 13, 2001 as Exhibit T3A-1 to
the Company's Application for Qualification of Indentures on Form T-3).
3.2 Form of Amended and Restated Articles of Incorporation of the Company
effective as of January 1, 2002 (Incorporated by reference to the same
titled exhibit to the Company's Application for Qualification of
Indentures on Form T-3, filed on November 13, 2001).
3.3 Certificate of Incorporation of Carriage House Assisted Living, Inc.
(Incorporated by reference to the same titled exhibit to the Company's
Application for Qualification of Indentures on Form T-3, filed on
November 13, 2001).
3.4 Form of Restated Certificate of Incorporation of Carriage House
Assisted Living, Inc. effective as January 1, 2002 (Incorporated by
reference to the same titled exhibit to the Company's Application for
Qualification of Indentures on Form T-3, filed on November 13, 2001).
3.5 Certificate of Incorporation of Home and Community Care, Inc.
(Incorporated by reference to the same titled exhibit to the Company's
Application for Qualification of Indentures on Form T-3, filed on
November 13, 2001).
3.6 Articles of Incorporation of ALC Indiana, Inc. (Incorporated by
reference to the same titled exhibit to the Company's Application for
Qualification of Indentures on Form T-3, filed on November 13, 2001).
3.7 Bylaws of the Company (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1, File No.
33-83938).
3.8 Bylaws of Carriage House (Incorporated by reference to the same titled
exhibit to the Company's Application for Qualification of Indentures on
Form T-3, filed on November 13, 2001).
3.9 Bylaws of Home and Community Care, Inc. (Incorporated by reference to
the same titled exhibit to the Company's Application for Qualification
of Indentures on Form T-3, filed on November 13, 2001).
3.10 Bylaws of ALC Indiana, Inc. (Incorporated by reference to the same
titled exhibit to the Company's Application for Qualification of
Indentures on Form T-3, filed on November 13, 2001).
4.1 Form of Indenture, dated as of January 1, 2002, among the Company,
Carriage House Assisted Living, Inc., Home and Community Care, Inc.,
ALC Indiana, Inc. and BNY Midwest Trust Company, as Trustee, of the
Senior Secured Notes of the Company, due 2009 (Incorporated by
reference to Exhibit T3C to the Company's Senior Secured Notes Amended
Application for Qualification of Indentures on Form T-3/A, filed on
December 19, 2001).
4.2 Form of Indenture, dated as of January 1, 2002, among the Company,
Carriage House Assisted Living, Inc., Home and Community Care, Inc.,
ALC Indiana, Inc. and BNY Midwest Trust Company, as Trustee, of the
Junior Secured Notes of the Company, due 2012 (Incorporated by
reference to Exhibit T3C to the Company's Junior Secured Notes Amended
Application for Qualification of Indentures on Form T-3/A, filed on
December 19, 2001).
4.3 Registration Rights Agreement, dated as of January 1, 2002, by and
among the Company, LTC Healthcare, Inc., LTC Properties, Inc., National
Health Investors, Inc., and Cerberus Capital Management, L.P.
(Incorporated by reference to the same titled exhibit to the Company's
Report on Form 10-K for the year ended December 31, 2001).
4.4 2002 Incentive Award Plan of the Company (Incorporated by reference to
the same titled exhibit to the Company's Report on Form 10-K for the
year ended December 31, 2001).
5.1 Opinion of Schreck Brignone Godfrey regarding the legality of the
securities being offered (filed herewith).
5.2 Opinion of Latham & Watkins regarding the legality of the securities
being offered (filed herewith).
10.1 Reimbursement Agreement, dated as of November 1, 1996, between the
Company and U.S. Bank of Washington, National Association (Incorporated
by reference to the same titled exhibit to the Company's Report on Form
10-K for the fiscal year ended December 31, 1998).
10.2 Reimbursement Agreement, dated as of July 1, 1997, between the Company
and United States National Bank of Oregon (Incorporated by reference to
the same titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).
10.3 Reimbursement Agreement, dated as of July 1, 1998, between the Company
and U.S. Bank National Association (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.4 Deed of Trust and Security Agreement, dated March 31, 1998, among DMG
Texas ALC, Partners, L.P., American Title Company of Houston and
Transatlantic Capital Company (Incorporated by reference to the same
titled exhibit to the Company's Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.5 Mortgage and Security Agreement, dated November 12, 1998, between DMG
New Jersey ALC, Inc. and Transatlantic Capital Company (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the fiscal year ended December 31, 1998).
10.6 Deed of Trust and Security Agreement, dated July 10, 1998, among DMG
Oregon ALC, Inc., Chicago Title Company and Transatlantic Capital
Company (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 10-K for the fiscal year ended December 31,
1998).
10.7 Amendment and Modification of Reimbursement Agreements, dated as of
August 18, 1999, by and between the Company and U.S. Bank National
Association (Incorporated by reference to the same titled exhibit to
the Company's Report on Form 10-K for the fiscal year ended December
31, 1998).
10.8 Loan Agreement, dated as of February 20, 2001, among Heller Healthcare
Finance, Inc., as Agent and a Lender, the financial institutions who
are or become parties thereto as Lenders, ALC Ohio, Inc. and ALC
Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc. and ALC New
Jersey, Inc., as Borrowers, and the parties who are or become Borrowers
thereunder (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated May 9, 2001).
10.9 Guaranty, dated as of February 20, 2001, by the Company for the benefit
of Heller Healthcare Finance, Inc. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated May 9,
2001).
10.10 Guaranty, dated as of January 1, 2002, by the Company for the benefit
of Heller Healthcare Finance, Inc. (Incorporated by reference to
the same titled exhibit to the Company's Report on Form 10-K for the
year ended December 31, 2001).
10.11 Third Amendment and Modification of Reimbursement Agreement, dated as
of March 12, 2001, between the Company and U.S. Bank National
Association. (Incorporated by reference to the same titled exhibit to
the Company's Report on Form 10-K for the fiscal year ended December
31, 2000).
10.12 Third Amendment and Modification of Reimbursement Agreement, dated as
of March 12, 2001, between the Company and U.S. Bank National
Association. (Incorporated by reference to the same titled exhibit to
the Company's Report on Form 10-K for the fiscal year ended December
31, 2000).
10.13 First Amendment to Loan Documents, as of June 27, 2001, between ALC
Ohio, Inc., ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc.,
ALC New Jersey, Inc., ALC Indiana, Inc., Assisted Living Concepts, Inc.
and Heller Healthcare Finance, Inc. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-Q for the
quarter ended June 30, 2001).
10.14 Second Amendment to Loan Documents between Assisted Living Concepts,
Inc., ALC Ohio, Inc., ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC
Nebraska, Inc., ALC New Jersey, Inc., ALC Indiana, Inc., and Heller
Healthcare Finance, Inc., dated October 3, 2001 (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-Q for the quarter ended September 30, 2001).
10.15 Amended and Restated Employment Agreement, effective as of January 1,
2001, between the Company and Wm. James 10.15 Nicol (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
8-K dated June 29, 2001).
10.16 First Amendment to the Amended and Restated Employment Agreement, dated
as of January 2, 2002, between the Company and Wm. James Nicol
(Incorporated by reference to the same titled exhibit to the Company's
Report on Form 10-K for the year ended December 31, 2001).
10.17 First Amended Joint Disclosure Statement of the Debtors Pursuant to
Section 1125 of the Bankruptcy Code dated October 30, 2001
(Incorporated by reference to the same titled exhibit to the Company's
Report on Form 8-K dated October 30, 2001).
10.18 Amended Findings of Fact, Conclusions of Law and Order Confirming the
Joint Plan of Reorganization dated December 28, 2001 (Incorporated by
reference to the Company's Report on Form 8-K dated December 28, 2001).
10.19 Employment Agreement, effective as of February 18, 2002, by and between
the Company and Steven Vick (Incorporated by reference to the same
titled exhibit to the Company's Report on Form 10-K for the year ended
December 31, 2001).
10.20 Amended and Restated Employment Agreement, effective as of January 1,
2002, by and between the Company and Sandra Campbell (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the year ended December 31, 2001).
10.21 Amended and Restated Employment Agreement, effective as of January 1,
2002, by and between the Company and Nancy Inez Gorshe (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the year ended December 31, 2001).
10.22 Amended and Restated Employment Agreement, effective as of January 1,
2002, by and between the Company and Drew Q. Miller (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the year ended December 31, 2001).
10.23 Employment Agreement, effective January 1, 2001, by and between the
Company and Ron W. Kerr (Incorporated by reference to the same titled
exhibit to the Company's Report on Form 10-K for the year ended
December 31, 2001).
10.24 Amendment to Employment Agreement, effective January 1, 2002, by and
between the Company and Ron W. Kerr (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-K for the year
ended December 31, 2001).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
21.1 List of Subsidiaries of the Company (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-K for the year
ended December 31, 2001).
23.1 Report on Schedule and Consent of KPMG LLP (filed herewith).
24.1 Powers of Attorney (included on the signatures page hereto).
(b) FINANCIAL DATA SCHEDULES
SCHEDULE II
ASSISTED LIVING CONCEPTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT BALANCE AT
BEGINNING END
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS(1) OF YEAR
----------- ---------- --------- ------------- ----------
Year ended December 31, 1999:
Valuation accounts deducted from assets:
Allowance for doubtful receivables................ $ 179 $1,071(2) $ 188 $1,062
------ ------ ------ ------
Year ended December 31, 2000:
Valuation accounts deducted from assets:
Allowance for doubtful receivables................ $1,062 $1,932 $1,595 $1,399
------ ------ ------ ------
Year ended December 31, 2001:
Valuation accounts deducted from assets:
Allowance for doubtful receivables................ $1,399 $ (61) $1,338 $ --
------ ------ ------ ------
</Table>
- ---------------
(1) Represents amount written off. For the year ended December
31, 2001, the deductions also includses $193,000 of fresh start adjustments.
(2) $561,000 of additions were charged to operating expenses, $510,000 of
additions related to home health operations which were discontinued and are
reported in general and administrative expenses in 1999.
(3) Balance at December 13, 2001 is that of the Successor Company.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the Registration Statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished
to the Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
II-3
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer, or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer of controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Portland, State of Oregon
on the 29th day of March, 2002.
ASSISTED LIVING CONCEPTS, INC.
By: /s/ STEVEN L. VICK
-------------------------------------
Steven L. Vick
President and Chief Executive Officer
CARRIAGE HOUSE ASSISTED LIVING, INC.
By: /s/ STEVEN L. VICK
-------------------------------------
Steven L. Vick
President
HOME AND COMMUNITY CARE, INC.
By: /s/ STEVEN L. VICK
-------------------------------------
Steven L. Vick
President
ALC INDIANA, INC.
By: /s/ STEVEN L. VICK
-------------------------------------
Steven L. Vick
President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints Steven L. Vick and Drew
Q. Miller, and each of them acting alone, his or her true and lawful
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to execute and cause to be filed with the Commission any and all
amendments and post-effective amendments to this Registration Statement, or any
registration statement for this offering that is to be effective upon filing
pursuant to rule 462(b) under the Securities Act of 1933, with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his or her substitute or substitutes may do or
cause to be done by virtue thereof.
IN WITNESS HEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his or her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Steven L. Vick President and Chief Executive March 29, 2002
- --------------------------- Officer
Steven L. Vick
/s/ Drew Q. Miller Senior Vice President and Chief March 29, 2002
- --------------------------- Financial Officer
Drew Q. Miller
/s/ M. Catherine Maloney Vice President, Controller and Chief March 29, 2002
- --------------------------- Accounting Officer
M. Catherine Maloney
/s/ W. Andrew Adams Chairman of the Board and Director March 29, 2002
- ---------------------------
W. Andrew Adams
/s/ Andre Dimitriadis Director March 29, 2002
- ---------------------------
Andre Dimitriadis
/s/ Mark Holiday Director March 29, 2002
- ---------------------------
Mark Holliday
/s/ Richard Ladd Director March 29, 2002
- ---------------------------
Richard Ladd
/s/ Matthew Patrick Director March 29, 2002
- ---------------------------
Matthew Patrick
/s/ Leonard Tannenbaum Director March 29, 2002
- ---------------------------
Leonard Tannenbaum
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints Steven L. Vick and Drew
Q. Miller, and each of them acting alone, his or her true and lawful
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to execute and cause to be filed with the Commission any and all
amendments and post-effective amendments to this Registration Statement, or any
registration statement for this offering that is to be effective upon filing
pursuant to rule 462(b) under the Securities Act of 1933, with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his or her substitute or substitutes may do or
cause to be done by virtue thereof.
IN WITNESS HEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his or her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Steven L. Vick President and Director March 29, 2002
- ---------------------------
Steven L. Vick
/s/ Sandra Campbell Secretary March 29, 2002
- ---------------------------
Sandra Campbell
/s/ Drew Q. Miller Treasurer March 29, 2002
- ---------------------------
Drew Q. Miller
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints Steven L. Vick and Drew
Q. Miller, and each of them acting alone, his or her true and lawful
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to execute and cause to be filed with the Commission any and all
amendments and post-effective amendments to this Registration Statement, or any
registration statement for this offering that is to be effective upon filing
pursuant to rule 462(b) under the Securities Act of 1933, with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his or her substitute or substitutes may do or
cause to be done by virtue thereof.
IN WITNESS HEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his or her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Steven L. Vick President and Director March 29, 2002
- ---------------------------
Steven L. Vick
/s/ Sandra Campbell Secretary March 29, 2002
- ---------------------------
Sandra Campbell
/s/ Drew Q. Miller Treasurer March 29, 2002
- ---------------------------
Drew Q. Miller
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints Steven L. Vick and Drew
Q. Miller, and each of them acting alone, his or her true and lawful
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to execute and cause to be filed with the Commission any and all
amendments and post-effective amendments to this Registration Statement, or any
registration statement for this offering that is to be effective upon filing
pursuant to rule 462(b) under the Securities Act of 1933, with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his or her substitute or substitutes may do or
cause to be done by virtue thereof.
IN WITNESS HEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his or her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Steven L. Vick President and Director March 29, 2002
- ---------------------------
Steven L. Vick
/s/ Sandra Campbell Secretary March 29, 2002
- ---------------------------
Sandra Campbell
/s/ Drew Q. Miller Treasurer March 29, 2002
- ---------------------------
Drew Q. Miller
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
2.1 First Amended Joint Plan of Reorganization of the Debtors dated October
30, 2001 (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K dated October 30, 2001).
3.1 Articles of Incorporation of the Company (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on Form
S-1, File No. 33-83938, and as amended by the Company's Certificate
Pursuant to NRS 78.207, filed on November 13, 2001 as Exhibit T3A-1 to
the Company's Application for Qualification of Indentures on Form T-3).
3.2 Form of Amended and Restated Articles of Incorporation of the Company
effective as of January 1, 2002 (Incorporated by reference to the same
titled exhibit to the Company's Application for Qualification of
Indentures on Form T-3, filed on November 13, 2001).
3.3 Certificate of Incorporation of Carriage House Assisted Living, Inc.
(Incorporated by reference to the same titled exhibit to the Company's
Application for Qualification of Indentures on Form T-3, filed on
November 13, 2001).
3.4 Form of Restated Certificate of Incorporation of Carriage House
Assisted Living, Inc. effective as January 1, 2002 (Incorporated by
reference to the same titled exhibit to the Company's Application for
Qualification of Indentures on Form T-3, filed on November 13, 2001).
3.5 Certificate of Incorporation of Home and Community Care, Inc.
(Incorporated by reference to the same titled exhibit to the Company's
Application for Qualification of Indentures on Form T-3, filed on
November 13, 2001).
3.6 Articles of Incorporation of ALC Indiana, Inc. (Incorporated by
reference to the same titled exhibit to the Company's Application for
Qualification of Indentures on Form T-3, filed on November 13, 2001).
3.7 Bylaws of the Company (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1, File No.
33-83938).
3.8 Bylaws of Carriage House (Incorporated by reference to the same titled
exhibit to the Company's Application for Qualification of Indentures on
Form T-3, filed on November 13, 2001).
3.9 Bylaws of Home and Community Care, Inc. (Incorporated by reference to
the same titled exhibit to the Company's Application for Qualification
of Indentures on Form T-3, filed on November 13, 2001).
3.10 Bylaws of ALC Indiana, Inc. (Incorporated by reference to the same
titled exhibit to the Company's Application for Qualification of
Indentures on Form T-3, filed on November 13, 2001).
4.1 Form of Indenture, dated as of January 1, 2002, among the Company,
Carriage House Assisted Living, Inc., Home and Community Care, Inc.,
ALC Indiana, Inc. and BNY Midwest Trust Company, as Trustee, of the
Senior Secured Notes of the Company, due 2009 (Incorporated by
reference to Exhibit T3C to the Company's Senior Secured Notes Amended
Application for Qualification of Indentures on Form T-3/A, filed on
December 19, 2001).
4.2 Form of Indenture, dated as of January 1, 2002, among the Company,
Carriage House Assisted Living, Inc., Home and Community Care, Inc.,
ALC Indiana, Inc. and BNY Midwest Trust Company, as Trustee, of the
Junior Secured Notes of the Company, due 2012 (Incorporated by
reference to Exhibit T3C to the Company's Junior Secured Notes Amended
Application for Qualification of Indentures on Form T-3/A, filed on
December 19, 2001).
4.3 Registration Rights Agreement, dated as of January 1, 2002, by and
among the Company, LTC Healthcare, Inc., LTC Properties, Inc., National
Health Investors, Inc., and Cerberus Capital Management, L.P.
(Incorporated by reference to the same titled exhibit to the Company's
Report on Form 10-K for the year ended December 31, 2001).
4.4 2002 Incentive Award Plan of the Company (Incorporated by reference to
the same titled exhibit to the Company's Report on Form 10-K for the
year ended December 31, 2001).
5.1 Opinion of Schreck Brignone Godfrey regarding the legality of the
securities being offered (filed herewith).
5.2 Opinion of Latham & Watkins regarding the legality of the securities
being offered.(filed herewith)
10.1 Reimbursement Agreement, dated as of November 1, 1996, between the
Company and U.S. Bank of Washington, National Association (Incorporated
by reference to the same titled exhibit to the Company's Report on Form
10-K for the fiscal year ended December 31, 1998).
10.2 Reimbursement Agreement, dated as of July 1, 1997, between the Company
and United States National Bank of Oregon (Incorporated by reference to
the same titled exhibit to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1998).
10.3 Reimbursement Agreement, dated as of July 1, 1998, between the Company
and U.S. Bank National Association (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.4 Deed of Trust and Security Agreement, dated March 31, 1998, among DMG
Texas ALC, Partners, L.P., American Title Company of Houston and
Transatlantic Capital Company (Incorporated by reference to the same
titled exhibit to the Company's Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.5 Mortgage and Security Agreement, dated November 12, 1998, between DMG
New Jersey ALC, Inc. and Transatlantic Capital Company (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the fiscal year ended December 31, 1998).
10.6 Deed of Trust and Security Agreement, dated July 10, 1998, among DMG
Oregon ALC, Inc., Chicago Title Company and Transatlantic Capital
Company (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 10-K for the fiscal year ended December 31,
1998).
10.7 Amendment and Modification of Reimbursement Agreements, dated as of
August 18, 1999, by and between the Company and U.S. Bank National
Association (Incorporated by reference to the same titled exhibit to
the Company's Report on Form 10-K for the fiscal year ended December
31, 1998).
10.8 Loan Agreement, dated as of February 20, 2001, among Heller Healthcare
Finance, Inc., as Agent and a Lender, the financial institutions who
are or become parties thereto as Lenders, ALC Ohio, Inc. and ALC
Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc. and ALC New
Jersey, Inc., as Borrowers, and the parties who are or become Borrowers
thereunder (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated May 9, 2001).
10.9 Guaranty, dated as of February 20, 2001, by the Company for the benefit
of Heller Healthcare Finance, Inc. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated May 9,
2001).
10.10 Guaranty, dated as of January 1, 2002, by the Company for the benefit
of Heller Healthcare Finance, Inc. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-K for the year
ended December 31, 2001).
10.11 Third Amendment and Modification of Reimbursement Agreement, dated as
of March 12, 2001, between the Company and U.S. Bank National
Association. (Incorporated by reference to the same titled exhibit to
the Company's Report on Form 10-K for the fiscal year ended December
31, 2000).
10.12 Third Amendment and Modification of Reimbursement Agreement, dated as
of March 12, 2001, between the Company and U.S. Bank National
Association. (Incorporated by reference to the same titled exhibit to
the Company's Report on Form 10-K for the fiscal year ended December
31, 2000).
10.13 First Amendment to Loan Documents, as of June 27, 2001, between ALC
Ohio, Inc., ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc.,
ALC New Jersey, Inc., ALC Indiana, Inc., Assisted Living Concepts, Inc.
and Heller Healthcare Finance, Inc. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-Q for the
quarter ended June 30, 2001).
10.14 Second Amendment to Loan Documents between Assisted Living Concepts,
Inc., ALC Ohio, Inc., ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC
Nebraska, Inc., ALC New Jersey, Inc., ALC Indiana, Inc., and Heller
Healthcare Finance, Inc., dated October 3, 2001 (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-Q for the quarter ended September 30, 2001).
10.15 Amended and Restated Employment Agreement, effective as of January 1,
2001, between the Company and Wm. James 10.15 Nicol (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
8-K dated June 29, 2001).
10.16 First Amendment to the Amended and Restated Employment Agreement, dated
as of January 2, 2002, between the Company and Wm. James Nicol
(Incorporated by reference to the same titled exhibit to the Company's
Report on Form 10-K for the year ended December 31, 2001).
10.17 First Amended Joint Disclosure Statement of the Debtors Pursuant to
Section 1125 of the Bankruptcy Code dated October 30, 2001
(Incorporated by reference to the same titled exhibit to the Company's
Report on Form 8-K dated October 30, 2001).
10.18 Amended Findings of Fact, Conclusions of Law and Order Confirming the
Joint Plan of Reorganization dated December 28, 2001 (Incorporated by
reference to the Company's Report on Form 8-K dated December 28, 2001).
10.19 Employment Agreement, effective as of February 18, 2002, by and between
the Company and Steven Vick (Incorporated by reference to the same
titled exhibit to the Company's Report on Form 10-K for the year ended
December 31, 2001).
10.20 Amended and Restated Employment Agreement, effective as of January 1,
2002, by and between the Company and Sandra Campbell (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the year ended December 31, 2001).
10.21 Amended and Restated Employment Agreement, effective as of January 1,
2002, by and between the Company and Nancy Inez Gorshe (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the year ended December 31, 2001).
10.22 Amended and Restated Employment Agreement, effective as of January 1,
2002, by and between the Company and Drew Q. Miller (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
10-K for the year ended December 31, 2001).
10.23 Employment Agreement, effective January 1, 2001, by and between the
Company and Ron W. Kerr (Incorporated by reference to the same titled
exhibit to the Company's Report on Form 10-K for the year ended
December 31, 2001).
10.24 Amendment to Employment Agreement, effective January 1, 2002, by and
between the Company and Ron W. Kerr (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-K for the year
ended December 31, 2001).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
21.1 List of Subsidiaries of the Company (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 10-K for the year
ended December 31, 2001).
23.1 Report on Schedule and Consent of KPMG LLP (filed herewith).
24.1 Powers of Attorney (included on the signatures page hereto).