EXHIBIT 99.1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE: CHAPTER 11 CASE NOS.
01-10670 AND
ASSISTED LIVING CONCEPTS, INC., ET AL., 01-10674
(JOINTLY ADMINISTERED)
DEBTORS.
FIRST AMENDED DISCLOSURE STATEMENT ACCOMPANYING FIRST AMENDED JOINT PLAN OF
REORGANIZATION FOR ASSISTED LIVING CONCEPTS, INC. AND CARRIAGE HOUSE ASSISTED
LIVING, INC. UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE DATED AS OF
OCTOBER 30, 2001
LATHAM & WATKINS
Robert A. Klyman
Jonathan S. Shenson
Sylvia K. Hamersley
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
(213) 485-1234
YOUNG CONAWAY STARGATT & TAYLOR,
LLP
James Patton
Michael R. Nestor
The Brandywine Building
1000 West Street, 17th Floor
Wilmington, Delaware 19899-0391
(302) 652-4100
Co-Counsel for Assisted Living
Concepts, Inc. and Carriage
House Assisted Living, Inc.,
Debtors and Debtors in Possession
Dated: October 30, 2001
I. INTRODUCTION
The Debtors hereby submit this disclosure statement (the "Disclosure
Statement") pursuant to Section 1125 of the Bankruptcy Code, for use in the
solicitation of votes on their Joint Plan of Reorganization (as it may be
amended, modified or supplemented, the "Plan"), filed with the United States
Bankruptcy Court for the District of Delaware on or about October 1, 2001.
On October 1, 2001 (the "Commencement Date"), each of Assisted
Living Concepts, Inc. ("ALC") and its wholly-owned subsidiary, Carriage House
Assisted Living, Inc. ("Carriage", and collectively with ALC, the "Debtors")
filed with the Clerk of the United States Bankruptcy Court for the District of
Delaware (the "Court") a voluntary petition for relief under chapter 11 of the
Bankruptcy Code. The Debtors have also filed with the Court the Plan, which sets
forth the manner in which Claims against, and Equity Interests in, the Debtors
will be treated. The Plan is attached to the Disclosure Statement as Exhibit A.
This Disclosure Statement describes certain aspects of the Plan, the Debtors'
businesses, and related matters. Unless otherwise defined herein, each
capitalized term contained herein has the meaning ascribed thereto in the Plan.
For purposes of this Disclosure Statement, ALC, together with its subsidiaries
and affiliates, shall be referred to as the "Company."
THE PLAN IS A FULLY PRE-NEGOTIATED PLAN OF REORGANIZATION ENDORSED
BY AN INFORMAL BONDHOLDER COMMITTEE, WHOSE MEMBERS HOLD IN THE AGGREGATE
APPROXIMATELY 47% OF THE DEBENTURES.
The Company and the Informal Bondholders Committee believe that the
Plan is fair and equitable and in the best interests of all stakeholders. In
other words, the Debtors are worth more to their respective creditors and
stockholders as going concerns than they would be if liquidated. To achieve such
higher value, the Plan contemplates the following treatment of ALC's unsecured
creditors and equity interest holders: (i) holders of Allowed General Unsecured
Claims (including but not limited to holders of the Debentures and claims
arising from the rejection of nonresidential real property leases) will receive,
on the Effective Date or as soon as practicable thereafter, on a Pro Rata basis
(a) New Senior Notes in the principal amount of $40,250,000, (b) New Junior
Notes in the principal amount of $15,250,000, and (c) 96% of the New Common
Stock; and (ii) holders of Allowed Trade Claims and Allowed Resident Deposit
Claims shall receive cash payments or other treatment sufficient to render such
claims Unimpaired; and (iii) holders of Old Common Stock in ALC will receive, on
a Pro Rata basis, 4% of the New Common Stock in ALC. Holders of Allowed Claims
and Interests against Carriage House shall be Unimpaired under the Plan.
THE DEBTORS AND THE INFORMAL BONDHOLDER COMMITTEE STRONGLY URGE ALL
HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO VOTE TO VOTE IN FAVOR OF THE
PLAN.
This Disclosure Statement is submitted pursuant to Section 1125 of
the Bankruptcy Code to holders of Equity Interests or Claims against the Debtors
in connection with
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(i) the solicitation of acceptances of the Plan and (ii) the hearing to consider
confirmation of the Plan, scheduled for December 5, 2001 at 8:30 a.m.
Attached as Exhibits to this Disclosure Statement are copies of the
following:
- The Plan (Exhibit A);
- An Order of the Court dated October 30, 2001 (the "Disclosure
Statement Order") approving the Disclosure Statement and
establishing certain procedures with respect to the
solicitation and tabulation of votes to accept or reject the
Plan (Exhibit B);
- Assisted Living Concepts, Inc. Organizational Chart (Exhibit
C);
- Assisted Living Concepts, Inc. Form 10-K for the period ending
December 31, 2000 (Exhibit D);
- Assisted Living Concepts, Inc. Form 10-Q for the period ending
June 30, 2001 (Exhibit E);
- Liquidation Analysis (Exhibit F);
- Projections for Reorganized ALC (Exhibit G);
- Bondholder Plan Support Agreements (Exhibit H);
- Description of the New Notes, New Common Stock and Related
Risk Factors (Exhibit I);
- List of Contracts and Leases to be Rejected (Exhibit J); and
- NHP Agreement (Exhibit K).
In addition, a Ballot for the acceptance or rejection of the Plan is
enclosed with the Disclosure Statement submitted to the holders of Claims and
Interests that the Debtors believe are entitled to vote to accept or reject the
Plan.
On October 30, 2001, after notice and a hearing, the Court entered
the Disclosure Statement Order approving this Disclosure Statement as containing
adequate information of a kind and in sufficient detail to enable hypothetical,
reasonable investors typical of the Debtors' creditors to make an informed
judgment as to whether to accept or reject the Plan. Approval of the Disclosure
Statement does not constitute a determination by the Court as to the fairness or
merits of the Plan.
The Disclosure Statement Order sets forth in detail the deadlines,
procedures and instructions for voting to accept or reject the Plan and for
filing objections to confirmation of the Plan, the record date for voting
purposes, and the applicable standards for tabulating votes. In addition,
detailed voting instructions accompany each Ballot. Each holder of a Claim or
Interest
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entitled to vote on the Plan should read the Disclosure Statement, the Plan, the
Disclosure Statement Order and the instructions accompanying the Ballots in
their entirety before voting on the Plan. These documents contain, among other
things, important information concerning the classification of Claims and Equity
Interests for voting purposes and the tabulation of votes. No solicitation of
votes to accept the Plan may be made other than pursuant to Section 1125 of the
Bankruptcy Code.
II. OVERVIEW OF THE PLAN
The following table briefly summarizes the classification and
treatment of Claims and Equity Interests under the Plan.(1)
The following is a designation of the Classes of Claims and
Interests under the Plan. In accordance with section 1123(a)(1) of the
Bankruptcy Code, Administrative Claims and Priority Tax Claims have not been
classified and are excluded from the following Classes. A Claim or Interest is
classified in a particular Class only to the extent that the Claim or Interest
qualifies within the description of that Class, and is classified in another
Class or Classes to the extent that any remainder of the Claim or Interest
qualifies within the description of such other Class or Classes. A Claim or
Interest is classified in a particular Class only to the extent that the Claim
or Interest is an Allowed Claim or Allowed Interest in that Class and has not
been paid, released or otherwise satisfied before the Effective Date; a Claim or
Interest which is not an Allowed Claim or Allowed Interest is not in any Class.
A Disputed Claim or Disputed Interest, to the extent that it subsequently
becomes an Allowed Claim or Allowed Interest, shall be included in the Class for
which it would have qualified had it not been disputed. Notwithstanding anything
to the contrary contained in the Plan, no distribution shall be made on account
of any Claim or Interest which is not an Allowed Claim or an Allowed Interest.
----------
(1) As this table merely provides a summary of the classification and
treatment of Claims and Equity Interests under the Plan, reference should
be made to the entire Disclosure Statement and the Plan for a complete
description of the classification and treatment of Claims and Equity
Interests.
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CLAIMS AGAINST AND INTERESTS IN ALC
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- -------- --------- --------
-- Administrative Paid in full in Cash on the 100%
Claims Effective Date or as soon as
practicable thereafter (unless
the holder of a particular claim
and ALC agree to some other
treatment), or in accordance
with the terms and conditions of
transactions or agreements
relating to obligations incurred
in the ordinary course of
business during the pendency of
the Chapter 11 Cases or assumed
by Reorganized ALC.
-- Tax Claims At the option of Reorganized ALC 100%
either (i) Reinstated, (ii) paid
in full in Cash on the Effective
Date or as soon as practicable
thereafter as possible, or (iii)
paid over a six-year period from
the date of assessment, as
provided in Section
1129(a)(9)(C) of the Bankruptcy
Code with interest payable at a
rate of 8-1/4% per annum or as
otherwise established by the
Court.
SECURED CLAIMS:
1A OHCS Claim Unimpaired; Reinstated on the 100%
Effective Date or as soon as
practicable thereafter.
1B NHP Claim Impaired 100%
1C U.S. Bank Idaho Unimpaired; Reinstated on the 100%
Claim Effective Date or as soon as
practicable thereafter.
1D U.S. Bank Ohio Unimpaired; Reinstated on the 100%
Claim Effective Date or as soon as
practicable thereafter.
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TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- -------- --------- --------
1E U.S. Bank Unimpaired; Reinstated on the 100%
Washington Claim Effective Date or as soon as
practicable thereafter.
2A et Other Secured Unimpaired if paid in full in 100%
seq. Claims Cash or Reinstated on the
Effective Date or as soon as
practicable thereafter as
possible; Impaired if holder
of Claim agrees to alternative
treatment.
UNSECURED CLAIMS
3 Priority Claims Unimpaired; paid in full on or 100%
before the later of (i) the
Effective Date or as soon as
practicable thereafter, (ii) the
date such Claim becomes an
Allowed Claim and (iii) the date
that such Claim would be paid in
accordance with any terms and
conditions of any agreements or
understandings relating thereto
between the Company and the
Holder of such Claim.
4 General Impaired; each holder of an 43%
Unsecured Claims Allowed Class 4 Claim to receive
against ALC on the Effective Date or as soon
as practicable thereafter, a Pro
Rata Share of 96% of ALC's New
Common Stock, New Senior Notes
in the principal amount of
$40,250,000 and New Junior Notes
in the principal amount of
$15,250,000.
5 Trade Claims Unimpaired; at the option of 100%
against ALC Reorganized ALC, paid in full in
Cash or Reinstated on the
Effective Date or as soon as
practicable thereafter.
6 Resident Deposit Unimpaired; Reinstated on the 100%
Account Claims Effective Date or as soon as
against ALC practicable thereafter.
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TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- -------- --------- --------
7 Guaranty Claims Unimpaired; Reinstated on the 100%
against ALC Effective Date or as soon as
practicable thereafter.
8 Intercompany Unimpaired; Reinstated on the 100%
Claims Effective Date or as soon as
practicable thereafter.
9 Old Common Stock Impaired; on the Effective Date 0%
of ALC and or as soon as practicable
Securities thereafter, holders of Allowed
Claims against Class 9 Interests will receive,
ALC on a Pro Rata basis, 4% of ALC's
New Common Stock in exchange for
the Old ALC Common Stock.
10 Old Stock Rights Impaired; will not receive or <0%
in ALC retain any property or interest.
CLAIMS AGAINST AND INTERESTS IN CARRIAGE HOUSE
-- Administrative Claims Paid in full in Cash on the Effective 100%
Date or as soon as practicable
thereafter (unless the holder of a
particular claim and ALC agree to some
other treatment), or in accordance with
the terms and conditions of
transactions or agreements relating to
obligations incurred in the ordinary
course of business during the pendency
of the Chapter 11 Cases or assumed by
Carriage House.
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-- Tax Claims At the option of Reorganized Carriage 100%
House either (i) Reinstated, (ii) paid
in full in Cash on the Effective Date
or as soon as practicable thereafter,
or (iii) paid over a six-year period
from the date of assessment, as
provided in Section 1129(a)(9)(C) of
the Bankruptcy Code with interest
payable at a rate of 8-1/4% per annum
or as otherwise established by the
Court.
SECURED CLAIMS
1 Other Secured Claims Unimpaired if paid in full in Cash or 100%
Reinstated on the Effective Date or as
soon as practicable thereafter;
Impaired if holder of Claim consents to
alternative treatment.
UNSECURED CLAIMS
2 Priority Claims Unimpaired; paid in full on or before 100%
the later of (i) the Effective Date or
as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed
Claim and (iii) the date that such
Claim would be paid in accordance with
any terms and conditions of any
agreements or understandings relating
thereto between the Company and the
Holder of such Claim.
3 General Unsecured Unimpaired; at the option of 100%
Claims against Reorganized Carriage House, paid in
Carriage House full in Cash or Reinstated on or before
the later of (i) the Effective Date or
as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed
Claim and (iii) the date that such
Claim would be paid in accordance with
any terms and conditions of any
agreements or understandings relating
thereto between the Company and the
Holder of such Claim.
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4 Trade Claims Unimpaired; at the option of 100%
Against Carriage Reorganized Carriage House, paid in
House full in Cash or Reinstated on or before
the later of (i) the Effective Date or
as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed
Claim and (iii) the date that such
Claim would be paid in accordance with
any terms and conditions of any
agreements or understandings relating
thereto between the Company and the
Holder of such Claim.
5 Intercompany Claims Unimpaired; Reinstated on the Effective 100%
Date or as soon as practicable
thereafter.
6 Old Common Stock of Unimpaired; Reinstated on the Effective 100%
Carriage House and Date or as soon as practicable
Securities Claims thereafter.
against Carriage
House
7 Old Stock Rights in Unimpaired; Reinstated on the Effective 100%
Carriage House Date or as soon as practicable
thereafter.
A. HOLDERS OF CLAIMS AND INTERESTS ENTITLED TO VOTE
Pursuant to the provisions of the Bankruptcy Code, only holders of
Allowed Claims and Allowed Interests in Classes of Claims and Interests,
respectively, that are Impaired are entitled to vote to accept or reject a
proposed chapter 11 plan. Holders of Claims and Interests in classes that are
Unimpaired under a chapter 11 plan are deemed to accept the Plan and are not
entitled to vote. Holders of Claims and Interests in classes that will receive
no property or interest under the Plan are deemed to have rejected the Plan and
are not entitled to vote.
With respect to ALC, Class 1B (NHP Claim against ALC), certain of
Class 2A et seq. Claims (Other Secured Claims against ALC), Class 4 (General
Unsecured Claims against ALC), and Class 9 (Old Common Stock of ALC and
Securities Claims against ALC) are Impaired and will receive distributions under
the Plan. To the extent Claims in such classes are Allowed Claims, the holders
of such Claims are entitled to vote to accept or reject the Plan.
With respect to ALC, Class 1A (OHCS Claim against ALC), Class 1C
(U.S. Bank Idaho Claim against ALC), Class 1D (U.S. Bank Ohio Claim against
ALC), Class 1E (U.S. Bank Washington Claim), certain of Class 2A et seq. Claims
(Other Secured Claims against ALC), Class 3 (General Unsecured Priority Claims),
Class 5 (Trade Claims against ALC), Class 6 (Resident Deposit Account Claims
against ALC), Class 7 (Guaranty Claims against ALC) and Class 8 (Intercompany
Claims against ALC) are Unimpaired and are presumed conclusively to have
accepted the Plan.
viii
With respect to ALC, Class 10 (Old Stock Rights in ALC) is Impaired,
but the votes of this Class 10 are not being solicited. Holders of Class 10
Interests are not receiving any distributions under the Plan and therefore are
deemed to have rejected the Plan.
With respect to Carriage House, all Classes are Unimpaired and are
presumed conclusively to have accepted the Plan.
Generally, for the Plan to be confirmed by the Court, two-thirds in
dollar amount, and one-half in number of the Allowed Claims, or with respect to
the Allowed Interests two-thirds of the Interests, in each Impaired Class of
Claims, or Interests, that actually are voted must vote to accept the Plan. The
Plan may be confirmed under certain circumstances, despite dissent by one or
more Impaired Classes, and the Debtors reserve the right to seek such
non-consensual confirmation of the Plan. However, a holder of a claim or
interest will be deemed to have rejected the Plan if such plan provides that the
claims or interests of such class do not entitle such holders to receive or
retain any property under the Plan. For voting and distribution purposes, the
Plan contemplates separate classes for the consolidated Debtors. Accordingly,
the voting and other confirmation requirements of the Bankruptcy Code must be
satisfied only for the Debtors.
If a Class of Claims or Interests rejects the Plan, the Plan may be
confirmed by the Court pursuant to Section 1129(b) of the Bankruptcy Code.
Section 1129(b) permits the confirmation of a plan of reorganization
notwithstanding the non-acceptance of the Plan by one or more impaired classes
of claims or equity interests, so long as the Court finds that the Plan does not
"discriminate unfairly" and is "fair and equitable" with respect to each
non-accepting class.
B. VOTING PROCEDURES
If you are entitled to vote to accept or reject the Plan, a Ballot
is enclosed for the purpose of voting on the Plan. If you are entitled to vote
Claims or Interests in more than one Class, you will receive a separate Ballot
for each Class of Claims or Interests. Each Ballot has been coded to reflect the
Class of Claims and Interests it represents. Accordingly, in voting to accept or
reject the Plan, you must use only the coded Ballot or Ballots sent to you with
this Disclosure Statement. Please complete and sign your original Ballot
(copies, facsimiles and oral votes will not be accepted), and return it to the
Voting Agent at the address set forth on the Ballot.
DO NOT RETURN YOUR DEBENTURES, NOTES OR SECURITIES WITH YOUR BALLOT.
TO BE COUNTED, YOUR COMPLETED BALLOT MUST BE RECEIVED BY THE VOTING
AGENT NO LATER THAN 4:00 P.M., EASTERN TIME, ON NOVEMBER 30, 2001. ANY EXECUTED
BALLOT RECEIVED BY THE VOTING AGENT THAT DOES NOT INDICATE EITHER AN ACCEPTANCE
OR REJECTION OF THE PLAN SHALL BE DEEMED TO CONSTITUTE AN ACCEPTANCE OF THE
PLAN.
Any Claim or Interest in an Impaired Class that otherwise is
entitled to vote on the Plan, and as to which an objection or request for
estimation is pending or that is scheduled by the Debtors as unliquidated,
disputed or contingent, is not entitled to vote on the Plan unless the
ix
holder of such Claim or Interest has obtained an order of the Court temporarily
allowing such Claim or Interests for the purpose of voting on the Plan.
Pursuant to the Disclosure Statement Order, the Court set November
6, 2001 as the record date for voting on the Plan and for receiving
distributions under the Plan. Accordingly, only holders of record as of November
6, 2001 that otherwise are entitled to vote under the Plan will receive a Ballot
and may vote on the Plan.
If you are the holder of a Claim or Interest entitled to vote on the
Plan, but did not receive a Ballot, received a damaged Ballot, or lost your
Ballot, or if you have any questions regarding the procedures for voting your
Claims or Interests, please contact the Voting Agent at:
Bankruptcy Services LLC
P.O. Box 5014
FDR Station
New York, NY 10150-5014
Tel: (212) 376-8494
Fax: (212) 376-8989
Attn: Assisted Living Concepts Claims Processing
C. CONFIRMATION HEARING
Pursuant to Section 1128 of the Bankruptcy Code, the Confirmation
Hearing has been scheduled for December 5, 2001 at 8:30 a.m., Eastern Time,
before the Hon. Sue L. Robinson in the United States District Court for the
District of Delaware, J. Caleb Boggs Building, 844 North King Street,
Wilmington, Delaware 19801. The Court may adjourn the Confirmation Hearing from
time to time without further notice except for the announcement of the
adjournment date made at the Confirmation Hearing or at any subsequently
adjourned Confirmation Hearing.
Objections to the Confirmation of the Plan must be Filed with the
Court and served upon (a) counsel for the Debtors, Robert A. Klyman, Latham &
Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, California 90071, and
Michael R. Nestor, Young Conaway Stargatt & Taylor, LLP, The Brandywine
Building, 1000 West Street, 17th Floor, Wilmington, Delaware 19899; and (b)
counsel for the Committee, Thomas R. Kreller, Milbank, Tweed, Hadley & McCloy,
LLP, 601 South Figueroa Street, 30th Floor, Los Angeles, California 90017; and
(c) Robert J. Dehney, Morris, Nichol, Arsht & Tunnell, 1201 N. Market Street,
P.O. Box 1347, Wilmington, Delaware 19899 so as to be received by such parties
before 4:00 p.m., Eastern Time, on November 30, 2001.
THE DEBTORS AND THE INFORMAL BONDHOLDERS COMMITTEE BELIEVE THAT THE
PLAN WILL ENABLE THE DEBTORS TO SUCCESSFULLY REORGANIZE AND ACCOMPLISH THE
OBJECTIVES OF CHAPTER 11, AND THAT ACCEPTANCE OF THE PLAN IS IN THE BEST
INTERESTS OF THE DEBTORS AND THEIR CREDITORS AND STOCKHOLDERS.
x
D. IDENTITY OF PERSON TO CONTACT FOR MORE INFORMATION REGARDING THE PLAN
Any interested party desiring more information about the Plan should
contact counsel to the Debtors, Robert A. Klyman, Latham & Watkins, 633 West
Fifth Street, Suite 4000, Los Angeles, California, (213) 485-1234 (phone) and
(213) 891-8763 (facsimile).
E. DISCLAIMER
ALL CREDITORS AND OTHER PARTIES IN INTEREST ARE ADVISED AND
ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE ACCOMPANYING PLAN OF
REORGANIZATION IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN.
PLAN SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO THE PLAN, OTHER EXHIBITS ANNEXED HERETO AND OTHER
DOCUMENTS REFERENCED AS FILED WITH THE COURT PRIOR TO OR CONCURRENT WITH THE
FILING OF THIS DISCLOSURE STATEMENT. THE STATEMENTS CONTAINED IN THIS DISCLOSURE
STATEMENT ARE MADE AS OF THE DATE HEREOF, AND THERE CAN BE NO ASSURANCE THAT THE
STATEMENTS CONTAINED HEREIN WILL BE CORRECT AT ANY TIME AFTER THE DATE HEREOF.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH
SECTION 1125 OF THE BANKRUPTCY CODE AND RULE 3016 OF THE FEDERAL RULES OF
BANKRUPTCY PROCEDURE. THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), NOR HAS THE
SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
PERSONS OR ENTITIES TRADING IN OR OTHERWISE PURCHASING, SELLING OR TRANSFERRING
SECURITIES OF ASSISTED LIVING CONCEPTS, INC. SHOULD EVALUATE THIS DISCLOSURE
STATEMENT AND THE PLAN IN LIGHT OF THE PURPOSES FOR WHICH THEY WERE PREPARED.
CERTAIN STATEMENTS CONTAINED HEREIN, INCLUDING PROJECTED FINANCIAL
INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS, ARE BASED ON ESTIMATES AND
ASSUMPTIONS. THERE CAN BE NO ASSURANCE THAT SUCH STATEMENTS WILL REFLECT ACTUAL
OUTCOMES.
THE INFORMATION IN THIS DISCLOSURE STATEMENT IS BEING PROVIDED
SOLELY FOR PURPOSES OF VOTING TO ACCEPT OR REJECT THE PLAN. NO PERSON OR ENTITY
MAY USE ANYTHING IN THIS DISCLOSURE STATEMENT FOR ANY OTHER PURPOSE. THE FACTUAL
INFORMATION CONTAINED HEREIN, INCLUDING THE DESCRIPTION OF THE DEBTORS, THEIR
BUSINESSES, AND EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASES, HAS
BEEN OBTAINED FROM VARIOUS DOCUMENTS, AGREEMENTS AND OTHER WRITINGS RELATING TO
THE DEBTORS, AND FROM DISCUSSIONS WITH AND VARIOUS WRITINGS PREPARED BY THE
DEBTORS, THE INFORMAL BONDHOLDER COMMITTEE AND THEIR RESPECTIVE LEGAL COUNSEL
AND FINANCIAL ADVISORS.
xi
THE TERMS OF THE PLAN GOVERN IN THE EVENT OF ANY INCONSISTENCY WITH
THE SUMMARIES HEREIN. ALL EXHIBITS HERETO ARE INCORPORATED INTO, AND ARE A PART
OF, THIS DISCLOSURE STATEMENT AS IF SET FORTH IN FULL HEREIN.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR
THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE OR BE
CONSTRUED AS AN ADMISSION OF ANY FACT, LIABILITY, STIPULATION OR WAIVER BUT
RATHER AS A STATEMENT MADE WITHOUT PREJUDICE SOLELY FOR SETTLEMENT PURPOSES,
WITH FULL RESERVATION OF RIGHTS. THIS DISCLOSURE STATEMENT SHALL NOT BE USED FOR
ANY LITIGATION PURPOSE WHATSOEVER, AND SHALL NOT BE ADMISSIBLE IN ANY PROCEEDING
INVOLVING THE DEBTORS, THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS IN THESE
CASES OR ANY OTHER PARTY IN INTEREST, NOR SHALL IT BE CONSTRUED TO BE CONCLUSIVE
ADVICE ON THE TAX, SECURITIES LAW OR OTHER LEGAL EFFECTS OF THE PLAN AS TO
HOLDERS OF CLAIMS AGAINST OR INTERESTS IN THE DEBTORS.
xii
TABLE OF CONTENTS
Page
----
I. INTRODUCTION.............................................................i
II. OVERVIEW OF THE PLAN...................................................iii
A. Holders Of Claims and Interests Entitled To Vote.................viii
B. Voting Procedures..................................................ix
C. Confirmation Hearing................................................x
D. Identity of Person to Contact for More Information Regarding
the Plan..........................................................xi
E. Disclaimer.........................................................xi
SECTION I. OVERVIEW OF CHAPTER 11..............................................1
SECTION II. DESCRIPTION OF THE DEBTORS' BUSINESS...............................2
SECTION III. SIGNIFICANT PREPETITION TRANSACTIONS..............................2
A. Assisted Living Concepts, Inc.......................................2
B. Carriage House Assisted Living, Inc.................................6
SECTION IV. KEY EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11
CASES.............................................................6
A. General.............................................................6
B. Pre-Petition Plan Negotiations......................................7
C. Other Pre-Petition Negotiations.....................................8
SECTION V. THE CHAPTER 11 CASES................................................8
A. Disclosure Statement and Plan Confirmation Hearings.................8
B. Significant Motions During the Chapter 11 Case......................9
C. Deadline to File Proof of Claims and Equity Interests..............11
D. Assumption and Rejection of Executory Contracts and
Unexpired Leases..................................................11
E. Parties in Interest and Professionals..............................12
SECTION VI. THE FUTURE BUSINESS OF REORGANIZED DEBTORS........................13
A. Capitalization and Structure of Reorganized Debtors................13
B. Composition of Management and the Directors of
Reorganized ALC...................................................13
C. Issuance of New Notes and New Common Stock.........................13
SECTION VII. SUMMARY OF THE PLAN OF REORGANIZATION............................14
A. Introduction.......................................................14
B. Classification and Treatment of Administrative Claims,
Claims and Equity Interests Under the Plan........................14
xiii
TABLE OF CONTENTS (CONT'D)
C. Indebtedness of Reorganized ALC....................................28
D. Distributions Under the Plan.......................................28
E. General Information Concerning the Plan............................33
F. Additional Information Regarding Treatment of Certain
Claims............................................................35
G. Allocation of Consideration........................................36
H. Cancellation of the Debentures....................................36
I. Cancellation of Existing Securities................................36
J. Indenture Trustee Fees.............................................36
K. Sources of Cash to Make Plan Distributions.........................37
L. Certain Corporate Governance Matters...............................37
M. Effect of Confirmation of the Plan.................................38
N. Retention of Jurisdiction..........................................39
O. Miscellaneous Provisions...........................................41
SECTION VIII. PROJECTIONS AND VALUATION ANALYSIS..............................44
SECTION IX. CONFIRMATION PROCEDURE............................................45
A. Solicitation of Votes..............................................45
B. The Confirmation Hearing...........................................49
C. Confirmation.......................................................50
SECTION X. EFFECTIVENESS OF THE PLAN..........................................54
A. Conditions Precedent to Confirmation and Consummation of
the Plan..........................................................54
B. Waiver of Conditions...............................................55
C. Effect of Failure of Conditions....................................55
D. Vacatur of Confirmation Order......................................55
SECTION XI. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN.........55
A. Liquidation Under Chapter 7........................................55
B. Alternative Plans of Reorganization................................56
C. Post-Confirmation Conversion/Dismissal.............................56
D. Final Decree.......................................................56
SECTION XII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN..............56
xiv
SECTION I.
OVERVIEW OF CHAPTER 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business and capital structure for the benefit of its estate,
creditors and stockholders. In addition to permitting rehabilitation of a
debtor, another goal of chapter 11 is to promote equality of treatment for
similarly situated creditors and equity interest holders with respect to the
distribution of a debtor's assets.
The commencement of a chapter 11 case creates an estate containing
all of the debtor's property as of the filing date. Generally, the debtor
remains in possession of its property and continues to operate its business as a
"debtor-in-possession".
The consummation of a plan of reorganization is the principal
objective of a chapter 11 case. A plan of reorganization sets forth the means
for treating claims against, and equity interests in, a debtor. Confirmation of
a plan of reorganization by the bankruptcy court makes the Plan binding upon the
debtor, the Debtors, any issuer of securities under the Plan, any person
acquiring property under the Plan and any creditor or equity interest holder of
the debtor. Subject to certain limited exceptions, an order of the bankruptcy
court confirming a plan of reorganization discharges the debtor from any debt
that arose prior to the date of confirmation of the Plan, and substitutes
therefor the obligations specified under the confirmed plan.
A claim or interest is impaired under a plan of reorganization if
the Plan provides that such claim will not be repaid in full or that the legal,
equitable or contractual rights of the holder of such claim or interest are
altered. A holder of an impaired claim or interest that is receiving a
distribution under a plan is entitled to vote to accept or reject a plan of
reorganization. Chapter 11 does not require that every holder of a claim or
interest to vote in favor of a plan of reorganization in order for the
bankruptcy court to confirm the Plan. However, the bankruptcy court must find
that the Plan meets a number of statutory tests before it may confirm the Plan.
Many of these tests are designed to protect the interests of holders of claims
or interests who do not vote to accept the Plan, but who nonetheless will be
bound by the Plan's provisions if it is confirmed by the bankruptcy court.
Before soliciting acceptances of the proposed plan, a plan proponent
must prepare and distribute to its creditors and equity interest holders
entitled to vote on the Plan a detailed disclosure statement. Section 1125 of
the Bankruptcy Code requires that the disclosure statement contain adequate
information of a kind, and in sufficient detail, to enable a hypothetical
reasonable investor to make an informed judgment about the Plan. The Debtors
have prepared this Disclosure Statement in accordance with the requirements of
Section 1125 of the Bankruptcy Code.
1
SECTION II.
DESCRIPTION OF THE DEBTORS' BUSINESS
Assisted Living Concepts, Inc. ("ALC", together with the Debtors and
non-debtors, the "Company") and its debtor subsidiaries (ALC and debtor
subsidiaries, collectively, the "Debtors") are in the business of owning,
managing, operating, and leasing free-standing assisted living residences. These
residences 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. The
Company's 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 August 31, 2001, the Company had operations in 16 states. According to
ALC's most recent Form 10-Q (attached hereto as Exhibit E), the Company had
assets of $331,398,000, and liabilities of $276,321,000.
As of the Commencement Date, the Company employed approximately
3,718 employees in 185 assisted living residences in operation. Of these
residences, the Debtors owned 115 residences and leased 70 residences.
An organizational chart for the Company is attached to this
Disclosure Statement as Exhibit C.
In addition to the disclosures made herein, please refer to the
attached Exhibits D and E, ALC's most recent Form 10-K and Form 10-Q, for
additional disclosures concerning the Debtors' business, operations, management
and structure.
SECTION III.
SIGNIFICANT PREPETITION TRANSACTIONS
A. ASSISTED LIVING CONCEPTS, INC.
1. THE DEBENTURES
In October 1997, ALC completed the public offering of $86.3 million
of 6% Convertible Subordinated Debentures ("6% Debentures") due November 2002
realizing net proceeds of $82.9 million after underwriter discounts, commissions
and other expenses. The 6% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $22.57 per common
share. In April 1998, ALC completed the offering of $75.0 million of 5.625%
Convertible Subordinated Debentures ("5.625% Debentures") due May 2003 realizing
net proceeds of $72.2 million after discounts, commissions and other expenses.
The 5.625% Debentures are convertible at any time at or prior to maturity,
unless previously redeemed, at a conversion price of $26.184 per common share.
The Debentures are governed by New York law and are publicly traded on the
American Stock Exchange. The trustee pursuant to the Old Indentures is Harris
Trust and Savings Bank.
2
2. IDAHO, OHIO AND WASHINGTON REVENUE BONDS
(a) Overview
Between 1995 and 1998, pursuant to three Indentures of Trust, state
agencies from each of Idaho, Ohio and Washington issued bonds (the "Revenue
Bonds") in order to provide financing for ALC's development and construction of
various properties in these states (the "Revenue Bond Indentures"). Pursuant to
these Revenue Bond Indentures, the payment of the principal and interest due on
the Revenue Bonds is to be funded by certain letters of credit issued by U.S.
Bank (the "Letters of Credit"), which can be drawn on by the trustee under the
Revenue Bond Indentures ("Revenue Bond Indenture Trustees"). U.S. Bank and ALC
entered into three separate Reimbursement Agreements, one for each bond issuance
in each of the three states (the "Reimbursement Agreements"), which provide for
the terms of the agreement to issue the Letters of Credit and the reimbursement
by ALC therefor. Pursuant to the Reimbursement Agreements, the obligations of
ALC thereunder including the reimbursement of any draws under the Letters of
Credit by the Revenue Bond Indenture Trustees are secured by the properties
financed by the bonds, located in each of Idaho, Ohio and Washington.
The Reimbursement Agreements were each subsequently modified and
amended three times pursuant to those certain Omnibus Amendments applicable to
all of the Reimbursement Agreements (the "Omnibus Amendments"). As additional
collateral for the waivers and amendments granted in the Omnibus Amendments,
among other things, ALC agreed to pledge three properties located in Washington
and $8,300,000 in cash in a U.S. Bank account, which amount was subsequently
reduced to $4,300,000 pursuant to the third Omnibus Amendment.
(b) Idaho Bonds
In July 1997, pursuant to an Indenture of Trust (the "Idaho
Indenture"), the Idaho Housing and Finance Association agreed to issue revenue
bonds in the principal amount of $7,350,000 in order to provide financing for
ALc's development and construction of four properties in Idaho (the "Idaho
Bonds"). The payment of the principal and interest due on the Idaho Bonds is to
be funded by the letter of credit issued by U.S. Bank (the "Idaho LC"). The
Idaho Bonds initially have a variable rate of interest and mature on July 1,
2017, with interest payments due on the first Business Day of each month if the
interest rate is variable, or, upon conversion of the bonds into fixed rate, on
January 1 and July 1 of each year.
In connection with the Idaho Indenture, U.S. Bank agreed to provide
the Idaho LC as the source of payment for the principal and interest due on the
Idaho Bonds. ALC and U.S. Bank entered into that certain Reimbursement
Agreement, dated as of July 1, 1997 (as amended from time to time, the "Idaho
Reimbursement Agreement"), which provides, in pertinent part, that when interest
is due on the bonds, the Revenue Bond Indenture Trustee under the Idaho
Indenture may draw on the Idaho LC in order to satisfy such obligation, and ALC
is then obligated to reimburse U.S. Bank for the amount drawn by the Indenture
Trustee. As security for the obligations arising under the Revenue Bond Idaho
Reimbursement Agreement, ALC pledged four properties located in Idaho in the
cities of Garden City, Idaho Falls, Moscow, and
3
Rexburg, and, in connection with the Idaho LC, the $4,300,000 in cash held in a
U.S. Bank account.
(c) Ohio Bonds
In July 1998, pursuant to the Indenture of Trust (the "Ohio
Indenture"), the Ohio Housing Finance Agency agreed to issue revenue bonds in
the principal amount of $13,220,000 in order to provide financing for ALC's
development and construction of seven properties in Ohio (the "Ohio Bonds"). The
payment of the principal and interest due on the Ohio Bonds is to be funded by
the letter of credit issued by U.S. Bank (the "Ohio LC"). The Ohio bonds
initially have a variable rate of interest and mature on July 1, 2018, with
interest due on the first of each month, or, upon conversion into fixed rate, on
January 1 and July 1 of each year.
In connection with the Ohio Indenture, U.S. Bank agreed to provide
the Ohio LC as the source of payment for the principal and interest due on the
Ohio Bonds. ALC and U.S. Bank entered into that certain Reimbursement Agreement,
dated as July 1, 1998 (as amended from time to time, the "Ohio Reimbursement
Agreement"), which provides, in pertinent part, that when interest is due on the
bonds, the Revenue Bond Indenture Trustee under the Ohio Indenture may draw on
the Ohio LC in order to satisfy such obligation, and ALC is then obligated to
reimburse U.S. Bank for the amount drawn by the Revenue Bond Indenture Trustee.
As security for the obligations arising under the Ohio Reimbursement Agreement,
ALC pledged seven properties located in Ohio in the cities of Bellefontaine,
Defiance, Findlay, Greenville, Kenton, Marion and Lima, and, in connection with
the Ohio LC, the $4,300,000 in cash held in a U.S. Bank account.
(d) Washington Bonds
In December 1995, pursuant to an Indenture of Trust (the "Washington
Indenture"), the Washington State Housing Finance Commission agreed to issue
revenue bonds in the principal amount of $8,300,000 in order to provide tax
exempt financing for ALC's acquisition of five facilities in Washington (the
"Washington Bonds"). The payment of the principal and interest due on the
Washington Bonds is to be funded by the letter of credit issued by U.S. Bank
(the "Washington LC"). The bonds initially have a variable rate of interest but
may be converted into fixed rate upon determination of the remarketing agent.
The variable bonds mature on November 1, 2016 with interest payments due on the
first of each month. The fixed rate bonds mature on January 1, 2017 with
interest payments due on January 1 and July 1 of each year.
In connection with the Washington Indenture, U.S. Bank agreed to
provide the Washington LC as the source of payment for the principal and
interest due on the Washington Bonds. ALC and U.S. Bank entered into that
certain Reimbursement Agreement, dated as of December 1, 1995 (as amended from
time to time, the "Washington Reimbursement Agreement"), which provides, in
pertinent part, that when interest is due on the bonds, the Revenue Bond
Indenture Trustee under the Washington Indenture may draw on the Washington LC
in order to satisfy such obligation, and ALC is then obligated to reimburse U.S.
Bank for the amount drawn by the Revenue Bond Indenture Trustee. As security for
the obligations arising under the Washington Reimbursement Agreement, ALC
pledged five properties located in
4
Washington in the cities of Port Townsend, Enumclaw, Bremerton, Port Orchard and
Spokane, and, in connection with the Washington LC, the $4,300,000 in cash in a
U.S. Bank account.
3. THE OREGON BONDS
In 1989, the Oregon Housing and Community Services Department (the
"OHCS") agreed to issue those certain general obligation elderly and disabled
housing bonds (the "Oregon Bonds"), in the aggregate principal amount of
$7,000,000, the proceeds of which were used to finance the construction and
operation of several facilities located in Oregon. Concurrently with the
issuance of the Oregon Bonds, ALC and the OHCS entered into various loan
agreements pursuant to which the OHCS made loans to ALC (the "Oregon Loans"),
which were secured by the properties financed by the Oregon Loans.
4. THE CLASS ACTION SETTLEMENT
In July 1999, various purchasers of ALC's common stock, 6%
Debentures, and 5.625% Debentures, including Miami Police Relief and Pension
Fund, Kevin S. Dubner, Thomas R. Tolley, Perry S. Heitman and Mary Ellen
Schraner, filed multiple class action lawsuits against ALC, and certain of its
directors and officers alleging breaches of federal securities laws. The subject
class action lawsuits were subsequently consolidated ("Class Action Litigation")
and, in connection therewith, in September 2000, the parties entered into a
settlement agreement and agreed to the sum of $30,000,000 in settlement of all
claims. Of the total settlement amount, ALC was responsible for $10,018,385,
after payments by ALC's insurance providers. Pursuant to the terms of the
Settlement Agreement, ALC has made a cash payment of $2,255,000, and on October
23, 2000, ALC issued a note for the remaining $7,763,385 (the "Settlement
Note"). Pursuant to the Settlement Note, ALC made three equal quarterly
installments of principal on January 23, 2001, April 23, 2001 and July 23, 2001,
each in the amount of $2,254,461, with a fourth installment of approximately
$1,000,000 paid on September 28, 2001. The Settlement Note was secured by
certain real property located in Platte County, Nebraska, for which the
mortgagor is Carriage House, and real property located in the following counties
in Arizona, for which the mortgagor is ALC: Maricopa, Yuma, Yavapai, Pinal and
Gila. ALC and one of its insurance carriers have a dispute over the amount of
coverage due to ALC that is currently in arbitration.
5. NHP LOANS
In September 1998, ALC and Nationwide Health Properties, Inc.
("NHP") entered into two loan agreements pursuant to which NHP agreed to make
loans to ALC in the principal amounts of $2,955,000 and $2,500,000 (the "NHP
Loans"). ALC executed two secured promissory notes for the respective amounts.
The $2,955,000 note is secured by property located in South Carolina, and the
$2,500,000 note is secured by property located in Pennsylvania. Both notes
mature on September 1, 2008.
6. THE HELLER FACILITY
In March 2001, ALC and certain non-debtor subsidiaries of ALC (the
"Heller Borrowers") entered into a Loan Agreement (the "Heller Loan Agreement")
with Heller Healthcare Finance, Inc. ("Heller"), pursuant to which Heller agreed
to make loans to the Heller
5
Borrowers in the principal amount of $45,000,000 ("Heller Facility"). The Heller
Borrowers used the proceeds of the Heller Facility to purchase certain
properties from ALC and others located in Ohio, Pennsylvania, Iowa, Nebraska and
New Jersey and to make payments on the Settlement Note. The Heller Borrowers did
not draw fully on the Heller Facility.
In June 2001, the Heller Borrowers and Heller amended the Heller
Facility (the "Heller Amendment"). Pursuant to the Heller Amendment, the Heller
Facility was reduced to $20,000,000, the maturity date of the Heller Facility
was established as September 28, 2001, a new borrower was added and additional
collateral was pledged. The Heller Facility bears an interest rate of 3.85% over
the three-month LIBOR and requires monthly interest-only payments until
maturity. As amended, the facility was used to pay trade payables, pay an
interest payment with respect to the Debentures, certain professional fees
relating to debt and lease restructuring, closing costs and other anticipated
costs, and to fund an interest reserve and tenant deposit accounts.
The Heller Facility is guaranteed by ALC; however, as amended, the
filing of a petition under chapter 11 of the Bankruptcy Code by ALC no longer
triggers an event of default under the Heller Loan Agreement.
On the Commencement Date, the Debtors moved the Bankruptcy Court for
and on October 19, 2001 obtained an order authorizing, among other things, the
Debtors to refinance the Heller Facility, as amended, with a
debtor-in-possession facility (as defined in the Plan, the "Final Financing
Order").
B. CARRIAGE HOUSE ASSISTED LIVING, INC.
Carriage House is a Delaware corporation that is a wholly-owned
subsidiary of ALC. It owns unencumbered properties in Blair, Seward and Falls
City Nebraska, and a facility in Columbus, Nebraska, which is subject to a
mortgage held by the Class Action Plaintiffs. Carriage House is also a lessee
under leases for facilities located in Beatrice, Norfolk and Wahoo, Nebraska. As
set forth below, Carriage House intends to reject the Norfolk and Wahoo leases.
SECTION IV.
KEY EVENTS LEADING TO THE
COMMENCEMENT OF THE CHAPTER 11 CASES
A. GENERAL
The Company's business has been impacted by competition within the
industry, a highly leveraged structure, and trends in the United States health
care industry. As described below, legislative changes to reimbursement policies
in conjunction with an increase in regulatory oversight, as well as an
increasing cost structure due to shortages in the qualified labor markets,
significantly longer fill-up periods, and rate pressures have had a significant
adverse effect on the Company's revenues. The Company is also highly leveraged,
with loan and lease agreements that contain financial covenants. Absent the
commencement of the Cases, the Company would have required additional financing
to meet maturing obligations, particularly
6
with respect to the Debentures that mature in November 2002 and May 2003. The
Company determined that it would likely be unable to obtain such financing.
Accordingly, the Company decided that a restructure of the Debentures through a
chapter 11 case would be in the best interest of all stakeholders.
B. PRE-PETITION PLAN NEGOTIATIONS
To address the Company's long-term financial needs, management began
developing plans to improve the Company's capital structure. In order to
recapitalize the Company's enterprise over the long-term and to maximize the
recovery for all stakeholders the Company and its financial advisors agreed that
this could be achieved best through a Plan. As such, during March, 2001, with
the assistance of its financial advisors, the Company began negotiations with
various members of the Informal Bondholders Committee in order to consummate a
consensual restructuring of the Debentures.
During these negotiations, the interest payments on the Debentures
became due. The Debtors paid the May 1, 2001 interest payment on May 25, 2001,
in part in exchange for the agreement by the holders of the Debentures to (a)
negotiate in good faith to reach agreement on a restructuring and (b) sign an
agreement whereby the holders of the Debentures agreed (x) not to release
certain information about the Company and (y) to refrain from selling,
transferring or otherwise disposing of the Debentures ("Lock-Up Agreement"). At
the time, the Company was convinced that the payment was necessary in order to
continue real and significant negotiations with the holders of the Debentures in
an attempt to arrive at a mutually agreeable restructuring of the Company's
debts. The Lock-Up Agreement expired on June 30, 2001 without an agreement
having been reached with respect to a restructuring. Consequently, the Company
disclosed to the public certain material non-public information as required by
the Lockup Agreement. In July 2001, holders of the Debentures who now comprise
the Informal Bondholders Committee agreed to resume the restructuring
discussions with the Company and executed a confidentiality agreement (the
"Confidentiality Agreement"), pursuant to which the signatories agreed to keep
certain information confidential. By its terms, the Confidentiality Agreement
expired on the earlier of the date on which the Company commences a case under
the Bankruptcy Code or November 1, 2001, unless terminated earlier by the
Company.
In September 2001, the Company and members of the Informal
Bondholders Committee agreed to the current terms of the Plan. The members of
the Informal Bondholders Committee executed Plan Support Agreements, copies of
which are attached hereto as Exhibit H. As set forth in the Plan Support
Agreements, the Informal Bondholders Committee agreed, among other things, to
vote for and support the Plan to the extent that it is consistent in all
material respects with the terms and conditions set forth in the Plan Support
Agreement. In addition, during the same period, the Company concluded
negotiating the Plan with the Informal Bondholders Committee.
C. HELLER PRE-PETITION NEGOTIATIONS
Also, in connection with the pre-petition negotiations concerning
the Plan, the Debtors needed to ensure access to capital necessary to fund their
continued operations during the pendency of these Chapter 11 Cases and their
strategic restructuring goals in connection
7
therewith and thereafter. These negotiations were successful and as a result,
and as discussed earlier in section VI.A.6 of the Disclosure Statement, the
Court entered the Final Financing Order. The Final Financing Order has already
provided the Debtors with access to additional funds for, among other things,
certain administrative expenses not ordinarily needed for their operations.
Also, the Court's entry of the Final Financing Order permitted ALC to enter into
that certain second amendment to the Heller Facility with the Heller Borrowers
(the "Second Amendment") and thereby avoid triggering a default under the
pre-petition Heller Facility which, among other things, would have compelled the
Heller Borrowers to commence separate chapter 11 cases solely to avoid the
exercise of remedies by Heller under the Heller Facility.
The relief obtained by the Debtors, through the Final Financing
Order, also provided ALC (through Texas ALC) the opportunity to acquire 16
properties (the "Meditrust Properties") currently leased by Texas ALC from T and
F Properties, as successor to Meditrust (the "Meditrust Acquisition"). Texas ALC
executed an option agreement whereby Texas ALC holds the exclusive right to
acquire the Meditrust Properties for a purchase price of $23.5 million (the
"Meditrust Purchase Price"). That option expired on October 31, 2001; ALC and
Texas ALC exercised that option by its expiration date and closed the Meditrust
Acquisition on October 24, 2001. The Meditrust Acquisition benefits these
estates. In fact, the projections attached hereto indicate that the the
Meditrust Acquisition will result in the valuation of Reorganized ALC increasing
by approximately $7 million.
Finally, the Final Financing Order provides the Debtors with a
financing arrangement, in place virtually at the outset of these cases, to exit
bankruptcy with funding on the effective date of the Plan sufficient to enable
the Debtors to refinance the DIP Financing and certain other amounts due and
owing under the Second Amendment (collectively, the "Exit Financing"). The Exit
Financing was heavily negotiated by the Debtors, the Informal Bondholders
Committee and the Lender. The Informal Bondholders Committee endorses the Exit
Financing and, in fact, made it a precondition to the Informal Bondholders
Committee's support of the DIP Financing.
D. OTHER PRE-PETITION NEGOTIATIONS
The commencement of the Chapter 11 Cases arguably constituted an
event of default under certain loan arrangements and leases to which certain
Non-Debtor Subsidiaries were parties. ALC negotiated waivers of such defaults on
behalf of such Non-Debtor Subsidiaries with Health Care Properties, Inc.,
Transatlantic and T and F Properties, among others.
SECTION V.
THE CHAPTER 11 CASES
A. DISCLOSURE STATEMENT AND PLAN CONFIRMATION HEARINGS
On the Petition Date, the Debtors filed this Disclosure Statement
and the Plan with the Court. The Court considered the adequacy of the Disclosure
Statement and the Plan at a hearing on October 30, 2001. The Confirmation
Hearing in respect of the Plan has been
8
scheduled for December 5, 2001 at 8:30 a.m., Eastern Time, before the Honorable
Sue L. Robinson in the United States District Court for the District of
Delaware, J. Caleb Boggs Building, 844 North King Street, Wilmington, Delaware
19801.
B. SIGNIFICANT MOTIONS DURING THE CHAPTER 11 CASE
1. "FIRST DAY" MOTIONS
Simultaneous with the filing of their chapter 11 petitions, the
Debtors filed numerous "first day" motions seeking orders from the Court
authorizing the Debtors to retain professionals and providing the Debtors
certain relief from certain administrative requirements imposed by the
Bankruptcy Code. On October 3, 2001 and October 19, 2001, the Court entered
orders granting the Debtors the various forms of relief requested. In
particular, the Debtors obtained orders approving the following motions and
applications:
(a) Motions Relating to Administration of Cases:
(i) Motion for the Joint Administration of the Cases;
(ii) Application for Order Authorizing the Retention and Employment
of Bankruptcy Services LLC as Notice and Claims Agent to
Debtors and Debtors in Possession;
(iii) Motion for Authority to Retain, Employ and Compensate
Professionals to Represent Debtors in the Ordinary Course;
(iv) Application to Retain Latham & Watkins as Attorneys for the
Debtors;
(v) Application to Retain Thompson Knight Brown Parker & Leahy as
local Texas counsel for the Debtors;
(vi) Application to Retain Young Conaway Stargatt & Taylor as local
Delaware counsel for the Debtors; and
(vii) Motion for Order Establishing Notice and Service Requirements
in Debtors' Chapter 11 Cases.
(b) Motions Relating to Financing:
(i) Motion for Interim and Final Orders Under 11 U.S.C.
Sections 105, 361, 362 and 364, (a) Approving
Postpetition Financing and Related Relief and (b) Setting
Final Hearing Pursuant to Bankruptcy Rule 4001(C); and
(ii) Motion Pursuant to Section 363 of the Bankruptcy Code and
Bankruptcy Rules 2002 and 4001 (i) Authorizing Debtors to Use
Cash Collateral and Grant Adequate Protection Therefor and
(ii) Scheduling a Final Hearing.
(c) Motions Relating to Employees and the Operation of the Business:
9
(i) Debtor's Motion for Order (a) Authorizing but not Requiring
Payment of Certain Prepetition (i) Wages, Salaries and Other
Compensation, (ii) Employee Medical, Pension and Similar
Benefits, (ii) Reimbursable Employee Expenses, and (iv)
Worker's Compensation Benefits; and (b) Authorizing and
Directing Applicable Banks and Other Financial Institutions to
Receive, Process, Honor and Pay All Checks Presented for
Payment and to Honor All Funds Transfer Requests Made by the
Debtors Relating to the Foregoing;
(ii) Motion Pursuant to Sections 363(b) and 105(a) for
Authorization to Continue the Debtors' Worker's Compensation
Programs, All Other Insurance Policies and All Agreements
Relating Thereto, and Pay All Prepetition Obligations in
Respect Thereto;
(iii) Motion for Order under Sections 105(c), 363, 1107 and 1108
Authorizing (i) Maintenance of Existing Bank Accounts; (ii)
Continued Use of Existing Business Forms and (iii) Continued
Use of Existing Cash Management System;
(iv) Application of the Debtors Pursuant to Section 345(b) for
Approval of Investment Guidelines; and
(v) Motion for Order Authorizing Rejection of Lease of
Nonresidential Real Property and Other Related Relief.
(d) Motions Relating to Vendors and Suppliers:
(i) Motion for Order Authorizing Grant of Administrative Expense
Status to Debtors' Undisputed Obligations Arising From the
Postpetition Delivery of Goods Ordered in the Prepetition
Period and Authorizing Debtors to Pay Such Obligations in the
Ordinary Course of Business;
(ii) Motion Pursuant to Sections 105(a), 361 and 363 of the
Bankruptcy Code Authorizing Payment of Certain Prepetition
Common Carrier, Warehouse and Related Obligations;
(iii) Motion for Order Authorizing Payment of Critical Trade
Vendors; and
(iv) Motion for Order (1) Prohibiting Utilities from Altering,
Refusing or Discontinuing Service on Account of Prepetition
Invoices and (2) Establishing Procedures for Determining
Requests for Additional Adequate Assurance.
(e) Motions Relating to Residents:
(i) Motion of the Debtors for Authorization to Maintain Resident
Trust Accounts; and
10
(ii) Motion for Order Authorizing Debtors to Pay Prepetition
Refunds to Residents.
(f) Other:
(i) Motion for Order Authorizing Payment of Sales and Use Taxes;
and
(ii) Motion for Authorization to Comply with Certain License and
Regulatory Agency Fee Requirements.
C. DEADLINE TO FILE PROOF OF CLAIMS AND EQUITY INTERESTS
On the Petition Date, the Debtors also filed a motion seeking an
order (the "Bar Date Order") from the Court requiring any person or entity
holding or asserting a claim against the Debtors to file a written proof of
claim with Bankruptcy Services LLC at the following address: Assisted Living
Concepts, Inc. c/o Bankruptcy Services LLC, 70 East 55th Street, 6th floor, New
York, New York 10022, Attention: Assisted Living Claims Processing, on or before
4:00 p.m. (Eastern Time) on November 15, 2001 (the "Bar Date"). The motion
requested that any person or entity that fails to timely file a proof of claim
will be barred, estopped and enjoined forever from voting on, or receiving a
distribution under, the Plan, and will be barred, estopped and enjoined forever
from asserting a Claim against the Debtors, their Estates, Reorganized Debtors,
and any of their successors or assigns. On October 3, 2001, the Court entered
the Bar Date and established November 15, 2001 as the Bar Date.
On October 30, 2001, the Court entered a supplemental Bar Date Order
extending the Bar Date to November 23, 2001 for a limited number of potential
claimants who did not receive timely notice of the Bar Date Order.
D. ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
1. ASSUMPTION AND CURE
Except as otherwise provided in the Plan, or in any contract,
instrument, release, indenture or other agreement or document entered into in
connection with the Plan, on the Effective Date, pursuant to Section 365 of the
Bankruptcy Code, the Reorganized Debtors will assume each executory contract and
unexpired lease entered into by the Debtors prior to the Petition Date that has
not previously (a) expired or terminated pursuant to its own terms or (b) been
assumed or rejected pursuant to Section 365 of the Bankruptcy Code. The
Confirmation Order will constitute an Order of the Court approving the
assumptions described in the Plan, pursuant to Section 365 of the Bankruptcy
Code, as of the Effective Date.
Any monetary amount by which each executory contract and unexpired
lease to be assumed pursuant to the Plan is in default will be satisfied,
pursuant to Section 365(b)(1) of the Bankruptcy Code, at the option of the
Debtors, subject to Informal Bondholder Committee consent, or Reorganized
Debtors: (a) by payment of the default amount in cash on the Effective Date or
(b) on such other terms as are agreed to by the parties to such executory
contract or unexpired lease. If there is a dispute regarding: (i) the amount of
any cure payment; (ii) the ability of Reorganized Debtors to provide "adequate
assurance of future performance" (within
11
the meaning of Section 365 of the Bankruptcy Code) under the contract or lease
to be assumed; or (iii) any other matter pertaining to assumption, the cure
payments required by Section 365(b)(1) of the Bankruptcy Code will be made
following the entry of a Final Order resolving the dispute and approving the
assumption.
2. REJECTION AND DAMAGES
Executory contracts (including any employment agreements) and
unexpired leases that exist between any of the Debtors and any person that are
not assumed in a manner consistent with Section V.D.1. above or that are not the
subject of a motion to assume that is pending on the Confirmation Date and that
is subsequently approved shall be rejected as of the Effective Date pursuant to
the Plan. All Claims for damages arising from the rejection of executory
contracts or unexpired leases must be filed with the Court in accordance with
the terms of the order authorizing such rejection, or, if not rejected by
separate order, within thirty (30) days from the entry of the Confirmation
Order. Any Claims not filed within such time will be forever barred from
assertion against the Debtors, their estates and Reorganized Debtors. Each of
the Allowed Claims arising from the rejection of executory contracts or
unexpired leases shall be treated as a General Unsecured claim.
Attached hereto as Schedule J is a list of all contracts and leases
that will be rejected by the Debtors. Schedule J may be amended from time to
time prior to Confirmation.
E. PARTIES IN INTEREST AND PROFESSIONALS
1. THE DEBTORS' PROFESSIONALS
During the course of the Chapter 11 Cases, the Court has approved or
will be asked to approve the Debtors' retention of the following professionals
to advise the Debtors in a variety of areas: Latham & Watkins (bankruptcy
co-counsel), Young Conaway Stargatt & Taylor, LLP (bankruptcy co-counsel), KPMG
LLP (accountants), and Thompson Knight Brown Parker & Leahy (Texas counsel).
Jefferies & Co. was retained pre-petition as the Debtors' financial advisors and
earned its fee pre-petition. Pursuant to its engagement letter, Jefferies will
provide additional services necessary to consummate these Bankruptcy Cases, but
will charge no additional fees to the Debtors.
2. THE CREDITORS' COMMITTEE AND ITS PROFESSIONALS
On October 12, 2001, the United States Trustee for the District of
Delaware, pursuant to Section 1102 of the Bankruptcy Code, appointed the
Creditors' Committee to represent the interests of all holders of unsecured
claims in these cases. The Creditors' Committee currently consists of the
following creditors: (i) The Bank of New York, (ii) LTC Properties, (iii)
National Health Investors, Inc., (iv) Deephaven Capital Management and (v) LTC
Healthcare, Inc.
The Creditor's Committee retained Milbank, Tweed, Hadley & McCloy
and Morris, Nichol, Arsht & Tunnell as the Creditors' Committee's co-counsel.
The Creditors' Committee retained Chanin & Co. as its industry and financial
advisors. The Creditors' Committee has employed no other professionals during
the pendency of these Chapter 11 Cases.
12
The Informal Bondholders Committee had retained Chanin & Co. and
Milbank, Tweed, Hadley & McCloy as financial advisor and attorneys,
respectively. The Company agreed to support a motion by one or both of them for
payment of reasonable compensation and reimbursement of expenses under Section
503(b) of the Bankruptcy Code for services rendered as professionals for the
Informal Bondholder Committee.
SECTION VI.
THE FUTURE BUSINESS OF REORGANIZED DEBTORS
A. CAPITALIZATION AND STRUCTURE OF REORGANIZED DEBTORS
The Plan provides that, on the Effective Date, Reorganized ALC will
Reinstate or consensually modify all of its prepetition secured indebtedness and
exchange the General Unsecured Claims against ALC for New Senior Notes, the New
Junior Notes and 96 percent of the New Common Stock. Reorganized Carriage House
will Reinstate its existing indebtedness. For a more detailed description of the
Debtors' post-Effective Date capital structure, please refer to the projections
attached hereto as Exhibit G.
Reorganized ALC will retain its equity interest in Carriage House
and the Non-Debtor Subsidiaries.
B. COMPOSITION OF MANAGEMENT AND THE DIRECTORS OF REORGANIZED ALC
The directors and officers of each of the Debtors will continue to
serve in such capacities until and through the Effective Date. As of the
Effective Date, the directors of each of the Debtors will be deemed to have
resigned. Immediately thereafter, ALC currently contemplates that the new board
of directors of Reorganized ALC shall consist of Andre Dimitriadis, Andy Adams,
Matthew Patrick, Mark Holliday, Richard Ladd and the CEO of Reorganized ALC.
The Board of Directors of Reorganized ALC shall select the Board of
Directors and senior management of Reorganized Carriage House.
Reorganized ALC may authorize an appropriate compensation and bonus
plan for permanent senior management employed by Reorganized ALC
post-Confirmation. After the Effective Date, Reorganized ALC may adopt a new
incentive plan for the grant to officers, employees and directors of the Company
of options to acquire shares of New Common Stock. The options will be based upon
performance criteria and a vesting schedule to be structured by the Board of
Directors of Reorganized ALC after consummation of the Plan.
C. ISSUANCE OF NEW NOTES AND NEW COMMON STOCK
On the Effective Date, the Holders of an Allowed Claim against ALC
in Class 4 shall receive, on a Pro Rata basis, New Senior Notes in the principal
amount of $40,250,000 and New Junior Notes in the amount of $15,250,000, and a
Pro Rata share of 96% of the New Common Stock. The New Senior Notes will mature
in 7 years from the Effective Date and require semi-annual interest payments at
a rate of 10% per annum. The New Junior Notes will
13
mature in 10 years and require pay-in-kind notes at a rate of 8% per annum for
the first three years after the effective date and thereafter semi-annual
interest payments in cash at the rate of 12% per annum. The New Notes will be
secured by real property. For a more detailed description of New Senior Notes
and New Junior Notes, please refer to Exhibit I attached hereto.
SECTION VII.
SUMMARY OF THE
PLAN OF REORGANIZATION
A. INTRODUCTION
The Plan is the product of diligent efforts by the Debtors to
formulate a plan that provides for a fair allocation of the Debtors' assets in
an orderly manner, consistent with the mandates of the Bankruptcy Code and other
applicable law.
The Debtors believe that confirmation of the Plan is critical to the
Debtors' continued survival, and that the Plan provides the best opportunity for
maximum recoveries to the Debtors' creditors. The Debtors believe, and will
demonstrate to the Court, that the Debtors' creditors and equity interest
holders will receive significantly more value under the Plan than any available
alternative.
B. CLASSIFICATION AND TREATMENT OF ADMINISTRATIVE CLAIMS,
CLAIMS AND EQUITY INTERESTS UNDER THE PLAN
Only administrative expenses, claims and equity interests that are
"allowed" may receive distributions under a chapter 11 plan. An administrative
claim, claim or equity interest becomes "allowed" when a plan proponent agrees
-- or in the case of a dispute, the Court determines -- that the administrative
claim, claim or equity interest is a valid obligation of a Debtor, including the
amount. Section 502(a) of the Bankruptcy Code provides that a timely filed
administrative expense claim, claim or equity interest is "allowed"
automatically unless the debtor or another party in interest objects. Section
502(b) of the Bankruptcy Code, however, provides that certain claims may not be
"allowed" in bankruptcy even if a proof of claim is filed. Such claims include,
without limitation, claims that are unenforceable under a governing agreement or
applicable non-bankruptcy law, claims for unmatured interest, claims for certain
services that exceed their reasonable value, lease and employment contract
rejection damage claims in excess of specified amounts and late-filed claims. In
addition, Rule 3003(c)(2) of the Federal Rules of Bankruptcy Procedure prohibits
the allowance of any claim or equity interest that either is not listed on the
debtor's schedules or is listed as disputed, contingent or unliquidated, if the
holder of such claim or equity interest has not timely filed a proof of claim or
equity interest.
The Bankruptcy Code also requires that, for the purposes of
treatment and voting, a chapter 11 plan divide different types of claims and
equity interests into separate classes, based upon their legal nature. Claims of
a substantially similar nature generally are classified together, as are equity
interests of a substantially similar nature. As a single entity may hold
multiple
14
claims and/or equity interests that give rise to different legal rights, such a
holder may be a member of multiple classes under a plan.
Under a chapter 11 plan, the separate classes of claims and equity
interest must be designated as either "impaired" or "unimpaired". If a class of
claims is "impaired" under a plan, the Bankruptcy Code affords certain rights to
the holders of such claims, including the right to vote on the Plan (with the
exception of classes of claims and interests that receive no distributions under
the Plan, and which therefore are deemed to have rejected the Plan), and the
right to receive an amount under the Plan that is no less than the value that
claim holder would receive in a chapter 7 liquidation. Under Section 1124 of the
Bankruptcy Code, a class is "impaired" if the legal, equitable, or contractual
rights attaching to the claims or interests of that class are modified, other
than by curing defaults and reinstating maturity or by payment in full in cash.
Typically, this means that the holder of a unimpaired claim will receive under
the Plan payment in full, in cash, with prepetition interest to the extent
permitted and provided under the governing agreement between the parties (if
applicable) or applicable non-bankruptcy law, and the remainder of the debtor's
obligations, if any, will be performed as they become due in accordance with
their terms. Thus, other than the right to accelerate the debtor's obligations,
the holder of an unimpaired claim will be placed in the position in which it
would have been if the debtor had not commenced a chapter 11 case.
Consistent with these requirements, the Plan divides the Claims
against, and Interests in, the Debtors into the following Classes:
CLAIMS AGAINST AND INTERESTS IN ALC
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- -------- --------- --------
-- Administrative Paid in full in Cash on the 100%
Claims Effective Date or as soon as
practicable thereafter (unless
the holder of a particular claim
and ALC agree to some other
treatment), or in accordance
with the terms and conditions of
transactions or agreements
relating to obligations incurred
in the ordinary course of
business during the pendency of
the Chapter 11 Cases or assumed
by Reorganized ALC.
15
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- -------- --------- --------
-- Tax Claims At the option of Reorganized ALC 100%
either (i) Reinstated, (ii) paid
in full in Cash on the Effective
Date or as soon as practicable
thereafter, or (iii) paid over a
six-year period from the date of
assessment, as provided in
Section 1129(a)(9)(C) of the
Bankruptcy Code with interest
payable at a rate of 8-1/4% per
annum or as otherwise
established by the Court.
SECURED CLAIMS:
1A OHCS Claim Unimpaired; Reinstated on the 100%
Effective Date or as soon as
practicable thereafter.
1B NHP Claim Impaired. 100%
1C U.S. Bank Idaho Unimpaired; Reinstated on the 100%
Claim Effective Date or as soon as
practicable thereafter.
1D U.S. Bank Ohio Unimpaired; Reinstated on the 100%
Claim Effective Date or as soon as
practicable thereafter.
1E U.S. Bank Unimpaired; Reinstated on the 100%
Washington Claim Effective Date or as soon as
practicable thereafter.
2A et Other Secured Unimpaired if paid in full in 100%
seq. Claims Cash or Reinstated on the
Effective Date or as soon as
practicable thereafter; Impaired
if holder of Claim agrees to
alternative treatment.
UNSECURED CLAIMS
16
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- -------- --------- --------
3 Priority Claims Unimpaired; paid in full on or 100%
before the later of (i) the
Effective Date or as soon as
practicable thereafter, (ii) the
date such Claim becomes an
Allowed Claim and (iii) the date
that such Claim would be paid in
accordance with any terms and
conditions of any agreements or
understandings relating thereto
between the Company and the
Holder of such Claim.
4 General Impaired; each holder of an 43%
Unsecured Claims Allowed Class 4 Claim to receive
against ALC on the Effective Date or as soon
as practicable thereafter, a Pro
Rata Share of 96% of ALC's New
Common Stock, New Senior Notes
in the principal amount of
$40,250,000 and New Junior Notes
in the principal amount of
$15,250,000.
5 Trade Claims Unimpaired; at the option of 100%
against ALC Reorganized ALC, paid in full in
Cash or Reinstated on the
Effective Date or as soon as
practicable thereafter.
6 Resident Deposit Unimpaired; Reinstated on the 100%
Account Claims Effective Date or as soon as
against ALC practicable thereafter.
7 Guaranty Claims Unimpaired; Reinstated on the 100%
against ALC Effective Date or as soon as
practicable thereafter.
8 Intercompany Unimpaired; Reinstated on the 100%
Claims Effective Date or as soon as
practicable thereafter.
17
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- -------- --------- --------
9 Old Common Stock Impaired; on the Effective Date <0%
of ALC and or as soon as practicable
Securities thereafter, holders of Allowed
Claims against Class 9 Interests will receive,
ALC ALC on a Pro Rata basis, 4% of
ALC's New Common Stock in exchange
for the Old ALC Common Stock.
10 Old Stock Rights Impaired; will not receive or 0%
in ALC retain any property or interest.
CLAIMS AGAINST AND INTERESTS IN CARRIAGE HOUSE
-- Administrative Claims Paid in full in Cash on the Effective 100%
Date or as soon as practicable
thereafter (unless the holder of a
particular claim and ALC agree to some
other treatment), or in accordance with
the terms and conditions of
transactions or agreements relating to
obligations incurred in the ordinary
course of business during the pendency
of the Chapter 11 Cases or assumed by
Carriage House.
-- Tax Claims At the option of Reorganized Carriage 100%
House either (i) Reinstated, (ii) paid
in full in Cash on the Effective Date
or as soon as practicable thereafter,
or (iii) paid over a six-year period
from the date of assessment, as
provided in Section 1129(a)(9)(C) of
the Bankruptcy Code with interest
payable at a rate of 8-1/4% per annum
or as otherwise established by the
Court.
SECURED CLAIMS
18
1 Other Secured Claims Unimpaired if paid in full in Cash or 100%
Reinstated on the Effective Date or as
soon as practicable thereafter;
Impaired if holder of Claim consents to
alternative treatment.
UNSECURED CLAIMS
2 Priority Claims Unimpaired; paid in full on or before 100%
the later of (i) the Effective Date or
as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed
Claim and (iii) the date that such
Claim would be paid in accordance with
any terms and conditions of any
agreements or understandings relating
thereto between the Company and the
Holder of such Claim.
3 General Unsecured Unimpaired; at the option of 100%
Claims against Reorganized Carriage House, paid in
Carriage House full in Cash or Reinstated on or before
the later of (i) the Effective Date or
as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed
Claim and (iii) the date that such
Claim would be paid in accordance with
any terms and conditions of any
agreements or understandings relating
thereto between the Company and the
Holder of such Claim.
4 Trade Claims Unimpaired; at the option of 100%
Against Carriage Reorganized Carriage House, paid in
House full in Cash or Reinstated on or before
the later of (i) the Effective Date or
as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed
Claim and (iii) the date that such
Claim would be paid in accordance with
any terms and conditions of any
agreements or understandings relating
thereto between the Company and the
Holder of such Claim.
5 Intercompany Claims Unimpaired; Reinstated on the Effective 100%
Date or as soon as practicable
thereafter.
6 Old Common Stock of Unimpaired; Reinstated on the Effective 100%
Carriage House and Date or as soon as practicable
Securities Claims thereafter.
against Carriage
House
7 Old Stock Rights in Unimpaired; Reinstated on the Effective 100%
Carriage House Date or as soon as practicable
thereafter.
19
For purposes of computing distributions under the Plan, Allowed
Claims do not include postpetition interest unless otherwise specified in the
Plan.
If the Plan is confirmed, except for Disputed Claims, distributions
will be deemed made on the Effective Date if made on the Effective Date or as
soon as practicable thereafter. Distributions on accounts of Claims that become
Allowed Claims after the Effective Date will be made pursuant to Section 8.02 of
the Plan (relating to timing and calculation of amounts to be distributed under
the Plan) and Section 8.06 of the Plan (relating to distributions on account of
Disputed Claims once they are allowed).
1. UNCLASSIFIED - ADMINISTRATIVE CLAIMS
Administrative Claims include the costs and expenses of
administration of the Chapter 11 Cases of a kind specified in Section 503(b) of
the Bankruptcy Code and entitled to priority under Section 507(a)(1) of the
Bankruptcy Code. Such costs include any actual, necessary costs and expenses of
operating the Debtors' businesses and preserving the Debtors' Estates, any
indebtedness or obligations incurred or assumed by the Debtors in connection
with the conduct of their businesses, all compensation and reimbursement of
expenses to the extent Allowed by the Court pursuant to Section 330 or Section
503 of the Bankruptcy Code, and any fees or charges assessed against the
Debtors' estates pursuant to Section 1930, Chapter 123 of Title 28 of the United
States Code.
Pursuant to the Plan, Allowed Administrative Claims (a) will be paid
Cash equal to the full unpaid portion of the Allowed Administrative Claim on
later the of the Effective Date and the date on which such Administrative Claim
becomes an Allowed Claim, or as soon thereafter as practicable, or (b) will
receive such other treatment as to which the Debtors and the holder of an
Allowed Administrative Claim shall agree in writing.
The Debtors anticipate that, with the exception noted below, most
Administrative Expenses will be paid as they come due during the Chapter 11
Cases, and that the Administrative Claims to be paid on the Effective Date will
mainly comprise the Allowed fees and expenses incurred by professionals
providing services in the Chapter 11 Cases.
The Debtors estimate that the amount of Allowed Administrative
Claims and Priority Claims under the Bankruptcy Code (the "Effective Date
Payments") will be the following: (a) payment of the DIP Financing
(approximately $4.4 million); (b) the Debtors' and Committee's professionals'
fees (approximately $2 million); and (c) severance payments.
2. UNCLASSIFIED - TAX CLAIMS
Except as otherwise agreed to by Reorganized ALC and Reorganized
Carriage House and the applicable taxing agency, Reorganized ALC or Reorganized
Carriage House, as appropriate, shall pay to each holder of an Allowed Priority
Tax Claim deferred Cash payments,
20
over a period not exceeding six years from the date of assessment of such Claim,
in an aggregate amount equal to the amount of such Allowed Priority Tax Claim,
plus interest from the Effective Date on the unpaid portion of such Allowed
Priority Tax Claim (without penalty of any kind) at the rate prescribed below.
Payment of the amount of each such Allowed Priority Tax Claim shall be made in
equal semiannual installments payable on June 1 and December 1, with the first
installment due on June 1 or December 1 after the latest of: (a) the Effective
Date, (b) 30 days after the date on which an Order allowing such Priority Tax
Claim becomes a Final Order, and (c) such other time or times as may be agreed
to by the holder of such Claim and Reorganized ALC. Each installment shall
include interest on the unpaid portion of such Allowed Priority Tax Claim,
without penalty of any kind, at the rate of 8-1/4% per annum or as otherwise
established by the Court; provided, however, that Reorganized ALC or Reorganized
Carriage House, as appropriate, shall have the right to pay any Allowed Priority
Tax Claim, or any remaining balance of such Claim, in full, at any time on or
after the Effective Date, without premium or penalty of any kind.
The Debtors believe that no Allowed Tax Claims exist.
3. HELLER SECURED ADMINISTRATIVE CLAIM
Pursuant to the Final Financing Order and the Postpetition
Documents, Heller has a secured and administrative claim against the Debtors in
the approximate amount of $44 million (the "Heller Claim"). The Debtors are
jointly and severally liable with respect to the Heller Claim obligations. The
Heller Claim is secured by the Aggregate Collateral. Unless otherwise agreed in
writing prior to or on the Effective Date by Heller, the Heller Claim shall be
paid in full in Cash on or before the Effective Date.
4. CLASSIFIED CLAIMS AGAINST AND INTERESTS IN ALC
ALC Class 1A - OHCS Claim (against ALC). On the Effective Date, or as
soon as practicable thereafter, the holder of the Class 1A OHCS Claim shall, in
full satisfaction, settlement, release and discharge of and in exchange for such
Secured Claim, receive (in the sole discretion of Reorganized ALC) the following
treatment: Either (a) the Plan shall leave unaltered the legal, equitable and
contractual rights to which such Claim entitles the Holder; (b) (i) the Debtors
shall cure any default with respect to such Claim that occurred before or after
the relevant Petition Date, (ii) the maturity of such Claim shall be Reinstated
as such maturity existed before any such default, (iii) the Holder of such Claim
shall be compensated for any damages incurred as a result of any reasonable
reliance by the Holder on any right to accelerate its Claim, and (iv) the legal,
equitable, and contractual rights of such Holder will not otherwise be altered;
or (c) such Claim shall receive such other treatment to which the Holder shall
consent. The Holder of the Allowed Secured Claim in Class 1A which is treated as
set forth in clause (a) or (b) of this paragraph will be Unimpaired and deemed
to have voted for the Plan; a Secured Claim in Class 1A which is treated as set
forth in clause (c) of this paragraph shall be Impaired and entitled to vote on
the Plan.
ALC Class 1B - NHP Claim (against ALC). On the Effective Date, or as soon
as practicable thereafter, the holder of the Class 1B NHP Claim shall, in full
satisfaction, settlement, release and discharge of and in exchange for its
Claim, receive the following
21
treatment: On the Effective Date, or as soon as practicable thereafter, the
holder of the Class 1B NHP Claim shall, in full satisfaction, settlement,
release and discharge of and in exchange for such Secured Claim, receive (in the
sole discretion of Reorganized ALC) the following treatment: NHP shall exchange
its mortgages on the Morehead Facility located in Indiana, Pennsylvania and on
the Pinewood House Facility located in Goosecreek, South Carolina in
sale-leaseback transactions with ALC. ALC and NHP shall execute definitive
documentation reflecting the foregoing sale-leasebacks, as well as modifications
to two other leases pursuant to which ALC leases from NHP two facilities in
South Carolina, and File such documentation with the Court no later than ten
days prior to the Confirmation Hearing. NHP is Impaired and entitled to vote on
the Plan. NHP and ALC executed an agreement memorializing the foregoing terms
(the "NHP Agreement"). Pursuant to the NHP Agreement, subject to a number of
conditions including Court approval of the Disclosure Statement, NHP has agreed
to support the Plan. A copy of the NHP Agreement is attached as Exhibit K to the
Disclosure Statement. The Committee does not endorse the NHP Agreement. The
Committee intends to enter into discussions with NHP and ALC with respect to the
NHP Agreement. If the Committee convinces ALC that the NHP Agreement is not in
the best of the Estate, ALC will return to NHP the collateral securing the Class
1B NHP Claim to NHP and move to reject the leases to which NHP and ALC are
parties. Alternatively, the Committee may be able to renegotiate the NHP
Agreement in a manner that will produce a more favorable result to the Estate.
Last, the Committee may determine that the NHP Agreement is in the best interest
of the Estate and ultimately support the NHP Agreement. ALC has given the
Committee a deadline of November 12, 2001 to finally resolve its position with
respect to the NHP Agreement. ALC shall notify NHP no later than November 15,
2001 of how the Class 1B NHP Claim will be treated.
ALC Class 1C - U.S. Bank Idaho Claim (against ALC). On the Effective
Date, or as soon as practicable thereafter, the holder of the Class 1C U.S. Bank
Idaho Claim shall, in full satisfaction, settlement, release and discharge of
and in exchange for such Secured Claim, receive (in the sole discretion of
Reorganized ALC) the following treatment: Either (a) the Plan shall leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; (b) (i) the Debtors shall cure any default with respect to
such Claim that occurred before or after the relevant Petition Date, (ii) the
maturity of such Claim shall be Reinstated as such maturity existed before any
such default, (iii) the Holder of such Claim shall be compensated for any
damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered. ALC Class 1C is Unimpaired
and shall be deemed to have voted in favor of the Plan.
Notwithstanding anything to the contrary in the Confirmation Order
or this Plan, the rights and remedies of U.S. Bank, and the obligations of ALC,
under the U.S. Bank Collateral Documents and the U.S. Bank Reimbursement
Agreements, including without limitation any security interests and other liens
granted thereunder: (x) shall not be impaired or affected in any manner by this
Plan or the Confirmation Order; (y) shall remain valid and fully enforceable
against Reorganized ALC in accordance with the terms thereof and applicable law;
and (z) in the case of security interests and other liens, shall remain valid
and perfected first priority security interests and liens.
22
ALC Class 1D - U.S. Bank Ohio Claim (against ALC). On the Effective
Date, or as soon as practicable thereafter, the holder of the Class 1D U.S. Bank
Ohio Claim shall, in full satisfaction, settlement, release and discharge of and
in exchange for such Secured Claim, receive (in the sole discretion of
Reorganized ALC) the following treatment: Either (a) the Plan shall leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; or (b) (i) the Debtors shall cure any default with respect
to such Claim that occurred before or after the relevant Petition Date, (ii) the
maturity of such Claim shall be Reinstated as such maturity existed before any
such default, (iii) the Holder of such Claim shall be compensated for any
damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered. ALC Class 1D is Unimpaired
and shall be deemed to have voted in favor of the Plan.
Notwithstanding anything to the contrary in the Confirmation Order
or this Plan, the rights and remedies of U.S. Bank, and the obligations of ALC,
under the U.S. Bank Collateral Documents and the U.S. Bank Reimbursement
Agreements, including without limitation any security interests and other liens
granted thereunder: (x) shall not be impaired or affected in any manner by this
Plan or the Confirmation Order; (y) shall remain valid and fully enforceable
against Reorganized ALC in accordance with the terms thereof and applicable law;
and (z) in the case of security interests and other liens, shall remain valid
and perfected first priority security interests and liens.
ALC Class 1E - U.S. Bank Washington Claim (against ALC). On the
Effective Date, or as soon as practicable thereafter, the holder of the Class 1E
U.S. Bank Washington Claim shall, in full satisfaction, settlement, release and
discharge of and in exchange for such Secured Claim, receive (in the sole
discretion of Reorganized ALC) the following treatment: Either (a) the Plan
shall leave unaltered the legal, equitable and contractual rights to which such
Claim entitles the Holder; or (b) (i) the Debtors shall cure any default with
respect to such Claim that occurred before or after the relevant Petition Date,
(ii) the maturity of such Claim shall be Reinstated as such maturity existed
before any such default, (iii) the Holder of such Claim shall be compensated for
any damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered. ALC Class 1E is Unimpaired
and shall be deemed to have voted in favor of the Plan.
Notwithstanding anything to the contrary in the Confirmation Order
or this Plan, the rights and remedies of U.S. Bank, and the obligations of ALC,
under the U.S. Bank Collateral Documents and the U.S. Bank Reimbursement
Agreements, including without limitation any security interests and other liens
granted thereunder: (x) shall not be impaired or affected in any manner by this
Plan or the Confirmation Order; (y) shall remain valid and fully enforceable
against Reorganized ALC in accordance with the terms thereof and applicable law;
and (z) in the case of security interests and other liens, shall remain valid
and perfected first priority security interests and liens.
ALC Class 2A Et Seq. - Other Secured Claims (against ALC). Class 2
consists of all other Secured Claims against the Debtors. This Class will be
further divided into subclasses designated by letters of the alphabet (CLASS 2A,
CLASS 2B, and so on), so that each Holder of any
23
Secured Claim is in a Class by itself, except to the extent that there are
Secured Claims that are substantially similar to each other and may be included
within a single Class. The Debtors will File a schedule of each Secured Claim on
or before ten (10) days prior to the commencement of the Confirmation Hearing.
Each Allowed Secured Claim in Class 2 will be treated as follows: Either (a) the
Plan shall leave unaltered the legal, equitable and contractual rights to which
such Claim entitles the Holder; (b) (i) the Debtors shall cure any default with
respect to such Claim that occurred before or after the relevant Petition Date,
(ii) the maturity of such Claim shall be reinstated as such maturity existed
before any such default, (iii) the Holder of such Claim shall be compensated for
any damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered; or (c) such Claim shall
receive such other treatment to which the Holder shall consent. The Holder of
each Allowed Secured Claim in Class 2 which is treated as set forth in clause
(a) or (c) of this paragraph will be Unimpaired and shall be deemed to have
voted for the Plan; any treatment under clause (c) of this paragraph will render
the claim Impaired and entitled to vote on the Plan.
ALC Class 3 - Priority Claims (against ALC). Class 3 is Unimpaired
and therefore is presumed to accept the Plan. Holders of Class 3 Claims are not
entitled to vote on the Plan.
A Priority Claim is a Claim for an amount entitled to priority under
sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code,
and does not include any Administrative Claim or Tax Claim. These unsecured
Priority Claims include, among others: (a) unsecured Claims for accrued employee
compensation earned within 90 days prior to the Petition Date, to the extent of
$4,650 per employee; (b) contributions to employee benefit plans arising from
services rendered within 180 days prior to the Petition Date, but only for such
plans to the extent of (i) the number of employees covered by such plans
multiplied by $4,650, less (ii) the aggregate amount paid to such employees
under section 507(a)(3) of the Bankruptcy Code, plus the aggregate amount paid
by each estate on behalf of such employees to any other employee benefit plan.
The Plan provides that unless otherwise agreed to by the parties,
each Holder of an Allowed Claim in Class 3 will be paid the Allowed Amount of
such Claim in full in Cash by Reorganized ALC on or before the later of (i) the
Effective Date or as soon as practicable thereafter, (ii) the date such Claim
becomes an Allowed Claim and (iii) the date that such Claim would be paid in
accordance with any terms and conditions of any agreements or understandings
relating thereto between the Company and the Holder of such Claim. Allowed
Claims in Class 3 are not Impaired under the Plan and the Holders of Allowed
Claims in Class 3 will be deemed to have accepted the Plan.
ALC Class 4 - General Unsecured Claims (against ALC). On the
Effective Date, or as soon as practicable thereafter, each Holder of an Allowed
Class 4 Claim shall, in full satisfaction, settlement, release and discharge of
and in exchange for such Claim, receive the following treatment: a Pro Rata
share of (a) the Senior Notes, (b) the New Junior Notes, and (c) ninety-six
percent (96%) of the New Common Stock. Class 4 is Impaired and therefore
entitled to vote on the Plan.
24
ALC Class 5 - Trade Claims (against ALC). On the Effective Date, or
as soon as practicable thereafter, each Holder of an Allowed Class 5 Claim
shall, in full satisfaction, settlement, release and discharge of and in
exchange for such Claim, receive (in the sole discretion of Reorganized ALC) the
following treatment: Either (a) the Plan shall leave unaltered the legal,
equitable and contractual rights to which such Claim entitles the Holder; (b)
(i) the Debtors shall cure any default with respect to such Claim that occurred
before or after the relevant Petition Date, (ii) the maturity of such Claim
shall be Reinstated as such maturity existed before any such default, (iii) the
Holder of such Claim shall be compensated for any damages incurred as a result
of any reasonable reliance by the Holder on any right to accelerate its Claim,
and (iv) the legal, equitable, and contractual rights of such Holder will not
otherwise be altered or (c) the Debtor shall pay each claimant Cash in the full
amount of its Claim. Class 5 is Unimpaired and not entitled to vote on the Plan;
Class 5 is deemed to have voted in favor of the Plan.
ALC Class 6 - Resident Deposit Account Claims (against ALC). On the
Effective Date, or as soon as practicable thereafter, each Holder of an Allowed
Class 6 Claim shall, in full satisfaction, settlement, release and discharge of
and in exchange for such Claim, receive (in the sole discretion of Reorganized
ALC) the following treatment: Either (a) the Plan shall leave unaltered the
legal, equitable and contractual rights to which such Claim entitles the Holder;
(b) (i) the Debtors shall cure any default with respect to such Claim that
occurred before or after the relevant Petition Date, (ii) the maturity of such
Claim shall be Reinstated as such maturity existed before any such default,
(iii) the Holder of such Claim shall be compensated for any actual and
compensatory damages incurred as a result of any reasonable reliance by the
Holder on any right to accelerate its Claim, and (iv) the legal, equitable, and
contractual rights of such Holder will not otherwise be altered or (c) the
Debtor shall pay each claimant Cash in the full amount of its Claim with each
such payment to be funded into a "resident trust account" and held "in trust" by
the Debtor for the benefit of each particular claimant. Class 6 is Unimpaired
and not entitled to vote on the Plan; Class 6 is deemed to have voted in favor
of the Plan.
ALC Class 7 - Guaranty Claims (against ALC). On the Effective Date,
or as soon as practicable thereafter, each Holder of an Allowed Class 7 Claim
shall, in full satisfaction, settlement, release and discharge of and in
exchange for such Claim, receive (in the sole discretion of Reorganized ALC) the
following treatment: Either (a) the Plan shall leave unaltered the legal,
equitable and contractual rights to which such Claim entitles the Holder; (b)
(i) the Debtors shall cure any default with respect to such Claim that occurred
before or after the relevant Petition Date, (ii) the maturity of such Claim
shall be Reinstated as such maturity existed before any such default, (iii) the
Holder of such Claim shall be compensated for any damages incurred as a result
of any reasonable reliance by the Holder on any right to accelerate its Claim,
and (iv) the legal, equitable, and contractual rights of such Holder will not
otherwise be altered or (c) the Debtor shall pay the claimant Cash in the full
amount of its Claim. Class 7 is Unimpaired and not entitled to vote on the Plan;
Class 7 is deemed to have voted in favor of the Plan.
ALC Class 8 - Intercompany Claim (against ALC). Each Allowed Class 8
Claim shall be Reinstated under the Plan and not entitled to vote on the Plan.
Class 8 is Unimpaired and deemed to have voted in favor of the Plan.
25
ALC Class 9 - Old Common Stock of ALC and Securities Claims (against
ALC). On the Effective Date, or as soon as practicable thereafter, each Holder
of an Allowed Class 9 Interest or Claim shall, in full satisfaction, settlement,
release and discharge of and in exchange for such Interest or Claim, receive the
following treatment: a Pro Rata Share of four percent (4.0%) of the New Common
Stock. Class 9 is Impaired and entitled to vote on the Plan. If Class 9 does not
vote in favor of the Plan, Class 9 will receive no property under the Plan;
instead, the New Common Stock otherwise allocable to Class 9 will be
redistributed on a Pro Rata basis to holders of Allowed Class 4 Claims.
ALC Class 10 - Interests of Holders of Old Stock Rights and All
Claims Arising Out of Such Old Stock Rights (against ALC). Each Holder of an
Allowed Class 10 Interest or Claim shall not receive or retain any property
under the Plan on account of such Interest or Claim in full satisfaction,
settlement, release and discharge of such Interest or Claim. Class 10 is
Impaired under the Plan and deemed to have voted to reject the Plan. The votes
of holders of Class 10 Interests or Claims (if any) are not being solicited. The
Debtors currently do not believe any such holders exist.
4. TREATMENT OF CLASSIFIED CLAIMS AGAINST AND INTERESTS IN CARRIAGE
HOUSE.
Carriage House Class 1A Et Seq. - Other Secured Claims (against
ALC). Class 1 consists of all other Secured Claims against Carriage House. This
Class will be further divided into subclasses designated by letters of the
alphabet (CLASS 1A, CLASS 1B, and so on), so that each Holder of any Secured
Claim is in a Class by itself, except to the extent that there are Secured
Claims that are substantially similar to each other and may be included within a
single Class. The Debtors will File a schedule of each Secured Claim on or
before ten (10) days prior to the commencement of the Confirmation Hearing. Each
Allowed Secured Claim in Class 1 will be treated as follows: Either (a) the Plan
shall leave unaltered the legal, equitable and contractual rights to which such
Claim entitles the Holder; (b) (i) the Debtors shall cure any default with
respect to such Claim that occurred before or after the relevant Petition Date,
(ii) the maturity of such Claim shall be reinstated as such maturity existed
before any such default, (iii) the Holder of such Claim shall be compensated for
any damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered; or (c) such Claim shall
receive such other treatment to which the Holder shall consent. The Holder of
each Allowed Secured Claim in Class 1 which is treated as set forth in clause
(a) or (c) of this paragraph will be Unimpaired, will be presumed to have
accepted the Plan and will not be entitled to vote for or against the Plan; any
treatment under clause (c) of this paragraph will render the claim Impaired and
entitled to vote on the Plan.
Carriage House Class 2 - Priority Claims (against Carriage House).
Class 2 is Unimpaired and therefore is presumed to accept the Plan. Holders of
Class 2 Claims are not entitled to vote on the Plan.
A Priority Claim is a Claim for an amount entitled to priority under
sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code,
and does not include any Administrative Claim or Tax Claim. These unsecured
Priority Claims include, among others: (a) unsecured Claims for accrued employee
compensation earned within 90 days prior to the
26
Petition Date, to the extent of $4,650 per employee; (b) contributions to
employee benefit plans arising from services rendered within 180 days prior to
the Petition Date, but only for such plans to the extent of (i) the number of
employees covered by such plans multiplied by $4,650, less (ii) the aggregate
amount paid to such employees under section 507(a)(3) of the Bankruptcy Code,
plus the aggregate amount paid by each estate on behalf of such employees to any
other employee benefit plan.
The Plan provides that unless otherwise agreed to by the parties,
each Holder of an Allowed Claim in Class 2 will be paid the Allowed Amount of
such Claim in full in Cash by Reorganized Carriage House on or before the later
of (i) the Effective Date or as soon as practicable thereafter, (ii) the date
such Claim becomes an Allowed Claim and (iii) the date that such Claim would be
paid in accordance with any terms and conditions of any agreements or
understandings relating thereto between Carriage House and the Holder of such
Claim. Allowed Claims in Class 2 are not Impaired under the Plan and the Holders
of Allowed Claims in Class 2 will be deemed to have accepted the Plan.
Carriage House Class 3 - General Unsecured Claims (against Carriage
House). On the Effective Date, or as soon as practicable thereafter, each
Allowed Class 3 Claim, in full satisfaction, settlement, release and discharge
of and in exchange for such Claim, shall be paid in full in Cash or Reinstated
on the Effective Date or as soon as practicable thereafter as possible. Allowed
Claims in Class 3 are not Impaired under the Plan and the Holders of Allowed
Claims in Class 3 will be deemed to have accepted the Plan.
Carriage House Class 4 - Trade Claims (against Carriage House). On
the Effective Date, or as soon as practicable thereafter, each Holder of an
Allowed Class 4 Claim shall, in full satisfaction, settlement, release and
discharge of and in exchange for such Claim, receive (in the sole discretion of
Reorganized Carriage House) the following treatment: Either (a) the Plan shall
leave unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; (b) (i) the Debtors shall cure any default with respect to
such Claim that occurred before or after the relevant Petition Date, (ii) the
maturity of such Claim shall be Reinstated as such maturity existed before any
such default, (iii) the Holder of such Claim shall be compensated for any
damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered or (c) the Debtor shall pay
the claimant Cash in the full amount of its Claim. Allowed Claims in Class 4 are
not Impaired under the Plan and the Holders of Allowed Claims in Class 4 will be
deemed to have accepted the Plan.
Carriage House Class 5 - Intercompany Claim (against Carriage
House). Each Allowed Class 5 Claim shall be Reinstated under the Plan and not
entitled to vote on the Plan. Class 5 is Unimpaired.
Carriage House Class 6 - Old Common Stock of Carriage House and
Securities Claims (against Carriage House). Each Allowed Class 6 Interest or
Claim shall be Reinstated under the Plan and not entitled to vote on the Plan.
Class 6 is Unimpaired.
Carriage House Class 7 - Interests of Holders of Old Stock Rights
and All Claims Arising Out of Such Old Stock Rights (against Carriage House).
Each Allowed Class 7 Interest
27
or Claim shall be Reinstated under the Plan and not entitled to vote on the
Plan. Class 7 in Unimpaired. The Debtors currently do not believe any such
holders exist.
C. INDEBTEDNESS OF REORGANIZED ALC
1. OUTSTANDING LONG-TERM DEBT CANCELLED PURSUANT TO PLAN
Pursuant to the Plan, the Debentures will be cancelled and new debt
will be issued, representing a reduction of outstanding debt from about $161
million to $55.5 million.
2. NEW INDEBTEDNESS OF REORGANIZED ALC
On the Effective Date, Reorganized ALC will issue the New Senior
Notes and New Junior Notes, and obtain exit financing from Heller. Reorganized
ALC will have additional indebtedness as set forth in the Projections, attached
hereto as Schedule G.
D. DISTRIBUTIONS UNDER THE PLAN
1. GENERAL
On the Effective Date or as soon as practicable thereafter to the
extent that the Plan provides for distributions on account of Allowed Claims or
Allowed Interests in the applicable Class, each Holder of an Allowed Claim or
Allowed Interest will receive the full amount of the distributions that the Plan
provides for Allowed Claims or Allowed Interests in the applicable Class.
Except as otherwise provided in the Plan or the Confirmation Order,
all Cash necessary for Reorganized Debtors to make payments pursuant to the Plan
will be obtained from the Debtors' existing cash balances, the operations of the
Debtors or Reorganized Debtors, or from Post-Effective Date borrowings, as
applicable. Reorganized Debtors, or such Person(s) as Reorganized Debtors may
employ in their sole discretion, will serve as Disbursing Agent. The Disbursing
Agent will make all distributions of cash and securities required to be
distributed under the applicable provisions of the Plan. Any Disbursing Agent
may employ or contract with other entities to assist in or make the
distributions required by the Plan. Each Disbursing Agent will serve without
bond, and each Disbursing Agent, other than Reorganized Debtors, will receive,
without further Court approval, reasonable compensation for distribution
services rendered pursuant to the Plan and reimbursement of reasonable
out-of-pocket expenses incurred in connection with such services from
Reorganized Debtors on terms acceptable to Reorganized Debtors.
Cash payments made pursuant to the Plan will be in U.S. dollars by
checks drawn on a bank selected by Reorganized ALC, or by wire transfer from a
bank, at the option of Reorganized ALC. Cash payments of $1,000,000 or more to
be made pursuant to the Plan will, to the extent requested in writing no later
than five days after the Confirmation Date, be made by wire transfer from a
bank. Cash payments to foreign creditors may be made, at the option of
Reorganized ALC, in such funds and by such means as are necessary or customary
in a particular foreign jurisdiction.
28
The Plan provides that the Disbursing Agent will make all
distributions required under the applicable provisions of the Plan. No
distributions under the Plan will be made to or on behalf of any Holder of any
Allowed Claim or Allowed Interest evidenced by the instruments, securities or
other documentation cancelled pursuant to the Plan, unless such Holder first
tenders the applicable instruments, securities or other documentation to the
Disbursing Agent.
2. TIMING AND METHODS OF DISTRIBUTIONS
a. COMPLIANCE WITH TAX REQUIREMENTS
In connection with the Plan, to the extent applicable, the
Disbursing Agent must comply with all tax withholding and reporting requirements
imposed on it by any governmental unit, and all distributions pursuant to the
Plan will be subject to such withholding and reporting requirements. The
Disbursing Agent will be authorized to take any and all actions that may be
necessary or appropriate to comply with such withholding and reporting
requirements.
Notwithstanding any other provision of the Plan: (i) each Holder of
an Allowed Claim or Interest that is to receive a distribution of Cash pursuant
to the Plan will have sole and exclusive responsibility for the satisfaction and
payment of any tax obligations imposed by any governmental unit, including
income, withholding and other tax obligations, on account of such distribution;
and (ii) no distribution will be made to or on behalf of such Holder pursuant to
the Plan unless and until such Holder has made arrangements satisfactory to the
Disbursing Agent for the payment and satisfaction of such tax obligations. Any
Cash to be distributed pursuant to the Plan will, pending the implementation of
such arrangements, be treated as an undeliverable distribution pursuant to the
Plan.
b. PRO RATA DISTRIBUTION
When the Plan provides for Pro Rata distribution, the property to be
distributed under the Plan shall be divided Pro Rata among the Holders of
Allowed Claims or Allowed Interests of the relevant Class.
However, the total amount of the Allowed Class 4 Claims will not be
known until after the Effective Date, either because certain Class 4 Claims will
be Disputed Claims or because those Claims will not have been made by their
holders prior to the Effective Date. As a result, ALC will hold back from the
initial issuance of New Common Stock, New Senior Notes and New Junior Notes on
the Effective Date a percentage of the New Common Stock, the New Senior Notes
and the New Junior Notes (the "Reserve") to be issued to holders of Class 4
Claims. The initial distribution with respect to Class 4 Claims will be made
only to the holders of Class 4 Claims that have been allowed prior to the
Effective Date (the "Cutoff Date"). Once the total amount of the Allowed Class 4
Claims has been determined, the shares of New Common Stock, the New Senior Notes
and the New Junior Notes held in Reserve will be distributed pro rata among the
holders of the Allowed Class 4 Claims (the date of this distribution, the
"Subsequent Distribution Date").
If the Reserve is insufficient to cover Class 4 Claims allowed after
the Cutoff Date, ALC and its subsidiaries will have no further liability with
respect to those Class 4 Claims
29
and the holders of those Claims will receive proportionately lower distributions
of shares of New Common Stock, New Senior Notes and New Junior Notes than the
holders of Class 4 Claims allowed prior to the Cutoff Date.
If the Reserve exceeds the distributions necessary to cover Class 4
Claims allowed after the Cutoff Date, the additional securities remaining in the
Reserve will be distributed among all holders of Class 4 Claims so as to ensure
that each holder of an allowed Class 4 Claim receives, in the aggregate, its pro
rata share of the New Common Stock, the New Senior Notes and the New Junior
Notes. In this case, the holders of Class 4 Claims allowed prior to the Cutoff
Date will receive distributions of securities both on the Effective Date and on
the Subsequent Distribution Date.
The right of the holders of Class 4 Claims allowed prior to the Cutoff
Date 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 such holders will be freely
transferable upon issuance.
In addition, the New Senior Notes or New Junior Notes that are
issued on the Subsequent Distribution Date may have an "issue price" different
from the "adjusted issue price" on such date of the New Senior Notes and New
Junior Notes, as applicable, that are issued on the Effective Date. Accordingly
the New Senior Notes and New Junior Notes issued on the Subsequent Distribution
Date may have a different CUSIP number than the New Senior Notes or New Junior
Notes, as applicable, issued on the Effective Date. A CUSIP number is a 9 digit
number assigned by Standard & Poor's Corporation that is used to identify a
particular securities issuance by an issuer. The issuance of a different CUSIP
number to New Senior Notes or New Junior Notes issued on the Subsequent
Distribution Date may adversely affect the liquidity, and trading price, of
those New Notes. This is because those New Senior Notes or New Junior Notes will
be treated, for trading purposes, as a separate issuance of securities from the
issuance of the New Senior Notes or New Junior Notes, as applicable, on the
Effective Date. Please refer to the discussion under the section in the
Disclosure Statement entitled "Certain Federal Income Tax Consequences of the
Plan - Federal Income Tax Consequences to Holders of Debentures - New Notes -
Original Issue Discount" for a discussion of "issue price" and "adjusted issue
price."
c. DISTRIBUTION RECORD DATE
As of the close of business on the Distribution Record Date, the
transfer registers for the Old Securities maintained by the Debtors, or their
respective agents, will be closed. The Disbursing Agent and the respective
agents of the Debtors will have no obligation to recognize the transfer of the
Old Securities occurring after the Distribution Record Date, and will be
entitled for all purposes relating to the Plan to recognize and deal only with
those Holders of record as of the close of business on the Distribution Record
Date. Distributions under the Plan shall be made by Reorganized ALC or its
designee to the holders of Allowed Administrative Claims and Allowed Claims at
the addresses set forth on the Schedules, unless such addresses are superseded
by addresses listed on proofs of claim or transfers of claims filed pursuant to
Bankruptcy Rule 3001, or at the last known address of such holders if the
Debtors or Reorganized ALC have been notified in writing of a change of address.
30
d. SURRENDER OF CANCELLED DEBT INSTRUMENTS OR SECURITIES
As a condition precedent to receiving any distribution pursuant to
the Plan on account of an Allowed Claim or Allowed Interest evidenced by the
instruments, securities or other documentation ("Instruments") canceled pursuant
to the Plan, the Holder of such Claim or Interest shall tender the applicable
Instruments evidencing such Claim or Interest to the Disbursing Agent pursuant
to a letter of transmittal furnished by the Disbursing Agent. Any Cash to be
distributed pursuant to the Plan on account of any such Claim or Interest will,
pending such surrender, be treated as an undeliverable distribution pursuant to
the Plan.
(1) SPECIAL PROCEDURES FOR LOST, STOLEN, MUTILATED OR DESTROYED
INSTRUMENTS
In addition to any requirements under the old certificates or bylaws
of the Debtors, any Holder of a Claim or an Interest evidenced by an Instrument
that has been lost, stolen, mutilated or destroyed will, in lieu of surrendering
such Instrument, deliver to the Disbursing Agent: (a) evidence satisfactory to
the Disbursing Agent of the loss, theft, mutilation or destruction; and (b) such
security or indemnity as may be required by the Disbursing Agent to hold the
Disbursing Agent harmless from any damages, liabilities or costs incurred in
treating such individual as a Holder of an Instrument. Upon compliance with the
Plan, the Holder of a Claim or Interest evidenced by such an Instrument will,
for all purposes under the Plan, be deemed to have surrendered an Instrument, as
applicable.
(2) FAILURE TO SURRENDER CANCELLED INSTRUMENT
Any Holder of an Instrument that fails to surrender or be deemed to
have surrendered such Instrument within one year after the Effective Date will
have its claim for a distribution pursuant to the Plan on account of such
Instrument discharged and shall be forever barred from asserting any such claim
against Reorganized Debtors or their property. In such cases, any Cash held for
distribution on account of such Claim will be returned to Reorganized ALC.
e. UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS
Any Person that is entitled to receive a Cash distribution under the
Plan but that fails to cash a check within 90 days of its issuance shall be
entitled to receive a reissued check from Reorganized ALC for the amount of the
original check, without any interest, if such person requests the Disbursing
Agent to reissue such check and provides the Disbursing Agent with such
documentation as the Disbursing Agent requests to verify that such Person is
entitled to such check, prior to the first anniversary of the Effective Date. If
a Person fails to cash a check within 90 days of its issuance and fails to
request reissuance of such check prior to the first anniversary of the Effective
Date, such Person shall not be entitled to receive any distribution under this
Plan. If the distribution to any Holder of an Allowed Claim or Allowed Interest
is returned to a Disbursing Agent as undeliverable, no further distributions
will be made to such Holder unless and until the applicable Disbursing Agent is
notified in writing of such Holder's then-current address. Undeliverable
distributions will remain in the possession of the Disbursing Agent pursuant to
the Plan until such time as a distribution becomes deliverable. Undeliverable
cash will be held in trust in segregated bank accounts in the name of the
Disbursing Agent for the
31
benefit of the potential claimants of such funds, and will be accounted for
separately. The Disbursing Agent holding undeliverable Cash shall invest such
cash in a manner consistent with ALC's guidelines. Any distribution which is not
claimed within one year of the Effective Date shall be deemed property of
Reorganized ALC.
3. OBJECTIONS TO CLAIMS AND AUTHORITY TO PROSECUTE OBJECTIONS; CLAIMS
RESOLUTION
Objections to Claims, including without limitation Administrative
Claims, shall be Filed and served upon the Holder of such Claim or
Administrative Claim no later than the later of (a) 60 days after the Effective
Date, and (b) 60 days after a proof of claim or request for payment of such
Claim is Filed, unless this period is extended by the Court; such extension may
be granted on an ex parte basis without notice or hearing. After the
Confirmation Date, only the Reorganized Debtors will have the authority to File
objections, settle, compromise, withdraw or litigate to judgment objections to
Claims and Interests. From and after the Confirmation Date, Reorganized ALC and
Reorganized Carriage House may settle or compromise any Disputed Claim or
Disputed Interest without approval of the Court.
Within 10 days prior to the date objections are due to the Plan, the
Debtors will file a schedule of claims which will be objected to under the Plan;
provided however that such schedule may be amended at or prior to the
Confirmation Hearing.
4. DISPUTED CLAIMS; RESERVE AND ESTIMATIONS
a. TREATMENT OF DISPUTED CLAIMS
No Payment on Account of Disputed Claims and Disputed Claims
Reserve. Notwithstanding any other provisions of the Plan, no payments or
distributions will be made on account of a Disputed Claim or a Disputed Interest
until such Claim or Interest becomes an Allowed Claim or Allowed Interest.
Reorganized ALC and Reorganized Carriage House may, at any time, request that
the Court estimate any contingent or unliquidated Claim pursuant to Section
502(c) of the Bankruptcy Code, irrespective of whether Reorganized ALC and
Reorganized Carriage House previously objected to such Claim or whether the
Court has ruled on any such objection. The Court will retain jurisdiction to
estimate any contingent or unliquidated Claim at any time during litigation
concerning any objection to the Claim, including during the pendency of any
appeal relating to any such objection. If the Court estimates any contingent or
unliquidated Claim, that estimated amount will constitute either the Allowed
Amount of such Claim or a maximum limitation on such Claim, as determined by the
Court. If the estimated amount constitutes a maximum limitation on such Claim,
Reorganized ALC and Reorganized Carriage House may elect to pursue any
supplemental proceedings to object to any ultimate payment on account of such
Claim. All of these Claims objection, estimation and resolution procedures are
cumulative and not necessarily exclusive of one another. In addition to seeking
estimation of Claims as provided in the Plan, Reorganized ALC and Reorganized
Carriage House may resolve or adjudicate certain Disputed Claims of Holders in
Unimpaired Classes in the manner in which the amount of such Claim and the
rights of the Holder of such Claim would have been resolved or adjudicated if
the Reorganization Cases had not been commenced, subject to any applicable
discharge and limitations on amounts of claims and
32
remedies available under bankruptcy law. Claims may be subsequently compromised,
settled, withdrawn or resolved by Reorganized ALC and Reorganized Carriage
House.
b. DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS ONCE THEY ARE
ALLOWED
The Disbursing Agent will make all distributions due under the Plan
on the Effective Date within ten days of the Effective Date. Within 30 days
after the end of each calendar quarter following the Effective Date, the
Disbursing Agent will make all distributions on account of any Disputed Claim or
Disputed Interest that has become an Allowed Claim or Allowed Interest during
the preceding calendar quarter. Such distributions will be made pursuant to the
provisions of the Plan governing the applicable Class. Holders of Disputed
Claims or Disputed Interests that are ultimately allowed will also be entitled
to receive, on the basis of the amount ultimately allowed, matured and payable
interest, if any, at the rate provided for the Class to which such Claim
belongs.
5. SETOFFS
Except with respect to claims of the Debtors or Reorganized ALC and
Reorganized Carriage House released pursuant to the Plan or any contract,
instrument, release, indenture or other agreement or document created in
connection with the Plan, Reorganized Debtors may, pursuant to Section 553 of
the Bankruptcy Code or applicable nonbankruptcy law, set off against any Allowed
Claim and the distributions to be made pursuant to the Plan on account of such
Claim (before any distribution is made on account of such Claim), the claims,
rights and causes of action of any nature that the Debtors or Reorganized ALC
and Reorganized Carriage House may hold against the Holder of such Allowed
Claim; provided, however, that neither the failure to effect such a setoff nor
the allowance of any Claim hereunder will constitute a waiver or release by the
Debtors or Reorganized ALC and Reorganized Carriage House of any such claims,
rights and causes of action that the Debtors or Reorganized ALC and Reorganized
Carriage House may possess against such Holder.
E. GENERAL INFORMATION CONCERNING THE PLAN
The following is a summary of certain additional information
concerning the Plan. This summary is qualified in its entirety by reference to
the provisions of the Plan.
1. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
Under Section 365 of the Bankruptcy Code, the Debtors have the
right, subject to Court approval, to assume or reject any executory contracts or
unexpired leases. If an executory contract or unexpired lease entered into
before the Commencement Date is rejected by the Debtors, it will be treated as
if the Company breached such contract or lease on the date immediately preceding
the Petition Date, and the other party to the agreement may assert an Unsecured
Claim for damages incurred as a result of the rejection. In the case of
rejection of employment agreements and real property leases, damages are subject
to certain limitations imposed by Sections 365 and 502 of the Bankruptcy Code.
a. ASSUMPTIONS
33
Except as otherwise provided in the Plan, or in any contract,
instrument, release, indenture or other agreement or document entered into in
connection with the Plan, on the Effective Date, pursuant to Section 365 of the
Bankruptcy Code, Reorganized Debtors will assume each executory contract and
unexpired lease entered into by the Debtors prior to the Petition Date that has
not previously (a) expired or terminated pursuant to its own terms or (b) been
assumed or rejected pursuant to Section 365 of the Bankruptcy Code. The
Confirmation Order will constitute an Order of the Court approving the
assumptions described in the Plan, pursuant to Section 365 of the Bankruptcy
Code, as of the Effective Date.
b. CURE OF DEFAULTS IN CONNECTION WITH ASSUMPTION
Any monetary amounts by which each executory contract and unexpired
lease to be assumed pursuant to the Plan is in default will be satisfied,
pursuant to Section 365(b)(1) of the Bankruptcy Code, at the option of the
Debtors or Reorganized ALC and Reorganized Carriage House: (a) by payment of the
default amount in cash on the Effective Date or (b) on such other terms as are
agreed to by the parties to such executory contract or unexpired lease. If there
is a dispute regarding: (i) the amount of any cure payments; (ii) the ability of
Reorganized ALC and Reorganized Carriage House to provide "adequate assurance of
future performance" (within the meaning of Section 365 of the Bankruptcy Code)
under the contract or lease to be assumed; or (iii) any other matter pertaining
to assumption, the cure payments required by Section 365(b)(1) of the Bankruptcy
Code will be made following the entry of a Final Order resolving the dispute and
approving the assumption.
c. REJECTIONS
Except as otherwise provided in the Plan or in any contract,
instrument, release, indenture or other agreement or document entered into in
connection with the Plan, on the Effective Date, pursuant to Section 365 of the
Bankruptcy Code, the Debtors will reject each of the executory contracts and
unexpired leases listed on Exhibit J hereto (the "Contract Schedule"); provided,
however, that the Debtors reserve the right, at any time prior to the Effective
Date and subject to the obligations under the Plan Support Agreement, to amend
the Contract Schedule to delete any executory contract or unexpired lease listed
therein, thus providing for its assumption pursuant to Article IV of the Plan or
to add more executory contracts and nonresidential real property leases to the
Contract Schedule. Each contract and lease listed on the Contract Schedule will
be rejected only to the extent that any such contract or lease constitutes an
executory contract or unexpired lease. Listing a contract or lease on the
Contract Schedule will not constitute an admission by the Debtors or Reorganized
Debtors that such contract or lease is an executory contract or unexpired lease
or that the Debtors or Reorganized Debtors have any liability thereunder. The
Confirmation Order shall constitute an Order of the Court approving such
rejections, pursuant to Section 365 of the Bankruptcy Code, as of the Effective
Date.
d. BAR DATE FOR REJECTION DAMAGES
If the rejection of an executory contract or unexpired lease
pursuant to Article IV of the Plan gives rise to a Claim by the other party or
parties to such contract or lease, such Claim shall be forever barred and shall
not be enforceable against the Debtors, Reorganized
34
Debtors, their successors or properties unless (a) a stipulation has been
entered into with respect to the rejection of such executory contract or
unexpired lease or (b) a proof of Claim is Filed and served on the Debtors and
counsel for the Debtors within 30 days after the Effective Date or such earlier
date as established by the Court. Reorganized Debtors shall have 120 days from
the date of such filing to file an objection to any claim for rejection damages.
2. CONTINUATION OF CERTAIN RETIREMENT AND OTHER BENEFITS
On and after the Effective Date, to the extent required by Section
1129(a)(13) of the Bankruptcy Code, Reorganized ALC shall continue to pay all
retiree benefits (if any), as the term "retiree benefits" is defined in Section
1114(a) of the Bankruptcy Code, maintained or established by the Debtors prior
to the Confirmation Date.
3. EXECUTORY CONTRACTS AND UNEXPIRED LEASES ENTERED INTO AND OTHER
OBLIGATIONS INCURRED AFTER THE PETITION DATE
Executory contracts and unexpired leases entered into and other
obligations incurred after the Petition Date by the Debtors shall be performed
by the Debtors or Reorganized Debtors in the ordinary course of their
businesses. Accordingly, such executory contracts, unexpired leases and other
obligations shall survive and remain unaffected by entry of the Confirmation
Order.
F. ADDITIONAL INFORMATION REGARDING TREATMENT OF CERTAIN CLAIMS
1. TREATMENT OF UNCLASSIFIED CLAIMS
The Bankruptcy Code does not require classification of certain
priority claims against a debtor. In these cases, these unclassified claims
include Administrative Claims and Priority Tax Claims. All distributions
referred to below that are scheduled for the Effective Date will be made on the
Effective Date or as soon as practicable thereafter.
Administrative Claims. An "Administrative Claim" is a claim for
payment of an administrative expense of a kind specified in Section 503(b) of
the Bankruptcy Code and referred to in Section 507(a)(1) of the Bankruptcy Code,
including, without limitation, the actual and necessary costs and expenses
incurred after the commencement of a Chapter 11 case of preserving the estate or
operating the business of the company (including wages, salaries and commissions
for services), loans and advances to the company made after the petition date,
compensation for legal and other services and reimbursement of expenses awarded
or allowed under Section 330(a) or 331 of the Bankruptcy Code, certain retiree
benefits, certain reclamation claims, and all fees and charges against the
estate under Chapter 123 of Title 28, United States Code. Subject to certain
additional requirements for professionals and certain other entities set forth
below, Reorganized ALC and Reorganized Carriage House, as the case may be, shall
pay each Holder of an Allowed Administrative Claim in full on the Effective
Date, on account of its Administrative Claim, unless the Holder and the Company
or Reorganized Debtors agree or shall have agreed to other treatment of such
Claim, or an order of the Court provides for other terms; provided that if
incurred in the ordinary course of business or otherwise assumed by the Debtors
pursuant to the Plan including Administrative Claims of governmental units for
taxes, an Allowed Administrative Claim will be assumed on the Effective Date and
paid, performed or
35
settled by Reorganized ALC when due in accordance with the terms and conditions
of the particular agreement(s) governing the obligation in the absence of the
Reorganization Cases. Holders of Administrative Claims shall have until 30 days
after the Effective Date to File requests for payment.
Claims by Professionals. Professionals or other entities requesting
compensation or reimbursement of expenses pursuant to Sections 327, 328, 330,
331, 503(b) and 1103 of the Bankruptcy Code for post-petition services rendered
before the Effective Date (including compensation requested pursuant to Section
503(b)(4) of the Bankruptcy Code by any professional or other entity for making
a substantial contribution in the Reorganization Cases) must File an application
for final allowance of compensation and reimbursement of expenses no later than
60 days after the Effective Date, unless such filing and service deadline is
extended by the Court. Objections to applications of professionals or other
entities for compensation or reimbursement of expenses must be filed and served
on the Reorganized Debtors, counsel for the Reorganized Debtors and the
requesting professional or other entity no later than 45 days after the date on
which the applicable application for compensation or reimbursement was filed and
served.
G. ALLOCATION OF CONSIDERATION
The aggregate consideration to be distributed to holders of Allowed
Claims in each class under the Plan shall be treated as first satisfying an
amount equal to the stated principal amount of the Allowed Claim for such
holders, and any remaining consideration considered as satisfying accrued but
unpaid interests and costs, if any, and attorneys' fees where applicable.
H. CANCELLATION OF THE DEBENTURES
On the Effective Date, the Debentures will be deemed cancelled and
of no further force or effect with respect to the Debtors without any further
action on the part of the Bankruptcy Court, any Person or any governmental
entity or agency. Following the Effective Date, holders of Debentures will
receive from the Disbursing Agent or its designee specific instructions
regarding the time and manner in which the Debentures are to be surrendered.
Pending such surrender, such Debentures will be deemed cancelled and shall
represent only the right to receive the distributions to which the holder is
entitled under this Plan.
I. CANCELLATION OF EXISTING SECURITIES
As of the Effective Date, by virtue of the Plan and in all events
without any action on the part of the holders thereof, each of the Old
Securities issued and outstanding or held in treasury, will be cancelled and
retired and no consideration will be paid or delivered with respect thereto.
J. INDENTURE TRUSTEE FEES
On the Effective Date, the Indenture Trustee shall receive an amount
of Cash equal to the amount of its reasonable fees and expenses (including the
reasonable fees and expenses of counsel retained by the Indenture Trustee), in
accordance with and to the extent
36
provided in the Old Indentures, whether incurred prior or subsequent to the
Commencement Date, without application by or on behalf of the Old Indenture
Trustee or its counsel to the Court. Distributions made to the holders of
Allowed Claims pursuant to the Plan will not be reduced on account of such
payments to the Indenture Trustee.
K. SOURCES OF CASH TO MAKE PLAN DISTRIBUTIONS
Except as otherwise provided in the Plan or the Confirmation Order,
all Cash necessary for Reorganized ALC and Reorganized Carriage House, as the
case may be, to make payments pursuant to the Plan will be obtained from
Reorganized ALC's cash balances or borrowings or the operations of the Debtors
or Reorganized Debtors.
L. CERTAIN CORPORATE GOVERNANCE MATTERS
a. CANCELLATION OF OLD SECURITIES AND RELATED AGREEMENTS
On the Effective Date, the Old Equity Securities and the Old Stock
Rights, and all obligations of the Debtors under all of the foregoing or under
any agreements relating to the foregoing (including, without limitation, the Old
Indentures) will be terminated, canceled and extinguished.
b. AMENDED ALC BYLAWS AND CERTIFICATE AND CARRIAGE HOUSE BYLAWS
AND CERTIFICATE
On the Effective Date, ALC shall adopt the Amended ALC Bylaws and
the Amended ALC Certificate, pursuant to applicable non-bankruptcy law and
Section 1123(a)(5)(1) of the Bankruptcy Code. The Amended ALC Bylaws and the
Amended ALC Certificate will, among other things: (i) authorize the issuance of
the New Common Stock; and (ii) prohibit the issuance of nonvoting equity
securities to the extent required by Section 1123(a)(6) of the Bankruptcy Code.
The Amended ALC Certificate will become effective upon the occurrence of the
Effective Date. Forms of the Amended ALC Certificate and the Amended ALC Bylaws
will be Filed with the Plan Supplement.
On the Effective Date, Carriage House shall adopt the Amended
Carriage House Bylaws and the Amended Carriage House Certificate, pursuant to
applicable non-bankruptcy law and Section 1123(a)(5)(1) of the Bankruptcy Code.
The Amended Carriage House Bylaws and the Amended Carriage House Certificate
will, among other things: (i) authorize the issuance of the New Common Stock;
and (ii) prohibit the issuance of nonvoting equity securities to the extent
required by Section 1123(a)(6) of the Bankruptcy Code. The Amended Carriage
House Certificate will become effective upon the occurrence of the Effective
Date. Forms of the Amended Carriage House Certificate and the Amended Carriage
House Bylaws will be Filed with the Plan Supplement.
37
M. EFFECT OF CONFIRMATION OF THE PLAN
1. VESTING OF ASSETS
Except as otherwise provided in any provision of the Plan, on the
Effective Date, all property of the Estates shall vest in Reorganized ALC and
Reorganized Carriage House, as applicable, free and clear of all Claims, Liens,
encumbrances and Interests. From and after the Effective Date, each Reorganized
Debtor may operate its business and use, acquire, and dispose of property and
settle and compromise Claims or Interests arising post-Confirmation without
supervision by the Court and free of any restrictions of the Bankruptcy Code,
the Bankruptcy Rules or the Local Bankruptcy Rules, other than those
restrictions expressly imposed by the Plan and the Confirmation Order.
2. DISCHARGE OF CLAIMS AND TERMINATION OF INTERESTS
Except as provided in the Confirmation Order, the rights afforded
under the Plan and the treatment of Claims and Interests under the Plan will be
in exchange for and in complete satisfaction, discharge and release of all
Claims and satisfaction or termination of all Interests, including any interest
accrued on Claims from the Commencement Date. Except as provided in the Plan or
Confirmation Order, Confirmation will, as of the Effective Date: (a) discharge
the Debtors from all Claims or other debts that arose before the Effective Date,
and all debts of a kind specified in Section 502(g), 502 (h) or 502(i) of the
Bankruptcy Code, whether or not (i) a proof of claim based on such debt is filed
or deemed filed pursuant to Section 501 of the Bankruptcy Code, (ii) a Claim
based on such debt is Allowed pursuant to Section 502 of the Bankruptcy Code, or
(iii) the holder of a Claim based on such debt has accepted the Plan; and (b)
satisfy or terminate all Interests and other rights of holders of Equity
Interests.
UPON CONFIRMATION, THE PLAN WILL BE BINDING ON ALL CREDITORS AND
EQUITY SECURITY HOLDERS REGARDLESS OF WHETHER SUCH CREDITORS OR EQUITY SECURITY
HOLDERS VOTED TO ACCEPT THE PLAN.
3. DISCHARGE OF DEBTORS AND INJUNCTION
Except as otherwise provided in the Plan or the Confirmation Order
(including the Heller Claim): (i) on the Effective Date, each Debtor shall be
deemed discharged and released to the fullest extent permitted by section 1141
of the Bankruptcy Code from all Claims and Interests, including, but not limited
to, demands, liabilities, Claims and Interests that arose before the
Confirmation Date and all debts of the kind specified in sections 502(g), 502(h)
or 502(i) of the Bankruptcy Code, whether or not: (A) a proof of Claim or proof
of Interest based on such debt or Interest is Filed or deemed Filed pursuant to
section 501 of the Bankruptcy Code, (B) a Claim or Interest based on such debt
or Interest is allowed pursuant to section 502 of the Bankruptcy Code or (C) the
holder of a Claim or Interest based on such debt or Interest has accepted the
Plan; and (ii) all Persons shall be precluded from asserting against each
Reorganized Debtor, its successors, or its assets or properties any other or
further Claims or Interests based upon any act or omission, transaction, or
other activity of any kind or nature that occurred prior to the Confirmation
Date. Except as otherwise provided in the Plan or the Confirmation Order
(including the Heller Claim), the Confirmation Order shall act as a discharge
38
of any and all Claims against and all debts and liabilities of the Debtors, as
provided in sections 524 and 1141 of the Bankruptcy Code, and such discharge
shall void any judgment against each Debtor at any time obtained to the extent
that it relates to a Claim discharged.
All Persons that have held, currently hold or may hold a Claim or
other debt or liability or an Equity Interest or other right of an equity
security holder, are permanently enjoined from taking any of the following
actions on account of any such Claims, debts or liabilities or terminated
Interests or rights: (a) commencing or continuing in any manner any action or
other proceeding against any of the Debtors, the Informal Bondholders Committee,
the Creditors' Committee (if and when appointed), and professional persons
retained by the Debtors, the Informal Bondholders Committee, Creditors'
Committee (if and when appointed), and each of their respective affiliates,
current or former officer, directors, agents, employees and representatives; (b)
enforcing, attaching, collecting or recovering in any manner any judgment,
award, decree or order against any of the Debtors, the Informal Bondholders
Committee, the Creditors' Committee (if and when appointed) and professional
persons retained by any of the Debtors, the Informal Bondholders Committee and
Creditors' Committee (if and when appointed) and each of their respective
affiliates, current or former officer, directors, agents, employees and
representatives; (c) creating, perfecting or enforcing any lien or encumbrance
against any of the Debtors, the Informal Bondholders Committee (including
present and former members), the Creditors' Committee (if and when appointed)
(including present and former members), and professional persons retained by any
of the Debtors, the Informal Bondholders Committee and the Creditors' Committee
(if and when appointed) and each of their respective affiliates, current or
former officer, directors, agents, employees and representatives; (d) asserting
a setoff, right of subrogation or recoupment of any kind against any obligation
due to any of the Debtors, the Informal Bondholders Committee, the Creditors'
Committee (if and when appointed) and professional persons retained by any of
the Debtors, the Informal Bondholders Committee and the Creditors' Committee and
each of their respective affiliates, current or former officer, directors,
agents, employees and representatives; and (e) commencing or continuing any
action, in any manner, in any place that does not comply with or is inconsistent
with the provisions of the Plan.
Notwithstanding the foregoing, nothing contained in the Disclosure
Statement or the Plan shall (i) be deemed to cause the release of any claims
that individual holders of Claims or Interests may have against any Person other
than the Debtors or (ii) apply to Heller or in any way prevent limit the
exercise of Heller's rights and remedies against any Debtor under the Final
Financing Order, Postpetition Documents or otherwise, whether before, on or
after the Effective Date.
Any Person injured by any willful violation of such injunction shall
recover actual damages, including costs and attorneys' fees, and, in appropriate
circumstances, may recover punitive damages, from the willful violator.
N. RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the
occurrence of the Effective Date, the Court will retain such jurisdiction over
the Chapter 11 Cases after the Effective Date to the full extent permitted by
law, including, without limitation, jurisdiction to:
39
(i) Allow, disallow, determine, liquidate, classify, subordinate,
estimate or establish the priority or secured or unsecured
status of any Claim or Interest, including the resolution of
any request for payment of any Administrative Claim, the
resolution of any objections to the allowance or priority of
Claims or Equity Interests and the resolution of any dispute
as to the treatment necessary to reinstate a Claim pursuant to
the Plan;
(ii) Grant or deny any applications for allowance of compensation
or reimbursement of expenses authorized pursuant to the
Bankruptcy Code or the Plan, for periods ending before the
Effective Date;
(iii) Resolve any matters related to the assumption or rejection of
any executory contract or unexpired lease to which any Debtor
is a party or with respect to which the any Debtor may be
liable, and to hear, determine and, if necessary, liquidate
any Claims arising therefrom;
(iv) Ensure that distributions to Holders of Allowed Claims are
accomplished pursuant to the provisions of the Plan;
(v) Decide or resolve any motions, adversary proceedings,
contested or litigated matters and any other matters and grant
or deny any applications involving the Debtors, Reorganized
Debtors or the Chapter 11 Cases that may be pending on the
Effective Date;
(vi) Enter such Orders as may be necessary or appropriate to
implement or consummate the provisions of the Plan and all
contracts, instruments, releases, indentures and other
agreements or documents created in connection with the Plan,
this Disclosure Statement or the Confirmation Order, except as
otherwise provided herein;
(vii) Resolve any cases, controversies, suits or disputes that may
arise in connection with the consummation, interpretation or
enforcement of the Plan or the Confirmation Order, including
the release and injunction provisions set forth in and
contemplated by the Plan and the Confirmation Order, or any
entity's rights arising under or obligations incurred in
connection with the Plan or the Confirmation Order;
(viii) Subject to any restrictions on modifications provided in any
contract, instrument, release, indenture or other agreement or
document created in connection with the Plan, modify the Plan
before or after the Effective Date pursuant to Section 1127 of
the Bankruptcy Code or modify this Disclosure Statement, the
Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection
with the Plan, this Disclosure Statement or the Confirmation
Order; or remedy any defect or omission or reconcile any
inconsistency in any Court Order, the Plan, this Disclosure
Statement, the Confirmation Order or any contract, instrument,
release, indenture or other agreement or document
40
created in connection with the Plan, this Disclosure Statement
or the Confirmation Order, in such manner as may be necessary
or appropriate to consummate the Plan, to the extent
authorized by the Bankruptcy Code;
(ix) Issue injunctions, enter and implement other Orders or take
such other actions as may be necessary or appropriate to
restrain interference by any entity with consummation,
implementation or enforcement of the Plan or the Confirmation
Order;
(x) Enter and implement such Orders as are necessary or
appropriate if the Confirmation Order is for any reason
modified, stayed, reversed, revoked or vacated;
(xi) Determine any other matters that may arise in connection with
or relating to the Plan, this Disclosure Statement, the
Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection
with the Plan, this Disclosure Statement or the Confirmation
Order, except as otherwise provided in the Plan; and
(xii) Enter an Order concluding the Chapter 11 Cases.
The foregoing list is illustrative only and not intended to limit in
any way the Court's exercise of jurisdiction.
O. MISCELLANEOUS PROVISIONS
1. EXEMPTION FROM TRANSFER TAXES
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance,
transfer or exchange of notes or equity securities under the Plan, the creation
of any mortgage, deed of trust or other security interest, the making or
assignment or any lease or sublease, or the making or delivery of any deed or
other instrument of transfer under, in furtherance of, or in connection with the
Plan, including, without limitation, any agreements of consolidation, deeds,
bills of sale or assignments executed in connection with any of the transactions
contemplated under the Plan shall not be subject to any stamp, real estate
transfer, mortgage recording or other similar tax.
2. PAYMENT OF STATUTORY FEES
All fees payable on or before the Effective Date pursuant to section
1930 of Title 28 of the United States Code, as determined by the Court at the
Confirmation Hearing, shall be paid on or before the Effective Date.
3. MODIFICATION OR WITHDRAWAL OF THE PLAN
The Debtors reserve the right, in accordance with the Bankruptcy
Code, to amend, modify or withdraw the Plan prior to the entry of the
Confirmation Order. After the entry of the Confirmation Order, the Debtors may
amend or modify the Plan, or remedy any defect or
41
omission or reconcile any inconsistency in the Plan in such a manner as may be
necessary to carry out the purpose and intent of the Plan.
4. GOVERNING LAW
Unless a rule of law or procedure is supplied by federal law
(including the Bankruptcy Code and Bankruptcy Rules), the laws of the State of
Delaware (without reference to the conflicts of laws provisions thereof) shall
govern the construction and implementation of the Plan and any agreements,
documents and instruments executed in connection with the Plan.
5. FILING OR EXECUTION OF ADDITIONAL DOCUMENTS
On or before the Effective Date, the Reorganized Debtors shall file
with the Court or execute, as appropriate, such agreements and other documents
as may be necessary or appropriate to effectuate and further evidence the terms
and conditions of the Plan.
6. WITHHOLDING AND REPORTING REQUIREMENTS
In connection with the Plan and all instruments issued in connection
therewith and distributions thereon, the Reorganized Debtors shall comply with
all withholding and reporting requirements imposed by any federal, state, local
or foreign taxing authority and all distributions thereunder shall be subject to
any such withholding and reporting requirements.
7. WAIVER OF RULE 62 (a) OF THE FEDERAL RULES OF CIVIL PROCEDURE
The Debtors may request that the Confirmation Order include (a) a
finding the Rule 62(a) of the Federal Rules of Bankruptcy Procedure shall not
apply to the Confirmation Order, and (b) authorization for the Debtors to
consummate the Plan immediately after the entry of the Confirmation Order.
8. HEADINGS
Headings used in the Plan are for convenience and reference only and
shall not constitute a part of the Plan for any purpose.
9. EXHIBITS AND SCHEDULES
All Exhibits and Schedules to the Plan and Disclosure Statement are
incorporated into and constitute a part of the Plan as if set forth herein.
10. NOTICES
All notices, requests and demand hereunder to be effective shall be
in writing and unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when actually delivered or, in the case of notice
by facsimile transmission, when received and telephonically confirmed, addressed
as provided for in the Plan.
42
11. PLAN SUPPLEMENT
Forms of documents relating to the Amended ALC Articles, Amended
Carriage House Certificate, New Senior Notes Indenture and New Junior Notes
Indenture shall be contained in the Plan Supplement and filed with the Clerk of
the Court at least 5 days prior to the date of the Confirmation Hearing. Upon
its filing with the Court, the Plan Supplement may be inspected during normal
Court hours. Holders of Claims may obtain a copy of the Plan Supplement upon
written request to counsel the Debtors.
12. CONFLICT
The terms of this Plan shall govern in the event of any
inconsistency with the summaries of the Plan set forth in the Disclosure
Statement.
13. SUCCESSORS AND ASSIGNS
The rights, benefits and obligations of any Person named or referred
to in the Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, trustee, administrator, successor or assign of such Person.
14. SATURDAY, SUNDAY OR LEGAL HOLIDAY
If any payment or act under the Plan is required to be made or
performed on a date that is not a Business Day, then the making of such payment
or the performance of such act may be completed on the next succeeding Business
Day, but shall be deemed to have been completed as of the required date.
15. POST-EFFECTIVE DATE EFFECT OF EVIDENCES OF CLAIMS OR INTERESTS
Notes, bonds, stock certificates and other evidences of Claims
against or Interests in the Debtor, and all Instruments of the Debtor (in either
case, other than those executed and delivered as contemplated hereby in
connection with the consummation of the Plan), shall, effective upon the
Effective Date, represent only the right to participate in the distributions
contemplated by the Plan.
16. SEVERABILITY OF PLAN PROVISIONS
If, prior to Confirmation, any term or provision of the Plan which
does not govern the treatment of Claims or Interests provided for herein or the
conditions to the Effective Date is held by the Court to be invalid, void, or
unenforceable, the Court shall have the power to alter and interpret such term
or provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void, or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of the
Plan will remain in full force and effect and will in no way be affected,
impaired, or invalidated by such holding, alteration, or interpretation. The
Confirmation Order shall constitute a judicial determination, and shall provide,
that each term and provision of the
43
Plan, as it may have been altered or interpreted in accordance with the
foregoing, is valid and enforceable pursuant to its terms.
17. BALLOTING
Each holder of Allowed Claim or an Allowed Interest entitled to vote
on the Plan will receive a ballot. The ballot will contain two boxes, one
indicating acceptance of the Plan and the other indicating rejection of the
Plan. Holders of Allowed Claims or Allowed Interests who elect to vote on the
Plan must mark one or the other box pursuant to the instructions contained on
the ballot. Any executed Ballot that does not indicate acceptance or rejection
of the Plan will be considered a non-vote and will not be counted as an
acceptance or rejection of the Plan.
18. NO ADMISSIONS OR WAIVER OF OBJECTIONS
Notwithstanding anything herein to the contrary, nothing contained
in the Plan shall be deemed as an admission by any Debtor with respect to any
matter set forth herein including, without limitation, liability on any Claim or
the propriety of any Claims classification. The Debtors are not bound by any
statements herein or in the Disclosure Statement as judicial admissions.
19. SURVIVAL OF SETTLEMENTS
All Court-approved settlements shall survive consummation of the
Plan, except to the extent that any provision of any such settlement is
inconsistent with the Plan, in which case the provisions of the Plan shall
supersede such inconsistent provision of such settlement.
SECTION VIII.
PROJECTIONS AND
VALUATION ANALYSIS
The Debtors and their advisors have developed financial projections,
as summarized below, to assess the feasibility of Reorganized Debtors generally.
The projections and valuations set forth below are based on a number of
significant assumptions, including the successful reorganization of the Debtors,
an assumed Effective Date of December 31, 2001, and no significant downturn in
the specific markets in which the Debtors operate.
THE PROJECTIONS ARE BASED ON A NUMBER OF SIGNIFICANT ASSUMPTIONS.
ACTUAL OPERATING RESULTS AND VALUES MAY VARY.
Annexed to this Disclosure Statement as Exhibit G are unaudited
financial projections of Reorganized ALC (the "Projections"). The Projections
are dependent upon many factors over which the Debtors do not have any control.
No assurance can be given that any of the assumptions on which the Projections
are based will prove to be correct. The Projections were not prepared with a
view to public disclosure or in compliance with (i) published guideline of the
SEC, (ii) the guidelines established by the American Institute of Certified
Public
44
Accountants regarding projections, or (iii) GAAP. While presented with numerical
specificity, such projections are based upon a variety of assumptions that may
not be realized, relating to future business and operations of Reorganized ALC
and the integration of their operations. The Projections are subject to
uncertainties and contingencies, all of which are difficult to predict, and many
of which are beyond the control of the Debtors. THE DEBTORS MAKE NO EXPRESS OR
IMPLIED REPRESENTATION OR WARRANTY AS TO THE ATTAINABILITY OF THE PROJECTED
FINANCIAL INFORMATION SET FORTH IN THE COMBINED COMPANY PROJECTIONS, OR AS TO
THE ACCURACY OR COMPLETENESS OF THE ASSUMPTIONS FROM WHICH THAT PROJECTED
INFORMATION IS DERIVED.
SECTION IX.
CONFIRMATION PROCEDURE
A. SOLICITATION OF VOTES
In accordance with Sections 1126 and 1129 of the Bankruptcy Code,
the Claims against and Interests in ALC Classes 1B, certain Claims of 2A et
seq., 4 and 9 are Impaired and the Holders of Allowed Claims and Interests each
of such Class are entitled to vote to accept or reject the Plan. Claims against
ALC in Classes 1A, 1C, 1D, 1E, certain Claims of 2A et seq., 3, 5, 6, 7 and 8
are Unimpaired and each and all of the Claims against and Interests in Carriage
House are Unimpaired. The Holders of Allowed Claims and Interests in each of
such Classes are conclusively presumed to have accepted the Plan and the
solicitation of acceptances to such Classes is not required under Section
1126(f) of the Bankruptcy Code. Interests of ALC in Class 10 are Impaired and
will not receive or retain any property under the Plan. Accordingly, the holders
of Interests in Class 10 are deemed to have rejected the Plan and the
solicitation of acceptances with respect to such Classes is not required under
Section 1126(g) of the Bankruptcy Code.
As to the class of claims entitled to vote on a plan, the Bankruptcy
Code defines acceptance of a plan by a class of creditors as acceptance by
holders of at least two-thirds in dollar amount and more than one-half in number
of the Claims of that class that have timely voted to accept or reject a plan.
A vote may be disregarded if the Court determines, after notice and
a hearing, that acceptance or rejection was not solicited or procured in good
faith or in accordance with the provisions of the Code.
Any creditor in an Impaired Class (i) whose Claim has been listed by
the Debtors in the Debtors' Schedules filed with the Court (provided that such
Claim has not been scheduled as disputed, contingent or unliquidated) or (ii)
who filed a proof of claim on or before November 15, 2001 (or, if not filed by
such date, any proof of claim filed within any other applicable period of
limitations or with leave of the Court), which Claim is not the subject of an
objection or request for estimation, is entitled to vote.
45
1. VOTING PROCEDURES FOR HOLDERS OF VOTING SECURITIES
If you are a registered holder of the Debentures and Old ALC Common
Stock ("Voting Securities"), in each case, to the extent such holder is entitled
to vote ("Holder of Voting Securities"), you will receive the ballot relating to
the securities you hold of record. Registered Holders may include brokerage
firms, commercial banks, trust companies or other nominees. If such entities do
not hold Voting Securities for their own account, they should provide copies of
this Disclosure Statement and an appropriate Ballot to their customers and to
beneficial owners. Any beneficial owner who has not received this Disclosure
Statement or a Ballot should contact their brokerage firm or nominee or the
Solicitation Agent.
All votes to accept or reject the Plan must be cast by using the
Ballot or, in the case of a brokerage firm or other nominee holding Voting
Securities in its own name on behalf of a beneficial owner, the Master Ballot,
enclosed with this Disclosure Statement. Brokerage firms or other nominees
holding Voting Securities for the account of only one beneficial owner may use a
Ballot. Purported votes which are cast in any other manner will not be counted.
Ballots and Master Ballots must be received by the Solicitation Agent no later
than 4:00 p.m., Eastern Time, on the Voting Deadline (November 30, 2001) which
may be extended at the Debtor's discretion or with Court approval. Ballots must
be sent to the Solicitation Agent at the following address:
Bankruptcy Services LLC
P.O. Box 5014
FDR Station
New York, NY 10150-5014
Tel: (212) 376-8494
Fax: (212) 376-8989
Attn: Assisted Living Concepts Claims Processing
You may receive a Ballot relating to Voting Securities that you did
not beneficially own on the Distribution Record Date. You should complete only
the Ballot corresponding to each class of Voting Securities which you
beneficially owned on the Distribution Record Date. Holders who purchase or
whose purchase is registered after the Distribution Record Date, and who wish to
vote on the Plan must arrange with their seller to receive a proxy from the
Holder of record on the Distribution Record Date, a form of which is provided
with each Ballot and Master Ballot.
Holders of Voting Securities who elect to vote on the Plan should
complete and sign the Ballot in accordance with the instructions thereon being
sure to check the appropriate box entitled "Accept the Plan" or "Reject the
Plan." Holders may not split their vote on the Plan with respect to a particular
class of Voting Securities. A Holder must vote all securities beneficially owned
in a particular class in the same way (i.e., all "accept" or all "reject") even
if such Voting Securities are owned through more than one broker or bank. Any
executed Ballot that does not indicate acceptance or rejection of the Plan will
not be counted as an acceptance or a rejection.
46
Again, delivery of the Ballots must be made to the Solicitation
Agent at Bankruptcy Services LLC, P.O. Box 5014, FDR Station, New York, NY
10150-5014, Attn: Assisted Living Concepts Claims Processing. The method of such
delivery is at the election and risk of the Holder. If such delivery is by mail,
it is recommended that Holders use an air courier with a guaranteed next day
delivery or registered mail, properly insured, with return receipt requested. In
all cases, sufficient time should be allowed to assure timely delivery.
You may receive multiple mailings of this Disclosure Statement,
especially if you own your Voting Securities through more than one broker or
bank. If you submit more than one Ballot for a class or issue of Voting
Securities because you beneficially own such Voting Securities through more than
one broker or bank, be sure to indicate in item [3] of the Ballot(s), the names
of all broker dealers or other intermediaries who hold Voting Securities for
you.
2. BENEFICIAL OWNERS OF DEBENTURES OR OLD COMMON STOCK
All beneficial owners of Voting Securities on the Distribution
Record Date are eligible to vote on the Plan, whether the Voting Securities were
held on the Distribution Record Date in such beneficial owner's name or in the
name of a brokerage firm, commercial bank, trust company or other nominee.
Any beneficial owner holding Voting Securities in its own name can
vote by completing and signing the enclosed Ballot and returning it directly to
the Solicitation Agent using the enclosed pre-addressed stamped envelope.
A beneficial owner holding Voting Securities in "street name" (i.e.,
through a brokerage firm, bank, trust company or other nominee) or a beneficial
owner's authorized signatory (a broker or other intermediary having power of
attorney to vote on behalf of a beneficial owner) can vote by following the
instructions set forth below:
1. Fill in all the applicable information on the Ballot.
2. Sign the Ballot (unless the Ballot has already been signed by
the bank, trust company or other nominee).
3. Return the Ballot to the addressee in the preaddressed,
stamped envelope enclosed with the ballot. If no envelope was enclosed, contact
the Solicitation Agent for instructions.
Authorized signatories voting on behalf of more than one beneficial
owner must complete a separate Ballot for each such beneficial owner. Any Ballot
submitted to a brokerage firm or proxy intermediary will not be counted until
such brokerage firm or proxy intermediary (i) properly executes and delivers
such Ballot to the Solicitation Agent or (ii) properly completes and delivers a
corresponding Master Ballot to the Solicitation Agent.
By submitting a vote for or against the Plan, you are certifying
that you are the beneficial owner of the Voting Securities being voted or an
authorized signatory for such a beneficial owner. Your submission of a Ballot
will also constitute a request that you (or in the
47
case of an authorized signatory, the beneficial owner) be treated as the record
holder of such securities for purposes of voting on the Plan.
3. BROKERAGE FIRMS, BANKS AND OTHER NOMINEES
A brokerage firm, commercial bank, trust company or other nominee
which is the registered holder of a Voting Security for a beneficial owner, or
its a participant in a securities clearing agency and is authorized to vote in
the name of such securities clearing agency pursuant to an omnibus proxy (as
described below) and is acting for a beneficial owner, can vote on behalf of
such beneficial owner by (i) distributing a copy of this Disclosure Statement
and all appropriate Ballots to such owner, (ii) collecting all such Ballots,
(iii) completing a Master Ballot compiling the votes and other information from
the Ballots collected, and (iv) transmitting such completed Master Ballot to the
Solicitation Agent. A proxy intermediary acting on behalf of a brokerage firm or
bank may follow the procedures outlines in the preceding sentence to vote on
behalf of such beneficial owner. A brokerage firm, commercial bank, trust
company or other nominee which is the registered holder of a Voting Security for
only one beneficial owner also may arrange for such beneficial owner to vote by
executing the appropriate ballot and by distributing a copy of this Disclosure
Statement and such executed Ballot to such beneficial owner for voting and
returning such ballot to the Solicitation Agent.
4. VOTING DEADLINE AND EXTENSIONS
In order to be counted for purposes of voting on the Plan, all of
the information requested by the applicable Ballot must be provided. Ballots
indicating acceptance or rejection of the Plan must be received by the
Solicitation Agent at its address set forth below no later the 5:00 p.m.,
Eastern Time, on the Voting Deadline. The Debtors reserve the right, in its sole
discretion, to extend the Voting Deadline or the Court may extended the Voting
Deadline, in which case the term "Voting Deadline" shall mean the latest date on
which a Ballot will be accepted.
5. WITHDRAWAL OF VOTES ON THE PLAN
The solicitation of acceptances of the Plan will expire on the
Voting Deadline. A properly submitted Ballot may be withdrawn by delivering a
written or facsimile transmission notice of withdrawal to the Solicitation
Agent, BSI, at the following address:
Bankruptcy Services LLC
P.O. Box 5014
FDR Station
New York, NY 10150-5014
Tel: (212) 376-8494
Fax: (212) 376-8989
Attn: Assisted Living Concepts Claims Processing
at any time prior to the Voting Deadline. Thereafter, withdrawal may be
effected only with the approval of the Court.
48
In order to be valid, a notice of withdrawal must (i) specify the
name of the holder who submitted the votes on the Plan to be withdrawn; (ii)
contain a description of the Claim or Interest to which it relates and the
aggregate principal amount or number of shares represented by such Claim or
Interest; and (iii) be signed by the holder in the same manner as on the Ballot.
The Debtors expressly reserve the absolute right to contest the validity of any
such withdrawals of votes on the Plan.
Any holder who has previously submitted to BSI prior to the
Expiration Date a properly completed Ballot, may revoke and change such vote by
submitting to BSI prior to the Expiration Date a subsequent properly completed
Ballot for acceptance or rejection of the Plan. In the case where more than one
timely, properly completed Ballot is received, only the one which bears the
latest date will be counted for purposes of determining whether sufficient
acceptances required to seek confirmation of the Plan have been received. If
more than one Master Ballot is submitted and the later dated Master Ballot(s)
supplement rather than supersede the earlier Master Ballot(s), please mark the
subsequent Master Ballot(s) with the words "Additional Votes" or such other
language as is customarily used to indicate additional votes that are not meant
to revoke earlier votes.
6. SOLICITATION AGENT
BSI has been appointed as Solicitation Agent (the "Solicitation
Agent") for the Plan. Questions and requests for assistance may be directed to
the Solicitation Agent. Requests for additional copies of this Disclosure
Statement, the Ballots or the Master Ballots should be directed to the
Solicitation Agent.
B. THE CONFIRMATION HEARING
The Bankruptcy Code requires the Court, after notice, to hold a
confirmation hearing. The Confirmation Hearing in respect of the Plan has been
scheduled for December 5, 2001 at 8:30 a.m., Eastern Time, before the Honorable
Sue L. Robinson at the United States District Court for the State of Delaware,
J. Caleb Boggs Building, 844 North King Street, Wilmington, Delaware 19801. The
Confirmation Hearing may be adjourned from time to time by the Court without
further notice except for an announcement of the adjourned date made at the
Confirmation Hearing. Any objection to confirmation must be made in writing and
specify in detail the name and address of the objector, all grounds for the
objection and the amount of the Claim or number of shares of common stock of the
Debtors or other Interests held by the objector. Any such objection must be
filed with the Court and served so that it is received by the Court and the
following parties on or before November 30, 2001 at 4:00 p.m., Eastern Time:
Latham & Watkins Young Conaway Stargatt & Taylor, LLP
Attorneys for the Debtors Attorneys for the Debtors
633 West Fifth Street, Suite 4000 1110 North Market Street
Los Angeles, California 90071 Rodney Square North, 11th Floor
Attn: Robert A. Klyman Wilmington, Delaware 19899
Jonathan S. Shenson Attn: Michael R. Nestor
49
Milbank, Tweed, Hadley & McCloy LLP Morris, Nichol, Arsht & Tunnell
Attorneys for the Informal Bondholders 1201 N. Market Street
Committee P.O. Box 1347
601 S. Figueroa St., 30th Floor Wilmington, Delaware
Los Angeles, CA 90071 Attn: Robert J. Dehney
Attn: Thomas R. Kreller
David B. Zolkin
C. CONFIRMATION
This Disclosure Statement and the appropriate Ballot are being
distributed to all creditors and equity interest holders who are entitled to
vote on the Plan. There is a separate ballot designated for each impaired class
in order to facilitate vote tabulation; however all Ballots are substantially
similar in form and substance and the term "Ballot" is used without intended
reference to the Ballot of any specific class of claims or equity interests.
The Bankruptcy Code requires that, in order to confirm the Plan, the
Court must make a series of findings concerning the Plan and the Company,
including, without limitation, that (i) the Plan has classified Claims and
Interests in a permissible manner, (ii) the Plan complies with applicable
provisions of the Bankruptcy Code, (iii) the Debtors have complied with
applicable provisions of the Bankruptcy Code, (iv) the Debtors have proposed the
Plan in good faith and not by any means forbidden by law, (v) the disclosure
required by Section 1125 of the Bankruptcy Code has been made, (vi) the Plan has
been accepted by the requisite votes of creditors (except to the extent that
cramdown is available under Section 1129(b) of the Bankruptcy Code), (vii) the
Plan is feasible and Confirmation is not likely to be followed by the
liquidation or the need for further financial reorganization of the Debtors,
(viii) the Plan is in the "best interests" of all Holders of Claims or Interests
in an impaired Class in that it provides to such Holders on account of their
Claims or Interests property of a value, as of the Effective Date, that is not
less than the amount that such Holder would receive or retain in a Chapter 7
liquidation, unless each Holder of a Claim or Interest in such Class has
accepted the Plan, (ix) all fees and expenses payable under 28 U.S.C. Section
1930, as determined by the Court at the hearing on Confirmation, have been paid
or the Plan provides for the payment of such fees on the Effective Date, and (x)
the Plan provides for the continuation after the Effective Date of all retiree
benefits, as defined in Section 1114 of the Bankruptcy Code, at the level
established at any time prior to Confirmation pursuant to Sections 1114(e)(1)(B)
or 1114(g) of the Bankruptcy Code, for the duration of the period that the
Debtors have obligated themselves to provide such benefits.
A plan is accepted by an Impaired class of claims if holders of at
least two-thirds in dollar amount and more than one-half in number of claims of
that class vote to accept the Plan. A plan is accepted by an impaired class of
interests if holders of at least two-thirds of the number of shares in such
class vote to accept the Plan. Only those holders of claims or interests who
actually vote count in these tabulations.
In addition to this voting requirement, Section 1129 of the
Bankruptcy Code requires that a plan be accepted by each holder of a claim or
interest in an impaired class or that the Plan otherwise be found by the
bankruptcy court to be in the best interests of each holder of a
50
claim or interest in such class. In addition, each impaired class must accept
the Plan for the Plan to be confirmed without application of the "fair and
equitable" and "unfair discrimination" tests in Section 1129(b) of the
Bankruptcy Code discussed below.
The Bankruptcy Code contains provisions authorizing the confirmation
of a plan even if it is not accepted by all impaired classes, as long as at
least one impaired class of claims (without including any acceptance of the Plan
by an insider) has accepted it. These so-called "cramdown" provisions are set
forth in Section 1129(b) of the Bankruptcy Code. As indicated above, a plan may
be confirmed under the cramdown provisions if, in addition to satisfying the
other requirements of Section 1129 of the Bankruptcy Code, it (i) is "fair and
equitable" and (ii) "does not discriminate unfairly" with respect to each class
of claims or interests that is impaired under, and has not accepted, the Plan.
The "fair and equitable" standard, also known as the "absolute priority rule,"
requires, among other things, that unless a dissenting class of claims or a
class of interests receives full compensation for its allowed claims or allowed
interests, no holder of claims or interests in any junior class may receive or
retain any property on account of such claims. The Bankruptcy Code establishes
different "fair and equitable" tests for secured creditors, unsecured creditors
and equity holders, as follows:
(a) Secured Creditors: either (i) each impaired secured creditor retains
its liens securing its secured claim and receives on account of its
secured claim deferred cash payments having a present value equal to
the amount of its allowed secured claim, (ii) each impaired secured
creditor realizes the "indubitable equivalent" of its allowed
secured claim, or (iii) the property securing the claim is sold free
and clear of liens with such liens to attach to the proceeds, and
the liens against such proceeds are treated in accordance with
clause (i) or (ii) of this subparagraph (a).
(b) Unsecured Creditors: either (i) each impaired unsecured creditor
receives or retains under the plan or reorganization property of a
value equal to the amount of its allowed claim, or (ii) the holders
of claims and equity interests that are junior to the claims of the
nonaccepting class do not receive any property under the Plan of
reorganization on account of such claims and equity interests.
(c) Equity Holders: either (i) each equity holder will receive or retain
under the plan of reorganization property of a value equal to the
greater of (a) the fixed liquidation preference or redemption price,
if any, of such stock or (b) the value of the stock, or (ii) the
holders of interests that are junior to the nonaccepting class will
not receive any property under the plan of reorganization.
The "fair and equitable" standard has also been interpreted to
prohibit any class senior to a dissenting class from receiving under a plan more
than 100% of its allowed claims. The requirement that a plan not "discriminate
unfairly" means, among other things, that a dissenting class must be treated
substantially equally with respect to other classes of equal rank.
The Debtors believe that, if necessary, the Plan may be crammed down
over the dissent of certain Classes of Claims and Interests, in view of the
treatment proposed for such Classes. If necessary and appropriate, the Debtors
intend to amend the Plan to permit cramdown of dissenting Classes of Claims or
Interests. There can be no assurance, however, that the
51
requirements of Section 1129(b) of the Bankruptcy Code would be satisfied even
if the Plan treatment provisions were amended or withdrawn as to one or more
Classes. The Debtors believe that the treatment under the Plan of the Holders of
Claims and Interests will satisfy the "fair and equitable" test since, although
no distribution will be made in respect of Interests in such Classes and, as a
result, such Classes will be deemed pursuant to Section 1126 of the Bankruptcy
Code to have rejected the Plan, no Class junior to such non-accepting Classes
will receive or retain any property under the Plan.
In addition, the Debtors do not believe that the Plan unfairly
discriminates against any Class that may not accept or otherwise consent to the
Plan. A plan of reorganization "does not discriminate unfairly" if (i) the legal
rights of a nonaccepting class are treated in a manner that is consistent with
the treatment of other classes whose legal rights are similarly situated to
those of the nonaccepting class, and (ii) no class receives payments in excess
of that which it is legally entitled to receive for its claims or equity
interests. The Debtors believe the Plan does not discriminate unfairly.
TO THE EXTENT NECESSARY, THE DEBTORS INTEND TO SEEK CONFIRMATION OF
THE PLAN UNDER SECTION 1129(b) OF THE BANKRUPTCY CODE.
Subject to the conditions set forth in the Plan, a determination by
the Court that the Plan is not confirmable pursuant to Section 1129 of the
Bankruptcy Code will not limit or affect the Company's ability to modify the
Plan to satisfy the Confirmation requirements of Section 1129 of the Bankruptcy
Code.
1. FEASIBILITY
Section 1129(a)(11) of the Bankruptcy Code requires as a condition
for Confirmation that the Court determine that the Plan is not likely to be
followed by a liquidation, or the need for further financial reorganization, of
the Debtors or Reorganized Debtors, unless such liquidation or reorganization is
proposed in the Plan. The Debtors believe that the Plan satisfies this
requirement. The Debtors have prepared the Projections which are attached to
this Disclosure Statement as Exhibit G. The Debtors believe that throughout the
forecast period ending December 31, 2006, assuming the underlying assumptions
are realized, cash provided by operations combined with availability under the
Post-Effective Date borrowings will be adequate to meet capital expenditure and
debt service requirements.
2. BEST INTERESTS TEST/LIQUIDATION ANALYSIS
With respect to each Impaired Class of Claims and Equity Interests,
Confirmation of the Plan requires that each holder of a Claim or Equity Interest
either (i) accept the Plan or (ii) receive or retain under the Plan property of
a value, as of the Effective Date, that is not less than the value such holder
would receive or retain if the Debtors were liquidated under chapter 7 of the
Bankruptcy Code. To determine what holders of Claims and Equity Interests of
each impaired Class would receive if the Debtors were liquidated under chapter
7, the Bankruptcy Court must determine the dollar amount that would be generated
from the liquidation of the Debtors' assets and properties in the context of a
chapter 7 liquidation case. The Cash amount
52
that would be available for satisfaction of Unsecured Claims and Equity
Interests would consist of the proceeds resulting from the disposition of the
unencumbered assets and properties of the Debtors augmented by the unencumbered
Cash held by the Debtors at the time of the commencement of the liquidation
case. Such Cash amount would be reduced by the amount of the costs and expenses
of the liquidation and by such additional administrative and priority claims
that might result from the termination of the Debtors' business and the use of
chapter 7 for the purposes of liquidation.
The Debtors' cost of liquidation under chapter 7 would include the
fees payable to a trustee in bankruptcy, as well as those fees that might be
payable to attorneys and other professionals that such a trustee might engage.
In addition, claims would arise by reason of the breach or rejection of
obligations incurred and leases and executory contracts assumed or entered into
by the Debtors during the pendency of the Chapter 11 Case. The foregoing types
of claims and other claims that might arise in a liquidation case or result from
the pending Chapter 11 Case, including unpaid expenses incurred by the Debtors
during the Chapter 11 Case such as compensation for attorneys, financial
advisors and accountants, would be paid in full from the liquidation proceeds
before the balance of those proceeds would be made available to pay prepetition
Unsecured Claims.
To determine if the Plan is in the best interests of each impaired
class, the present value of the distributions from the proceeds of a liquidation
of the Debtors' unencumbered assets and properties, after subtracting the
amounts attributable to the foregoing claims, are then compared with the value
of the property offered to such Classes of Claims and Equity Interests under the
Plan.
After considering the effects that a chapter 7 liquidation would
have on the ultimate proceeds available for distribution to creditors in the
Chapter 11 Cases including (i) the increased costs and expenses of a liquidation
under chapter 7 from fees payable to a trustee in bankruptcy and professional
advisors to such trustee, (ii) the erosion in value of assets in a chapter 7
case in the context of the expeditious liquidation required under chapter 7 and
the "forced sale" atmosphere that would prevail and (iii) the substantial
increases in Claims which would be satisfied on a priority basis or on parity
with creditors in the Chapter 11 Case, the Debtors have determined that
confirmation of the Plan will provide each holder of an Allowed Claim or Equity
Interest with a recovery that is not less than such holder would receive
pursuant to liquidation of the Debtors under chapter 7.
The Debtors also believe that the value of any distributions to each
class of Allowed Claims in a chapter 7 case would be less than the value of
distributions under the Plan because such distributions in a chapter 7 case
would not occur for a substantial period of time. It is likely that distribution
of the proceeds of the liquidation could be delayed for two years after the
completion of such liquidation in order to resolve Claims and prepare for
distributions. In the likely event litigation was necessary to resolve Claims
asserted in the chapter 7 case, the delay could be prolonged.
The Debtors' Liquidation Analysis is attached hereto as Exhibit F.
The information set forth in Exhibit F provides a summary of the liquidation
values of the Debtors' assets, assuming a chapter 7 liquidation in which a
trustee appointed by the Court would
53
liquidate the assets of the Debtors' Estates. Reference should be made to the
Liquidation Analysis for a complete discussion and presentation of the
Liquidation Analysis. The Liquidation Analysis was prepared by KPMG. The
Debtors, their management and agents were not involved in the preparation of the
Liquidation Analysis.
Underlying the Liquidation Analysis are a number of estimates and
assumptions that, although developed and considered reasonable by management,
are inherently subject to significant economic and competitive uncertainties and
contingencies beyond the control of the Debtors and their management. The
Liquidation Analysis is also based on assumptions with regard to liquidation
decisions that are subject to change. Accordingly, the values reflected might
not be realized if the Debtors were, in fact, to undergo such a liquidation. The
chapter 7 liquidation period is assumed to be a period of more than one year,
allowing for, among other things, the (i) discontinuation of operations, (ii)
selling of assets and (iii) collection of receivables.
SECTION X.
EFFECTIVENESS OF THE PLAN
A. CONDITIONS PRECEDENT TO CONFIRMATION AND CONSUMMATION OF THE PLAN
1. CONDITIONS TO CONFIRMATION
The Plan provides that the Court will not enter the Confirmation
Order unless the Confirmation Order is acceptable in form and substance to the
Debtors and Informal Bondholder Committee and the Confirmation Order expressly
authorizes and directs the Company and Reorganized Debtors to perform those
actions specified in of the Plan.
In addition to the foregoing conditions to Confirmation, there are a
number of procedural and substantive confirmation requirements under the
Bankruptcy Code that must be satisfied for the Plan to be confirmed pursuant to
Section 1129 of the Bankruptcy Code. There can be no assurance that the
Confirmation conditions or the conditions set forth in Section 1129 of the
Bankruptcy Code will be satisfied, or, if so permitted, waived by the Debtors.
2. CONDITIONS TO EFFECTIVE DATE
The Plan shall not become effective unless and until it has been
confirmed and the following conditions have been satisfied in full or waived:
(1) the Confirmation Order in a form satisfactory to the Debtors and the
Informal Bondholder Committee shall have become a Final Order; (2) the Effective
Date shall have occurred by January 31, 2002; (3) all authorizations, consents
and regulatory approvals (including, without limitation, any approvals required
under regulations relating to the change in ownership of ALC upon the Effective
Date) required (if any) for the Plan's effectiveness shall have been obtained;
(4) each of the New Junior Note Indenture and the New Senior Note Indenture has
been qualified under the Trust Indenture Act of 1939, as amended; and (5) all
other actions and documents necessary to implement the treatment of creditor
Claims shall have been effected or executed or, if waivable, waived by the
Person or Persons entitled to the benefit thereof.
54
B. WAIVER OF CONDITIONS
The Debtors may waive any or all of the other conditions set forth
in the Plan without leave of or order of the Court and without any formal
action. The Debtors reserve the right to amend or revoke the Plan. Although the
Plan is styled as a joint Plan, the Debtors reserve the right to proceed with
Confirmation under the Plan for one Debtor and not the other.
C. EFFECT OF FAILURE OF CONDITIONS
In the event that the Effective Date does not occur on or before 120
days after the Confirmation Date, upon notification submitted by the Debtors and
Informal Bondholder Committee to the Court: (a) the Confirmation Order shall be
vacated, (b) no distributions under the Plan shall be made, (c) the Debtors and
all holders of Claims and Equity Interests shall be restored to the status quo
ante as of the day immediately preceding the Confirmation Date as though the
Confirmation Date had never occurred, and (d) the Debtors' obligations with
respect to the Claims and Equity Interests shall remain unchanged and nothing
contained in the Plan shall constitute or be deemed a waiver or release of any
Claims or Equity Interests by or against the Debtors or any other person or to
prejudice in any manner the rights of the Debtors or any person in any further
proceedings involving the Debtors.
D. VACATUR OF CONFIRMATION ORDER
If an order denying confirmation of the Plan is entered, then the
Plan shall be null and void in all respects, and nothing contained in the Plan
shall (a) constitute a waiver or release of any Claims against or Equity
Interests in the Debtors; (b) prejudice in any manner the rights of the holder
of any Claim against, or Equity Interest in, the Debtors; (c) prejudice in any
manner any right, remedy or claim of the Debtors; or (d) be deemed an admission
against interest by the Debtors.
SECTION XI.
ALTERNATIVES TO CONFIRMATION
AND CONSUMMATION OF THE PLAN
A. LIQUIDATION UNDER CHAPTER 7
If no plan is confirmed, the Chapter 11 Cases may be converted to
cases under chapter 7 of the Bankruptcy Code, pursuant to which a trustee would
be elected to liquidate the Debtors' assets for distribution in accordance with
the priorities established by chapter 7. A discussion of the effects that a
chapter 7 liquidation would have on the recoveries of holders of Claims and
Equity Interests and the Debtors' liquidation analysis are set forth herein. The
Debtors and the Informal Bondholder Committee believe that liquidation under
chapter 7 would result in smaller distributions being made to creditors than
those provided for in the Plan because of (a) the likelihood that the Debtors'
assets would have to be sold or otherwise disposed of in a less orderly fashion
over a shorter period of time, (b) additional administrative expenses involved
in the appointment of a trustee, and (c) additional expenses and claims, some of
which would be entitled to priority, which would be generated during the
liquidation and from the rejection of leases and other executory contracts in
connection with a cessation of the Debtors' operations.
55
B. ALTERNATIVE PLANS OF REORGANIZATION
If the Plan is not confirmed, the Debtors could attempt to formulate
a different plan. Such a plan might involve either a reorganization and
continuation of the Debtors' businesses or orderly liquidation of their assets.
With respect to an alternative plan, the Debtors have explored various
alternatives in connection with the formulation and development of the Plan. The
Debtors believe that the Plan, as described herein, enables creditors to realize
the most value under the circumstances. In a liquidation under chapter 11, the
Debtors' assets would be sold in an orderly fashion over a more extended period
of time than in a liquidation under chapter 7, possibly resulting in somewhat
greater (but indeterminate) recoveries than would be obtained in chapter 7.
Further, if a trustee were not appointed, because such appointment is not
required in a chapter 11 case, the expenses for professional fees would most
likely be lower than those incurred in a chapter 7 case. Although preferable to
a chapter 7 liquidation, the Debtors believe that any alternative liquidation
under chapter 11 is a much less attractive alternative to creditors and Equity
Interest holders than the Plan because of the greater return provided by the
Plan.
C. POST-CONFIRMATION CONVERSION/DISMISSAL.
A creditor or party in interest may bring a motion to convert or
dismiss the case under Section 1112(b), after the Plan is confirmed if there is
a default in performance under the Plan. If the Court orders the case converted
to Chapter 7 after the Plan is confirmed, then all property that had been
property of the Chapter 11 estate, and that has not been disbursed pursuant to
the Plan, will revest in the Chapter 7 estate. The automatic stay will be
reimposed upon the revested property, but only to the extent that relief from
stay was not previously authorized by the Court during these cases.
The Confirmation Order may also be revoked under very limited
circumstances. The Court may revoke the Confirmation Order if the Confirmation
Order was procured by fraud and if a party in interest brings an adversary
proceeding to revoke confirmation within 180 days after the entry of the order
of confirmation.
D. FINAL DECREE.
Once the Estates have been fully administered as referred to in
Bankruptcy Rule 3019, Reorganized ALC and Reorganized Carriage House, or such
other party as the Court shall designate in the Plan Confirmation Order, shall
file a motion with the Court to obtain a final decree to close the case.
SECTION XII.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES OF THE PLAN
The following discussion summarizes the material federal income tax
consequences expected to result from the consummation of the Plan to ALC and to
holders of Debentures and certain other Claims against ALC or Carriage House.
This discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Tax Code"),
56
applicable Treasury Regulations, judicial authority and current administrative
rulings and pronouncements of the Internal Revenue Service (the "Service").
There can be no assurance that the Service will not take a contrary view, and no
ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations
may be forthcoming that could alter or modify the statements and conclusions set
forth herein. Any such changes or interpretations may or may not be retroactive
and could affect the tax consequences to holders of Claims, ALC, and Reorganized
ALC. It cannot be predicted at this time whether any tax legislation will be
enacted or, if enacted, whether any tax law changes contained therein would
affect the tax consequences to the holders of Claims, ALC and Reorganized ALC.
The following summary is for general information only. The tax
treatment of a holder of a Claim may vary depending upon such holder's
particular situation. This discussion assumes that holders of Debentures or Old
Common Stock have held such property as "capital assets" within the meaning of
Section 1221 of the Tax Code (generally, property held for investment) and will
also hold the New Notes and New Common Stock as capital assets. This summary
does not address all of the tax consequences that may be relevant to a holder,
nor does it address the federal income tax consequences to holders subject to
special treatment under the federal income tax laws, including, without
limitation, brokers or dealers in securities or currencies, certain securities
traders, tax-exempt entities, financial institutions, insurance companies,
foreign corporations, foreign trusts or foreign partnerships, holders who are
not citizens or residents of the United States, holders that hold the Debentures
or Old Common Stock as a position in a "straddle" or as part of a "synthetic
security," "hedging," "conversion" or other integrated instrument, holders that
have a "functional currency" other than the United States dollar and holders
that have acquired Debentures or Old Common Stock in connection with the
performance of services. EACH HOLDER OF A CLAIM SHOULD CONSULT ITS TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES TO IT OF THE PLAN, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
FEDERAL INCOME TAX CONSEQUENCES TO ALC
Cancellation of Indebtedness and Reduction of Tax Attributes. ALC
generally will realize cancellation of indebtedness ("COI") income with respect
to the exchange of Debentures for New Notes and New Common Stock pursuant to the
Plan to the extent that the sum of the fair market value of the New Common Stock
and the issue price of the New Notes received by holders of Debentures is less
than the adjusted issue price, including accrued but unpaid interest, of such
Debentures discharged thereby. Under Section 108 of the Tax Code, however, COI
income will not be recognized if the COI income occurs in a case brought under
the Bankruptcy Code, provided the taxpayer is under the jurisdiction of a court
in such case and the cancellation of indebtedness is granted by the court or is
pursuant to a plan approved by the court. Accordingly, because the cancellation
of ALC's indebtedness will occur in a case brought under the Bankruptcy Code,
ALC will be under the jurisdiction of the court in such case and the
cancellation of the Debentures will be pursuant to the Plan, ALC will not be
required to recognize any COI income realized as a result of the implementation
of the Plan. Notwithstanding the foregoing, under Section 108(b) of the Tax
Code, ALC will be required to
57
reduce certain tax attributes, including its net operating losses and loss
carryforwards ("NOLs") (and certain other losses, credits and carryforwards, if
any) and tax basis in assets (but not below the amount of liabilities remaining
immediately after the discharge of indebtedness), in an amount equal to the
amount of COI income excluded from income as described in the preceding
paragraph (subject to certain modifications).
ALC anticipates that it will generate a substantial consolidated NOL
for the portion of the 2001 tax year that will precede the Effective Date. Any
such NOLs, however, are subject to audit and possible challenge by the Service
and thus may ultimately vary from any specific amounts claimed. In any event, as
a result of the application of Section 108(b) of the Tax Code, ALC believes that
most, if not all, of its NOLs (and certain other losses, credits and
carryforwards, if any) will be eliminated after consummation of the Plan. In
addition, Reorganized ALC may be required to reduce its tax basis in its assets
as of the beginning of the taxable year following consummation of the Plan (but
not below the amount of its liabilities remaining immediately after the
consummation of the Plan) to the extent that ALC's COI income exceeds the amount
of NOLs and any other losses, credits and carryovers so reduced (subject to
certain modifications).
Section 382 Limitations on NOLs. Under Section 382 of the Tax Code, if a
corporation with NOLs (a "Loss Corporation") undergoes an "ownership change,"
the use of such NOLs (and certain other tax attributes) will generally be
subject to an annual limitation as described below. In general, an "ownership
change" occurs if the percentage of the value of the Loss Corporation's stock
owned by one or more direct or indirect "five percent shareholders" has
increased by more than 50 percentage points over the lowest percentage of that
value owned by such five percent shareholder or shareholders at any time during
the applicable "testing period" (generally, the shorter of (i) the three-year
period preceding the testing date or (ii) the period of time since the most
recent ownership change of the corporation).
A Loss Corporation's use of NOLs (and certain other tax attributes)
after an "ownership change" will generally be limited annually to the product of
the "long-term tax-exempt rate" (determined based on interest rates published
monthly by the Service) and the value of the Loss Corporation's outstanding
stock immediately before the ownership change (excluding certain capital
contributions) (the "Section 382 Limitation"). However, the Section 382
Limitation for a taxable year any portion of which is within the five-year
period following the Effective Date will be increased by the amount of any
"recognized built-in gains" for such taxable year. The increase in a year cannot
exceed the "net unrealized built-in gain" (which is zero unless such gain exists
immediately before the "ownership change" and exceeds a statutorily-defined
threshold amount) reduced by recognized built-in gains from prior years ending
during such five-year period. In addition, any "recognized built-in losses" for
a taxable year any portion of which is within the five-year period following the
Effective Date will be subject to limitation in the same manner as if such loss
was an existing NOL to the extent such recognized built-in losses do not exceed
the "net unrealized built-in loss" (which is zero unless such loss exists
immediately before the "ownership change" and exceeds a statutorily-defined
threshold amount) reduced by recognized built-in losses for prior taxable years
ending during such five-year period. At this time, ALC is unable to predict
whether it will have a "net unrealized built-in gain" or a "net unrealized
built-in loss" that will exceed the statutorily-defined threshold amount at the
Effective Date. Finally, if Reorganized ALC does not continue
58
ALC's historic business or use a significant portion of ALC's business assets in
a new business for two years after the "ownership change," the Section 382
Limitation would be zero (except as increased by recognized built-in gains, as
described above).
The Tax Code provides two alternative bankruptcy exceptions from the
Section 382 Limitation for Loss Corporations undergoing an ownership change
pursuant to a bankruptcy proceeding. The first exception, Section 382(l)(5) of
the Tax Code, applies where qualified (so-called "old and cold") creditors (and
shareholders) of the debtor receive at least 50% of the vote and value of the
stock of the reorganized debtor in a case under the Bankruptcy Code. Under this
exception, a debtor's pre-ownership change NOLs are not subject to the Section
382 Limitation but are instead reduced by the amount of any interest deductions
allowed during the three taxable years preceding the taxable year in which the
ownership change occurs, and during the part of the taxable year prior to and
including the effective date of the bankruptcy reorganization, in respect of the
debt converted into stock of the debtor corporation in the reorganization.
Moreover, if this exception applies, any further ownership change of the debtor
within a two-year period after the original ownership change to which this
exception applied will preclude the debtor's utilization of any pre-change
losses at the time of the subsequent ownership change against future taxable
income.
An "old and cold" creditor is a creditor that has held the debt of
the debtor for at least eighteen months prior to the date of the filing of the
case or that has held "ordinary course indebtedness" at all times it has been
outstanding. However, any debt owned immediately before an ownership change by a
creditor that does not become a direct or indirect 5% shareholder of the
reorganized debtor generally will be treated as always having been owned by such
creditor, except in the case of any creditor whose participation in formulating
the plan of reorganization makes evident to the debtor that such creditor has
not owned the debt for such period. Because it is uncertain whether a sufficient
number of the holders of the Debentures as of the Effective Time will satisfy
the holding requirements to be considered as "old and cold" creditors, and
because the Debentures do not appear to constitute "ordinary course
indebtedness," it is unclear whether ALC will be eligible to utilize the Section
382(l)(5) exception. However, even if ALC were eligible to utilize the Section
382(l)(5) exception, application of the exception would require ALC to
significantly reduce any of its NOLs because of interest deductions taken by ALC
with respect to the Debentures.
The second bankruptcy exception, Section 382(1)(6) of the Tax Code,
requires no reduction of the debtor corporation's pre-ownership change NOLs as
required by Section 382(1)(5) of the Code but provides relief in the form of a
relaxed computation of the Section 382 Limitation. In that regard, Section
382(1)(6) of the Tax Code provides that the value of the Loss Corporation's
outstanding stock for purposes of computing the Section 382 Limitation will be
increased to reflect the cancellation of indebtedness in the bankruptcy case
(but the value of such stock as adjusted may not exceed the value of ALC's gross
assets immediately before the ownership change (subject to certain
adjustments)).
The Plan will trigger an ownership change of ALC on the Effective
Date. Because it is unclear at the present time whether the Section 382(1)(5)
exception will be applicable to the ownership change, and, even if applicable,
the Section 382(l)(5) exception would require significant reductions in ALC's
NOLs remaining after reduction by any COI
59
income, ALC intends to apply Section 382(1)(6) to such ownership change.
Accordingly, Reorganized ALC's use of pre-ownership change NOLs and certain
other tax attributes (if any), to the extent remaining after the reduction
thereof as a result of the COI income of ALC, will be limited and generally will
not exceed each year the product of the long-term tax-exempt rate and the value
of Reorganized ALC's stock, increased to reflect the indebtedness cancelled
pursuant to the Plan.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF DEBENTURES
Exchange of Debentures for New Notes and New Common Stock. Whether the
exchange of Debentures for New Notes and New Common Stock pursuant to the Plan
will be a nontaxable recapitalization under the Tax Code will depend in part
upon whether the Debentures and the New Notes are considered to be "securities"
within the meaning of the provisions of the Tax Code governing reorganizations.
The test as to whether a debt instrument is a "security" involves an overall
evaluation of the nature of the debt instrument, with the term of the debt
instrument usually regarded as one of the most significant factors. Generally,
debt instruments with a term of five years or less have not qualified as
"securities," whereas debt instruments with a term of ten years or more (like
the New Junior Notes) generally have qualified as "securities." In cases where
the term of a debt instrument is more than five years but less than ten years
(such as is the case with the Debentures and the New Senior Notes), the
determination as to whether such debt instrument constitute a "security"
requires an analysis of other relevant factors pertaining to the debt instrument
and the issuer.
Although the treatment of the Debentures and New Senior Notes is not
entirely certain because the stated term of such instruments is less than ten
years but longer than five years, both the Debentures and the New Senior Notes
should, and the New Junior Notes will, be treated as "securities" for federal
income tax purposes (and the remainder of the discussion of the federal income
tax consequences of the Plan assumes that each of the Debentures and the New
Notes will be treated as "securities" for federal income tax purposes).
Accordingly, the exchange of Debentures for New Notes and New Common Stock
pursuant to the Plan should constitute a recapitalization for federal income tax
purposes. As a result, exchanging holders should not recognize any gain or loss
in connection with the exchange (except to the extent the New Notes and New
Common Stock are attributable to accrued but unpaid interest on the Debentures,
in which event holders would generally be required to treat such amounts as
payment of interest includible in income in accordance with the holders' method
of accounting for tax purposes (see "Accrued Interest" below)). A holder's
adjusted tax basis in the Debentures will be allocated between the New Notes and
New Common Stock (other than New Notes and New Common Stock received in respect
of accrued but unpaid interest on the Debentures (see "Accrued Interest"
below)), in accordance with their respective fair market values on the Effective
Date. The holder's holding period for the New Notes and New Common Stock (except
for New Notes and New Common Stock attributable to accrued but unpaid interest)
will include the holder's holding period for the Debentures.
If the Debentures or any of the New Notes were determined not to
constitute "securities" for federal income tax purposes, a holder may be
required to recognize gain (including possible treatment of all or part of the
gain as dividend income under certain circumstances, and recognition of accrued
market discount on the Debentures as ordinary income
60
(see "New Notes - Market Discount" below)) or loss in connection with the
exchange of Debentures for New Notes and New Common Stock pursuant to the Plan.
In addition, the tax basis and holding period consequences with respect to the
New Notes and New Common Stock potentially could differ materially from the tax
basis and holding period consequences set forth in the preceding paragraph.
Holders should consult their tax advisors as to the material tax consequences to
them of the consummation of the transactions contemplated by the Plan if the
Debentures or New Notes were determined not to constitute "securities" for
federal income tax purposes.
New Notes
Original Issue Discount. Because the New Junior Notes provide that
for the first three years of the term of the New Junior Notes Reorganized ALC
will issue additional New Junior Notes in lieu of the payment of interest due
thereon in cash, such payments of interest "in-kind" will not constitute
payments of "qualified stated interest." Therefore, the New Junior Notes will be
issued with original issue discount ("OID"). Consequently, a holder will be
required to include OID in gross income on an annual basis under a constant
yield accrual method, regardless of its regular method of tax accounting,
possibly in advance of the receipt of cash attributable to such income.
The amount of OID on a New Junior Note will be equal to the excess
of (i) the sum of the Note's principal amount due at maturity plus all other
scheduled payments thereon (other than payments of qualified stated interest)
over (ii) the issue price of the Note. The "issue price" of a debt instrument
issued in exchange for another debt instrument depends on whether either debt
instrument is "traded on an established securities market" at any time during
the sixty-day period ending thirty days after the Effective Date. If neither is
so traded, the issue price of the debt instrument received will be equal to its
stated principal amount, assuming the debt instrument provides for "adequate
stated interest" (i.e., interest at least at the applicable federal rate), and
will be equal to its "imputed principal amount," if the debt instrument does not
provide for "adequate stated interest." If the debt instrument received is
"traded on an established securities market," then its issue price will be its
trading price immediately following issuance. If the exchanged debt instrument
is so traded (but the debt instrument received in exchange therefor is not), the
issue price of the debt instrument received will generally be equal to the fair
market value of the debt instrument exchanged therefor at the time of the
exchange (less the fair market value of the portion of such debt instrument
allocable to any other property received in addition to the new debt instrument,
such as the New Common Stock and New Senior Notes). ALC does not anticipate that
the Debentures will be "traded on an established securities market" during the
relevant sixty-day period referred to above. ALC is unable at this time to
predict whether the New Notes will be so traded at such time.
In general, the holder of a New Junior Note must include in gross
income for federal income tax purposes the sum of the daily portions of OID with
respect to such Note for each day during the taxable year or portion of a
taxable year on which such holder holds the Note. The daily portion is
determined by allocating to each day of any accrual period a pro-rata portion of
an amount equal to the "adjusted issue price" of the New Junior Note at the
beginning of the accrual period multiplied by the yield to maturity of the Note
(taking into account the length of the accrual period). The "adjusted issue
price" of a New Junior Note at the start of any
61
accrual period is the issue price of the Note increased by the accrued OID for
all prior accrual periods and reduced by any prior cash payments (other than
payments of qualified stated interest) made on such Note. The tax basis of a New
Junior Note in the hands of a holder will be increased by the amount of OID, if
any, on the Note that is included in the holder's gross income and will be
decreased by the amount of any cash payments received with respect to the Note
(other than payments of qualified stated interest), whether such payments are
denominated as principal or interest. The stated interest payable on the New
Junior Notes will not constitute qualified stated interest for purposes of the
OID rules.
The New Senior Notes may also be issued with OID. This determination
will depend on the nature of the trading of the Debentures and the New Senior
Notes at and around the Effective Date. If the New Senior Notes are issued with
OID, a holder of New Senior Notes will be required to include OID with respect
to such Notes in gross income, and to compute the adjusted issue price of such
Notes and the holder's adjusted tax basis in such notes, as described in the
preceding paragraph. The stated interest payable on the New Senior Notes will
constitute qualified stated interest for purposes of the OID rules.
AHYDO Rules. The New Junior Notes will constitute "applicable high
yield discount obligations" ("AHYDOs") if the yield to maturity of such Notes
equals or exceeds the sum of the "applicable federal rate" in effect on the
Effective Date (the "AFR") plus five percentage points and the Notes have
"significant" OID. Because payments of interest on the New Junior Notes for the
first three years of their term will be made with additional New Junior Notes,
the New Junior Notes should be considered to have "significant" original issue
discount. In addition, based on the current AFR, the yield to maturity of the
New Junior Notes will be greater than the current AFR plus five percentage
points, and therefore the New Junior Notes would constitute AHYDOs. In any
event, a determination of whether the New Junior Notes constitute AHYDOs
ultimately will depend on the AFR at the Effective Date and, possibly, the
nature of the trading of the Debentures and the New Junior Notes at and around
the Effective Date.
If the New Junior Notes are AHYDOs, Reorganized ALC will not be
permitted to deduct OID that accrues with respect to such Notes until amounts
attributable to such OID are paid in cash or in property other than stock or
debt of Reorganized ALC (or persons related to Reorganized ALC). In addition, to
the extent that the yield to maturity of the New Junior Notes exceeds the sum of
the AFR plus six percentage points, interest attributable to such excess yield
(the "Dividend-Equivalent Interest") will not be deductible at any time by
Reorganized ALC (regardless of whether Reorganized ALC actually pays such
Dividend-Equivalent Interest in cash or in property). Such Dividend-Equivalent
Interest would be treated as a dividend for purposes of the corporate dividends
received deduction to the extent it is deemed to have been paid out of
Reorganized ALC's current or accumulated earnings and profits. Subject to
otherwise applicable limitations, holders of the New Junior Notes that are
domestic corporations may be entitled to a dividends received deduction
(generally at a 70% rate) with respect to any Dividend-Equivalent Interest to
the extent that Reorganized ALC has sufficient current or accumulated earnings
and profits. If the Dividend-Equivalent Interest exceeds Reorganized ALC's
current and accumulated earnings and profits, the excess will continue to be
subject to tax as ordinary OID income in accordance with the OID rules described
above.
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Market Discount. The Tax Code generally requires 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 holder's period of
ownership. A "market discount bond" is a debt obligation 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 (i) its "issue price," plus (ii) the amount of OID includible in
income by all prior holders of the debt instrument, minus (iii) all cash
payments (other than payments constituting qualified stated interest) received
by such previous holders. The market discount rules also provide that a 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 indebtedness incurred or
maintained to purchase or carry such debt instrument until the holder disposes
of the debt instrument in a taxable transaction.
A 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 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 Service. If a 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.
In the case of certain non-recognition transactions, such as the
exchange of the Debentures for the New Notes and New Common Stock pursuant to
the Plan (assuming the exchange constitutes a reorganization), special rules
apply. Any accrued market discount on the Debentures would not have to be
recognized as income at the time of the exchange (except to the extent of gain
recognized in the exchange not otherwise treated as a dividend); however, on a
subsequent taxable disposition of the New Notes or New Common Stock received in
the exchange, gain would be treated as ordinary income to the extent of market
discount accrued prior to the exchange in the case of New Common Stock, and
prior to and after the exchange in the case of New Notes (in each case to the
extent not previously included in income).
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 holder of such an obligation
generally will not be required to include any OID in income. Generally, a holder
may elect to amortize the premium 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. A holder
who elects to amortize bond premium must reduce the 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
63
debt obligations then owned and thereafter acquired by the holder and may be
revoked only with the consent of the Service.
If a holder acquires an obligation issued with OID at an
"acquisition premium," the amount of OID that the 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 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 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 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."
Sale, Retirement or Other Taxable Disposition of New Notes. In
general, a holder of a New Note will recognize gain or loss upon the sale,
retirement or other taxable disposition of such 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 therefor (except to the extent attributable to the
payment of accrued but unpaid interest, which generally will be taxable to a
holder as ordinary income) and (ii) the holder's adjusted tax basis in such New
Note. Any gain or loss recognized on the sale, retirement or other taxable
disposition of a New Note generally will be (subject to the market discount
rules discussed above) long-term capital gain or loss if such Note has been held
for more than one year.
Constant Yield Election. A holder of New Notes, subject to certain
limitations, may elect to include in gross income all interest that accrues on a
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
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 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 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 holder's tax basis in an obligation
will be increased by
64
each accrual of the amounts treated as OID under the constant yield election
described in this paragraph.
New Common Stock
Dividends. A holder of New Common Stock generally will be required
to include in gross income as ordinary dividend income the amount of any
distributions paid on the New Common Stock to the extent that such distributions
are paid out of Reorganized ALC's current or accumulated earnings and profits as
determined for federal income tax purposes. Distributions in excess of such
earnings and profits will reduce the holder's tax basis in its New Common Stock
and, to the extent such excess distributions exceed such tax basis, will be
treated as gain from a sale or exchange of such New Common Stock. Corporate
holders of New Common Stock may be entitled to a dividends received deduction
(generally at a 70% rate) with respect to distributions out of earnings and
profits and are urged to consult their tax advisors in this regard.
Sale or Other Taxable Disposition. Upon the sale or other
disposition of New Common Stock, a holder generally will recognize capital gain
or loss equal to the difference between the amount of cash and fair market value
of any property received on the sale and such holder's adjusted tax basis in the
New Common Stock. Capital gain or loss recognized upon the disposition of the
New Common Stock will be long-term if, at the time of the disposition, the
holding period for the New Common Stock exceeds one year.
However, under Section 108(e)(7) of the Tax Code, a creditor that
receives stock in exchange for debt is required, to the extent that gain is
recognized upon a subsequent disposition of such stock, to "recapture" as
ordinary income any bad debt deductions taken by the creditor with respect to
such debt and any ordinary loss claimed by the creditor upon the receipt of the
stock in satisfaction of such debt; reduced by any amount included in income
upon the receipt of the stock. In addition, as discussed above, if any
Debentures held by a holder have accrued market discount at the Effective Date,
then any gain recognized by such holder upon the disposition of New Common Stock
would have to be treated as ordinary income to the extent of such accrued market
discount that is allocated to the New Common Stock on the Effective Date.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF OLD COMMON STOCK
Holders exchanging Old Common Stock for New Common Stock pursuant to
the Plan will not recognize any gain or loss for federal income tax purposes. A
holder's tax basis in New Common Stock received will be equal to the holder's
tax basis in the Old Common Stock surrendered therefor.
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF OTHER CLAIMS
A holder of a Claim in a class not discussed above will generally
recognize gain or loss equal to any cash received (plus the fair market value of
any other property received) with respect to its Claim (other than for accrued
but unpaid interest) less its adjusted basis in its Claim. The character of such
gain or loss as long-term or short-term capital gain or loss or as ordinary
income or loss will be determined by a number of factors, including the tax
status of the holder, whether the Claim constitutes a capital asset in the hands
of the holder, whether the Claim has been held for more than one year, whether
the
65
Claim was purchased at a discount, and whether and to what extent the holder had
previously claimed a bad debt deduction.
ACCRUED INTEREST
Holders of Claims will be treated as receiving a payment of interest
(includible in income in accordance with the holder's method of accounting for
tax purposes) to the extent that any cash or other property received pursuant to
the Plan is attributable to accrued but unpaid interest, if any, on such Claims.
The extent to which the receipt of cash or other property should be attributable
to accrued but unpaid interest is unclear. ALC intends to take the position that
such cash or property distributed pursuant to the Plan will first be allocable
to the principal amount of a Claim and then, to the extent necessary, to any
accrued but unpaid interest thereon. Each holder should consult its tax advisor
regarding the determination of the amount of consideration received under the
Plan that is attributable to interest (if any). A holder generally will be
entitled to recognize a loss to the extent any accrued interest was previously
included in its gross income and is not paid in full.
If any property received pursuant to the Plan is considered
attributable to accrued but unpaid interest, a holder's basis in such property
should be equal to the amount of interest income treated as satisfied by the
receipt of such property. The holding period in such property should begin on
the day immediately after the Effective Date.
BACKUP WITHHOLDING
A holder of New Notes or New Common Stock may be subject to backup
withholding with respect to interest or dividends paid on, OID accrued on, and
gross proceeds from a sale of the New Notes or New Common Stock unless (i) such
holder is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and complies with applicable requirements of the backup withholding
rules. A holder of New Notes or New Common Stock who does not provide
Reorganized ALC with his or her correct taxpayer identification number may be
subject to penalties imposed by the Service.
Reorganized ALC will report to holders of the New Notes and New
Common Stock and to the Service the amount of any "reportable payments"
(including any interest and dividends paid, and original issue discount accrued,
on the New Notes and New Common Stock) and any amount withheld with respect to
the New Notes and New Common Stock during the calendar year.
ASSISTED LIVING CONCEPTS, INC.
By: ____________________________
Title: _________________________
66
CARRIAGE HOUSE ASSISTED LIVING INC
By: ____________________________
Title: _________________________
LATHAM & WATKINS
Robert A. Klyman (CA No. 142723)
Jonathan S. Shenson (CA No. 184250)
Sylvia K. Hamersley (CA No. 208452)
633 West Fifth St., Suite 4000
Los Angeles, CA 90071-2007
Telephone: (213) 485-1234
Facsimile: (213) 891-8763
YOUNG CONAWAY STARGATT & TAYLOR,
LLP
James Patton (Bar No. 2202)
Michael R. Nestor (Bar No. 3526)
Rodney Square North, Eleventh Floor
P.O. Box 391
Wilmington, Delaware 19899-0391
Telephone: (302) 571-6600
Facsimile: (302) 571-1253
By: ____________________________
Co-Counsel for the Debtors
67
Exhibit A
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE: CHAPTER 11 CASE NOS.
01-10670 AND
ASSISTED LIVING CONCEPTS, INC., et al., 01-10674
(JOINTLY ADMINISTERED)
DEBTORS.
FIRST AMENDED JOINT PLAN OF REORGANIZATION OF
ASSISTED LIVING CONCEPTS INC. AND CARRIAGE
HOUSE ASSISTED LIVING, INC. DATED AS OF OCTOBER 30, 2001
LATHAM & WATKINS
Robert A. Klyman
Jonathan S. Shenson
Sylvia K. Hamersley
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
(213) 485-1234
YOUNG, CONAWAY, STARGATT & TAYLOR
James Patton
Michael R. Nestor
Rodney Square North, Eleventh
Floor
P.O. Box 391
Wilmington, Delaware 19899
(302) 571-6600
Co-Counsel for Assisted Living
Concepts, Inc., and Carriage
House Assisted Living, Inc.,
Debtors and Debtors-in-Possession
Dated: October 30, 2001
TABLE OF CONTENTS
PAGE
ARTICLE I. INTRODUCTION.................................................................... 1
ARTICLE II. DEFINITION OF TERMS AND RULES OF INTERPRETATION................................. 1
Section 2.01 Definition of Terms........................................................ 1
Section 2.02 Interpretation And Computation Of Time..................................... 17
ARTICLE III. CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS................................... 18
Section 3.01 Unclassified Claims. (Applicable to Both Debtors)......................... 23
Section 3.02 Treatment of Classified Claims Against and Interests in ALC................ 25
Section 3.03 Treatment of Classified Claims Against and Interests in Carriage House..... 29
ARTICLE IV. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES........................... 31
ARTICLE V. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN.............................. 32
Section 5.01 Overview of Plan Implementation............................................ 32
Section 5.02 Distributions.............................................................. 32
Section 5.03 Treatment of Trade Creditors under the Plan................................ 32
Section 5.04 The Creditors' Committee................................................... 33
Section 5.05 Vesting Of Assets.......................................................... 33
Section 5.06 Preservation Of Causes Of Action........................................... 33
Section 5.07 Article Of Incorporation................................................... 33
Section 5.08 Management Of Reorganized ALC and Reorganized Carriage House............... 34
Section 5.09 Disbursing Agent........................................................... 34
Section 5.10 Discharge Of Debtors And Injunction........................................ 34
Section 5.11 No Liability For Solicitation Or Participation............................. 35
Section 5.12 Limitation Of Liability.................................................... 36
Section 5.13 Objections to Claims....................................................... 36
Section 5.14 Other Documents And Actions................................................ 36
Section 5.15 Corporate Action........................................................... 36
Section 5.16 Retiree Benefits........................................................... 37
ARTICLE VI. CONFIRMATION AND EFFECTIVE DATE CONDITIONS...................................... 38
Section 6.01 Conditions To Confirmation................................................. 38
Section 6.02 Conditions To Effective Date............................................... 38
Section 6.03 Waiver of Conditions....................................................... 38
Section 6.04 Effect of Failure of Conditions............................................ 38
Section 6.05 Vacatur of Confirmation Order.............................................. 39
ii
ARTICLE VII. CONFIRMABILITY OF PLAN AND CRAMDOWN............................................. 39
ARTICLE VIII. PROVISIONS REGARDING VOTING AND DISTRIBUTIONS UNDER THE PLAN AND TREATMENT
OF DISPUTED, CONTINGENT AND UNLIQUIDATED CLAIMS AND EQUITY INTERESTS............ 39
Section 8.01 Voting of Claims and Equity Interests...................................... 39
Section 8.02 Method of Distributions Under the Plan..................................... 39
Section 8.03 Special Procedures for Lost, Stolen, Mutilated or Destroyed Instruments... 43
Section 8.04 Failure to Surrender Cancelled Instrument.................................. 43
Section 8.05 Undeliverable or Unclaimed Distributions................................... 43
Section 8.06 Disputed Claims; Reserve and Estimations................................... 44
Section 8.07 Setoffs.................................................................... 44
ARTICLE IX. IMPLEMENTATION AND EFFECT OF CONFIRMATION OF THIS PLAN.......................... 45
Section 9.01 Effect of Confirmation of the Plan......................................... 45
ARTICLE X. RETENTION OF JURISDICTION....................................................... 45
ARTICLE XI. MISCELLANEOUS PROVISIONS........................................................ 47
Section 11.01 Exemption From Transfer Taxes.............................................. 47
Section 11.02 Payment of Statutory Fees.................................................. 47
Section 11.03 Modification or Withdrawal of the Plan..................................... 48
Section 11.04 Governing Law.............................................................. 48
Section 11.05 Filing or Execution of Additional Documents................................ 48
Section 11.06 Withholding and Reporting Requirements.................. .................. 48
Section 11.07 Waiver of Rule 62 (a) of the Federal Rules of Civil Procedure.............. 48
Section 11.08 Headings................................................................... 48
Section 11.09 Exhibits and Schedules..................................................... 48
Section 11.10 Notices.................................................................... 49
Section 11.11 Plan Supplement............................................................ 49
Section 11.12 Conflict................................................................... 49
Section 11.13 Successors And Assigns..................................................... 49
Section 11.14 Saturday, Sunday Or Legal Holiday.......................................... 49
Section 11.15 Post-Effective Date Effect Of Evidences Of Claims Or Interests............. 50
Section 11.16 Severability Of Plan Provisions............................................ 50
Section 11.17 Balloting.................................................................. 50
Section 11.18 No Admissions or Waiver of Objections...................................... 50
Section 11.19 Survival of Settlements.................................................... 51
iii
ARTICLE I.
INTRODUCTION
Assisted Living Concepts, Inc. ("ALC") and ALC's wholly-owned
subsidiary Carriage House Assisted Living, Inc. ("Carriage House" and together
with ALC, the "Debtors") hereby propose the following Joint Plan of
Reorganization (defined herein as the "Plan") for the resolution of their
outstanding creditor claims and equity interests. Reference is made to the First
Amended Disclosure Statement Accompanying Joint Plan of Reorganization for
Assisted Living Concepts, Inc. and Carriage House Assisted Living, Inc. under
Chapter 11 of the United States Bankruptcy Code dated as of October 30, 2001
(defined herein as the "Disclosure Statement") for a discussion of the Debtors'
history, businesses, properties and results of operations, and for a summary of
the Plan and certain related matters.
All holders of Claims and Equity Interests are encouraged to read the
Plan and the Disclosure Statement in their entirety before voting to accept or
reject the Plan. No materials, other than the Disclosure Statement, the exhibits
and schedules attached thereto or referenced therein, have been approved by the
Debtors for use in soliciting acceptances or rejections of the Plan.
THE PLAN IS THE PRODUCT OF INTENSE NEGOTIATIONS BETWEEN THE DEBTORS AND
THE INFORMAL BONDHOLDERS COMMITTEE AND REPRESENTS THE BEST POSSIBLE RETURN TO
HOLDERS OF CLAIMS AND INTERESTS. THE DEBTORS AND THE INFORMAL BONDHOLDERS
COMMITTEE STRONGLY URGE YOU TO READ THE DISCLOSURE STATEMENT AND VOTE IN FAVOR
OF THE PLAN.
Notwithstanding anything herein to the contrary, all statements in this
Plan and the accompanying Disclosure Statement concerning the history of the
Debtors' businesses, the past or present financial condition of the debtors,
transactions to which the debtors were or are party, or the effect of
confirmation of the Plan on secured creditors, unsecured creditors or equity
security holders are attributable exclusively to the Debtors and not to any
other party.
ARTICLE II.
DEFINITION OF TERMS AND RULES OF INTERPRETATION
SECTION 2.01 DEFINITION OF TERMS
Unless otherwise defined herein, or the context otherwise requires, the
following terms shall have the respective meanings set forth below:
5.625% DEBENTURES means the $75,000,000, 5.625% Senior
Subordinated Debentures due May 2003 issued
pursuant to the 5.625% Debenture Indenture.
6% DEBENTURES means the $86,250,000, 6% Senior Subordinated
Debentures due November 2002 issued pursuant to
the 6% Debenture Indenture.
5.625% DEBENTURE INDENTURE means that certain Indenture, dated as of April
13, 1998, among ALC, as Issuer, and Harris
Trust and Savings Bank, as Trustee, pursuant to
which the 5.625% Debentures were issued,
together with any amendments or supplements
thereto.
6% DEBENTURE INDENTURE means that certain Indenture, dated as of
October 24, 1997, among ALC, as Issuer, and
Harris Trust and Savings Bank, as Trustee,
pursuant to which the 6% Debentures were
issued, together with any amendments or
supplements thereto.
ADMINISTRATIVE CLAIM means any right to payment constituting a cost
or expense of administration of the Chapter 11
Cases of a kind specified under section 503(b)
and entitled to priority under section
507(a)(1) of the Bankruptcy Code, including,
without limitation, any actual and necessary
costs and expenses of preserving the estates of
the Debtors, any actual and necessary costs and
expenses of operating the respective businesses
of the Debtors, any indebtedness or obligations
incurred or assumed by any of the Debtors in
Possession in connection with the conduct of
their respective businesses, including, without
limitation, all compensation and reimbursement
of expenses to the extent Allowed by the Court
under section 330 or 503 of the Bankruptcy
Code, and any fees or charges assessed against
the estates of the Debtors under section 1930
of chapter 123 of Title 28 of the United States
Code, and the actual and necessary costs and
expenses, including professional fees, incurred
by the Informal Bondholders Committee from the
Commencement Date through the Effective Date.
AGGREGATE COLLATERAL shall have the same meaning as defined in that
certain Final Financing Order.
2
ALC means Assisted Living Concepts, Inc., a Nevada
corporation.
ALLOWED CLAIM OR ALLOWED means a Claim against or Interest in a Debtor
INTEREST to the extent that
a. a proof of the Claim or Interest
i. was timely Filed and served upon a
Debtor and no objection to the Claim or
Interest is Filed within the time fixed by the
Court for such objections; or
ii. is deemed Filed under applicable law
(e.g., filed on the Schedules as noncontingent,
nondisputed and liquidated) or pursuant to a
Final Order of the Court and no objection to
the Claim or Interest is Filed within the time
fixed by the Court for such objections; or
iii. is Allowed pursuant to subparagraph b
of this definition; or
iv. is Allowed under the Plan.
b. If a Debtor files an objection to a proof of
Claim or Interest within a time fixed by the
Court, the Claim or Interest shall be Allowed
to the extent of
i. any amount of such Claim or Interest to
which the Debtors did not object; or
ii. any amount otherwise authorized by
Final Order or the Plan.
ALLOWED ADMINISTRATIVE CLAIM,
ALLOWED PRIORITY TAX CLAIM,
ALLOWED SECURED CLAIM and
ALLOWED UNSECURED CLAIM have correlative meanings.
ALLOWED CLASS CLAIM means an Allowed Claim in the particular Class
described.
ALLOWED CLASS INTEREST means an Allowed Interest in the particular
Class described.
AMENDED ALC ARTICLES means the amended and restated articles of
incorporation of Reorganized ALC that will be
effective on the Effective Date, in the form
which will be Filed with the Plan Supplement.
AMENDED CARRIAGE HOUSE means the amended and restated certificate of
incorporation
3
CERTIFICATE of Reorganized Carriage House that will be
effective on the Effective Date, in the form
which will be Filed with the Plan Supplement.
BALLOTS means each of the ballot forms distributed with
the Disclosure Statement to each holder of an
Impaired Claim or Impaired Equity Interest
(other than to holders of Impaired Equity
Interests deemed to have rejected the Plan or
otherwise not entitled to vote on the Plan),
upon which is to be indicated, among other
things, acceptance or rejection of the Plan.
BANKRUPTCY CODE means Title 11 of the United States Code, 11
U.S.C. Sections 101 et seq., as in effect
on The date hereof or hereafter amended if such
amendments are made applicable to the Chapter
11 Cases.
BANKRUPTCY RULES means the Federal Rules of Bankruptcy Procedure
as promulgated by the United States Supreme
Court under section 2075 of Title 28 of the
United States Code, and local rules of the
Court, as the context may require.
BUSINESS DAY means any day on which commercial banks are
open for business, and not authorized to close,
in the City of New York, New York, except any
day designated as a legal holiday in Bankruptcy
Rule 9006(a).
CARRIAGE HOUSE means Carriage House Assisted Living, Inc., a
Delaware corporation.
CASH means legal tender of the United States of
America and equivalents thereof.
CHAPTER 11 CASES means the jointly administered Chapter 11 cases
commenced by the Debtors on the Commencement
Date.
CLAIM means a claim against a Debtor, whether or not
asserted or Allowed, as defined in section
101(5) of the Bankruptcy Code.
CLASS means a class of Claims or Interests designated
pursuant to the Plan.
CLERK means the Clerk of the Court.
COLLATERAL means any property or interest in property of a
Debtor's Estate subject to a Lien to secure the
payment or performance of a Claim as of the
Commencement Date,
4
which Lien is not subject to avoidance under
the Bankruptcy Code or applicable
non-bankruptcy law or otherwise invalid under
the Bankruptcy Code or applicable
non-bankruptcy law.
COMMENCEMENT DATE means October 1, 2001, the date on which each
of the Debtors filed their respective petitions
for relief commencing the Chapter 11 Cases.
CONFIRMATION means the conclusion of the Confirmation
Hearing.
CONFIRMATION DATE means the date on which the Confirmation Order
is entered on the Docket.
CONFIRMATION HEARING means the hearing to consider confirmation of
the Plan pursuant to section 1128 of the
Bankruptcy Code.
CONFIRMATION ORDER means the order entered by the Court confirming
the Plan pursuant to section 1129 of the
Bankruptcy Code.
COURT means, (a) the United States Bankruptcy Court
for the District of Delaware, having
jurisdiction over the Chapter 11 Cases; (b) to
the extent there is no reference pursuant to
section 157 of Title 28 of the United States
Code, the United States District Court for the
District of Delaware; and (c) any other court
having jurisdiction over the Chapter 11 Cases.
CREDITORS' COMMITTEE means the official unsecured creditors'
committee appointed in the Chapter 11 Cases by
the Office of the United States Trustee, as its
composition may be changed from time to time by
the addition, resignation and/or removal of its
members.
DEBENTURES means, collectively, the 6% Debentures and the
5.625% Debentures.
DEBTORS shall have the meaning ascribed to it in the
Article I of the Plan.
DEBTORS IN POSSESSION means the Debtors in their capacities as
debtors in possession in the Chapter 11 Cases
pursuant to sections 1107(a) and 1108 of the
Bankruptcy Code.
DISBURSING AGENT means the Person responsible for making
distributions under the Plan. Reorganized ALC,
or such Person(s) as Reorganized ALC may employ
in its sole discretion, will serve as
Disbursing Agent.
5
DISCLOSURE STATEMENT means the written disclosure statement, dated
as of October 1, 2001, that relates to this
Plan, as approved by the Court pursuant to
section 1125 of the Bankruptcy Code, as such
disclosure statement may be amended, modified
or supplemented from time to time.
DISPUTED means, with reference to any Claim, or Equity
Interest, or any portion thereof, any Claim or
Equity Interest proof of which was timely and
properly Filed and in either case or in the
case of any Administrative Claim, Claim or
Equity Interest that is disputed under the Plan
or as to which the Debtors have interposed a
timely objection and/or request for estimation
in accordance with section 502(c) of the
Bankruptcy Code and Bankruptcy Rule 3018, which
objection and/or request for estimation has not
been withdrawn or determined by a Final Order,
and any Claim or Equity Interest proof of which
was required to be Filed by Order of the Court
but as to which a proof of claim or interest
was not timely or properly Filed.
DISTRIBUTION means a distribution to a holder of an Allowed
Claim pursuant to this Plan.
DISTRIBUTION RECORD DATE means October 30, 2001.
DOCKET means the docket in the Chapter 11 Cases
maintained by the Clerk.
EFFECTIVE DATE means eleven days following entry of the
Confirmation Order. If the Court enters an
Order making Bankruptcy Rule 7062 inapplicable
to the proceedings respecting the Confirmation
Order or otherwise determining that the
Effective Date may occur immediately following
Confirmation then the Effective Date will be
one business day after the Confirmation Date.
If (1) a stay of the Confirmation Order is in
effect and/or (2) all conditions to the
Effective Date have not been satisfied or, if
waivable, not waived by the party for whose
benefit such condition exists, the Effective
Date shall be extended to the first Business
Day on which no such stay is in effect and/or
all such conditions have been satisfied or
waived, as applicable; provided, that in no
event shall the Effective Date be later than
one hundred twenty (120) days after the
Confirmation Date; and provided further that
the Court may extend the deadline for the
Effective Date to occur following notice and
hearing. For purposes of the Plan and the
Disclosure Statement "as soon as practicable"
shall
6
mean within ten days of the date performance is
otherwise due.
EFFECTIVE DATE PAYMENTS means all payments which must be made on the
Effective Date or as soon as practicable
thereafter.
ESTATES means, collectively, the estates created in
each of the Debtors' Chapter 11 Cases under
section 541 of the Bankruptcy Code.
FILE or FILED means filed with the Court in the Chapter 11
Cases.
FINAL FINANCING ORDER means that certain Final Order Authorizing
Debtor: (A) to Incur Postpetition Debt; (b) to
Guarantee Certain Indebtedness of Certain
Subsidiaries of Assisted Living Concepts, Inc.
and (c) to Grant Liens and Other Relief to
Heller Healthcare Finance, Inc. entered in
these Chapter 11 Cases on or about Friday
October 19, 2001.
FINAL ORDER means an order or judgment of the Court as
entered on the Docket in the Chapter 11 Cases,
or other court of competent jurisdiction, the
operation or effect of which has not been
stayed, reversed or amended, and as to which
order or judgment (or any revision,
modification, or amendment thereof) the time to
appeal or seek review or rehearing has expired
and as to which no appeal or petition for
review or rehearing was filed or, if filed,
remains pending.
GAAP means Generally Accepted Accounting Principles
in the United States of America as in effect on
the date of this Plan, including those set
forth in (i) the opinions and pronouncements of
the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii)
statements and pronouncements of the Financial
Accounting Standards Board, (iii) such other
statements by such other entity as approved by
a significant segment of the accounting
profession and (iv) the rules and regulations
of the SEC governing the inclusion of financial
statements (including pro forma financial
statements) in periodic reports required to be
filed pursuant to section 13 of the Exchange
Act, including opinions and pronouncements in
staff accounting bulletins and similar written
statements from the accounting staff of the
SEC.
GENERAL UNSECURED CLAIM means any Claim that is not an Administrative
Claim, Priority Claim, Tax Claim, Resident
Deposit Account
7
Claim, Intercompany Claim, Trade Claim,
Guaranty Claim or Secured Claim.
GUARANTY CLAIM any claims arising from guarantees executed by
a Debtor in connection with a secured
obligation of one of the Non-Debtor
Subsidiaries or Non-Debtor Affiliates,
including, without limitation, the
Transatlantic Guaranty Claim.
HELLER means Heller Healthcare Finance, Inc.
HELLER CLAIM shall have the meaning, and include the amounts
set forth, in Section 3.01(a)(iv) of the Plan.
HOLDER means the holder of a Claim or Equity Interest.
IMPAIRED means, when used with reference to a Claim or
Interest, a Claim or Interest that is impaired
within the meaning of section 1124 of the
Bankruptcy Code.
INFORMAL BONDHOLDER COMMITTEE means that certain informal committee of
bondholders organized pre-petition and composed
of certain holders of the Debentures in
connection with the Debtors' pre-petition
efforts to commence and facilitate negotiations
of a restructuring of the Debentures. The
members of the Informal Bondholder Committee
are: (i) LTC Healthcare, Inc., (ii) LTC
Properties, Inc., (iii) Sun Trust Equitable
Securities (for the account of NHI), (iv)
Deephaven Capital Management, (iv) JMG Capital
Partners, (v) Triton Capital Investments, Ltd.,
and (vi) JMG Capital Management Purchase
Pension Plan.
INSTRUMENT means any share of stock, security, promissory
note or other "instrument," within the meaning
of that term, as defined in section 9105(1)(i)
of the UCC.
INTERCOMPANY CLAIMS means all Claims asserted by any Debtor(s)
against any other Debtor(s), or by or against
any Non-Debtor Subsidiary or Non-Debtor
Affiliate.
LIEN has the meaning set forth in section 101(37) of
the Bankruptcy Code.
LITIGATION CLAIMS means any claims or causes of action held or
asserted by a Debtor.
LOCAL BANKRUPTCY RULES means the local rules of the Court, as
applicable from time to time in the Chapter 11
Cases.
8
NEW COMMON STOCK means common stock of Reorganized ALC which is
to be issued by Reorganized ALC on and after
the Effective Date, as more fully described in
the Description of the New Common Stock
attached to this Plan as Exhibit I.
NEW JUNIOR NOTES means the $15,250,000 junior secured notes due
on the tenth anniversary of the Effective Date,
to be issued by the Reorganized ALC pursuant to
the New Junior Note Indenture, with an interest
rate of 8.0% pay-in-kind for the first three
years, and 12% thereafter, and to be secured by
the New Junior Note Collateral, as more fully
described in the Description of the New Junior
Notes attached to the Disclosure Statement as
Exhibit I.
NEW JUNIOR NOTES COLLATERAL means all of the property pledged as the New
Senior Notes Collateral.
NEW JUNIOR NOTES INDENTURE means that certain Indenture dated as of the
Effective Date among Reorganized ALC, as
Issuer, the other parties thereto and
[__________________], as the New Junior Notes
Trustee, pursuant to which the New Junior Notes
will be issued.
NEW JUNIOR NOTES TRUSTEE means ___________________, serving as trustee
pursuant to the New Junior Note Indenture.
NEW NOTES means, collectively, the New Senior Notes and
the New Junior Notes.
NEW NOTES TRUSTEE means the New Senior Notes Trustee and the New
Junior Notes Trustee.
NEW SENIOR NOTES means the 10% $40,250,000 senior secured notes
due on the seventh anniversary of the Effective
Date, to be issued by Reorganized ALC pursuant
to the New Senior Notes Indenture and to be
secured by the New Senior Notes Collateral, as
more fully described in the Description of the
New Senior Notes attached to the Disclosure
Statement as Exhibit I.
NEW SENIOR NOTES COLLATERAL means all presently unencumbered real property
owned by the Debtors, all real property owned
by the Debtors that becomes unencumbered before
or as of the Effective Date that shall be
pledged to secure the New Senior Notes and, in
certain circumstances, certain property of the
Non-Debtor Subsidiaries and Non-Debtor
Affiliates as provided for in the New Senior
Notes Indenture.
9
NEW SENIOR NOTES INDENTURE means that certain Indenture dated as of the
Effective Date among ALC, as Issuer, the other
parties thereto and [___________________], as
Trustee, pursuant to which the New Senior Notes
will be issued.
NEW SENIOR NOTES TRUSTEE means ___________________, serving as trustee
pursuant to the New Senior Note Indenture.
NHP means Nationwide Health Properties, Inc.
NHP COLLATERAL means the Collateral securing the obligations
of ALC, directly or indirectly arising out of,
in connection with or otherwise relating to the
NHP Loan Agreement including certain real
property located in Berkeley County, South
Carolina and Indiana County, Pennsylvania but
only to the extent and as further described in
the deeds of trust, UCC Financing Statements
(and other applicable documents and agreements)
securing the obligations of the NHP Loan
Agreement.
NHP LOAN AGREEMENT means the Loan Agreement, dated as of September
3, 1998, by and between ALC, as borrower, and
NHP, as lender, and as such Loan Agreement has
been modified and amended from time to time.
NON-DEBTOR AFFILIATES means any and all of the non-debtor affiliates
of either of the Debtors, but excluding the
Non-Debtor Subsidiaries, including, ALC Nevada
McKinney, Inc., ALC Nevada Paris, Inc., ALC
Nevada Plano, Inc., ALC Texas McKinney, Inc.,
ALC Texas Paris, Inc., ALC Texas Plano, Inc.,
ALCH Nevada, Inc., ALCH Texas, Inc., ALFH
Nevada, Inc., ALFH Texas, Inc., DMG Nevada ALC,
Inc., DMG Texas ALC, Inc., Nevada ALC, Inc.,
Nevada ALF, Inc., Texas ALC, Inc. and Texas
ALF, Inc.
NON-DEBTOR SUBSIDIARIES means any and all non-debtor subsidiaries of
either of the Debtors including, ALC Florida,
Inc., ALC Iowa, Inc., ALC McKinney Partners,
LP, ALC Nebraska, Inc., ALC New Jersey, Inc.,
ALC Ohio, Inc., ALC Paris Partners, LP, ALC
Pennsylvania, Inc., ALC Plano Partners, LP,
ALCH Texas Partners, LP, ALF Partners, LP, ALFH
Texas Partners, LP, Assisted Living Concepts
Services, Inc., DMG New Jersey ALC, Inc., DMG
Oregon ALC, Inc., DMG Texas ALC Partners, LP,
Elder Care Home Health Services, Inc., Home and
Community Care, Inc., and Texas ALC Partners,
LP.
10
OHCS means the Oregon Housing and Community Services
Department.
OHCS LOAN AGREEMENTS means the following: (i) the Loan Agreement,
dated as of May 23, 1991, by and between Madras
Elder Care and Madras Senior Residence, as
borrowers, and OHCS, as lender, with ALC as
successor-in-interest to Madras Elder Care and
Madras Senior Residence; (ii) the Loan
Agreement, dated as of July 25, 1995, by and
between ALC, as borrower, and OHCS, as lender;
(iii) the Loan Agreement, dated as of February
13, 1996, by and between ALC, as borrower, and
OHCS, as lender; (iv) the Loan Agreement, dated
as of December 28, 1995, by and between ALC, as
borrower, and OHCS, as lender; (v) the Loan
Agreement, dated as of February 26, 1996, by
and between ALC, as borrower, and OHCS, as
lender and (vi) the Loan Agreement, dated as of
March 5, 1996, by and between ALC as borrower
and OHCS, as lender and, in each case, as such
Loan Agreement has been modified and amended
from time to time.
OHCS COLLATERAL means the Collateral securing the obligations
of ALC, whether direct or indirect, arising out
of, in connection with or otherwise relating to
the OHCS Loan Agreements including the
following real property located in Oregon:
Jefferson County, Lincoln County, Hood River
County, Silverton, Prinville and Bend but only
to the extent and as further described in the
deeds of trust, UCC Financing Statements (and
other applicable documents and agreements)
securing the obligations of the OHCS Loan
Agreements.
OLD ALC COMMON STOCK means all authorized and issued shares of
common stock of ALC, with a par value of $.01,
and any right, contractual or otherwise, to
acquire any common shares of ALC, existing
prior to the Commencement Date.
OLD CARRIAGE HOUSE COMMON STOCK means all authorized and issued shares of
common stock of Carriage House, with a par
value of $.01, and any right, contractual or
otherwise, to acquire any common shares of
Carriage House, existing prior to the
Commencement Date.
OLD INDENTURE TRUSTEE means Harris Trust and Savings Banks, as
Trustee under the 5.625% Debenture Indenture
and the 6% Debenture Indenture.
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OLD INDENTURES means, collectively, the 5.625% Debenture
Indenture and the 6% Debenture Indenture.
OLD SECURITIES means, collectively, any Old Equity Security or
Debenture.
OLD EQUITY SECURITY means any equity security (as defined in
section 101(16) of the Bankruptcy Code) of any
of the Debtors, including the Old ALC Common
Stock and Old Carriage House Common Stock.
OLD STOCK RIGHTS means, collectively, any warrants, and any
other rights, to purchase or otherwise acquire
Old Equity Securities, and any stock
appreciation or similar rights relating to Old
Common Stock, existing prior to the Effective
Date. "Old Stock Rights" do not include any
rights arising out of the ownership of Old ALC
Common Stock or Old Carriage House Common
Stock.
ORDER means an order or judgment of the Court as
entered on the Docket.
OTHER PRIORITY CLAIM means any Claim, other than an Administrative
Claim or a Tax Claim, entitled to priority in
right of payment under section 507(a) of the
Bankruptcy Code.
PERSON means any individual, corporation, general
partnership, limited partnership, limited
liability partnership, limited liability
company, association, joint stock company,
joint venture, government or political
subdivision, official committee appointed by
the United States Trustee, unofficial committee
of creditors or equity holders, or other entity
(as defined in the Bankruptcy Code).
PETITION DATE shall have the same meaning as Commencement
Date.
PLAN means this Joint Chapter 11 plan of
reorganization as it may be amended or
modified, from time to time, together with all
addenda, exhibits, schedules, supplements or
other attachments, if any.
PLAN SUPPLEMENT means the forms of documents specified in
Section 11.11 of the Plan.
POSTPETITION DOCUMENTS shall have the same meaning as defined in the
Final Financing Order.
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POSTPETITION TAX CLAIMS means Administrative Claims and other Claims by
a governmental unit for taxes against any of
the Debtor (and for interest and/or penalties
related to such taxes) for any tax year or
period, all or any portion of which occurs or
falls within the period from and including the
Commencement Date through and including the
Effective Date.
PRIORITY CLAIM means an Allowed Claim entitled to priority
under sections 507(a)(3) through 507(a)(7) of
the Bankruptcy Code, and includes Priority Tax
Claims.
PRO RATA means, with respect to any distribution on
account of an Allowed Claim or Allowed
Interest, a proportionate share, so that the
ratio of the consideration distributed on
account of an Allowed Claim or Allowed Interest
in a Class to the amount of such Allowed Claim
or Allowed Interest is the same as the ratio of
the amount of the consideration distributed on
account of all Allowed Claims or Allowed
Interests in such Class to the amount of all
Allowed Claims or Allowed Interests in such
Class.
REINSTATED means, (x) with respect to a Claim, (i) the
Debtors shall cure any default with respect to
such Claim that occurred before or after the
relevant Petition Date, (ii) the maturity of
such Claim shall be reinstated as such maturity
existed before any such default, (iii) the
Holder of such Claim shall be compensated for
any damages incurred as a result of any
reasonable reliance by the Holder on any right
to accelerate its Claim, and (iv) the legal,
equitable, and contractual rights of such
Holder will not otherwise be altered and (y)
with respect to an Old Equity Interest, the
legal, equitable and contractual rights of the
Holder of such Old Equity Interest will not be
altered.
REORGANIZED ALC means, on and after the Effective Date, ALC (as
reorganized pursuant to this Plan).
REORGANIZED CARRIAGE HOUSE means, on and after the Effective Date,
Carriage House (as reorganized pursuant to this
Plan).
REORGANIZED DEBTOR(S) means, on and after the Effective Date,
Reorganized ALC and/or Reorganized Carriage
House as the case may be and, in each case, to
the extent applicable.
RESIDENT DEPOSIT ACCOUNTS means a Claim by a resident of any of the
CLAIM(S) Debtors, Non-Debtor Subsidiaries, or Non-Debtor
Affiliates against any
13
Debtor for, and limited to, any funds remitted
to it by said resident to be held in trust (for
the benefit of the resident, "in trust") or
otherwise placed in a resident trust account
(or its functional equivalent, in each case,
"resident trust account").
SCHEDULED means set forth on the Schedules.
SCHEDULES means the schedules of assets and liabilities
filed by any Debtor pursuant to section 521 of
the Bankruptcy Code and Bankruptcy Rule 1007,
including any amendments and modifications
thereto through the Confirmation Date.
SEC means the United States Securities and Exchange
Commission.
SECURED CLAIM means any Claim secured by a lien on collateral
to the extent of the value of such collateral,
as determined in accordance with section 506(a)
of the Bankruptcy Code, or, in the event that
such Claim is subject to setoff under section
553 of the Bankruptcy Code, to the extent of
such setoff.
SECURITIES CLAIMS means (a) any Claim arising from rescission of
a purchase or sale of Old ALC Common Stock or
Old Carriage House Common Stock or for damages
arising from the purchase or sale of Old ALC
Common Stock or Old Carriage House Common
Stock, or (b) any Claim for indemnity,
reimbursement or contribution on account of any
such Claim.
SECURITIES SETTLEMENT means the Stipulation, dated as of September
29, 2000, and entered into in connection with
that that certain Consolidated Class Action
Complaint, filed on July 23, 1999 and amended
by a subsequent filing on October 20, 1999 in
the Assisted Living Concepts, Inc. Securities
Litigation Class Action matter (Lead Case No.
99-167-AA) in the United States District Court
in Oregon.
TAX CLAIM means any unsecured Claim of a governmental
unit of the kind specified in sections 502(i)
and 507(a)(8) of the Bankruptcy Code.
TRADE CLAIM means any unsecured claim against a Debtor that
arises from the provision to the Debtor of
goods and services in the ordinary course of
the Debtor's business.
14
TRANSATLANTIC means Transatlantic Capital Company LLC, a
lender to DMG New Jersey, Inc., and
Transatlantic's successors and assigns.
TRANSATLANTIC GUARANTY CLAIM means the Claim arising from that certain
guaranty executed by ALC in favor of
Transatlantic in connection with that certain
$8,700,000 secured promissory note dated as of
November 12, 1998 made by DMG New Jersey, Inc.
in favor of Transatlantic.
U.S. BANK means U.S. Bank National Association (formerly
known as United States National Bank of Oregon
& successor by merger to U.S. Bank of
Washington, N.A.).
U.S. BANK REIMBURSEMENT means and includes following: i) the
AGREEMENTS Reimbursement Agreement, dated as of November
1, 1996, by and between ALC, as borrower, and
U.S. Bank, as lender, and as such Reimbursement
Agreement has been modified and amended from
time to time (the "Washington Reimbursement
Agreement"); ii) the Reimbursement Agreement,
dated as of July 1, 1997, by and between ALC,
as borrower, and U.S. Bank, as lender, and as
such Reimbursement Agreement has been modified
and amended from time to time (the "Idaho
Reimbursement Agreement"); iii) the
Reimbursement Agreement, dated as of July 1,
1998, by and between ALC, as borrower, and U.S.
Bank, as lender, and as such Reimbursement
Agreement has been modified and amended from
time to time (the "Ohio Reimbursement
Agreement"), each as amended or modified by (a)
Amendment and Modification of Reimbursement
Agreements dated as of August 18, 1999; (b)
Second Amendment and Modification of
Reimbursement Agreements dated as of July 28,
2000; (c) Third Amendment and Modification of
Reimbursement Agreements dated as of March 12,
2001; (d) Waiver Agreement dated as of August
3, 2001; and (e) that certain agreement dated
as of October 2001 regarding ALC's use of cash
collateral.
U.S. BANK COLLATERAL means the Collateral securing the obligations
of ALC, whether direct or indirect, arising out
of, in connection with or otherwise relating to
the U.S. Bank Reimbursement Agreements
including i) with respect to Washington
Reimbursement Agreement, the U.S. Bank
Washington Collateral; ii) with respect to the
Idaho Reimbursement Agreement, the U.S. Bank
Idaho Collateral, and iii) with respect to the
Ohio Reimbursement Agreement, the U.S.
15
Bank Ohio Collateral and, in each case, only to
the extent and as further described in the U.S.
Bank Reimbursement Agreements and the U.S. Bank
Collateral Documents that secure the
obligations of ALC under each of the U.S. Bank
Reimbursement Agreements.
U.S. BANK COLLATERAL DOCUMENTS means all documents and agreements securing
ALC's obligations under the U.S. Bank
Reimbursement Agreements and any related loan
agreements, including but not limited to all
deeds of trust, mortgages, assignments of
leases, security agreements, pledge agreements,
UCC Financing Statements and assignments of
deposit accounts.
U.S. BANK IDAHO CLAIM means the Claim secured by the U.S. Bank Idaho
Collateral.
U.S. BANK IDAHO COLLATERAL includes (i) four assisted living unit
facilities owned by ALC and located on real
property in the following Idaho locations:
Garden City, Idaho Falls, Moscow and Rexburg;
(ii) three assisted living unit facilities
owned by ALC and located on real property in
the following Washington locations: Ferndale,
Summer and Yakima; and (iii) $4,300,000 held in
a deposit account at U.S. Bank, all as pledged
by ALC as collateral to secure its obligations
under the Idaho Reimbursement Agreement.
U.S. BANK OHIO CLAIM means the Claim secured by the U.S. Bank Ohio
Collateral.
U.S. BANK OHIO COLLATERAL includes (i) seven residential care facilities
owned by ALC and located on real property in
the following Ohio locations: Bellefontaine,
Defiance, Findlay, Greenville, Kenton, Marion
and Lima; (ii) three assisted living unit
facilities owned by ALC and located on real
property in the following Washington locations:
Ferndale, Summer and Yakima; and (iii)
$4,300,000 held in a deposit account at U.S.
Bank, all as pledged by ALC as collateral to
secure its obligations under the Ohio
Reimbursement Agreement.
U.S. BANK WASHINGTON CLAIM means the Claim secured by the U.S. Bank
Washington Collateral.
U.S. BANK WASHINGTON COLLATERAL includes (i) eight assisted living unit
facilities owned by ALC and located on real
property in the following Washington locations:
Port Townsend, Enumclaw, Bremerton, Port
Orchard, Spokane, Ferndale, Summer and Yakima;
and (ii) $4,300,000 held in a deposit account
at U.S. Bank, all as pledged by ALC as
collateral to secure its
16
obligations under the Washington Reimbursement
Agreement.
UCC means the Uniform Commercial Code, as in effect
and as modified or amended at any relevant
time.
UNIMPAIRED means with reference to a Class of Claims or
Interests, that the Class is not Impaired. An
Unimpaired Class is not entitled to vote on the
Plan.
VOTING AGENT means Bankruptcy Services LLC.
VOTING DEADLINE means the date on which Ballots must be
received by the Voting Agent. For purposes of
the Plan, the Voting Deadline is November 30,
2001 at 4:00 p.m. Eastern Time, or, if the
Voting Deadline is extended by Court Order, the
latest date on which a Ballot will be accepted.
SECTION 2.02 INTERPRETATION AND COMPUTATION OF TIME
(a) Defined Terms.
Any term used in the Plan that is not defined in the Plan, either in
Article II (Definitions) or elsewhere, but that is used in the Bankruptcy Code,
the Bankruptcy Rules or the Local Bankruptcy Rules, shall have the meaning
assigned to that term in the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, as the case may be.
(b) Rules Of Interpretation.
For purposes of the Plan: (a) whenever it appears appropriate from the
context, each term, whether stated in the singular or the plural, shall include
both the singular and the plural; (b) any reference in the Plan to a contract,
instrument, release or other agreement or document being in a particular form or
on particular terms and conditions means that such document shall be
substantially in such form or substantially on such terms and conditions;
provided, however, that any change to such form, terms, or conditions which is
material to a party to such document shall not be made without such party's
consent; (c) any reference in the Plan to an existing document or exhibit Filed
or to be Filed means such document or exhibit, as it may have been or (to the
extent otherwise permitted, hereafter) may be amended, modified or supplemented
from time to time; (d) unless otherwise specified in a particular reference, all
references in the Plan to paragraphs, Articles and Exhibits are references to
paragraphs, Articles and Exhibits of or to the Plan; (e) the words "herein,"
"hereof," "hereto," "hereunder" and others of similar import refer to the Plan
in its entirety rather than to only a particular portion of the Plan; (f)
captions and headings to Articles and paragraphs are inserted for convenience of
reference only and are not intended to be a part of or to affect the
interpretations of the Plan; (g) the rules of construction set forth in section
102 of the Bankruptcy Code shall apply; and (h) all exhibits to the Plan are
incorporated into the Plan, and shall be deemed to be included in the Plan,
provided that they are Filed no later than the commencement of the Confirmation
Hearing.
17
(c) Time Periods.
In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
ARTICLE III
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
The following is a designation of the Classes of Claims and
Interests under the Plan. In accordance with section 1123(a)(1) of the
Bankruptcy Code, Administrative Claims and Priority Tax Claims have not been
classified and are excluded from the following Classes. A Claim or Interest is
classified in a particular Class only to the extent that the Claim or Interest
qualifies within the description of that Class, and is classified in another
Class or Classes to the extent that any remainder of the Claim or Interest
qualifies within the description of such other Class or Classes. A Claim or
Interest is classified in a particular Class only to the extent that the Claim
or Interest is an Allowed Claim or Allowed Interest in that Class and has not
been paid, released or otherwise satisfied before the Effective Date; a Claim or
Interest which is not an Allowed Claim or Allowed Interest is not in any Class.
A Disputed Claim or Disputed Interest, to the extent that it subsequently
becomes an Allowed Claim or Allowed Interest, shall be included in the Class for
which it would have qualified had it not been disputed. Notwithstanding anything
to the contrary contained in the Plan, no distribution shall be made on account
of any Claim or Interest which is not an Allowed Claim or an Allowed Interest.
CLAIMS AGAINST AND INTERESTS IN ALC
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- --------------- --------------------------------- -------------------
-- Administrative Paid in full in Cash on the 100%
Claims Effective Date or as soon as
practicable thereafter (unless
the holder of a particular claim
and ALC agree to some other
treatment), or in accordance with
the terms and conditions of
transactions or agreements
relating to obligations incurred
in the ordinary course of
business during the pendency of
the Chapter 11 Cases or assumed
by Reorganized ALC.
18
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- --------------- --------------------------------- -------------------
-- Tax Claims At the option of Reorganized ALC 100%
either (i) Reinstated, (ii) paid
in full in Cash on the Effective
Date or as soon as practicable
thereafter as possible, or (iii)
paid over a six-year period from
the date of assessment, as
provided in Section 1129(a)(9)(C)
of the Bankruptcy Code with
interest payable at a rate of
8-1/4% per annum or as otherwise
established by the Court.
SECURED CLAIMS:
1A OHCS Claim Unimpaired; Reinstated on the 100%
Effective Date or as soon as
practicable thereafter.
1B NHP Claim Impaired. 100%
1C U.S. Bank Idaho Unimpaired; Reinstated on the 100%
Claim Effective Date or as soon as
practicable thereafter.
1D U.S. Bank Ohio Unimpaired; Reinstated on the 100%
Claim Effective Date or as soon as
practicable thereafter.
1E U.S. Bank Unimpaired; Reinstated on the 100%
Washington Claim Effective Date or as soon as
practicable thereafter.
2A et Other Secured Unimpaired if paid in full in 100%
seq. Claims Cash or Reinstated on the
Effective Date or as soon as
practicable thereafter as
possible; Impaired if holder of
Claim agrees to alternative
treatment.
UNSECURED CLAIMS:
19
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- --------------- --------------------------------- -------------------
3 Priority Claims Unimpaired; paid in full on or 100%
before the later of (i) the
Effective Date or as soon as
practicable thereafter, (ii) the
date such Claim becomes an
Allowed Claim and (iii) the date
that such Claim would be paid in
accordance with any terms and
conditions of any agreements or
understandings relating thereto
between ALC and the Holder of
such Claim.
4 General Impaired; each holder of an 43%
Unsecured Claims Allowed Class 4 Claim to receive
against ALC on the Effective Date or as soon
as practicable thereafter, a Pro
Rata Share of 96% of ALC's New
Common Stock, New Senior Notes
in the principal amount of
$40,250,000 and New Junior Notes
in the principal amount of
$15,250,000.
5 Trade Claims Unimpaired; at the option of 100%
against ALC Reorganized ALC, paid in full in
Cash or Reinstated on the
Effective Date or as soon as
practicable thereafter.
6 Resident Deposit Unimpaired; Reinstated on the 100%
Account Claims Effective Date or as soon as
against ALC practicable thereafter.
7 Guaranty Claims Unimpaired; Reinstated on the 100%
against ALC Effective Date or as soon as
practicable thereafter.
8 Intercompany Unimpaired; Reinstated on the 100%
Claims Effective Date or as soon as
practicable thereafter.
9 Old ALC Common Impaired; on the Effective Date <0%
Stock and or as soon as practicable
Securities thereafter, holders of Allowed
Claims against Class 9 Interests will receive,
ALC on a Pro Rata basis, 4% of ALC's
New Common Stock in exchange for
the Old ALC Common Stock.
20
TYPE OF ALLOWED
CLAIM OR EQUITY ESTIMATED
CLASS INTEREST TREATMENT RECOVERY
----- --------------- --------------------------------- -------------------
10 Old Stock Rights Impaired; will not receive or 0%
in ALC retain any property or interest.
CLAIMS AGAINST AND INTERESTS IN CARRIAGE HOUSE
-- Administrative Claims Paid in full in Cash on the Effective 100%
Date or as soon as practicable
thereafter (unless the holder of a
particular claim and ALC agree to some
other treatment), or in accordance with
the terms and conditions of
transactions or agreements relating to
obligations incurred in the ordinary
course of business during the pendency
of the Chapter 11 Cases or assumed by
the Debtors in Possession.
-- Tax Claims At the option of Reorganized Debtors 100%
either (i) Reinstated, (ii) paid in
full in Cash on the Effective Date or
as soon as practicable thereafter, or
(iii) paid over a six-year period from
the date of assessment, as provided in
Section 1129(a)(9)(C) of the Bankruptcy
Code with interest payable at a rate of
8-1/4% per annum or as otherwise
established by the Court.
SECURED CLAIMS:
1 Other Secured Unimpaired if paid in full in Cash or 100%
Claims Reinstated on the Effective Date or as
soon as practicable thereafter; Impaired
if holder of Claim consents to
alternative treatment.
UNSECURED CLAIMS:
21
2 Priority Claims Unimpaired; paid in full on or before 100%
the later of (i) the Effective Date or
as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed
Claim and (iii) the date that such
Claim would be paid in accordance with
any terms and conditions of any
agreements or understandings relating
thereto between Carriage House and the
Holder of such Claim.
3 General Unimpaired; at the option of Reorganized 100%
Unsecured Carriage House, paid in full in Cash or
Claims against Reinstated on or before the later of
Carriage House (i) the Effective Date or as soon as
practicable thereafter, (ii) the date
such Claim becomes an Allowed Claim and
(iii) the date that such Claim would be
paid in accordance with any terms and
conditions of any agreements or
understandings relating thereto between
Carriage House and the Holder of such
Claim.
4 Trade Claims Unimpaired; at the option of Reorganized 100%
Against Carriage House, paid in full in Cash or
Carriage House Reinstated on or before the later of (i)
the Effective Date or as soon as
practicable thereafter, (ii) the date
such Claim becomes an Allowed Claim and
(iii) the date that such Claim would be
paid in accordance with any terms and
conditions of any agreements or
understandings relating thereto between
Carriage House and the Holder of such
Claim.
5 Intercompany Unimpaired; Reinstated on the Effective 100%
Claims Date or as soon as practicable
thereafter.
6 Old Common Unimpaired; Reinstated on the Effective 100%
Stock of Date or as soon as practicable
Carriage House thereafter.
and Securities
Claims against
Carriage House
7 Old Stock Unimpaired; Reinstated on the Effective 100%
Rights in Date or as soon as practicable
Carriage House thereafter.
22
GENERAL PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS
SECTION 3.01 UNCLASSIFIED CLAIMS. (APPLICABLE TO BOTH DEBTORS)
(a) Administrative Claims.
(i) General.
Subject to (x) the bar date provisions herein and (y) additional
requirements for professionals and certain other entities set forth below, the
Reorganized Debtors, as applicable, shall pay to each holder of an Allowed
Administrative Claim, on account of its Administrative Claim and in full
satisfaction thereof, Cash equal to the Allowed amount of such Administrative
Claim on the Effective Date or as soon as practicable thereafter, unless the
holder agrees or shall have agreed to other treatment of such Claim. Payment on
an Administrative Claim which arose in the ordinary course of each Debtor's
business will not be made until such payment would have become due in the
ordinary course of each Debtor's business or under the terms of the Claim in the
absence of the Chapter 11 Cases.
(ii) Payment Of Statutory Fees.
On or before the Effective Date, all fees payable pursuant to 28 U.S.C.
Section 1930, as determined by the Court at the hearing on Confirmation, shall
be paid in Cash equal to the amount of such Administrative Claim.
(iii) Bar Date For Administrative Claims.
1) General Provisions.
Except as provided below, for (i) non-tax liabilities incurred in the
ordinary course of business by each Debtor in Possession and (ii) Postpetition
Tax Claims, requests for payment of Administrative Claims must be Filed and
served on counsel for Reorganized ALC no later than (x) sixty (60) days after
the Effective Date, or (y) such later date, if any, as the Court shall order
upon application made prior to the end of such 60-day period. Holders of
Administrative Claims (including, without limitation, professionals requesting
compensation or reimbursement of expenses and the holders of any Claims for
federal, state or local taxes) that are required to File a request for payment
of such Claims and that do not File such requests by the applicable bar date
shall be forever barred from asserting such Claims against any of the Debtors or
the Reorganized Debtors or any of their respective properties.
2) Professionals.
All professionals or other Persons requesting compensation or
reimbursement of expenses pursuant to any of sections 327, 328, 330, 331, 503(b)
and 1103 of the Bankruptcy Code for services rendered on or before the Effective
Date (including, inter alia, any compensation requested by any professional or
any other Person for making a substantial contribution in the Reorganization
Case) shall File and serve on the Reorganized Debtors, the
23
Informal Bondholder Committee, and the Creditors' Committee an application for
final allowance of compensation and reimbursement of expenses no later than (i)
sixty (60) days after the Effective Date, or (ii) such later date as the Court
shall order upon application made prior to the end of such 60-day period. ALC
has agreed to support an application under Section 503(b) with respect to
reasonable compensation for post-Commencement Date services provided by Chanin
Capital Partners and Milbank Tweed Hadley & McCloy LLP to the Informal
Bondholder Committee. Objections to applications of professionals for
compensation or reimbursement of expenses must be Filed and served on
Reorganized ALC, the Informal Bondholder Committee, the Creditors' Committee (if
and when appointed) and the professionals to whose application the objections
are addressed on or before (i) sixty days after such application is Filed and
served or (ii) such later date as the Court shall order upon application made
prior to the end of such 60-day period or upon agreement between the Reorganized
Debtors and the affected professional. Any professional fees and reimbursements
or expenses incurred by the Reorganized Debtors subsequent to the Effective Date
may be paid by the Reorganized Debtors without application to or Order of the
Court.
3) Ordinary Course Liabilities.
Holders of Administrative Claims based on liabilities incurred
post-petition in the ordinary course of the Debtors' business (other than Claims
of governmental units for taxes or Claims and/or penalties related to such
taxes) shall not be required to File any request for payment of such Claims.
Such Administrative Claims shall be assumed and paid by Reorganized ALC or
Reorganized Carriage House, as appropriate, pursuant to the terms and conditions
of the particular transaction giving rise to such Administrative Claim, without
any further action by the holders of such Claims.
4) Tax Claims.
All requests for payment of Postpetition Tax Claims, for which no bar
date has otherwise been previously established, must be Filed on or before the
later of (i) sixty (60) days following the Effective Date; and (ii) 120 days
following the filing of the tax return for such taxes for such tax year or
period with the applicable governmental unit. Any holder of any Postpetition Tax
Claim that is required to File a request for payment of such taxes and that does
not File such a Claim by the applicable bar date shall be forever barred from
asserting any such Postpetition Tax Claim against any of the Debtors or
Reorganized Debtors, or any of their respective properties, whether any such
Postpetition Tax Claim is deemed to arise prior to, on, or subsequent to, the
Effective Date. The Debtors are paying all Postpetition Tax Claims as they come
due; however, certain taxing authorities conduct audits which may result in a
postpetition tax liability of which the Debtors are currently unaware.
(iv) Heller
Pursuant to the Final Financing Order and the Postpetition Documents,
Heller has a secured administrative claim against the Debtors in the approximate
amount of $44 million (the "Heller Claim"). The Debtors are jointly and
severally liable for the Heller Claim obligations. The Heller Claim is secured
by the Aggregate Collateral. Unless otherwise agreed in writing
24
prior to or on the Effective Date, the Heller Claim shall be paid in full in
Cash on or before the Effective Date.
(b) Treatment Of Priority Tax Claims.
Except as otherwise agreed to by Reorganized ALC and Reorganized
Carriage House and the applicable taxing agency, Reorganized ALC or Reorganized
Carriage House, as appropriate, shall pay to each holder of an Allowed Priority
Tax Claim deferred Cash payments, over a period not exceeding six years from the
date of assessment of such Claim, in an aggregate amount equal to the amount of
such Allowed Priority Tax Claim, plus interest from the Effective Date on the
unpaid portion of such Allowed Priority Tax Claim (without penalty of any kind)
at the rate prescribed below. Payment of the amount of each such Allowed
Priority Tax Claim shall be made in equal semiannual installments payable on
June 1 and December 1, with the first installment due on June 1 or December 1
after the latest of: (a) the Effective Date, (b) 30 days after the date on which
an Order allowing such Priority Tax Claim becomes a Final Order, and (c) such
other time or times as may be agreed to by the holder of such Claim and
Reorganized ALC. Each installment shall include interest on the unpaid portion
of such Allowed Priority Tax Claim, without penalty of any kind, at the rate of
8-1/4% per annum or as otherwise established by the Court; provided, however,
that Reorganized ALC or Reorganized Carriage House, as appropriate, shall have
the right to pay any Allowed Priority Tax Claim, or any remaining balance of
such Claim, in full, at any time on or after the Effective Date, without premium
or penalty of any kind.
SECTION 3.02 TREATMENT OF CLASSIFIED CLAIMS AGAINST AND INTERESTS IN ALC.
ALC Class 1A - OHCS Claim (against ALC). On the Effective Date, or as
soon as practicable thereafter, the holder of the Class 1A OHCS Claim shall, in
full satisfaction, settlement, release and discharge of and in exchange for such
Secured Claim, receive (in the sole discretion of Reorganized ALC) the following
treatment: either (a) the Plan shall leave unaltered the legal, equitable and
contractual rights to which such Claim entitles the Holder; (b) (i) the Debtors
shall cure any default with respect to such Claim that occurred before or after
the relevant Petition Date, (ii) the maturity of such Claim shall be Reinstated
as such maturity existed before any such default, (iii) the Holder of such Claim
shall be compensated for any damages incurred as a result of any reasonable
reliance by the Holder on any right to accelerate its Claim, and (iv) the legal,
equitable, and contractual rights of such Holder will not otherwise be altered;
or (c) such Claim shall receive such other treatment to which the Holder shall
consent. The Holder of the Allowed Secured Claim in Class 1A which is treated as
set forth in clause (a) or (b) of this paragraph will be Unimpaired and deemed
to have voted for the Plan; a Secured Claim in Class 1A which is treated as set
forth in clause (c) of this paragraph shall be Impaired and entitled to vote on
the Plan.
ALC Class 1B - NHP Claim (against ALC). On the Effective Date, or as
soon as practicable thereafter, the holder of the Class 1B NHP Claim shall, in
full satisfaction, settlement, release and discharge of and in exchange for its
Claim, receive the following treatment: On the Effective Date, or as soon as
practicable thereafter, the holder of the Class 1B NHP Claim shall, in full
satisfaction, settlement, release and discharge of and in exchange for
25
such Secured Claim, receive (in the sole discretion of Reorganized ALC) the
following treatment: NHP shall exchange its mortgages on the Morehead Facility
located in Indiana, Pennsylvania and on the Pinewood House Facility located in
Goosecreek, South Carolina in sale-leaseback transactions with ALC. ALC and NHP
shall execute definitive documentation reflecting the foregoing sale-leasebacks,
as well as modifications to two other leases pursuant to which ALC leases from
NHP two facilities in South Carolina, and File such documentation with the Court
no later than ten days prior to the Confirmation Hearing. NHP is Impaired and
entitled to vote on the Plan. NHP and ALC executed an agreement memorializing
the foregoing terms (the "NHP Agreement"). Pursuant to the NHP Agreement,
subject to a number of conditions including Court approval of the Disclosure
Statement, NHP has agreed to support the Plan. A copy of the NHP Agreement is
attached as Exhibit K to the Disclosure Statement. The Committee does not
endorse the NHP Agreement. The Committee intends to enter into discussions with
NHP and ALC with respect to the NHP Agreement. If the Committee convinces ALC
that the NHP Agreement is not in the best of the Estate, ALC will return to NHP
the collateral securing the Class 1B NHP Claim to NHP and move to reject the
leases to which NHP and ALC are parties. Alternatively, the Committee may be
able to renegotiate the NHP Agreement in a manner that will produce a more
favorable result to the Estate. Last, the Committee may determine that the NHP
Agreement is in the best interest of the Estate and ultimately support the NHP
Agreement. ALC has given the Committee a deadline of November 12, 2001 to
finally resolve its position with respect to the NHP Agreement. ALC shall notify
NHP no later than November 15, 2001 of how the Class 1B NHP Claim will be
treated.
ALC Class 1C - U.S. Bank Idaho Claim (against ALC). On the Effective
Date, or as soon as practicable thereafter, the holder of the Class 1C U.S. Bank
Idaho Claim shall, in full satisfaction, settlement, release and discharge of
and in exchange for its Claim, receive (in the sole discretion of Reorganized
ALC) the following treatment: Either (a) the Plan shall leave unaltered the
legal, equitable and contractual rights to which such Claim entitles the Holder;
or (b) (i) the Debtors shall cure any default with respect to such Claim that
occurred before or after the relevant Petition Date, (ii) the maturity of such
Claim shall be Reinstated as such maturity existed before any such default,
(iii) the Holder of such Claim shall be compensated for any damages incurred as
a result of any reasonable reliance by the Holder on any right to accelerate its
Claim, and (iv) the legal, equitable, and contractual rights of such Holder will
not otherwise be altered. ALC Class 1C is Unimpaired and shall be deemed to have
voted in favor of the Plan.
ALC Class 1D - U.S. Bank Ohio Claim (against ALC). On the Effective
Date, or as soon as practicable thereafter, the holder of the Class 1D U.S. Bank
Ohio Claim shall, in full satisfaction, settlement, release and discharge of and
in exchange for such Secured Claim, receive (in the sole discretion of
Reorganized ALC) the following treatment: Either (a) the Plan shall leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; or (b) (i) the Debtors shall cure any default with respect
to such Claim that occurred before or after the relevant Petition Date, (ii) the
maturity of such Claim shall be Reinstated as such maturity existed before any
such default, (iii) the Holder of such Claim shall be compensated for any
damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered. ALC Class 1D is Unimpaired
and shall be deemed to have voted in favor of the Plan.
26
ALC Class 1E - U.S. Bank Washington Claim (against ALC). On the
Effective Date, or as soon as practicable thereafter, the holder of the Class 1E
U.S. Bank Washington Claim shall, in full satisfaction, settlement, release and
discharge of and in exchange for such Secured Claim, receive (in the sole
discretion of Reorganized ALC) the following treatment: Either (a) the Plan
shall leave unaltered the legal, equitable and contractual rights to which such
Claim entitles the Holder; (b) (i) the Debtors shall cure any default with
respect to such Claim that occurred before or after the relevant Petition Date,
(ii) the maturity of such Claim shall be Reinstated as such maturity existed
before any such default, (iii) the Holder of such Claim shall be compensated for
any damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered. ALC Class 1E is Unimpaired
and shall be deemed to have voted in favor of the Plan.
ALC Class 2A Et Seq. - Other Secured Claims (against ALC). Class 2
consists of all other Secured Claims against the Debtors. This Class will be
further divided into subclasses designated by letters of the alphabet (CLASS 2A,
CLASS 2B, and so on), so that each Holder of any Secured Claim is in a Class by
itself, except to the extent that there are Secured Claims that are
substantially similar to each other and may be included within a single Class.
The Debtors will File a schedule of each Secured Claim on or before ten (10)
days prior to the commencement of the Confirmation Hearing. Each Allowed Secured
Claim in Class 2 will be treated as follows: Either (a) the Plan shall leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; (b) (i) the Debtors shall cure any default with respect to
such Claim that occurred before or after the relevant Petition Date, (ii) the
maturity of such Claim shall be reinstated as such maturity existed before any
such default, (iii) the Holder of such Claim shall be compensated for any
damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered; or (c) such Claim shall
receive such other treatment to which the Holder shall consent. The Holder of
each Allowed Secured Claim in Class 2 which is treated as set forth in clause
(a) or (c) of this paragraph will be Unimpaired and shall be deemed to have
voted for the Plan; any treatment under clause (c) of this paragraph will render
the claim Impaired and entitled to vote on the Plan..
ALC Class 3 - Priority Claims (against ALC). Class 3 is Unimpaired and
therefore is presumed to accept the Plan. Holders of Class 3 Claims are not
entitled to vote on the Plan.
A Priority Claim is a Claim for an amount entitled to priority under
sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code,
and does not include any Administrative Claim or Tax Claim. These unsecured
Priority Claims include, among others: (a) unsecured Claims for accrued employee
compensation earned within 90 days prior to the Petition Date, to the extent of
$4,650 per employee; (b) contributions to employee benefit plans arising from
services rendered within 180 days prior to the Petition Date, but only for such
plans to the extent of (i) the number of employees covered by such plans
multiplied by $4,650, less (ii) the aggregate amount paid to such employees
under section 507(a)(3) of the Bankruptcy Code, plus the aggregate amount paid
by each estate on behalf of such employees to any other employee benefit plan.
27
The Plan provides that unless otherwise agreed to by the parties, each
Holder of an Allowed Claim in Class 3 will be paid the Allowed Amount of such
Claim in full in Cash by Reorganized ALC on or before the later of (i) the
Effective Date or as soon as practicable thereafter, (ii) the date such Claim
becomes an Allowed Claim and (iii) the date that such Claim would be paid in
accordance with any terms and conditions of any agreements or understandings
relating thereto between ALC and the Holder of such Claim. Allowed Claims in
Class 3 are not Impaired under the Plan and the Holders of Allowed Claims in
Class 3 will be deemed to have accepted the Plan.
ALC Class 4 - General Unsecured Claims (against ALC). On the Effective
Date, or as soon as practicable thereafter, each Holder of an Allowed Class 4
Claim shall, in full satisfaction, settlement, release and discharge of and in
exchange for such Claim, receive the following treatment: a Pro Rata Share of
(a) the New Senior Notes, (b) the New Junior Notes, and (c) ninety-six percent
(96%) of the New Common Stock. Class 4 is Impaired and therefore entitled to
vote on the Plan.
ALC Class 5 - Trade Claims (against ALC). On the Effective Date, or as
soon as practicable thereafter, each Holder of an Allowed Class 5 Claim shall,
in full satisfaction, settlement, release and discharge of and in exchange for
such Claim, receive (in the sole discretion of Reorganized ALC) the following
treatment: Either (a) the Plan shall leave unaltered the legal, equitable and
contractual rights to which such Claim entitles the Holder; (b) (i) the Debtor
shall cure any default with respect to such Claim that occurred before or after
the relevant Petition Date, (ii) the maturity of such Claim shall be Reinstated
as such maturity existed before any such default, (iii) the Holder of such Claim
shall be compensated for any damages incurred as a result of any reasonable
reliance by the Holder on any right to accelerate its Claim, and (iv) the legal,
equitable, and contractual rights of such Holder will not otherwise be altered
or (c) the Debtor shall pay each claimant Cash in the full amount of its Claim.
Class 5 is Unimpaired and not entitled to vote on the Plan; Class 5 is deemed to
have voted in favor of the Plan.
ALC Class 6 - Resident Deposit Account Claims (against ALC). On the
Effective Date, or as soon as practicable thereafter, each Holder of an Allowed
Class 6 Claim shall, in full satisfaction, settlement, release and discharge of
and in exchange for such Claim, receive (in the sole discretion of Reorganized
ALC) the following treatment: Either (a) the Plan shall leave unaltered the
legal, equitable and contractual rights to which such Claim entitles the Holder;
(b) (i) the Debtor shall cure any default with respect to such Claim that
occurred before or after the relevant Petition Date, (ii) the maturity of such
Claim shall be Reinstated as such maturity existed before any such default,
(iii) the Holder of such Claim shall be compensated for any actual and
compensatory damages incurred as a result of any reasonable reliance by the
Holder on any right to accelerate its Claim, and (iv) the legal, equitable, and
contractual rights of such Holder will not otherwise be altered or (c) the
Debtor shall pay each claimant Cash in the full amount of its Claim with each
such payment to be funded into a "resident trust account" and held "in trust" by
the Debtor for the benefit of each particular claimant. Class 6 is Unimpaired
and not entitled to vote on the Plan; Class 6 is deemed to have voted in favor
of the Plan.
ALC Class 7 - Guaranty Claims (against ALC). On the Effective Date, or
as soon as practicable thereafter, each Holder of an Allowed Class 7 Claim
shall, in full satisfaction,
28
settlement, release and discharge of and in exchange for such Claim, receive (in
the sole discretion of Reorganized ALC) the following treatment: Either (a) the
Plan shall leave unaltered the legal, equitable and contractual rights to which
such Claim entitles the Holder; (b) (i) the Debtor shall cure any default with
respect to such Claim that occurred before or after the relevant Petition Date,
(ii) the maturity of such Claim shall be Reinstated as such maturity existed
before any such default, (iii) the Holder of such Claim shall be compensated for
any damages incurred as a result of any reasonable reliance by the Holder on any
right to accelerate its Claim, and (iv) the legal, equitable, and contractual
rights of such Holder will not otherwise be altered or (c) the Debtor shall pay
the claimant Cash in the full amount of its Claim. Class 7 is Unimpaired and not
entitled to vote on the Plan; Class 7 is deemed to have voted in favor of the
Plan.
ALC Class 8 - Intercompany Claim (against ALC). Each Allowed Class 8
Claim shall be Reinstated under the Plan and not entitled to vote on the Plan.
Class 8 is Unimpaired and deemed to have voted in favor of the Plan.
ALC Class 9 - Old Common Stock of ALC and Securities Claims (against
ALC). On the Effective Date, or as soon as practicable thereafter, each Holder
of an Allowed Class 9 Interest or Claim shall, in full satisfaction, settlement,
release and discharge of and in exchange for such Interest or Claim, receive the
following treatment: a Pro Rata Share of four percent (4.0%) of the New Common
Stock. Class 9 is Impaired and entitled to vote on the Plan. If Class 9 does not
vote in favor of the Plan, Class 9 will receive no property under the Plan;
instead, the New Common Stock otherwise allocable to Class 9 will be
redistributed on a Pro Rata basis to holders of Allowed Class 4 Claims.
ALC Class 10 - Interests of Holders of Old Stock Rights and All Claims
Arising Out of Such Old Stock Rights (against ALC). Each Holder of an Allowed
Class 10 Interest or Claim shall not receive or retain any property under the
Plan on account of such Interest or Claim in full satisfaction, settlement,
release and discharge of such Interest or Claim. Class 10 is Impaired under the
Plan and deemed to have voted to reject the Plan. The votes of holders of Class
10 Interests or Claims (if any) are not being solicited. The Debtors currently
do not believe any such holders exist.
SECTION 3.03 TREATMENT OF CLASSIFIED CLAIMS AGAINST AND INTERESTS IN
CARRIAGE HOUSE.
Carriage House Class 1A Et Seq. - Other Secured Claims (against ALC).
Class 1 consists of all other Secured Claims against Carriage House. This Class
will be further divided into subclasses designated by letters of the alphabet
(CLASS 1A, CLASS 1B, and so on), so that each Holder of any Secured Claim is in
a Class by itself, except to the extent that there are Secured Claims that are
substantially similar to each other and may be included within a single Class.
The Debtors will File a schedule of each Secured Claim on or before ten (10)
days prior to the commencement of the Confirmation Hearing. Each Allowed Secured
Claim in Class 1 will be treated as follows: Either (a) the Plan shall leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; (b) (i) the Debtors shall cure any default with respect to
such Claim that occurred before or after the relevant Petition Date, (ii) the
maturity of such Claim shall be reinstated as such maturity existed before any
such default, (iii)
29
the Holder of such Claim shall be compensated for any damages incurred as a
result of any reasonable reliance by the Holder on any right to accelerate its
Claim, and (iv) the legal, equitable, and contractual rights of such Holder will
not otherwise be altered; or (c) such Claim shall receive such other treatment
to which the Holder shall consent. The Holder of each Allowed Secured Claim in
Class 1 which is treated as set forth in clause (a) or (b) of this paragraph
will be Unimpaired, will be presumed to have accepted the Plan and will not be
entitled to vote for or against the Plan; any treatment under clause (c) of this
paragraph will render the claim Impaired and entitled to vote on the Plan.
Carriage House Class 2 - Priority Claims (against Carriage House).
Class 2 is Unimpaired and therefore is presumed to accept the Plan. Holders of
Class 2 Claims are not entitled to vote on the Plan.
A Priority Claim is a Claim for an amount entitled to priority under
sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code,
and does not include any Administrative Claim or Tax Claim. These unsecured
Priority Claims include, among others: (a) unsecured Claims for accrued employee
compensation earned within 90 days prior to the Petition Date, to the extent of
$4,650 per employee; (b) contributions to employee benefit plans arising from
services rendered within 180 days prior to the Petition Date, but only for such
plans to the extent of (i) the number of employees covered by such plans
multiplied by $4,650, less (ii) the aggregate amount paid to such employees
under section 507(a)(3) of the Bankruptcy Code, plus the aggregate amount paid
by each estate on behalf of such employees to any other employee benefit plan.
The Plan provides that unless otherwise agreed to by the parties, each
Holder of an Allowed Claim in Class 2 will be paid the Allowed Amount of such
Claim in full in Cash by Reorganized Carriage House on or before the later of
(i) the Effective Date or as soon as practicable thereafter, (ii) the date such
Claim becomes an Allowed Claim and (iii) the date that such Claim would be paid
in accordance with any terms and conditions of any agreements or understandings
relating thereto between Carriage House and the Holder of such Claim. Allowed
Claims in Class 2 are not Impaired under the Plan and the Holders of Allowed
Claims in Class 2 will be deemed to have accepted the Plan.
Carriage House Class 3 - General Unsecured Claims (against Carriage
House). On the Effective Date, or as soon as practicable thereafter, each
Allowed Class 3 Claim, in full satisfaction, settlement, release and discharge
of and in exchange for such Claim, shall be paid in full in Cash or Reinstated
on the Effective Date or as soon as practicable thereafter as possible. Allowed
Claims in Class 3 are not Impaired under the Plan and the Holders of Allowed
Claims in Class 3 will be deemed to have accepted the Plan.
Carriage House Class 4 - Trade Claims (against Carriage House). On the
Effective Date, or as soon as practicable thereafter, each Holder of an Allowed
Class 4 Claim shall, in full satisfaction, settlement, release and discharge of
and in exchange for such Claim, receive (in the sole discretion of Reorganized
Carriage House) the following treatment: Either (a) the Plan shall leave
unaltered the legal, equitable and contractual rights to which such Claim
entitles the Holder; (b) (i) the Debtors shall cure any default with respect to
such Claim that occurred before or after the relevant Petition Date, (ii) the
maturity of such Claim shall be
30
Reinstated as such maturity existed before any such default, (iii) the Holder of
such Claim shall be compensated for any damages incurred as a result of any
reasonable reliance by the Holder on any right to accelerate its Claim, and (iv)
the legal, equitable, and contractual rights of such Holder will not otherwise
be altered or (c) the Debtor shall pay Claimant Cash in the full amount of its
Claim. Allowed Claims in Class 4 are not Impaired under the Plan and the Holders
of Allowed Claims in Class 4 will be deemed to have accepted the Plan.
Carriage House Class 5 - Intercompany Claim (against Carriage House).
Each Allowed Class 5 Claim shall be Reinstated under the Plan and not entitled
to vote on the Plan. Class 5 is Unimpaired.
Carriage House Class 6 - Old Common Stock of Carriage House and
Securities Claims (against Carriage House). Each Allowed Class 6 Interest or
Claim shall be Reinstated under the Plan and not entitled to vote on the Plan.
Class 6 is Unimpaired.
Carriage House Class 7 - Interests of Holders of Old Stock Rights and
All Claims Arising Out of Such Old Stock Rights (against Carriage House). Each
Allowed Class 7 Interest or Claim shall be Reinstated under the Plan and not
entitled to vote on the Plan. Class 7 in Unimpaired. The Debtors currently do
not believe any such holders exist.
ARTICLE IV.
TREATMENT OF EXECUTORY
CONTRACTS AND UNEXPIRED LEASES
The Plan constitutes a motion to assume or reject all executory
contracts and nonresidential real property leases, except for those executory
contracts and nonresidential real property leases that have already been assumed
or rejected pursuant to an earlier Order of the Court or that are the subject of
a motion for such an Order pending as of the Confirmation Hearing. Prior to the
Confirmation Hearing, the Debtors will file a schedule of all real property
leases and executory contracts to be rejected; any contract or lease not on that
schedule shall be deemed assumed by the applicable Debtor as of the Effective
Date.
Each Reorganized Debtor, except as otherwise agreed by the parties,
will cure any and all undisputed defaults within 30 days of the Effective Date
under any executory contract or unexpired lease assumed pursuant to the Plan, in
accordance with section 365 of the Bankruptcy Code. All disputed defaults that
are required to be cured shall be cured either within 30 days of the entry of a
Final Order determining the amount, if any, of the Debtors' or the Reorganized
Debtors' liability with respect thereto, or as may be agreed otherwise by the
parties. The Confirmation Order shall state that all pre-petition contracts and
unexpired leases that are listed on the schedule described herein (except for
those previously assumed, if any) are deemed rejected under the Plan.
Any Claim for damages arising from the rejection of an executory
contract or unexpired lease must be Filed and served on counsel for the Debtors,
the Informal Bondholder Committee and Creditors' Committee (if and when
appointed) within thirty (30) days after the
31
order of the Court approving such rejection becomes a Final Order or be (i)
forever barred and unenforceable against any Debtor, its Estate, the Reorganized
Debtors and their respective property, and (ii) barred from receiving any
distribution under the Plan. All Allowed Claims arising from the rejection of
executory contracts or unexpired leases shall be treated as either an ALC Class
4 Claim (if it results in an Allowed Claim against ALC) and Carriage House Class
3 Claim (if it results in an Allowed Claim against Carriage House).
ARTICLE V.
MEANS FOR EXECUTION
AND IMPLEMENTATION OF THE PLAN
SECTION 5.01 OVERVIEW OF PLAN IMPLEMENTATION
Except as otherwise provided in the Plan or the Confirmation Order, all
Cash necessary for the Reorganized Debtors to make payments pursuant to the Plan
will be obtained from the Reorganized Debtor's cash balances or borrowings and
the operations of the Debtors or the Reorganized Debtors.
SECTION 5.02 DISTRIBUTIONS
On the Effective Date or as soon as practicable thereafter, the
Reorganized Debtors shall fund or arrange for the funding of the Effective Date
Payments. Subject to the provisions of the Plan, and except as otherwise
provided herein, property to be distributed hereunder to an Impaired Class shall
be distributed on or as soon as practicable after the later of (i) the Effective
Date, to each holder of a Claim or an Interest in that Class that is an Allowed
Claim or an Allowed Interest as of the Effective Date, and (ii) the date the
Order of the Court allowing such Claim or Interest becomes a Final Order, to
each holder of an Allowed Claim or an Allowed Interest of that Class that is
Allowed after the Effective Date, to the extent allowed. Property to be
distributed under the Plan to a Class that is not Impaired or on account of a
Claim of a kind described in Bankruptcy Code section 507(a)(1) shall be
distributed on the later of (x) the date specified in the preceding clauses (i)
and (ii) applicable to the Claims or Interests and (y) the date on which the
distribution to the holder of the Claim would have been due and payable in the
ordinary course of business or under the terms of the Claim in the absence of
the Chapter 11 Cases. Notwithstanding any other provision of the Plan, each
Debtor and each of the Reorganized Debtors shall not be obligated to make any
distribution with respect to any unclassified Claim, or any Allowed Claim, other
than those in the hands of the holders shown on the books and records of the
Debtor as of the Confirmation Hearing unless otherwise identified on a Filed
proof of claim.
SECTION 5.03 TREATMENT OF TRADE CREDITORS UNDER THE PLAN
When the Debtors file the Plan, each Debtor intends that all Claims of
its trade creditors will be unimpaired and paid in full. The Plan's treatment of
Trade Claims (Class 5 under the Plan) is intended to maximize the preservation
of working capital by encouraging the maintenance of favorable trade credit
terms. If this Plan is confirmed, holders of Trade Claims shall not be required
to file proofs of claim with the Court and no bar date would be established
32
as to such Trade Claims. On and after the Effective Date (and, subject to Court
approval, prior to the Effective Date), all Trade Claims at the option of
Reorganized ALC and Reorganized Carriage House, as applicable, will be paid in
full or Reinstated and paid in the ordinary course of business of the Debtors.
If the Debtors dispute any trade claim, the Debtors contemplate that such
dispute will be determined, resolved or adjudicated as if the Chapter 11 cases
had not been commenced and will survive the Effective Date and the consummation
of the Plan as if the Chapter 11 Cases had not been commenced.
SECTION 5.04 THE CREDITORS' COMMITTEE
On the Effective Date, the Creditors' Committee shall be dissolved and
the members of such committee shall be released and discharged from all further
rights and duties arising from or related to the Chapter 11 Cases. The
professionals retained by such committee and the members thereof shall not be
entitled to compensation or reimbursement of expenses incurred for services
rendered after the Effective Date.
SECTION 5.05 VESTING OF ASSETS
Except as otherwise provided in any provision of the Plan, on the
Effective Date, all property of the Estates shall vest in Reorganized ALC and
Reorganized Carriage House, as applicable, free and clear of all Claims, Liens,
encumbrances and Interests; provided, however that any and all liens and
security interests arising pre-petition or post-petition in favor of U.S. Bank
in the U.S. Bank Collateral shall not be impaired or affected in any manner and
shall remain valid and fully enforceable against Reorganized ALC in accordance
with the agreements between ALC and U.S. Bank and applicable law. From and after
the Effective Date, each Reorganized Debtor may operate its business and use,
acquire, and dispose of property and settle and compromise Claims or Interests
arising post-Confirmation without supervision by the Court and free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, other than those restrictions expressly imposed by the Plan
and the Confirmation Order.
SECTION 5.06 PRESERVATION OF CAUSES OF ACTION
Except in any contract, instrument, release, or other agreement entered
into in connection with the Plan or as otherwise provided in the Plan, in
accordance with section 1123(b) of the Bankruptcy Code, each Reorganized Debtor
shall retain all litigation claims that each Debtor or the Estate may hold
against any Person.
SECTION 5.07 ARTICLE OF INCORPORATION
On the Effective Date, Reorganized ALC shall adopt the Amended ALC
Articles pursuant to applicable non-bankruptcy law and section 1123(a)(5)(I) of
the Bankruptcy Code. The Amended ALC Articles will, among other provisions: (i)
authorize the issuance of the New Common Stock; and (ii) prohibit the issuance
of nonvoting equity securities to the extent required by section 1123(a)(6) of
the Bankruptcy Code. The Amended ALC Articles will become effective upon the
occurrence of the Effective Date.
33
On the Effective Date, Reorganized Carriage House shall adopt the
Amended Carriage House Certificate pursuant to applicable non-bankruptcy law and
section 1123(a)(5)(I) of the Bankruptcy Code. The Amended Carriage House
Certificate will, among other provisions, prohibit the issuance of nonvoting
equity securities to the extent required by section 1123(a)(6) of the Bankruptcy
Code. The Amended Carriage House Certificate will become effective upon the
occurrence of the Effective Date.
SECTION 5.08 MANAGEMENT OF REORGANIZED ALC AND REORGANIZED CARRIAGE HOUSE
The directors and officers of each of the Debtors will continue to
serve in such capacities until and through the Effective Date. As of the
Effective Date, the directors of each of the Debtors will be deemed to have
resigned. Immediately thereafter, ALC currently contemplates that the new board
of directors of Reorganized ALC shall consist of Leonard Tannenbaum, Andre
Dimitriadis, Andy Adams, Matthew Patrick, Mark Holliday, Richard Ladd and the
CEO of Reorganized ALC.
The Board of Directors of Reorganized ALC shall select the Board of
Directors and senior management of Reorganized Carriage House.
Reorganized ALC may authorize an appropriate compensation and bonus
plan for permanent senior management employed by Reorganized ALC
post-Confirmation. After the Effective Date, Reorganized ALC may adopt a new
incentive plan for the grant to officers, employees and directors of the Company
of options to acquire shares of New Common Stock. The options will be based upon
performance criteria and a vesting schedule to be structured by the Board of
Directors of Reorganized ALC after consummation of the Plan.
SECTION 5.09 DISBURSING AGENT
Reorganized ALC (or its designee) shall act as the Disbursing Agent for
the purpose of making all distributions provided for under the Plan. The
Disbursing Agent shall serve without bond.
SECTION 5.10 DISCHARGE OF DEBTORS AND INJUNCTION
Except as otherwise provided in the Plan or the Confirmation Order (and
except with respect to any claims of Heller against any Debtor, including,
without limitation, the Heller Claim): (i) on the Effective Date, each Debtor
shall be deemed discharged and released to the fullest extent permitted by
section 1141 of the Bankruptcy Code from all Claims and Interests, including,
but not limited to, demands, liabilities, Claims and Interests that arose before
the Confirmation Date and all debts of the kind specified in sections 502(g),
502(h) or 502(i) of the Bankruptcy Code, whether or not: (A) a proof of Claim or
proof of Interest based on such debt or Interest is Filed or deemed Filed
pursuant to section 501 of the Bankruptcy Code, (B) a Claim or Interest based on
such debt or Interest is allowed pursuant to section 502 of the Bankruptcy Code
or (C) the holder of a Claim or Interest based on such debt or Interest has
accepted the Plan; and (ii) all Persons shall be precluded from asserting
against each Reorganized Debtor, its successors, or its assets or properties any
other or further Claims or Interests based upon any act or omission,
transaction, or other activity of any kind or nature that occurred prior to the
Confirmation Date. Except as otherwise provided in the Plan or the Confirmation
Order (and
34
except with respect to any claims of Heller against any Debtor, including,
without limitation, the Heller Claim), the Confirmation Order shall act as a
discharge of any and all Claims against and all debts and liabilities of the
Debtor, as provided in sections 524 and 1141 of the Bankruptcy Code, and such
discharge shall void any judgment against each Debtor at any time obtained to
the extent that it relates to a Claim discharged.
All Persons that have held, currently hold or may hold a Claim or other
debt or liability or an Equity Interest or other right of an equity security
holder, are permanently enjoined from taking any of the following actions on
account of any such Claims, debts or liabilities or terminated Interests or
rights: (a) commencing or continuing in any manner any action or other
proceeding against any of the Debtors, the Informal Bondholders Committee, the
Creditors' Committee (if and when appointed), and professional persons retained
by the Debtors, the Informal Bondholders Committee, Creditors' Committee (if and
when appointed), and each of their respective affiliates, current or former
officer, directors, agents, employees and representatives; (b) enforcing,
attaching, collecting or recovering in any manner any judgment, award, decree or
order against any of the Debtors, the Informal Bondholders Committee, the
Creditors' Committee (if and when appointed) and professional persons retained
by any of the Debtors, the Informal Bondholders Committee and Creditors'
Committee (if and when appointed) and each of their respective affiliates,
current or former officer, directors, agents, employees and representatives; (c)
creating, perfecting or enforcing any lien or encumbrance against any of the
Debtors, the Informal Bondholders Committee (including present and former
members), the Creditors' Committee (if and when appointed) (including present
and former members), and professional persons retained by any of the Debtors,
the Informal Bondholders Committee and the Creditors' Committee (if and when
appointed) and each of their respective affiliates, current or former officer,
directors, agents, employees and representatives; (d) asserting a setoff, right
of subrogation or recoupment of any kind against any obligation due to any of
the Debtors, the Informal Bondholders Committee, the Creditors' Committee (if
and when appointed) and professional persons retained by any of the Debtors, the
Informal Bondholders Committee and the Creditors' Committee and each of their
respective affiliates, current or former officer, directors, agents, employees
and representatives; and (e) commencing or continuing any action, in any manner,
in any place that does not comply with or is inconsistent with the provisions of
the Plan.
Nothing contained in the Disclosure Statement or the Plan shall (i) be
deemed to cause the release of any claims that individual holders of Claims or
Interests may have against any Person other than the Debtors or (ii) apply to
Heller or in any way prevent or limit Heller's exercise of its rights and
remedies against any Debtor under the Final Financing Order, the Postpetition
Documents, or otherwise, either before, on or after the Effective Date.
Any Person injured by any willful violation of such injunction shall
recover actual damages, including costs and attorneys' fees, and, in appropriate
circumstances, may recover punitive damages, from the willful violator.
SECTION 5.11 NO LIABILITY FOR SOLICITATION OR PARTICIPATION
As specified in section 1125(e) of the Bankruptcy Code, Persons that
solicit acceptances or rejections of the Plan and/or that participate in the
offer, issuance, sale, or
35
purchase of securities offered or sold under the Plan, in good faith and in
compliance with the applicable provisions of the Bankruptcy Code, shall not be
liable, on account of such solicitation or participation, for violation of any
applicable law, rule, or regulation governing the solicitation of acceptances or
rejections of the Plan or the offer, issuance, sale, or purchase of securities.
SECTION 5.12 LIMITATION OF LIABILITY
Neither (a) any Reorganized Debtor or any of their respective
postpetition employees, officers, directors, agents, representatives,
affiliates, attorneys or any other professional persons employed by any of them,
nor (b) the Informal Bondholders' Committee, or any of their respective
postpetition members, agents, employees, directors, officers, representatives,
attorneys or other professional advisors nor (c) the Creditors' Committee (if
and when appointed), or any of their respective postpetition members, agents,
employees, directors, officers representatives, attorneys or other professional
advisors, in each case, shall have any responsibility, or have or incur any
liability, to any Person whatsoever, under any theory of liability (except for
any claim based upon willful misconduct or gross negligence), for any act taken
or omission made in good faith directly related to formulating, implementing,
confirming, or consummating the Plan, the Disclosure Statement, or any contract,
instrument, release, or other agreement or document created in connection with
the Plan, provided that nothing in this paragraph shall limit the liability of
any Person for breach of any express obligation it has under the terms of this
Plan or under any post-petition agreement or other post-petition document
entered into by such Person or in accordance with the terms of this Plan or for
any breach of a duty of care owed to any other Person occurring after the
Effective Date.
SECTION 5.13 OBJECTIONS TO CLAIMS
Except as otherwise provided is the Plan, objections to Claims,
including without limitation Administrative Claims, shall be Filed and served
upon the Holder of such Claim or Administrative Claim no later than the later of
(a) 60 days after the Effective Date, and (b) 60 days after a proof of claim or
request for payment of such Claim is Filed, unless this period is extended by
the Court; such extension may be granted on an ex parte basis without notice or
hearing. After the Confirmation Date, only Reorganized ALC and Reorganized
Carriage House will have the authority to File objections, settle, compromise,
withdraw or litigate to judgment objections to Claims and Interests. From and
after the Confirmation Date, Reorganized ALC and Reorganized Carriage House may
settle or compromise any Disputed Claim or Disputed Interest without approval of
the Court.
SECTION 5.14 OTHER DOCUMENTS AND ACTIONS
The Debtors, the Debtors in Possession, and the Reorganized Debtors
may, and shall, execute such documents and take such other actions as are
necessary to effectuate the transactions provided for in the Plan.
SECTION 5.15 CORPORATE ACTION
The issuance of the New Common Stock, the New Senior Notes, the New
Junior Notes, the adoption of the Amended ALC Articles and the selection of the
Persons who will serve as the initial directors and officers of Reorganized ALC
as of the Effective Date, and other
36
matters under the Plan involving the corporate structure of the Debtor or
corporate action by each Debtor, shall be deemed to have occurred and be
effective on and after the Effective Date without any requirement of further
action by the stockholders or directors of each Debtor. Without limiting the
foregoing, upon entry of the Confirmation Order by the Clerk, the filing by the
Reorganized ALC of the Amended ALC Articles shall be authorized and approved in
all respects. On the Effective Date or as soon thereafter as is practicable,
pursuant to applicable law, the bylaws of ALC shall be the bylaws of Reorganized
ALC.
The adoption of the Amended Carriage House Certificate and the
selection of the Persons who will serve as the initial directors and officers of
Reorganized Carriage House as of the Effective Date, and other matters under the
Plan involving the corporate structure of the Debtor or corporate action by each
Debtor, shall be deemed to have occurred and be effective on and after the
Effective Date without any requirement of further action by the stockholders or
directors of each Debtor. Without limiting the foregoing, upon entry of the
Confirmation Order by the Clerk, the filing by Reorganized Carriage House of the
Amended Carriage House Certificate shall be authorized and approved in all
respects. On the Effective Date or as soon thereafter as is practicable,
pursuant to applicable law, the bylaws of Carriage House shall be the bylaws of
Reorganized Carriage House.
SECTION 5.16 RETIREE BENEFITS
On and after the Effective Date, to the extent required by section
1129(a)(13) of the Bankruptcy Code, Reorganized ALC shall continue to pay all
retiree benefits (if any), as the term "retiree benefits" is defined in section
1114(a) of the Bankruptcy Code, maintained or established by the Debtors prior
to the Confirmation Date.
37
ARTICLE VI.
CONFIRMATION AND EFFECTIVE DATE CONDITIONS
SECTION 6.01 CONDITIONS TO CONFIRMATION
The conditions to Confirmation shall be the following:
(a) The satisfaction of the requirements of 11 U.S.C. Section
1129;
(b) The Confirmation Order shall (i) be acceptable in form and
substance to the Debtors (in the Debtors' sole and absolute discretion) and (ii)
expressly authorize and direct the Debtors to perform the actions that are
conditions to the effectiveness of the Plan; and
(c) Each of the events and actions required by the Plan to occur
or to be taken prior to Confirmation shall have occurred or have been taken, or
the Debtors or the party whose obligations are conditioned by such occurrences
and/or actions, as applicable, shall have waived such occurrences or actions.
SECTION 6.02 CONDITIONS TO EFFECTIVE DATE
The Plan shall not become effective unless and until it has been
confirmed and the following conditions have been satisfied in full or waived:
(1) the Confirmation Order in a form satisfactory to the Debtors and the
Informal Bondholders Committee shall have become a Final Order; (2) the
Effective Date shall have occurred by January 31, 2002; (3) all authorizations,
consents and regulatory approvals (including, without limitation, any approvals
required under regulations relating to the change in ownership of the Debtors
upon the Effective Date) required (if any) for the Plan's effectiveness shall
have been obtained; (4) each of the New Junior Note Indenture and the New Senior
Note Indenture has been qualified under the Trust Indenture Act of 1939, as
amended; and (5) all other actions and documents necessary to implement the
treatment of creditor Claims shall have been effected or executed or, if
waivable, waived by the Person or Persons entitled to the benefit thereof.
SECTION 6.03 WAIVER OF CONDITIONS
The Debtors and the Informal Bondholders Committee, as applicable, may
waive any or all of the other conditions set forth in the Plan without leave of
or order of the Court and without any formal action. The Debtors reserve the
right to amend or revoke the Plan with the consent of the Informal Bondholders
Committee, which consent shall not to be unreasonably withheld. Although this
Plan is styled as a joint plan, the Debtors reserve the right to proceed with
Confirmation under this Plan for one Debtor and not the other.
SECTION 6.04 EFFECT OF FAILURE OF CONDITIONS
In the event that the Effective Date does not occur, upon notification
submitted by the Debtors and the Informal Bondholders Committee to the Court:
(a) the Confirmation Order shall be vacated, (b) no distributions under the Plan
shall be made, (c) the Debtors and all holders of Claims and Equity Interests
shall be restored to the status quo ante as of the day immediately
38
preceding the Confirmation Date as though the Confirmation Date had never
occurred, and (d) the Debtors' obligations with respect to the Claims and Equity
Interests shall remain unchanged and nothing contained in the Plan shall
constitute or be deemed a waiver or release of any Claims or Equity Interests by
or against the Debtors or any other person or to prejudice in any manner the
rights of the Debtors or any person in any further proceedings involving the
Debtors.
SECTION 6.05 VACATUR OF CONFIRMATION ORDER
If an order denying confirmation of the Plan is entered, then the Plan
shall be null and void in all respects, and nothing contained in the Plan shall
(a) constitute a waiver or release of any Claims against or Equity Interests in
the Debtors; (b) prejudice in any manner the rights of the holder of any Claim
against, or Equity Interest in, the Debtors; (c) prejudice in any manner any
right, remedy or claim of the Debtors; or (d) be deemed an admission against
interest by the Debtors.
ARTICLE VII.
CONFIRMABILITY OF PLAN AND CRAMDOWN
In the event at least one Impaired Class of Claims votes to accept the
Plan (and at least one Impaired Class either votes to reject the Plan or is
deemed to have rejected the Plan), either or both of the Debtors, as
appropriate, shall request the Court to confirm the Plan under the cramdown
provisions of the Bankruptcy Code.
ARTICLE VIII.
PROVISIONS REGARDING VOTING AND DISTRIBUTIONS
UNDER THE PLAN AND TREATMENT OF DISPUTED,
CONTINGENT AND UNLIQUIDATED CLAIMS AND EQUITY INTERESTS
SECTION 8.01 VOTING OF CLAIMS AND EQUITY INTERESTS
Each holder of an Allowed Claim or an Allowed Equity Interest in an
Impaired Class of Claims or Equity Interests shall be entitled to vote
separately to accept or reject the Plan as provided in such order as may be
entered by the Court establishing certain procedures with respect to the
solicitation and tabulation of votes to accept or reject the Plan, or any other
order or orders of the Court.
SECTION 8.02 METHOD OF DISTRIBUTIONS UNDER THE PLAN
(a) Distributions Under the Plan
On the Effective Date or as soon as practicable thereafter to the
extent that the Plan provides for distributions on account of Allowed Claims or
Allowed Interests in the applicable Class, each Holder of an Allowed Claim or
Allowed Interest will receive the full amount of the distributions that the Plan
provides for Allowed Claims or Allowed Interests in the applicable Class.
Beginning on the date that is 10 days after the end of the calendar quarter
39
following the Effective Date and 10 days after the end of each calendar quarter
thereafter, distributions will also be made respectively (a) to Holders of
Claims or Interests to whom a distribution has become deliverable during the
preceding calendar quarter and (b) to Holders of Disputed Claims or Disputed
Interests in any such Class whose Claims or Interests were Allowed during the
preceding calendar quarter. Such quarterly distributions will also be in the
full amount that the Plan provides for Allowed Claims or Allowed Interests in
the applicable Class.
Except as otherwise provided in the Plan or the Confirmation Order, all
Cash necessary for the Reorganized Debtors to make payments pursuant to the Plan
will be obtained from the Debtors' existing cash balances, the operations of the
Debtors or Reorganized Debtors or Post-Effective Date borrowings, as applicable.
The Reorganized Debtors, or such Person(s) as the Reorganized Debtors
may employ in their sole discretion, will serve as Disbursing Agent. The
Disbursing Agent will make all distributions of cash and securities required to
be distributed under the applicable provisions of the Plan. Any Disbursing Agent
may employ or contract with other entities to assist in or make the
distributions required by the Plan. Each Disbursing Agent will serve without
bond, and each Disbursing Agent, other than the Reorganized Debtors, will
receive, without further Court approval, reasonable compensation for
distribution services rendered pursuant to the Plan and reimbursement of
reasonable out-of-pocket expenses incurred in connection with such services from
the Reorganized Debtors on terms acceptable to the Reorganized Debtors.
Cash payments made pursuant to the Plan will be in U.S. dollars by
checks drawn on a bank selected by the Reorganized Debtors, or by wire transfer
from a bank, at the option of Reorganized ALC. Cash payments of $1,000,000 or
more to be made pursuant to the Plan will, to the extent requested in writing no
later than five days after the Confirmation Date, be made by wire transfer from
a bank. Cash payments to foreign creditors, if any, may be made, at the option
of the Reorganized Debtors, in such funds and by such means as are necessary or
customary in a particular foreign jurisdiction.
The Disbursing Agent will make all distributions required under the
applicable provisions of the Plan. No distributions under the Plan will be made
to or on behalf of any Holder of any Allowed Claim or Allowed Interest evidenced
by the instruments, securities or other documentation cancelled pursuant to the
Plan, unless such Holder first tenders the applicable instruments, securities or
other documentation to the Disbursing Agent.
(b) Timing and Methods of Distributions
(i) Compliance with Tax Requirements
In connection with the Plan, to the extent applicable, the Disbursing
Agent must comply with all tax withholding and reporting requirements imposed on
it by any governmental unit, and all distributions pursuant to the Plan will be
subject to such withholding and reporting requirements. The Disbursing Agent
will be authorized to take any and all actions that may be necessary or
appropriate to comply with such withholding and reporting requirements.
Notwithstanding any other provision of the Plan: (i) each Holder of an
Allowed Claim or Interest that is to receive a distribution of Cash pursuant to
the Plan will have sole and
40
exclusive responsibility for the satisfaction and payment of any tax obligations
imposed by any governmental unit, including income, withholding and other tax
obligations, on account of such distribution; and (ii) no distribution will be
made to or on behalf of such Holder pursuant to the Plan unless and until such
Holder has made arrangements satisfactory to the Disbursing Agent for the
payment and satisfaction of such tax obligations. Any Cash to be distributed
pursuant to the Plan will, pending the implementation of such arrangements, be
treated as an undeliverable distribution pursuant to the Plan.
(ii) Pro Rata Distribution
When the Plan provides for Pro Rata distribution, the property to be
distributed under the Plan shall be divided Pro Rata among the Holders of
Allowed Claims or Allowed Interests of the relevant Class.
However, the total amount of the Allowed Class 4 Claims will not be
known until after the Effective Date, either because certain Class 4 Claims will
be Disputed Claims or because those Claims will not have been made by their
holders prior to the Effective Date. As a result, ALC will hold back from the
initial issuance of New Common Stock, New Senior Notes and New Junior Notes on
the Effective Date a percentage of the New Common Stock, the New Senior Notes
and the New Junior Notes (the "Reserve") to be issued to holders of Class 4
Claims. The initial distribution with respect to Class 4 Claims will be made
only to the holders of Class 4 Claims that have been allowed prior to the
Effective Date (the "Cutoff Date"). Once the total amount of the Allowed Class 4
Claims has been determined, the shares of New Common Stock, the New Senior Notes
and the New Junior Notes held in Reserve will be distributed pro rata among the
holders of the Allowed Class 4 Claims (the date of this distribution, the
"Subsequent Distribution Date").
If the Reserve is insufficient to cover Class 4 Claims allowed after
the Cutoff Date, ALC and its subsidiaries will have no further liability with
respect to those Class 4 Claims and the holders of those Claims will receive
proportionately lower distributions of shares of New Common Stock, New Senior
Notes and New Junior Notes than the holders of Class 4 Claims allowed prior to
the Cutoff Date.
If the Reserve exceeds the distributions necessary to cover Class 4
Claims allowed after the Cutoff Date, the additional securities remaining in the
Reserve will be distributed among all holders of Class 4 Claims so as to ensure
that each holder of an allowed Class 4 Claim receives, in the aggregate, its pro
rata share of the New Common Stock, the New Senior Notes and the New Junior
Notes. In this case, the holders of Class 4 Claims allowed prior to the Cutoff
Date will receive distributions of securities both on the Effective Date and on
the Subsequent Distribution Date.
The right of the holders of Class 4 Claims allowed prior to the Cutoff
Date 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 such holders will be freely
transferable upon issuance.
41
In addition, the New Senior Notes or New Junior Notes that are issued
on the Subsequent Distribution Date may have an "issue price" different from the
"adjusted issue price" on such date of the New Senior Notes and New Junior
Notes, as applicable, that are issued on the Effective Date. Accordingly the New
Senior Notes and New Junior Notes issued on the Subsequent Distribution Date may
have a different CUSIP number than the New Senior Notes or New Junior Notes, as
applicable, issued on the Effective Date. A CUSIP number is a 9 digit number
assigned by Standard & Poor's Corporation that is used to identify a particular
securities issuance by an issuer. The issuance of a different CUSIP number to
New Senior Notes or New Junior Notes issued on the Subsequent Distribution Date
may adversely affect the liquidity, and trading price, of those New Notes. This
is because those New Senior Notes or New Junior Notes will be treated, for
trading purposes, as a separate issuance of securities from the issuance of the
New Senior Notes or New Junior Notes, as applicable, on the Effective Date.
Please refer to the discussion under the section in the Disclosure Statement
entitled "Certain Federal Income Tax Consequences of the Plan - Federal Income
Tax Consequences to Holders of Debentures - New Notes - Original Issue Discount"
for a discussion of "issue price" and "adjusted issue price."
(iii) Distribution Record Date
As of the close of business on the Distribution Record Date, the
transfer registers for any Notes or securities (the "Old Securities") maintained
by the Debtors, or their respective agents, will be closed. The Disbursing Agent
and the respective agents of the Debtors will have no obligation to recognize
the transfer of the Old Securities occurring after the Distribution Record Date,
and will be entitled for all purposes relating to the Plan to recognize and deal
only with those Holders of record as of the close of business on the
Distribution Record Date. Distributions under the Plan shall be made by
Reorganized ALC or its designee to the holders of Allowed Administrative Claims
and Allowed Claims at the addresses set forth on the Schedules, unless such
addresses are superseded by addresses listed on proofs of claim or transfers of
claims filed pursuant to Bankruptcy Rule 3001, or at the last known address of
such holders if the Debtors or Reorganized ALC has been notified in writing of a
change of address.
(iv) Surrender of Cancelled Debt Instruments or Securities
As a condition precedent to receiving any distribution pursuant to the
Plan on account of an Allowed Claim evidenced by the instruments, securities or
other documentation ("Instruments") canceled pursuant to the Plan, the Holder of
such Claim shall tender the applicable Instruments evidencing such Claim to the
Disbursing Agent pursuant to a letter of transmittal furnished by the Disbursing
Agent. Any Cash to be distributed pursuant to the Plan on account of any such
Claim or Interest will, pending such surrender, be treated as an undeliverable
distribution pursuant to the Plan.
(v) Fractional Shares
The calculation of percentage distribution of the New Common Stock to
be made to Holders of certain Allowed Claims and Interests, as provided for in
the Plan, may mathematically entitle such Holder to a fractional interest in the
New Common Stock. The number of shares of New Common Stock to be received by a
Holder of an Allowed Claim and/or Interest shall be rounded to the next greater
or lower whole number of shares as follows: (a)
42
fractions of 1/2 or greater shall be rounded to the next greater whole number
and (b) fractions of less than 1/2 shall be rounded to the next lower whole
number. The total number of shares of New Common Stock to be distributed to a
class of Claims or Interests shall be adjusted as necessary to account for the
rounding described above. No consideration shall be provided in lieu of the
fractional shares that are rounded down and not issued.
SECTION 8.03 SPECIAL PROCEDURES FOR LOST, STOLEN, MUTILATED OR DESTROYED
INSTRUMENTS
In addition to any requirements under the Bylaws of the Debtors, any
Holder of a Claim evidenced by an Instrument that has been lost, stolen,
mutilated or destroyed will, in lieu of surrendering such Instrument, deliver to
the Disbursing Agent: (a) evidence satisfactory to the Disbursing Agent of the
loss, theft, mutilation or destruction; and (b) such security or indemnity as
may be required by the Disbursing Agent to hold the Disbursing Agent harmless
from any damages, liabilities or costs incurred in treating such individual as a
Holder of an Instrument. Upon compliance with the Plan, the Holder of a Claim
evidenced by such an Instrument will, for all purposes under the Plan, be deemed
to have surrendered an Instrument, as applicable.
SECTION 8.04 FAILURE TO SURRENDER CANCELLED INSTRUMENT
Any Holder of an Instrument that fails to surrender or be deemed to
have surrendered such Instrument within one year after the Effective Date will
have its claim for a distribution pursuant to the Plan on account of such
Instrument discharged and shall be forever barred from asserting any such claim
against the Reorganized Debtors or their property. In such cases, any Cash held
for distribution on account of such claim will be disposed of pursuant to the
provisions of the Plan.
SECTION 8.05 UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS
Any Person that is entitled to receive a cash distribution under the
Plan but that fails to cash a check within 90 days of its issuance shall be
entitled to receive a reissued check from the Reorganized Debtors for the amount
of the original check, without any interest, if such person requests the
Disbursing Agent to reissue such check and provides the Disbursing Agent with
such documentation as the Disbursing Agent requests to verify that such Person
is entitled to such check, prior to the first anniversary of the Effective Date.
If a Person fails to cash a check within 90 days of its issuance and fails to
request reissuance of such check prior to the first anniversary of the Effective
Date, such Person shall not be entitled to receive any distribution under this
Plan. If the distribution to any Holder of an Allowed Claim or Allowed Interest
is returned to a Disbursing Agent as undeliverable, no further distributions
will be made to such Holder unless and until the applicable Disbursing Agent is
notified in writing of such Holder's then-current address. Undeliverable
distributions will remain in the possession of the Disbursing Agent pursuant to
the Plan until such time as a distribution becomes deliverable. Undeliverable
cash will be held in trust in segregated bank accounts in the name of the
Disbursing Agent for the benefit of the potential claimants of such funds, and
will be accounted for separately. The Disbursing Agent holding undeliverable
cash shall invest such cash in a manner consistent with Reorganized ALC's
investment and deposit guidelines. Any distribution which is not claimed within
one year of the Effective Date shall be deemed property of Reorganized ALC.
43
SECTION 8.06 DISPUTED CLAIMS; RESERVE AND ESTIMATIONS
(a) Treatment of Disputed Claims
No Payment on Account of Disputed Claims and Disputed Claims Reserve.
Notwithstanding any other provisions of the Plan, no payments or distributions
will be made on account of a Disputed Claim or a Disputed Interest until such
Claim or Interest becomes an Allowed Claim or Allowed Interest. Reorganized ALC
and Reorganized Carriage House may, at any time, request that the Court estimate
any contingent or unliquidated Claim pursuant to section 502(c) of the
Bankruptcy Code, irrespective of whether Reorganized ALC and Reorganized
Carriage House previously objected to such Claim or whether the Court has ruled
on any such objection. The Court will retain jurisdiction to estimate any
contingent or unliquidated Claim at any time during litigation concerning any
objection to the Claim, including during the pendency of any appeal relating to
any such objection. If the Court estimates any contingent or unliquidated Claim,
that estimated amount will constitute either the Allowed Amount of such Claim or
a maximum limitation on such Claim, as determined by the Court. If the estimated
amount constitutes a maximum limitation on such Claim, Reorganized ALC and
Reorganized Carriage House may elect to pursue any supplemental proceedings to
object to any ultimate payment on account of such Claim. All of these Claims
objection, estimation and resolution procedures are cumulative and not
necessarily exclusive of one another. In addition to seeking estimation of
Claims as provided in the Plan, Reorganized ALC and Reorganized Carriage House
may resolve or adjudicate certain Disputed Claims of Holders in Unimpaired
Classes in the manner in which the amount of such Claim and the rights of the
Holder of such Claim would have been resolved or adjudicated if the
Reorganization Cases had not been commenced, subject to any applicable discharge
and limitations on amounts of claims and remedies available under bankruptcy
law. Claims may be subsequently compromised, settled, withdrawn or resolved by
Reorganized ALC and Reorganized Carriage House.
(b) Distributions on Account of Disputed Claims Once They Are
Allowed
Within 30 days after the end of each calendar quarter following the
Effective Date, the Disbursing Agent will make all distributions on account of
any Disputed Claim or Disputed Interest that has become an Allowed Claim or
Allowed Interest during the preceding calendar quarter. Such distributions will
be made pursuant to the provisions of the Plan governing the applicable Class.
Holders of Disputed Claims or Disputed Interests that are ultimately allowed
will also be entitled to receive, on the basis of the amount ultimately allowed,
matured and payable interest, if any, at the rate provided for the Class to
which such Claim belongs.
SECTION 8.07 SETOFFS
Except with respect to claims of the Debtors, Reorganized ALC and
Reorganized Carriage House released pursuant to the Plan or any contract,
instrument, release, indenture or other agreement or document created in
connection with the Plan, the Reorganized Debtors may, pursuant to section 553
of the Bankruptcy Code or applicable nonbankruptcy law, set off against any
Allowed Claim and the distributions to be made pursuant to the Plan on account
of such Claim (before any distribution is made on account of such Claim), the
claims, rights and causes
44
of action of any nature that the Reorganized Debtors may hold against the Holder
of such Allowed Claim; provided, however, that neither the failure to effect
such a setoff nor the allowance of any Claim hereunder will constitute a waiver
or release by Reorganized ALC and Reorganized Carriage House of any such claims,
rights and causes of action that the Debtors, Reorganized ALC and Reorganized
Carriage House may possess against such Holder.
ARTICLE IX.
IMPLEMENTATION AND EFFECT
OF CONFIRMATION OF THIS PLAN
SECTION 9.01 EFFECT OF CONFIRMATION OF THE PLAN
See Sections 5.05 and 5.10 of the Plan.
ARTICLE X.
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the occurrence
of the Effective Date, the Court will retain such jurisdiction over the Chapter
11 Cases after the Effective Date to the full extent permitted by law,
including, without limitation, jurisdiction to:
(a) Allow, disallow, determine, liquidate, classify, subordinate,
estimate or establish the priority or secured or unsecured status of any Claim
or Interest, including the resolution of any request for payment of any
Administrative Claim, the resolution of any objections to the allowance or
priority of Claims or Interests and the resolution of any dispute as to the
treatment necessary to reinstate a Claim pursuant to the Plan;
(b) Grant or deny any applications for allowance of compensation
or reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending before the Effective Date;
(c) Resolve any matters related to the assumption or rejection of
any executory contract or unexpired lease to which any Debtor is a party or with
respect to which the any Debtor may be liable, and to hear, determine and, if
necessary, liquidate any Claims arising therefrom;
(d) Ensure that distributions to Holders of Allowed Claims or
Allowed Interests are accomplished pursuant to the provisions of the Plan;
(e) Decide or resolve any motions, adversary proceedings,
contested or litigated matters and any other matters and grant or deny any
applications involving the Debtors, Reorganized Debtors or the Chapter 11 Cases
that may be pending on the Effective Date;
(f) Enter such Orders as may be necessary or appropriate to
implement or consummate the provisions of the Plan and all contracts,
instruments, releases, indentures and
45
other agreements or documents created in connection with the Plan, the
Disclosure Statement or the Confirmation Order, except as otherwise provided
herein;
(g) Resolve any cases, controversies, suits or disputes that may
arise in connection with the consummation, interpretation or enforcement of the
Plan or the Confirmation Order, including the release and injunction provisions
set forth in and contemplated by the Plan and the Confirmation Order, or any
entity's rights arising under or obligations incurred in connection with the
Plan or the Confirmation Order;
(h) Subject to any restrictions on modifications provided in any
contract, instrument, release, indenture or other agreement or document created
in connection with the Plan, modify the Plan before or after the Effective Date
pursuant to section 1127 of the Bankruptcy Code or modify the Disclosure
Statement, the Confirmation Order or any contract, instrument, release,
indenture or other agreement or document created in connection with the Plan,
the Disclosure Statement or the Confirmation Order; or remedy any defect or
omission or reconcile any inconsistency in any Court Order, the Plan, the
Disclosure Statement, the Confirmation Order or any contract, instrument,
release, indenture or other agreement or document created in connection with the
Plan, the Disclosure Statement or the Confirmation Order, in such manner as may
be necessary or appropriate to consummate the Plan, to the extent authorized by
the Bankruptcy Code;
(i) Issue injunctions, enter and implement other Orders or take
such other actions as may be necessary or appropriate to restrain interference
by any entity with consummation, implementation or enforcement of the Plan or
the Confirmation Order;
(j) Enter and implement such Orders as are necessary or
appropriate if the Confirmation Order is for any reason modified, stayed,
reversed, revoked or vacated;
(k) Determine any other matters that may arise in connection with
or relating to the Plan, this Disclosure Statement, the Confirmation Order or
any contract, instrument, release, indenture or other agreement or document
created in connection with the Plan, the Disclosure Statement or the
Confirmation Order, except as otherwise provided in the Plan; and
(l) Enter an Order concluding the Chapter 11 Cases.
The foregoing list is illustrative only and not intended to limit in
any way the Court's exercise of jurisdiction. If the Court abstains from
exercising jurisdiction or is otherwise without jurisdiction over any matter
arising out of the Chapter 11 Cases, including without limitation the matters
set forth in this Article, this Article shall have no effect upon and shall not
control, prohibit, or limit the exercise of jurisdiction by any other court
having competent jurisdiction with respect to such matter.
46
ARTICLE XI.
MISCELLANEOUS PROVISIONS
SECTION 11.01 EXEMPTION FROM TRANSFER TAXES
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance,
transfer or exchange of notes or equity securities under the Plan, the creation
of any mortgage, deed of trust or other security interest, the making or
assignment or any lease or sublease, or the making or delivery of any deed or
other instrument of transfer under, in furtherance of, or in connection with the
Plan, including, without limitation, any agreements of consolidation, deeds,
bills of sale or assignments executed in connection with any of the transactions
contemplated under the Plan shall not be subject to any stamp, real estate
transfer, mortgage recording or other similar tax.
SECTION 11.02 PAYMENT OF STATUTORY FEES/INDENTURE TRUSTEE FEES
All fees payable on or before the Effective Date pursuant to section
1930 of Title 28 of the United States Code, as determined by the Court at the
Confirmation Hearing, shall be paid on or before the Effective Date.
On the Effective Date, the Indenture Trustee shall receive an amount of
Cash equal to the amount of its reasonable fees and expenses (including the
reasonable fees and expenses of counsel retained by the Indenture Trustee), in
accordance with and to the extent provided in the Old Indentures, whether
incurred prior or subsequent to the Commencement Date, without application by or
on behalf of the Old Indenture Trustee or its counsel to the Court.
Distributions made to the holders of Allowed Claims pursuant to the Plan will
not be reduced on account of such payments to the Indenture Trustee.
SECTION 11.03 MODIFICATION OR WITHDRAWAL OF THE PLAN
The Debtors reserve the right, in accordance with the Bankruptcy Code,
to amend, modify or withdraw the Plan prior to the entry of the Confirmation
Order. After the entry of the Confirmation Order, the Debtors may amend or
modify the Plan, or remedy any defect or omission or reconcile any inconsistency
in the Plan in such a manner as may be necessary to carry out the purpose and
intent of the Plan.
SECTION 11.04 GOVERNING LAW
Unless a rule of law or procedure is supplied by federal law (including
the Bankruptcy Code and Bankruptcy Rules), the laws of the State of Delaware
(without reference to the conflicts of laws provisions thereof) shall govern the
construction and implementation of the Plan and any agreements, documents and
instruments executed in connection with the Plan.
47
SECTION 11.05 FILING OR EXECUTION OF ADDITIONAL DOCUMENTS
On or before the Effective Date, the Reorganized Debtors shall file
with the Court or execute, as appropriate, such agreements and other documents
as may be necessary or appropriate to effectuate and further evidence the terms
and conditions of the Plan.
SECTION 11.06 WITHHOLDING AND REPORTING REQUIREMENTS
In connection with the Plan and all instruments issued in connection
therewith and distributions thereon, the Reorganized Debtors shall comply with
all withholding and reporting requirements imposed by any federal, state, local
or foreign taxing authority and all distributions thereunder shall be subject to
any such withholding and reporting requirements.
SECTION 11.07 WAIVER OF RULE 62 (a) OF THE FEDERAL RULES OF CIVIL PROCEDURE
The Debtors may request that the Confirmation Order include (a) a
finding the Rule 62(a) of the Federal Rules of Bankruptcy Procedure shall not
apply to the Confirmation Order, and (b) authorization for the Debtors to
consummate the Plan immediately after the entry of the Confirmation Order.
SECTION 11.08 HEADINGS
Headings used in the Plan are for convenience and reference only and
shall not constitute a Part of the Plan for any purpose.
SECTION 11.09 EXHIBITS AND SCHEDULES
All Exhibits and Schedules to the Plan and Disclosure Statement are
incorporated into and constitute a part of the Plan as if set forth herein.
SECTION 11.10 NOTICES
All notices, requests and demand hereunder to be effective shall be in
writing and unless otherwise expressly provided herein, shall be deemed to have
been duly given or made when actually delivered or, in the case of notice by
facsimile transmission, when received and telephonically confirmed, addressed as
follows:
Latham & Watkins Young Conaway Stargatt & Taylor, LLP
Attorneys for the Debtors Attorneys for the Debtors
633 West Fifth Street, Suite 4000 1110 North Market Street
Los Angeles, California 90071 Rodney Square North, 11th Floor
Attn: Robert A. Klyman Wilmington, Delaware 19899
Jonathan S. Shenson Attn: Michael R. Nestor
48
Milbank, Tweed, Hadley & McCloy LLP Morris, Nichol, Arsht & Tunnell
Attorneys for the Informal Bondholders 1201 N. Market Street
Committee P.O. Box 1347
601 S. Figueroa St., 30th Floor Wilmington, Delaware
Los Angeles, CA 90071 Attn: Robert J. Dehney
Attn: Thomas R. Kreller
David B. Zolkin
SECTION 11.11 PLAN SUPPLEMENT
Forms of documents relating to the Amended ALC Articles, Amended
Carriage House Certificate, New Senior Notes Indenture and New Junior Notes
Indenture shall be contained in the Plan Supplement and filed with the Clerk of
the Court at least 5 days prior to the date of the Confirmation Hearing. Upon
its filing with the Court, the Plan Supplement may be inspected during normal
Court hours. Holders of Claims may obtain a copy of the Plan Supplement upon
written request to counsel the Debtors.
SECTION 11.12 CONFLICT
The terms of this Plan shall govern in the event of any inconsistency
with the summaries of the Plan set forth in the Disclosure Statement.
SECTION 11.13 SUCCESSORS AND ASSIGNS
The rights, benefits and obligations of any Person named or referred to
in the Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, trustee, administrator, successor or assign of such Person.
SECTION 11.14 SATURDAY, SUNDAY OR LEGAL HOLIDAY
If any payment or act under the Plan is required to be made or
performed on a date that is not a Business Day, then the making of such payment
or the performance of such act may be completed on the next succeeding Business
Day, but shall be deemed to have been completed as of the required date.
SECTION 11.15 POST-EFFECTIVE DATE EFFECT OF EVIDENCES OF CLAIMS OR INTERESTS
Notes, bonds, stock certificates and other evidences of Claims against
or Interests in the Debtors, and all Instruments of the Debtors (in either case,
other than those executed and delivered as contemplated hereby in connection
with the consummation of the Plan), shall, effective upon the Effective Date,
represent only the right to participate in the distributions contemplated by the
Plan.
49
SECTION 11.16 SEVERABILITY OF PLAN PROVISIONS
If, prior to Confirmation, any term or provision of the Plan that does
not govern the treatment of Claims or Interests provided for herein or the
conditions to the Effective Date is held by the Court to be invalid, void, or
unenforceable, the Court shall have the power to alter and interpret such term
or provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void, or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of the
Plan will remain in full force and effect and will in no way be affected,
impaired, or invalidated by such holding, alteration, or interpretation. The
Confirmation Order shall constitute a judicial determination, and shall provide,
that each term and provision of the Plan, as it may have been altered or
interpreted in accordance with the foregoing, is valid and enforceable pursuant
to its terms.
SECTION 11.17 BALLOTING
Each holder of Allowed Claim or an Allowed Interest entitled to vote on
the Plan will receive a ballot. The ballot will contain two boxes, one
indicating acceptance of the Plan and the other indicating rejection of the
Plan. Holders of Allowed Claims or Allowed Interests who elect to vote on the
Plan must mark one or the other box pursuant to the instructions contained on
the ballot. Any executed Ballot that does not indicate acceptance or rejection
of the Plan will be considered a non-vote and will not be counted as an
acceptance or rejection of the Plan.
SECTION 11.18 NO ADMISSIONS OR WAIVER OF OBJECTIONS
Notwithstanding anything herein to the contrary, nothing contained in
the Plan shall be deemed as an admission by any Debtor with respect to any
matter set forth herein including, without limitation, liability on any Claim or
the propriety of any Claims classification. The Debtors are not bound by any
statements herein or in the Disclosure Statement as judicial admissions.
SECTION 11.19 SURVIVAL OF SETTLEMENTS
All Court-approved settlements shall survive consummation of the Plan,
except to the extent that any provision of any such settlement is inconsistent
with the Plan, in which case the provisions of the Plan shall supersede such
inconsistent provision of such settlement.
Dated: __________, 2001 ASSISTED LIVING CONCEPTS, INC.
By: ___________________________________
Its:___________________________________
50
Dated: __________, 2001 CARRIAGE HOUSE ASSISTED LIVING, INC.
By: ___________________________________
Its:___________________________________
51
EXHIBIT B
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
ASSISTED LIVING CONCEPTS, INC., et al. ) Case No. 01-10674 (SLR)
)
)
) (Jointly Administered)
Debtors. )
ORDER APPROVING DISCLOSURE STATEMENT, FIXING
TIME FOR FILING ACCEPTANCES OR REJECTIONS OF PLAN,
ESTABLISHING PROCEDURE FOR COUNTING VOTES,
AND APPROVING FORM AND MANNER OF NOTICE AND SOLICITATION
Assisted Living Concepts, Inc. ("ALC") and Carriage House Assisted
Living, Inc. (collectively, the "Debtors") as Debtors and Debtors In Possession,
having filed (a) the First Amended Plan of Reorganization of Assisted Living
Concepts, Inc. and Carriage House Assisted Living, Inc. Under Chapter 11 of the
Bankruptcy Code dated as of October 26, 2001 (the "Plan") and Disclosure
Statement for the Plan (the "Disclosure Statement"), and (b) forms of Ballots
for voting on the Plan; and the Court finding that due, proper and adequate
notice of the hearing on approval of the Disclosure Statement has been given to
all parties in interest; and no objections having been filed; and after a
hearing having been held on October 30, 2001; and all parties in interest having
been given an opportunity to be heard at the hearing; and the Court having found
that the Disclosure Statement contains "adequate information" as the term is
defined by 11 U.S.C. Section 1125;
IT IS HEREBY FOUND THAT:
A. The Disclosure Statement contains adequate information within the
meaning of section 1125 of title 11 of the United States Code (the "Bankruptcy
Code").
B. The forms of the ballots (the "Ballots") and master ballots (the
"Master Ballots") filed with this Court on October 25, 2001 are sufficiently
consistent with Official Form No. 14 and adequately address the particular needs
of these chapter 11 cases and are appropriate for each class of claims or
interests entitled under the Plan to vote to accept or reject the Plan.
C. The period, set forth below, during which the Debtors may solicit
acceptances to the Plan is a reasonable period of time for creditors to make an
informed decision to accept or reject the Plan.
D. The procedures for the solicitation and tabulation of votes to
accept or reject the Plan (as more fully set forth in the Disclosure Statement)
provide for a fair and equitable voting process and are consistent with section
1126 of the Bankruptcy Code.
E. The procedures set forth herein and Exhibit A hereto regarding
notice (the "Confirmation Hearing Notice") to all creditors and interest holders
of the time, date, and place of the hearing to confirm the Plan (the
"Confirmation Hearing") and the contents of the Solicitation Package comply
with Rules 2002 and 3017 of the Federal Rules of Bankruptcy Procedure (the
"Bankruptcy Rules") and constitute sufficient notice to all interested parties.
NOW, THEREFORE, IT IS:
1. ORDERED that the Motion is GRANTED; and it is further
2. ORDERED that the Disclosure Statement is APPROVED; and it is further
3. ORDERED that the form and manner of notice of the time set for
filing objections to, and the hearing to consider the approval of, the
Disclosure Statement was adequate; and it is further
4. ORDERED that the Ballots (and Master Ballots as appropriate) are to
be distributed to the holders of impaired claims against and interests in ALC in
Classes 1B (NHP), 4 and 9, which Classes are entitled to vote to accept or
reject the Plan; and it is further
5. ORDERED that, with respect to the Ballots to be distributed to Class
4, ALC is authorized to send Ballots to record holders of the Senior Note
Claims, including, without limitation, brokers, banks, dealers, or other agents
or nominees (collectively, the "Master Ballot Agents"), and each Master Ballot
Agent shall be entitled to receive reasonably sufficient copies of Ballots to
distribute to the beneficial owners of claims for whom such Master Ballot Agent
holds the Class 4 Claims, and ALC shall be responsible for each such Master
Ballot Agent`s reasonable costs and expenses associated with the distribution of
copies of Ballots to the beneficial owners of such claims and tabulation of the
Ballots; and it is further
6. ORDERED that each Master Ballot Agent shall receive returned Ballots
from the beneficial owners, tabulate the results, and return, inter alia, such
results to Bankruptcy Services LLC ("BSI") in a Master Ballot by the Voting
Deadline (as defined below); and it is further
7. ORDERED that the Master Ballot Agents shall complete the Master
Ballots according to the instructions set forth in the Master Ballots; and it
is further
8. ORDERED that with respect to the Ballots to be distributed to Class
9, ALC is authorized to send Ballots to the holders of the Debtors' publicly
traded stock as reflected in the records maintained by the Debtors' Transfer
Agent(s) as of the close of business on the Record Date, which include, without
limitation, the brokers, dealers, commercial banks, trust companies, or other
nominees (collectively, the "Nominee Stockholders") through which the beneficial
owners (collectively, the "Beneficial Stockholders") hold stock, and each
Nominee Stockholder shall be entitled to receive reasonably sufficient copies of
Ballots to distribute to the Beneficial Stockholders for whom such Nominee
Stockholders hold stock, and the Debtors shall be responsible for each such
Nominee Stockholders` reasonable costs and expenses associated with the
distribution of Ballots to the Beneficial Stockholders; and it is further
9. ORDERED that all Ballots and Master Ballots must be properly
executed, completed, and delivered to BSI (i) by mail, in the return envelope
provided with each Ballot, (ii) by overnight courier, or (iii) by personal
delivery so that they are received by BSI no later than 4:00 p.m., prevailing
Eastern Time, on November 30, 2001 (the "Voting Deadline"); and it is further
10. ORDERED that Ballots accepting or rejecting the Plan must be
received by the Voting Deadline at the following address:
Bankruptcy Services, LLC
Attn: Assisted Living Concepts Claims Processing
P.O. Box 5014
FDR Station
New York, NY 10150-5014
Ballots received after the Voting Deadline, will not be counted; and it is
further
11. ORDERED that, solely for purposes of voting to accept or reject the
Plan and not for the purpose of the allowance of, or distribution on account of,
a claim and without prejudice to the rights of the Debtors in any other context,
each claim within a class of claims entitled to vote to accept or reject the
Plan is to be temporarily allowed in an amount equal to the amount of such claim
as set forth in a timely filed proof of claim, or, if no proof of claim was
filed, the amount of such claim as set forth in (i) the ALC schedules of assets
and liabilities dated October 26, 2001, or any amendment thereof (collectively,
the "Schedules"), provided that:
a. If a claim is deemed allowed in accordance with the Plan, such
claim is allowed for voting purposes in the deemed allowed
amount set forth in the Plan;
b. If a claim for which a proof of claim has been timely filed is
marked as contingent, unliquidated, or disputed, the Debtors
propose that such claim be temporarily allowed for voting
purposes only, and not for purposes of allowance or
distribution, at $1.00;
c. If a claim has been estimated or otherwise allowed for voting
purposes by order of the Court, such claim is temporarily
allowed in the amount so estimated or allowed by the Court for
voting purposes only, and not for purposes of allowance or
distribution;
d. If a claim is listed in the Schedules as contingent,
unliquidated, or disputed. or scheduled in the amount of zero,
and a proof of claim was not (i) filed by the applicable bar
date for the filing of proofs of claim established by the
Court or (ii) deemed timely filed by an order of the Court
prior to the Voting Deadline, unless the Debtors have
consented in writing, the Debtors propose that such claim be
disallowed for voting purposes and for purposes of allowance
and distribution pursuant to Bankruptcy Rule 3003(c); and
e. If the Debtors have served an objection to a claim at least
ten (10) days before the Voting Deadline, the Debtors propose
that such claim be temporarily disallowed for voting purposes
only and not for purposes of allowance or distribution, except
to the extent and in the manner as may be set forth in the
objection; and it is further
12. ORDERED that if any claimant seeks to challenge the allowance of
its claim for voting purposes in accordance with the above procedures, such
claimant is directed to serve on the Debtors and file with the Court on or
before the tenth (10th) day after the later of(i) service of the Confirmation
Hearing Notice and (ii) service of notice of an objection, if any, to such
claim, a motion for an order pursuant to Bankruptcy Rule 3018(a) temporarily
allowing such claim in a different amount for purposes of voting to accept or
reject the Plan; and it is further
13. ORDERED that as to any creditor filing a motion pursuant to
Bankruptcy Rule 3018(a), such creditor's Ballot shall not be counted unless
temporarily allowed by the Court for voting purposes after notice and a hearing;
and it is further
14. ORDERED that any Ballot that is properly completed, executed, and
timely returned to BSI but does not indicate an acceptance or rejection of the
Plan, or indicates both an acceptance and a rejection of the Plan, shall not be
counted; and it is further
16. ORDERED that if a creditor casts more than one Ballot voting the
same claim before the Voting Deadline, the last Ballot received before the
Voting Deadline is deemed to reflect the voter's intent and thus to supersede
any prior Ballots; and it is further
17. ORDERED that creditors must vote all of their claims within a
particular class under the Plan, whether or not such claims are asserted against
the same or multiple Debtors, either to accept or reject the Plan and may not
split their vote(s), and thus a Ballot that partially rejects and partially
accepts the Plan will be deemed a vote to accept the Plan; and it is further
18. ORDERED that the following types of Ballots will not be counted in
determining whether the Plan has been accepted or rejected: (i) any Ballot
received after the Voting Deadline unless the Debtors shall have granted an
extension of the Voting Deadline with respect to such Ballot; (ii) any Ballot
that is illegible or contains insufficient information to permit the
identification of the claimant or interest holder; (iii) any Ballot cast by a
person or entity that does not hold a claim or interest in a class that is
entitled to vote to accept or reject the Plan; (iv) any Ballot cast for a claim
identified as unliquidated, contingent, or disputed for which no proof of claim
was timely filed; (v) any unsigned Ballot; and (vi) any Ballot transmitted to
BSI by facsimile; and it is further
19. ORDERED that the Confirmation Hearing will be held at 8:30 a.m.
Eastern Time on December 5, 2001; provided, however, that the Confirmation
Hearing may be continued from time to time by the Court or the Debtors without
further notice; and it is further
20. ORDERED that any objections to confirmation of the Plan must (i) be
in writing, (ii) state the name and address of the objecting party and the
nature of the claim or interest of such party, (iii) state with particularity
the basis and nature of any objection or proposed modification, and (iv) be
filed, together with proof of service, with the Court and served so that they
are actually received no later than 4:00 p.m. Eastern Time, on November 30, 2001
(the "Objection
Deadline"), by (i) Latham & Watkins, 633 West Fifth Street, Suite 4000 Los
Angeles, California 90071 (Attention: Robert A. Klyman, Esq.), (ii) Young
Conaway Stargart & Taylor, LLP, The Brandywine Building, 1000 West Street, 17th
Floor, P.O. Box 391, Wilmington, Delaware 19899-0391 (Attention: Michael R.
Nestor, Esq.), (iii) Milbank Tweed Hadler & McCloy LLP, 601 So. Figueroa Street,
Floor 30, Los Angeles, California 90017 (Attention: David Zolkin, Esq.) and (iv)
The Office of the United States Trustee, Suite 950 West, Curtis Center, 601
Walnut Street, Philadelphia, Pennsylvania 19106 (Attention: Don Beskrone,
Esquire); and it is further
21. ORDERED that objections to confirmation of the Plan not timely
filed and served in the manner set forth above shall not be considered and shall
be overruled; and it is further
22. ORDERED that the Debtors and the Committee may serve replies to
such objections or proposed modifications by no later than 12:00 p.m. on
December 4, 2001; and it is further;
23. ORDERED that the Confirmation Hearing Notice annexed hereto is
APPROVED; and it is further
24. ORDERED that the Debtors must serve all known creditors and equity
security holders with a copy of the Confirmation Hearing Notice by November 7,
2001; and it is further
25. ORDERED that the date hereof is the Record Date for purposes of
determining which creditors are entitled to vote on the Plan; and it is further
26. ORDERED that the Debtors are directed to mail or cause to be mailed
solicitation packages containing a copy of this Order, the Confirmation Hearing
Notice (attached hereto as Exhibit A), the Disclosure Statement, and the Plan
(the "Solicitation Packages"), by November 7, 2001, to (i) the U.S. Trustee,
(ii) attorneys for the Committee, (iii) all known holders of impaired claims
against and interest in ALC in Classes lB, 4 and 9 under the Plan, (iv) the
Securities and Exchange Commission, (v) the Internal Revenue Service, (vi) the
United States Department of
Justice, (vii) the Pension Benefit Guaranty Corporation, and (viii) any other
known holders of claims against or equity interests in the Debtors; provided,
however, that the Debtors are not required to distribute copies of the Plan and
Disclosure Statement to any holder of an unimpaired claim or interest in any
class under the Plan or any holder of any claim or interest who is not entitled
to any distribution under the Plan, unless such party makes a specific request
in writing for the same; and it is further
27. ORDERED that in addition, holders of claims in classes entitled to
vote to accept or reject the Plan shall receive, as part of their Solicitation
Packages, a Ballot and a Ballot return envelope; and it is further
28. ORDERED that, pursuant to sections 1126(f) and (g) of the
Bankruptcy Code and Bankruptcy Rule 3017(d), Solicitation Packages for holders
of claims against or interests in any Debtor in a class under the Plan that is
conclusively presumed to accept or is deemed to reject the Plan under section
1126(f) or (g) of the Bankruptcy Code will not include a Ballot; and it is
further
29. ORDERED that the Debtors shall publish the Confirmation Hearing
Notice not less than twenty (20) days before the Confirmation Hearing in the
national edition of The Wall Street Journal; and it is further
30. ORDERED that, with respect to addresses from which Disclosure
Statement Notices were returned as undeliverable by the United States Postal
Service, the Debtors are excused from mailing Solicitation Packages to those
entities listed at such addresses unless the Debtors are provided with accurate
addresses for such entities before November 8, 2001; and it is further
31. ORDERED that failure to mail Solicitation Packages to such entities
will not constitute inadequate notice of the Confirmation Hearing, the Voting
Deadline, or violation of Bankruptcy Rule 3017(d); and it is further
32. ORDERED that the Debtor is hereby authorized to utilize the
services of Bankruptcy Services, LLC (the "Tabulation Agent") to serve as the
Debtors` agent in connection with (i) the preparation and mailing of
solicitation materials as described below and (ii) the tabulation and
certification of ballots accepting or rejecting the Plan, and to incur and pay
all fees, costs and expenses reasonably associated therewith. BSI is authorized
to perform the following services as the Debtors voting agent:
(a) coordinating the printing and mailing of the Confirmation
Hearing Notice;
(b) coordinating the printing of Ballots;
(c) identifying voting and non-voting creditors and equity
security holders;
(d) preparing voting reports by Plan class and voting amount and
maintaining all such information in a BSI database;
(e) printing Ballots specific to each creditor, indicating voting
class under the Plan, voting amount of claim, and other
relevant information;
(f) coordinating the mailing of Ballots and providing an affidavit
verifying the mailing of Ballots;
(g) receiving Ballots and tabulating and certifying the votes on
the Plan; and
(h) providing any other balloting-related services as the Debtors
may from time to time request, including, without limitation,
providing testimony at the confirmation hearing with respect
to the Balloting Services and the results of the voting on the
Plan; and it is further
33. ORDERED that the Debtors are authorized to take or refrain from
taking any action necessary or appropriate to implement the terms of and the
relief granted in this Order without seeking further order of the Court; and it
is further
34. ORDERED that any person or entity that seeks to solicit rejections
of the Plan shall seek an order of this Court, by motion on notice to the
attorneys for the Debtors, the attorneys for the Committee, for approval of any
solicitation materials as containing "adequate information"
based upon the same standard of review that is applicable to the Disclosure
Statement; and it is further
35. ORDERED that the filing of a motion seeking approval of any
solicitation materials seeking rejection of the Plan shall not affect the
approval of the Disclosure Statement herein or the dates set forth herein; and
it is further
36. ORDERED that the Debtors are authorized to make nonsubstantive
changes to the Disclosure Statement, the Plan, and related documents without
further order of the Court, including, without limitation, changes to correct
typographical and grammatical errors and to make conforming changes among the
Disclosure Statement.
Dated: Wilmington Delaware
October 30, 2001
/s/ Sue L. Robinson
---------------------------------
The Honorable Sue L. Robinson
Chief Judge, United States
District Court
EXHIBIT A
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
ASSISTED LIVING CONCEPTS, INC., et al, ) Case No. 01-10674 (SLR)
)
)
) (Jointly Administered)
Debtors. )
NOTICE OF (I) APPROVAL OF DISCLOSURE STATEMENT,
(II) DEADLINE FOR VOTING ON DEBTORS' PLAN OF
REORGANIZATION, (III) HEARING TO CONSIDER
CONFIRMATION OF THE PLAN, AND (IV) LAST DATE
FOR FILING OBJECTIONS TO CONFIRMATION OF THE PLAN
TO: ALL HOLDERS OF CLAIMS AGAINST AND INTERESTS IN ASSISTED LIVING
CONCEPTS (CLASSES 1B, 4 AND 9)
PLEASE TAKE NOTICE THAT YOUR VOTE IS BEING SOLICITED IN CONNECTION WITH
THE DEBTORS' JOINT PLAN REORGANIZATION OF ASSISTED LIVING CONCEPTS, INC. (THE
"PLAN"). YOU SHOULD CAREFULLY REVIEW THE MATERIAL SET FORTH IN THE DISCLOSURE
STATEMENT ENCLOSED HEREWITH (AND IN THE EXHIBITS ATTACHED THERETO) IN ORDER TO
MAKE AN INDEPENDENT DETERMINATION AS TO WHETHER TO VOTE TO ACCEPT OR REJECT THE
PLAN. THE DEBTORS AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS RECOMMEND
THAT YOU VOTE TO ACCEPT THE PLAN.
APPROVAL OF DISCLOSURE STATEMENT
PLEASE TAKE FURTHER NOTICE that, by Order dated October 30, 2001, the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court") approved the Debtors' Disclosure Statement Pursuant to Section 1125 of
the Bankruptcy Code with respect to the Debtors' Plan (the "Disclosure
Statement") as containing adequate information within the meaning of section
1125 of the Code.
DEADLINE FOR VOTING ON THE PLAN
PLEASE TAKE FURTHER NOTICE that, by Order dated October 25, 2001, the
Bankruptcy Court established November 30, 2001, at 4:00 p.m. Eastern Standard
Time (the "Voting Deadline") as the deadline by which ballots accepting or
rejecting the Plan must be received. To be counted, your ballot (which is
enclosed herewith) must actually be received on or before the Voting Deadline
by:
Bankruptcy Services, LLC
Attn: Assisted Living Concepts Claims Processing
P.O. Box 5014
FDR Station
New York, NY 10150-50l4
Ballots received by facsimile will not be counted.
CONFIRMATION HEARING
PLEASE TAKE FURTHER NOTICE that, on December 5, 2001 at 8:30 a.m.
Eastern Standard Time, or as soon thereafter as counsel may be heard, a hearing
will commence before the Honorable Sue L.Robinson, Chief United States District
Court Judge, at the United States District Court, 844 King Street, 6th Floor,
Wilmington, Delaware 19801 to consider
confirmation of the Plan, as the same may be further amended or modified, and
for such other and further relief as may be just (the "Confirmation Hearing").
PLEASE TAKE FURTHER NOTICE that the Confirmation Hearing may be
adjourned from time to time without further notice to creditors or other parties
in interest, other than by an announcement of such an adjournment in open court
at the Confirmation Hearing or any adjournment thereof. Additionally, the Plan
may be modified in accordance with the Code, the Federal Rules of Bankruptcy
Procedure and other applicable law, without further notice, prior to or as a
result of the Confirmation Hearing.
DEADLINE FOR OBJECTIONS TO CONFIRMATION OF THE PLAN
PLEASE TAKE FURTHER NOTICE that objections, if any, to the confirmation
of the Plan, including any supporting memoranda, must be in writing, be filed
with the Clerk of the United States Bankruptcy Court for the District of
Delaware, 5th Floor, 824 Market Street, Wilmington, Delaware 19801 together with
proof of service, and shall (a) state the name and address of the objecting
party and the amount of its claim or the nature of its interest in the Debtors'
Chapter 11 Cases, (b) state with particularity the provision or provisions of
the Plan objected to and for any objection asserted, the, legal and factual
basis for such objection, and (c) be served upon (i) Latham & Watkins, 633 West
Fifth Street, Suite 4000, Los Angeles, California 90071, Attention: Robert A.
Klyman, Esq., (ii) Young Conaway Stargatt & Taylor, LLP, The Brandywine
Building, 1000 West Street, 17th Floor, P.O. Box 391, Wilmington, Delaware
19899-0391, Attention: Michael R. Nestor, Esq., (iii) Milbank Tweed Hadley &
McCloy LLP, 601 So. Figueroa Street, 30th Floor, Los Angeles, California 90017,
Attention: David Zolkin, Esq., and (iv) The Office of the United States Trustee,
844 King Street, Suite
2313, Wilmington, Delaware 19801, Attention: Don Beskrone, Esq. by hand or in a
manner as will cause such objection to be received by all such parties on or
before 4:00 P.M. EASTERN STANDARD TIME, ON NOVEMBER 30, 2001. Any objection not
filed and served as set forth above will be deemed waived and will not be
considered by the Court.
Wilmington, Delaware Respectfully submitted,
Dated: , 2001
LATHAM & WATKINS
Robert A. Klyman (Bar No. 142723)
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
Telephone: (213) 485-1234
Facsimile: (213) 891-8763
YOUNG CONAWAY STARGATT & TAYLOR, LLP
Michael Nestor (Bar No. 3526)
The Brandywine Building
1000 West Street, 17th Floor
P.O. Box 391
Wilmington, Delaware 19899-0391
(302) 571-6600
Co-Counsel for Debtors and Debtors in
Possession
EXHIBIT C
ASSISTED LIVING CONCEPTS, INC.
CORPORATE STRUCTURE
Assisted Living Concepts, Inc.
(93-1148702)
authorized to do business in IN,
OH, OR, WA, ID, PA, SC, IA, NJ,
AZ, TX, NE, and MI
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-9057
________________________________________________________________________________
ALF Partners, LP
a Texas Limited Partnership
authorized to do business in Texas
(93-1129481)
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-9057
General Partner (99%) Limited Partner (1%)
Texas ALF, Inc. Nevada ALF, Inc.
(88-0367738) (88-03677137)
A Nevada Corporation a Nevada Corporation
authorized to do business in Texas not authorized to do business in Texas
owned 100% by ALC, Inc. owned 100% by ALC, Inc.
600 E. Charleston Blvd. 600 E. Charleston Blvd.
Las Vegas, NV 89104 Las Vegas, NV 89104
Alpine House Longview, TX
Angelina House Jacksonville, TX
Arbor House Witchita Fall, TX
Bradfield, House Mesquite, TX
Cedarview House Gun Barrel City, TX
harrison House Greenville, TX
Lakeland House Athens, TX
Mackenzie House Lubbock, TX
Neches House Lufkin, TX
Oakwood House Marshall, TX
Preston House Sherman, TX
Strake House Conroe, TX
Winkler House Carthage, TX
Wildflower House Temple, TX
_______________________________________________________________________________
ASSISTED LIVING CONCEPTS, INC.
CORPORATE STRUCTURE
Assisted Living Concepts, Inc.
(93-1148702)
authorized to do business in IN,
OH, OR, WA, ID, PA, SC, IA, NJ,
AZ, TX, NE, and MI
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-9057
_______________________________________________________________________________
Texas ALC Partners, LP
(74-2785808)
a Texas Limited Partnership
authorized to do business in Texas
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-9057
General Partner (99%) Limited Partner (1%)
Texas ALC, Inc. Nevada ALC, Inc.
(88-0359367) (88-0359366)
authorized to do business in Texas not authorized to do business in Texas
owned 100% by ALC, Inc. owned 100% by ALC, Inc.
600 E. Charleston Blvd. 600 E. Charleston Blvd.
Las Vegas, NV 89104 Las Vegas, NV 89104
Sabine House Orange, TX
Hickory House Levelland, TX
Wheeler House Gainsville, TX
Potter House Amarillo, TX
Lucas House Beaumont, TX
Hoyt House Sweetwater, TX
Santa Fe House Plainview, TX
Marcy House Big Spring, TX
Corner House Canyon, TX
Millican House Bryan, TX
Austin House Nacogdouches, TX
Azalea House Henderson, TX
Meredith House Pampa, TX
Lakewell House Mineral Wells, TX
Bluebonnet House College Station, TX
Chisolm House Abilene, TX
_______________________________________________________________________________
ASSISTED LIVING CONCEPTS, INC.
CORPORATE STRUCTURE
Assisted Living Concepts, Inc.
(93-1148702)
authorized to do business in IN,
OH, OR, WA, ID, PA, SC, IA, NJ,
AZ, TX, NE, and MI
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-9057
_______________________________________________________________________________
DMG Texas ALC Partners, LP
(88-03899846)
authorized to do business in TX
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-90057
General Partner (99%) Limited Partner (99%)
DMG Texas ALC, Inc. DMG Nevada ALC, Inc.
(88-0389845) (88-0389844)
authorized to do business in NV and TX authorized to do business in NV
owned 100% by ALC, Inc. owned 100% by ALC, Inc.
600 E. Charleston Blvd. 600 E. Charleston Blvd.
Las Vegas, NV 89104 Las Vegas, NV 89104
Hopkins House Sulpher Springs, TX
Wren House Cleburne, TX
Katy House Denison, TX
Rose House Pt. Arthur, TX
Cimmaron House Midland, TX
Mercer House Rowlett, TX
Redbud House McKinney, TX
________________________________________________________________________________
ASSISTED LIVING CONCEPTS, INC.
CORPORATE STRUCTURE
Assisted Living Concepts, Inc.
(93-1148702)
authorized to do business in IN,
OH, OR, WA, ID, PA, SC, IA, NJ,
AZ, TX, NE, and MI
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-9057
________________________________________________________________________________
<Table>
<Caption>
DMG OR ALC, Inc. DMG NJ ALC, Inc. Home and Community Care, Inc. Elder Care Health
(93-1248074) (88-0404992) (86-0864255) Services, Inc.
authorized to do authorized to do authorized to do
business in OR business in NJ business in NV
11835 NE Glenn 11835 NE Glenn IA, FL, IN, OH, TX, and LA
Wading Dr. Wading Dr. a Nevada Corporation
Building E Building E 11835 NE Glenn Wading Dr.
Portland, OR 97220-9057 Portland, OR 97220-9057 Portland, OR 97220-9057 Building E
Astor House Granville House Pacesetter
Astoria, OR Burlington, NJ Affiliates
Jackson House Linsay House
Talent, OR Pennsville, NJ
Macklyn House Chapin House
Brookings, OR Rio Grande, NJ
</Table>
_______________________________________________________________________________
ASSISTED LIVING CONCEPTS, INC.
CORPORATE STRUCTURE
Assisted Living Concepts, Inc.
(93-1148702)
authorized to do business in IN,
OH, OR, WA, ID, PA, SC, IA, NJ,
AZ, TX, NE, and MI
11835 NE Glenn Wading Dr.
Building E
Portland, OR 97220-9057
________________________________________________________________________________
<Table>
Carriage House Assisted Living, Inc. Assisted Concepts Service, Inc. Subsidiaries
(93-1147652) (93-1229804) ALC Iowa, Inc. -88-0480714
authorized to do business in authorized to do business in ALC Nebraska, Inc. -88-0480713
Delaware, Nebraska, and Colorado Nevada ALC New Jersey, Inc. -88-0480712
a Delaware Corporation 11835 NE Glenn Wading Dr. ALC Pennsylvania, Inc. -88-0480710
11835 NE Glenn Wading Dr. Building E ALC Ohio, Inc. -88-0480709
Building E Portland, OR 97220-9057 ALC Florida, Inc. -88-0480711
Portland, OR 97220-9057 ALC McKinney Partners LP
ALC Paris Partners, LP
ALC Plano Partners, LP
Homestead Beatrice, NE ALCH Texas Partners, LP
Madison Norfolk, NE ALFH Texas Partners, LP
Sauders Wahoo, NE
Mahoney York, NE
Morton Nebraska City, NE Affiliates
Pathfinder Fremont, NE ALC Nevada McKinney, Inc.
Cottonwood Columbus, NE ALC Nevada Paris, Inc.
Carter Blair, NE ALC Nevada Plano, Inc.
Greene Seward, NE ALC Texas McKinney, Inc.
ALC Texas Paris, Inc.
ALC Texas Plano, Inc.
ALCH Nevada, Inc.
ALCH Texas, Inc.
ALFH Nevada, Inc.
ALFH Texas, Inc.
</Table>
EXHIBIT D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________ .
COMMISSION FILE NUMBER 1-13498
ASSISTED LIVING CONCEPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 93-1148702
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11835 NE GLENN WIDING DRIVE, BUILDING E
PORTLAND, OR 97220-9057
(503) 252-6233
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
6.0% CONVERTIBLE SUBORDINATED DEBENTURES DUE NOVEMBER 2002 AMERICAN STOCK EXCHANGE
5.625% CONVERTIBLE SUBORDINATED DEBENTURES DUE MAY 2003 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
The Registrant had 17,120,745 shares of common stock, $.01 par value,
outstanding at March 9, 2001. The aggregate market value of the voting stock
held by non-affiliates of the registrant on such date was approximately $13.5
million.
PART I
References in this report to "ALC," the "Company," "us" or "we" refer to
Assisted Living Concepts, Inc. and its subsidiaries.
ITEM 1. 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, 2000 we had operations in 16 states.
We also 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. When we
completed our initial public offering in November 1994 we had a base of five
leased residences (137 units). We opened twenty residences (798 units) in 1999
and no new residences in 2000. As of December 31, 2000, we had 185 assisted
living residences in operation representing an aggregate of 7,149 units. Of
these residences, we owned 115 residences (4,515 units) and leased 70 residences
(2,634 units). For the year ended December 31, 2000, our 165 Same Store
Residences (those residences that had been operating in their entirety for both
1999 and 2000) had an average occupancy rate of 83.7% and an average monthly
rental rate of $1,985 per unit.
The principal elements of our business strategy are to:
- increase occupancy and improve operating efficiencies at our
existing base of residences;
- reduce overhead costs where possible; and
- establish necessary financing to meet maturing obligations.
We anticipate that revenues at a majority of our residences will continue
to come from private pay sources. However, we believe that by having located
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 or more aggressively seek limits on reimbursement rates. See "Risk
Factors - We depend on reimbursement by third-party payors" included in Item 7.
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.
RECENT DEVELOPMENTS
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our financial statements for the years
ended December 31, 1996 and 1997 and the first three
1
fiscal quarters of 1998. This agreement received final court approval on
November 30, 2000 and we were subsequently dismissed from the litigation with
prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health
("ISDH") had alleged that we were operating our Logansport, Indiana facility
known as McKinney House, as a residential care facility without a license. We
believe our services have been consistent with those of a "Housing with
Services Establishment" (which is not required to be licensed) pursuant to
Indiana Code Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the residents in our facilities and the services to be provided to them. We
agreed that prior to March 20, 2001, we will provide in-service training
regarding the Program Description throughout our Indiana facilities. Under the
Program Description, we must discharge residents who require certain types or
levels of care that we agreed not to provide in Indiana. We are currently
implementing the Program Description and, while its full impact is not now
known, we do not expect the impact to be material to our financial condition,
results of operations, cash flow and liquidity. Without admitting liability, we
paid a civil penalty of $10,000. The State dismissed the lawsuit against us with
prejudice.
Management Changes
On March 3, 2000, our Board of Directors announced the appointment of Wm.
James Nicol and John Gibbons to the Board, including the appointment of Mr.
Nicol as Chairman of the Board. We also announced the formation of an Executive
Committee of our Board of Directors comprised of Dr. Keren Brown Wilson, Mr.
Nicol and Mr. Gibbons. On March 3, 2000, we also announced the resignation of
James W. Cruckshank as our Chief Financial Officer and the appointment of Mr.
Gibbons as Interim Chief Financial Officer. At that time, we entered into a
Separation and Consulting Agreement with Mr. Cruckshank, pursuant to which Mr.
Cruckshank's employment agreement with us was terminated, and Mr. Cruckshank
agreed to provide us
2
with consulting services through the end of 2000. See "Executive Compensation -
Agreements with Former Officers" included in Item 11.
On March 16, 2000, we announced the appointment of Drew Q. Miller as
Senior Vice President, Chief Financial Officer and Treasurer and the resignation
of Mr. Gibbons as Interim Chief Financial Officer.
On April 21, 2000, we eliminated the position of Vice President and Chief
Operating Officer which had been held by Leslie Mahon. Keren Brown Wilson
assumed these duties until her position of President and CEO was restructured in
October, 2000.
Effective October 19, 2000, Dr. Wilson resigned as President and Chief
Executive Officer and from our Board. She will remain active with us, continuing
to represent us at various assisted living industry events and providing
consulting services to us, as requested, until December 31, 2001. We incurred a
charge of $800,000 in the fourth quarter of 2000 in connection with her
resignation, such amount to be paid out over the fourteen-month period ending
December 31, 2001.
Upon the resignation of Dr. Wilson, Mr. Nicol served as the Acting
President and Chief Executive Officer until his permanent appointment. On
November 8, 2000, our Board appointed Wm. James Nicol as President and Chief
Executive Officer and Jill M. Krueger replaced Dr. Wilson on the Executive
Committee.
In January, 2001, our Board determined the Executive Committee was no
longer needed and discontinued it.
Annual Meeting of Shareholders
On January 16, 2001, we held our annual shareholders' meeting. The sole
purpose of this meeting was the re-election of two of our directors, Richard C.
Ladd and Jill M. Krueger, and the election of four new directors, Wm. James
Nicol (Chairman, President & Chief Executive Officer), John M. Gibbons, Leonard
Tannenbaum and Bruce E. Toll. Following the meeting, Mr. Gibbons was appointed
Vice Chairman of the Board.
Modification and Amendment to Rights Agreement
On November 8, 2000, we modified and amended our Rights Agreement to
provide that the acquisition of up to $15.0 million in face value of our
convertible debentures is not to be considered "beneficially owned," as
defined under the Rights Agreement, for purposes of calculating whether a
beneficial owner owns 15% or more of our common shares then outstanding, in
which event certain rights as described in the Rights Agreement would arise.
Amendment of Loan Documents
On March 12, 2001, we amended certain loan documents with U. S. Bank
National Association ("U.S. Bank"). Pursuant to the amendment, we agreed to
pay fees of $34,700 in exchange for the following: the modification of certain
financial covenants, and the waiver of U.S. Bank's right to declare an event of
default for our failure to comply with certain financial covenants as of
December 31, 2000 and for our anticipated failure to comply with certain
financial covenants for the three months ending March 31, 2001. The amendment
also provides the following: approval for us to repurchase for cash up to $25.0
million in face value of our convertible debentures prior to maturity; a
requirement that we 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; and the requirement that U.S. Bank
release such deposits to us upon satisfactory resolution of the regulatory
action.
Additional Financing
In November 2000, we entered into a short-term bridge loan with Red
Mortgage Capital, Inc. ("Red Mortgage") in the amount of $4.0 million secured
by three previously unencumbered properties. This loan matures on August 1,
2001, requires monthly interest-only payments until maturity and bears interest
at the
3
greater of 10% or LIBOR plus 3.5%. We intend to replace this loan with long-term
HUD financing prior to its maturity.
On March 2, 2001, we entered into an agreement with Heller Healthcare
Finance, Inc. ("Heller") for a $45.0 million line of credit, under which five
wholly owned subsidiaries are the jointly and severally liable borrowers of any
funds drawn. This line matures on August 31, 2002 and requires monthly
interest-only payments until maturity. This line bears an interest rate of 3.85%
over the three-month LIBOR rate floating monthly and will be secured by up to 32
properties owned by the borrowers and leased to another of our affiliates or us.
We guaranteed the line. In addition to having paid a commitment fee of $450,000,
we are to pay funding fees of 0.5% of the principal amount funded at the time of
funding and pay an exit fee of 1.0% of the principal being repaid. The borrowers
may elect to exercise up to three six-month extensions of the maturity date,
subject to the satisfaction of certain conditions. We intend to replace a
substantial portion of this financing with long-term HUD financing to the extent
the processing time and increasing limitations by HUD on submission of
applications and amount financed permit. While the line remains outstanding, we
have agreed that all of our remaining unencumbered properties, except one, will
remain unencumbered, unless the net proceeds of such financing are used to
repurchase our convertible debentures or pay off other indebtedness (if approved
by Heller). Proceeds of the line may be used for the payment of our
shareholders' litigation settlement, the repurchase of 16 of our leased
properties and the repurchase of some of our convertible debentures. Our initial
draw on this line was $1.3 million on March 2, 2001.
Option Cancellation
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-Executive Employee Equity
Participation Plan. We agreed to make lump sum payments of $250 to each option
holder who agreed to the cancellation of all of their 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 such payment. We 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.
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
4
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 program director who is responsible for the
overall day-to-day operation of the residence, including quality of care,
marketing, social services and financial performance. The program director is
assisted by professional and non-professional personnel, some of whom may be
independent providers or part-time personnel, including nurses, personal service
assistants, maintenance and kitchen personnel. The 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, 16 regional operations managers who oversee the day-to-day
operations of up to 10 to 12 residences, and team leaders who provide peer
support for up to three to four residences. Residence personnel also are
supported by corporate staff based at our headquarters. We also have regional
property managers who oversee the maintenance of the residences and several
regional marketing coordinators who assist with marketing the residence.
Corporate and regional personnel work with the program directors to establish
residence goals and strategies, quality assurance oversight, development of
Company policies and procedures, government relations, marketing and sales,
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 become 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) pressure to lower or
refrain from increasing rates, (c) competition for workers in already tight
labor
5
markets and (d) lower margins until excess units are absorbed. We have
experienced slower fill-up than expected of new residences in some markets as
well as declining occupancy in our stabilized residences due to the increase in
options available to potential new residents when units are vacated. 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, 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 the Health Care
Financing Administration ("HCFA"). Under a Medicaid Waiver Program, states
apply to HCFA for a waiver to use Medicaid funds to support community-based
options for the low-income elderly who need long-term care. These waivers permit
states to reallocate a portion of Medicaid funding for nursing facility care to
other forms of care such as assisted living. In 1994, the federal government
implemented new regulations which empowered states to further expand their
Medicaid Waiver Programs and eliminated restrictions on the amount of Medicaid
funding states could allocate to community-based care, such as assisted living.
A limited number of states including Oregon, New Jersey, Texas, 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, 1998, 1999 and 2000, direct payments
received from state Medicaid agencies accounted for approximately 10.7%, 10.4%
and 11.1%, respectively, of our revenue while the tenant-paid portion received
from Medicaid residents accounted for approximately 5.8%, 5.9% and 6.2%,
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, 2000, 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
6
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.
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, "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
the primary targets of these insurers, assisted living companies, including us,
have experienced premium and deductible increases. During the claim year ended
December 31, 2000, our professional liability insurance coverage included
deductible levels of $100,000 per incident; for the claim year ending December
31, 2001 this deductible level has been replaced with a retention level of
$250,000 for all states except Florida and Texas in which our retention level is
$500,000. 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, 2000 we had 3,613 employees, of whom 1,628 were
full-time employees and 1,985 were part-time employees. None of our employees
are represented by any labor union. We believe that our labor relations are
generally good.
7
ITEM 2. PROPERTIES
The following chart sets forth, as of December 31, 2000 the location,
number of units, date of licensure, and ownership status of our residences. In
addition, the chart sets forth occupancy rates as of December 31, 2000.
OPENING OCCUPANCY(%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
WEST REGION
Idaho
Burley .................................. 35 08/97 Leased 100.0
Caldwell ................................ 35 08/97 Leased 100.0
Garden City ............................. 48 04/97 Owned 91.7
Hayden .................................. 39 11/96 Leased 94.9
Idaho Falls ............................. 39 01/97 Owned 43.6
Moscow .................................. 35 04/97 Owned 40.0
Nampa ................................... 39 02/97 Leased 94.9
Rexburg ................................. 35 08/97 Owned 77.1
Twin Falls .............................. 39 09/97 Owned 64.1
---
Sub Total ....................... 344 78.8
Oregon
Astoria ................................. 28 08/96 Owned 92.9
Bend .................................... 46 11/95 Owned 100.0
Brookings ............................... 36 07/96 Owned 97.2
Canby ................................... 25 12/90 Leased 96.0
Estacada ................................ 30 01/97 Owned 76.7
Eugene .................................. 47 08/97 Leased 93.6
Hood River .......... ................... 30 10/95 Owned 100.0
Klamath Falls ........................... 36 10/96 Leased 100.0
Lincoln City ............................ 33 10/94 Owned 78.8
Madras .................................. 27 03/91 Owned 96.3
Myrtle Creek ............................ 34 03/96 Leased 79.4
Newberg ................................. 26 10/92 Leased 100.0
Newport ................................. 36 06/96 Leased 91.7
Pendleton ............................... 39 04/91 Leased 87.2
Prineville .............................. 30 10/95 Owned 90.0
Redmond ................................. 37 03/95 Leased 94.6
Silverton ............................... 30 07/95 Owned 83.3
Sutherlin ............................... 30 01/97 Leased 96.7
Talent .................................. 36 10/97 Owned 91.7
---
Sub Total ....................... 636 92.0
Washington
Battleground ............................ 40 11/96 Leased 97.5
Bremerton(4) ............................ 39 05/97 Owned 97.4
Camas ................................... 36 03/96 Leased 94.4
Enumclaw ................................ 40 04/97 Owned 95.0
Ferndale ................................ 39 10/98 Owned 92.3
Grandview ............................... 36 02/96 Leased 91.7
Hoquiam ................................. 40 07/97 Leased 82.5
Kelso ................................... 40 08/96 Leased 90.0
8
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Kennewick ............................... 36 12/95 Leased 86.1
Port Orchard ............................ 39 06/97 Owned 89.7
Port Townsend ........................... 39 01/98 Owned 100.0
Spokane ................................. 39 09/97 Owned 92.3
Sumner(4) ............................... 48 03/98 Owned 83.3
Vancouver ............................... 44 06/96 Leased 86.4
Walla Walla ............................. 36 02/96 Leased 100.0
Yakima .................................. 48 07/98 Owned 97.9
---
Sub Total ....................... 639 92.2
Arizona
Apache Junction ......................... 48 03/98 Owned 64.6
Bullhead City ........................... 40 08/97 Leased 70.0
Lake Havasu ............................. 36 04/97 Leased 100.0
Mesa .................................... 50 01/98 Owned 68.0
Payson .................................. 39 10/98 Owned 82.1
Peoria .................................. 50 07/99 Owned 42.0
Prescott Valley ......................... 39 10/98 Owned 87.2
Surprise ................................ 50 10/98 Owned 32.0
Yuma .................................... 48 03/98 Owned 93.8
---
Sub Total ....................... 400 69.3
CENTRAL REGION
Texas
Abilene ................................. 38 10/96 Leased 86.8
Amarillo ................................ 50 03/96 Leased 96.0
Athens .................................. 38 11/95 Leased 94.7
Beaumont ................................ 50 04/96 Leased 78.0
Big Springs ............................. 38 05/96 Leased 89.5
Bryan ................................... 30 06/96 Leased 100.0
Canyon .................................. 30 06/96 Leased 96.7
Carthage ................................ 30 10/95 Leased 96.7
Cleburne ................................ 45 01/96 Owned 100.0
Conroe .................................. 38 07/96 Leased 97.4
College Station ......................... 39 10/96 Leased 76.9
Denison ................................. 30 01/96 Owned 100.0
Gainesville ............................. 40 01/96 Leased 100.0
Greenville .............................. 41 11/95 Leased 100.0
Gun Barrel City ......................... 40 10/95 Leased 90.0
Henderson ............................... 30 09/96 Leased 83.3
Jacksonville ............................ 39 12/95 Leased 97.4
Levelland ............................... 30 01/96 Leased 93.3
Longview ................................ 30 09/95 Leased 100.0
Lubbock ................................. 50 07/96 Leased 88.0
Lufkin .................................. 39 05/96 Leased 87.2
Marshall ................................ 40 07/95 Leased 80.0
McKinney ................................ 39 01/97 Owned 100.0
McKinney ................................ 50 05/98 Owned 84.0
Mesquite ................................ 50 07/96 Leased 98.0
9
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Midland ................................. 50 12/96 Owned 84.0
Mineral Wells ........................... 30 07/96 Leased 100.0
Nacogdoches ............................. 30 06/96 Leased 100.0
Orange .................................. 36 03/96 Leased 88.9
Pampa ................................... 36 08/96 Leased 91.7
Paris Oaks .............................. 50 12/98 Owned 100.0
Plainview ............................... 36 07/96 Leased 88.9
Plano ................................... 64 05/98 Owned 76.6
Port Arthur ............................. 50 05/96 Owned 96.0
Rowlett ................................. 36 10/96 Owned 97.2
Sherman ................................. 39 10/95 Leased 102.6
Sulphur Springs ......................... 30 01/96 Owned 93.3
Sweetwater .............................. 30 03/96 Leased 100.0
Temple .................................. 40 01/97 Leased 80.0
Wichita Falls ........................... 50 10/96 Leased 100.0
-----
Sub Total ....................... 1,581 92.2
Nebraska
Beatrice ................................ 39 07/97 Leased 97.4
Blair ................................... 30 07/98 Owned 70.0
Columbus ................................ 39 06/98 Owned 97.4
Fremont ................................. 39 05/98 Owned 100.0
Nebraska City ........................... 30 06/98 Owned 90.0
Norfolk ................................. 39 04/97 Leased 84.6
Seward .................................. 30 10/98 Owned 70.0
Wahoo ................................... 39 06/97 Leased 79.5
York 39 05/97 Leased 92.3
-----
Sub Total ....................... 324 87.7
Iowa
Atlantic ................................ 30 09/98 Owned 86.7
Carroll ................................. 35 01/99 Owned 100.0
Clarinda ................................ 35 09/98 Owned 100.0
Council Bluffs .......................... 50 03/99 Owned 68.0
Denison ................................. 35 05/98 Leased 88.6
Sergeant Bluff .......................... 39 11/99 Owned 28.2
-----
Sub Total ............................... 224 76.8
SOUTHEAST REGION
Georgia
Rome .................................... 39 08/99 Owned 51.3
Florida
Defuniak Springs ........................ 39 07/99 Owned 53.9
Milton .................................. 39 06/99 Owned 79.5
NW Pensacola ............................ 39 06/99 Owned 43.6
Quincy .................................. 39 04/99 Owned 48.7
-----
Sub Total ....................... 156 56.4
10
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Louisiana
Alexandria ............................. 48 07/98 Owned 45.8
Bunkie ................................. 39 01/99 Owned 59.0
Houma .................................. 48 08/98 Owned 89.6
Ruston ................................. 39 01/99 Owned 89.7
---
Sub Total ...................... 174 70.7
South Carolina
Aiken .................................. 39 02/98 Owned 97.4
Clinton ................................ 39 11/97 Leased 89.7
Goose Creek ............................ 39 08/98 Owned 79.5
Greenwood .............................. 39 05/98 Leased 76.9
Greer .................................. 39 06/99 Owned 89.7
James Island ........................... 39 08/98 Owned 97.4
North Augusta .......................... 39 10/98 Owned 82.1
Port Royal ............................. 39 09/98 Owned 74.4
Summerville ............................ 39 02/98 Owned 87.2
---
Sub Total ...................... 351 86.0
EAST REGION
Indiana
Bedford ................................ 39 03/98 Owned 97.4
Bloomington ............................ 39 01/98 Owned 41.0
Camby .................................. 39 12/98 Owned 87.2
Crawfordsville ......................... 39 06/99 Owned 100.0
Elkhart ................................ 39 09/97 Leased 76.9
Fort Wayne ............................. 39 06/98 Owned 53.9
Franklin ............................... 39 05/98 Owned 46.2
Huntington ............................. 39 02/98 Owned 87.2
Jeffersonville ......................... 39 03/99 Owned 12.8
Kendallville ........................... 39 05/98 Owned 48.7
Lafayette .............................. 39 11/99 Owned 82.1
LaPorte ................................ 39 10/98 Owned 53.9
Logansport ............................. 39 02/98 Owned 89.7
Madison ................................ 39 10/97 Leased 74.4
Marion ................................. 39 03/98 Owned 43.6
Muncie ................................. 39 02/98 Owned 89.7
New Albany ............................. 39 05/98 Owned 74.4
New Castle ............................. 39 02/98 Owned 97.4
Seymour ................................ 39 05/98 Owned 94.9
Shelbyville ............................ 39 05/98 Owned 51.3
Warsaw ................................. 39 10/97 Owned 51.3
---
Sub Total ...................... 819 69.2
Michigan
Coldwater .............................. 39 10/99 Owned 66.7
Kalamazoo .............................. 39 11/99 Owned 66.7
Three Rivers ........................... 39 04/99 Owned 56.4
---
Sub Total ...................... 117 63.3
11
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
New Jersey
Bridgeton .............................. 39 03/98 Owned 89.7
Burlington ............................. 39 11/97 Owned 94.9
Egg Harbor ............................. 39 04/99 Owned 97.4
Glassboro .............................. 39 03/97 Leased 97.4
Millville .............................. 39 05/97 Leased 92.3
Pennsville ............................. 39 11/97 Owned 94.9
Rio Grande ............................. 39 11/97 Owned 94.9
Vineland ............................... 39 01/97 Leased 82.1
-----
Sub Total ...................... 312 93.0
Ohio
Bellefontaine .......................... 35 03/97 Owned 48.6
Bucyrus ................................ 35 01/97 Owned 100.0
Cambridge .............................. 39 10/97 Owned 100.0
Celina ................................. 39 04/97 Owned 76.9
Defiance ............................... 35 02/96 Owned 94.3
Findlay ................................ 39 03/97 Owned 56.4
Fremont ................................ 39 07/97 Leased 92.3
Greenville ............................. 39 02/97 Owned 100.0
Hillsboro .............................. 39 03/98 Owned 53.9
Kenton ................................. 35 03/97 Owned 91.4
Lima ................................... 39 06/97 Owned 28.2
Marion ................................. 39 04/97 Owned 92.3
Newark ................................. 39 10/97 Leased 100.0
Sandusky ............................... 39 09/98 Owned 59.0
Tiffin ................................. 35 06/97 Leased 85.7
Troy ................................... 39 03/97 Leased 100.0
Wheelersburg ........................... 39 09/97 Leased 59.0
Zanesville ............................. 39 12/97 Owned 92.3
-----
Sub Total ...................... 682 79.3
Pennsylvania
Butler ................................. 39 12/97 Owned 94.9
Hermitage .............................. 39 03/98 Owned 64.1
Indiana ................................ 39 03/98 Owned 71.8
Johnstown .............................. 39 06/98 Owned 56.4
Latrobe ................................ 39 12/97 Owned 92.3
Lower Burrell .......................... 39 01/97 Owned 102.6
New Castle ............................. 39 04/98 Owned 94.9
Penn Hills ............................. 39 05/98 Owned 79.5
Uniontown .............................. 39 06/98 Owned 92.3
-----
Sub Total ...................... 351 82.9
-----
Grand Total .................... 7,149 83.0%
=====
----------
(1) Reflects the date operations commenced, typically the licensure date for
developed residences and the date of purchase for acquired residences.
(2) As of December 31, 2000, we owned 115 residences and we leased 70
residences pursuant to long-term operating leases. Of the 115 owned
residences, 37 are subject to permanent mortgage financing, 3 are
12
subject to short-term loans which we intend to replace with permanent HUD
mortgage financing, 8 secure our litigation payable, 3 were added as
additional security for one lender and 16 were used as collateral for a
financing that occurred subsequent to December 31, 2000. See Notes 5, 8
and 19 to the consolidated financial statements included elsewhere herein.
(3) Occupancy is calculated based upon occupied units at December 31, 2000.
(4) As of December 31, 2000, Bremerton and Sumner had received notices of stop
placement of admissions and Sumner had received a notice of license
revocation from the State of Washington Department of Social and Health
Services. These matters were still outstanding at the time of this filing.
In 2000, we also leased office space for the corporate office in Portland,
Oregon and the regional offices in Vancouver, WA; Dallas, Texas; Omaha,
Nebraska; and Dublin, Ohio.
ITEM 3. LEGAL PROCEEDINGS
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our 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
subsequently dismissed from the litigation with prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health
("ISDH") had alleged that we were operating our Logansport, Indiana facility
known as McKinney House as a residential care facility without a license. We
believe our services have been consistent with those of a "Housing with Services
Establishment" (which is not required to be licensed) pursuant to Indiana Code
Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the
13
residents in our facilities and the services to be provided to them. We agreed
that prior to March 20, 2001, we will provide in-service training regarding the
Program Description throughout our Indiana facilities. Under the Program
Description, we must discharge residents who require certain types or levels of
care that we agreed not to provide in Indiana. We are currently implementing the
Program Description and, while its full impact is not now known, we do not
expect the impact to be material to our financial condition, results of
operations, cash flow and liquidity. Without admitting liability, we paid a
civil penalty of $10,000. The State dismissed the lawsuit against us with
prejudice.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
We held our Annual Meeting of Stockholders on January 16, 2001. The
meeting involved the election of six directors. The directors who were nominated
and elected to serve as directors until the 2002 Annual Meeting of Stockholders
and, in each case, until their respective successors are duly elected and
qualified were Wm. James Nicol, John M. Gibbons, Jill M. Krueger, Richard C.
Ladd, Bruce E. Toll and Leonard Tannenbaum. Shares represented at the annual
meeting were 15,669,644 of total outstanding shares of 17,120,745 to reach a
quorum of 91.5%. The results of the election were at least 87.3% in favor of
each of the above six directors.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock, par value $0.01 (the "Common Stock"), is listed on
the American Stock Exchange ("AMEX") under the symbol "ALF." The following
table sets forth the high and low closing sales prices of the Common Stock, as
reported by the AMEX, for the periods indicated.
1998 1999(1) 2000
---- ------- ----
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
Years ended December 31:
1st Quarter ...................... $21.63 $17.50 $14.50 $ 3.31 $2.38 $1.31
2nd Quarter ..................... 21.38 14.13 3.31 2.88 1.50 0.63
3rd Quarter....................... 18.00 12.44 - - 0.88 0.44
4th Quarter....................... 14.50 9.88 2.25 .81 0.63 0.19
----------
(1) On April 15, 1999, the AMEX halted trading in the Common Stock. Trading
was resumed on October 4, 1999 after our restatement related to the
years ended December 31, 1996 and 1997 and the first three fiscal
quarters of 1998 was completed.
As of December 31, 2000, we had approximately 99 holders of record of
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 current policy is to retain any earnings to finance the operations
of our business. In addition, certain outstanding indebtedness and certain lease
agreements restrict the payment of cash dividends. It is anticipated that the
terms of future debt financing may do so as well. Therefore, the payment of any
cash dividends on the Common Stock is unlikely in the foreseeable future.
Our common stock currently is listed on the AMEX under the symbol
"ALF," our 5.625% Convertible Subordinated Debentures due 2003 (the "5.625%
Debentures") currently are listed on AMEX under the symbol "ALS5E03" and our
6.0% Convertible Subordinated Debentures due 2002 (the "6.0% Debentures")
currently are listed on AMEX under the symbol "ALS6K02." AMEX recently
notified us that we had fallen below certain of AMEX's continued listing
guidelines and that it was reviewing our listing eligibility. In particular, we
have incurred losses from continued operations for each of its past six fiscal
years ending December 31, 2000, and the price per share of our common stock as
quoted on AMEX recently has been below the minimum bid price of $1.00 per share.
We may choose to effect a reverse stock split in the event that the price of our
common stock does not otherwise meet the minimum bid requirement. However, we
reported a net loss of $1.51 per basic and diluted share for the year ended
December 31, 2000, and may not report net income in the near future. We have
provided AMEX with additional information and have been involved in ongoing
discussions with AMEX in connection with its review of our listing eligibility.
While AMEX has decided not to delist us at this time, they will continue to
review our listing status on a quarterly basis.
If AMEX were to delist our securities, it is possible that the
securities would continue to trade on the over-the-counter market. However, the
extent of the public market for the securities and the availability of
quotations would depend upon such factors as the aggregate market value of each
class of the securities, the interest in maintaining a market in such securities
on the part of securities firms and other factors. There can be no assurance
that any public market for our securities will exist in the event that such
securities are delisted.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data. The consolidated statement of operations data for the years ended December
31, 1998, 1999 and 2000, as well as the consolidated balance sheet data as of
December 31, 1999 and 2000, are derived from our consolidated financial
statements included elsewhere in this report which have been audited by KPMG
LLP, independent auditors. You should read the selected financial data below in
conjunction with our consolidated financial statements, including the related
notes, and the information in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue ...................................................... $ 21,022 $ 49,605 $ 89,384 $ 117,489 $ 139,423
Operating expenses:
Residence operating expenses .............................. 14,055 31,591 57,443 81,767 95,032
Corporate general and administrative ...................... 1,864 4,050 11,099 21,178 18,365
Building rentals .......................................... 3,949 7,969 12,764 15,367 16,004
Depreciation and amortization ............................. 1,094 3,683 6,339 8,981 9,923
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 ............................. 20,962 47,293 99,611 132,433 149,344
-------- -------- -------- --------- ---------
Operating income (loss) ...................................... 60 2,312 (10,227) (14,944) (9,921)
-------- -------- -------- --------- ---------
Other income (expense):
Interest expense .......................................... (1,146) (4,946) (11,039) (15,200) (16,363)
Interest income ........................................... 455 1,526 3,869 1,598 786
Gain (loss) on sale of assets ................................ (854) (1,250) (651) (127) 13
Loss on sale of marketable securities ........................ -- -- -- -- (368)
Debenture conversion costs ................................... (426) -- -- -- --
Other income (expense), net .................................. (4) (121) (1,174) (260) 67
-------- -------- -------- --------- ---------
Total other expense .................................. (1,975) (4,791) (8,995) (13,989) (15,865)
-------- -------- -------- --------- ---------
Loss before cumulative effect of change in accounting principle (1,915) (2,479) (19,222) (28,933) (25,786)
Cumulative effect of change in accounting principle ........... -- -- (1,523) -- --
-------- -------- -------- --------- ---------
Net loss ..................................................... $ (1,915) $ (2,479) $(20,745) $ (28,933) $ (25,786)
======== ======== ======== ========= =========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in accounting principle $ (0.23) $ (0.21) $ (1.18) $ (1.69) $ (1.51)
Cumulative effect of change in accounting principle ........... -- -- (0.09) -- --
--------- -------- -------- --------- ---------
Basic and diluted net loss per common share .................. $ (0.23) $ (0.21) $ (1.27) $ (1.69) $ (1.51)
========= ======== ======== ========= =========
Basic and diluted weighted average common shares outstanding . 8,404 11,871 16,273 17,119 17,121
========= ======== ======== ========= =========
AT DECEMBER 31,
---------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ............... $ 2,105 $ 63,269 $ 55,036 $ 7,606 $ 9,889
Working capital (deficit) ................ (27,141) 40,062 43,856 37 (16,983)
Total assets ............................ 147,223 324,367 414,669 346,188 336,458
Long-term debt, excluding current portion 49,663 157,700 266,286 233,199 231,657
Shareholders' equity .................... 56,995 132,244 119,197 89,344 63,886
16
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE, OCCUPANCY AND AVERAGE RENTAL DATA)
1999 QUARTERLY FINANCIAL DATA
----------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO
RESULTS OF OPERATIONS QTR QTR QTR QTR DATE
--- --- --- --- -------
Revenue .......................... $ 26,583 $ 28,479 $ 30,398 $ 32,029 $ 117,489
Operating income (loss) .......... (4,243) (6,115) (2,561) (2,025) (14,944)
Net loss ......................... (7,660) (9,006) (6,256) (6,011) (28,933)
Basis and diluted net loss per
common share(1) ................ $ (0.45) $ (0.53) $ (0.37) $ (0.35) $ (1.69)
Basic and diluted weighted
average common shares
outstanding .................... 17,116 17,116 17,121 17,121 17,119
Average monthly rental rate per
unit ........................... $ 1,871 $ 1,881 $ 1,903 $ 1,926 $ 1,898
Average occupancy rate(2) ........ 72.9% 74.3% 76.0% 77.5% 75.1%
End of period occupancy rate(2) .. 73.2% 75.9% 76.5% 78.7% 78.7%
2000 QUARTERLY FINANCIAL DATA
-----------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO
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 ......................... (3,791) (3,821) (12,445) (5,729) (25,786)
Basis and diluted net loss per
common share(1) ................ (.22) $ (.22) $ (.73) $ (.34) $ (1.51)
Basic and diluted weighted
average common shares
outstanding .................... 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(2) ........ 78.4% 79.8% 81.4% 83.1% 80.7%
End of period occupancy rate(2) .. 79.6% 81.6% 82.6% 83.0% 83.0%
-----------------
(1) Quarter net loss per share amounts may not add to the full year total
due to rounding.
(2) Based upon available units.
17
ITEM 7. 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, 2000, 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, 2000, we
operated 185 residences (7,149 units), of which we owned 115 residences (4,515
units) and leased 70 residences (2,634 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
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 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 - We depend on reimbursement by third-party payors."
We believe that our current cash on hand, cash available from
operations and financing by Heller will be sufficient to meet our working
capital needs through July 2002. However, we will have up to $45.0 million in
principal from the Heller financing maturing on August 31, 2002 (unless the five
wholly owned subsidiaries, which are the borrowers, are able to and do extend
the maturity dates for up to three six-month extensions), and have $161.3
million (less any amounts repurchased with the Heller line of credit) in
principal amount of convertible debentures maturing between November 2002 and
May 2003. We also expect the cost to maintain our long-lived assets in their
present condition to increase; however, we cannot yet estimate the financial
impact since our experience is limited due to the newness of these assets.
We are currently exploring various alternatives to address our
financing needs and the maturities of our long-term debt. The Heller and Red
Mortgage financings have been sought to fund potential working capital needs, to
fund the cost of our shareholders' litigation settlement, the repurchase of 16
of our leased properties and the repurchase of some of our convertible
debentures in the open market. We expect to replace the Red Mortgage financing
with long-term HUD mortgage loans and we also expect to replace a substantial
portion of
18
the Heller financing with long-term HUD mortgage loans, to the extent the
processing time and increasing limitations by HUD on submission of applications
and amount financed permit. In addition, we are also considering issuing new
securities with longer maturities to the holders of our convertible debentures
in exchange for some or all of their debentures. We have 48 unencumbered
residences available to use as collateral for these various alternatives, 47 of
which are subject to negative covenants not to encumber them except under
certain circumstances, including the use of the net proceeds of the financing
which they secure for the reduction of our indebtedness to our convertible
debenture holders. No commitments are currently in place and there can be no
assurance that our efforts will be successful, in which event we will have to
consider other alternatives, including reorganization under the bankruptcy laws
or raising highly dilutive capital through the issuance of equity or
equity-related securities.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, operating
expenses as a percentage of revenue.
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
---- ---- ----
Revenue ................................................................... 100.0% 100.0% 100.0%
Operating expenses:
Residence operating expenses ........................................... 64.3% 69.6% 68.1%
Corporate general and administrative ................................... 12.4% 18.0% 13.2%
Building rentals ....................................................... 12.8% 12.0% 10.6%
Building rentals to related party ...................................... 1.5% 1.1% 0.9%
Depreciation and amortization .......................................... 7.1% 7.6% 7.1%
Litigation settlement .................................................. -- -- 7.2%
Terminated merger expense .............................................. 1.2% 0.2% --
Site abandonment costs ................................................. 2.7% 4.2% --
Write-off of impaired assets and related expenses ...................... 9.5% -- --
---- ---- ----
Total operating expenses .......................................... 111.4% 112.7% 107.1%
---- ---- ----
Operating loss ............................................................ (11.4)% (12.7)% (7.1)%
---- ---- ----
Other income (expense):
Interest expense ....................................................... (12.4)% (12.9)% (11.7)%
Interest income ........................................................ 4.3% 1.4% 0.6%
Gain (loss) on sale of assets .......................................... (0.7)% (0.1)% --
Loss on sale of marketable securities .................................. -- -- (0.3)%
Other income (expense), net ............................................ (1.3)% (0.2)% --
---- ---- ----
Total other income (expense) ...................................... (10.1)% (11.9)% (11.4)%
---- ---- ----
Loss before cumulative effect of change in accounting principle ........... (21.5)% (24.6)% (18.5)%
Cumulative effect of change in accounting principle ....................... (1.7)% -- --
---- ---- ----
Net loss .................................................................. (23.2)% (24.6)% (18.5)%
===== ===== =====
19
The following table sets forth, for the periods presented, the number
of total residences and units operated, average occupancy rates and the sources
of our 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,
------------------------
TOTAL RESIDENCES 1998 1999 2000
---------------- ---- ---- ----
Residences operated (end of period) ................................. 165 185 185
Units operated (end of period) ...................................... 6,329 7,148 7,149
Average occupancy rate (based on occupied units) .................... 72.3% 75.1% 80.7%
Sources of revenue:
Medicaid state portion ........................................... 10.7% 10.4% 11.1%
Medicaid resident portion ........................................ 5.8% 5.9% 6.2%
Private .......................................................... 83.5% 83.7% 82.7%
----- ----- -----
Total ....................................................... 100.0% 100.0% 100.0%
===== ===== =====
The following table sets forth, for the periods presented, the total
number of residences and units operated, average occupancy rates and the sources
of our revenue for the 59 Same Store Residences included in operating results
for all of fiscal years 1997 and 1998, and the 108 Same Store Residences
included in operating results for all of fiscal years 1998 and 1999 and the 165
Same Store Residences included in operating results for all of fiscal years 1999
and 2000. Same Store Residences are defined as those residences, which were
operating throughout comparable periods.
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------
SAME STORE RESIDENCES 1997 1998 1998 1999 1999 2000
--------------------- ---- ---- ---- ---- ---- ----
Residences operated (end of period) .................. 59 59 108 108 165 165
Units operated (end of period) ....................... 2,104 2,157 4,035 4,048 6,350 6,351
Average occupancy rate (based on occupied
units) ............................................... 86.9% 93.5% 80.5% 84.7% 77.8% 83.7%
Sources of revenue:
Medicaid state portion ............................... 11.9% 15.1% 12.7% 13.4% 10.8% 12.1%
Medicaid resident portion ............................ 6.5% 8.7% 6.9% 7.7% 6.1% 6.7%
Private .............................................. 81.6% 76.2% 80.4% 78.9% 83.1% 81.2%
---- ---- ---- ---- ---- ----
Total ................................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
The following table sets forth, for the periods presented, the results
of operations for the 59 Same Store Residences included in operating results for
all of fiscal years 1997 and 1998, and the 108 Same Store Residences included in
operating results for all of fiscal years 1998 and 1999 and the 165 Same Store
Residences included in operating results for all of fiscal years 1999 and 2000
(in thousands).
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------
SAME STORE RESIDENCES 1997 1998 1998 1999 1999 2000
--------------------- ---- ---- ---- ---- ---- ----
Revenue................................... $38,274 $42,002 $70,920 $77,881 $113,511 $127,943
Residence operating expenses.............. 22,908 24,801 43,659 52,154 77,396 85,689
------ ------ ------ ------ -------- --------
Residence operating income ............... 15,366 17,201 27,261 25,727 36,115 42,254
Building rentals ......................... 5,635 6,375 12,385 14,825 15,336 15,977
Depreciation and amortization ............ 2,280 1,647 3,451 3,067 7,181 7,181
------ ------ ------ ------ -------- --------
Total other operating expenses ... 7,915 8,022 15,836 17,892 22,517 23,158
------ ------ ------ ------ -------- --------
Operating income.................. $ 7,451 $ 9,179 $11,425 $ 7,835 $ 13,598 $ 19,096
======= ======= ======= ======= ======== ========
20
Year ended December 31, 2000 compared to year ended December 31, 1999:
CONSOLIDATED SAME STORE RESIDENCES
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------
INCREASE/ INCREASE/
1999 2000 (DECREASE) 1999 2000 (DECREASE)
---- ---- ---------- ---- ---- ----------
(IN MILLIONS) (IN MILLIONS)
Revenue ...................................... $117.5 $139.4 18.6% $113.5 $127.9 12.7%
Operating expenses:
Residence operating expenses ............... 81.8 95.0 16.1% 77.4 85.7 10.7%
Corporate general and
administrative ........................... 21.2 18.4 (13.2)% -- -- --
Building rentals ........................... 15.4 16.0 3.9% 15.3 16.0 4.6%
Depreciation and amortization .............. 9.0 9.9 10.0% 7.2 7.2 --
Litigation settlement ...................... -- 10.0 100.0% -- -- --
Terminated merger expense .................. 0.2 -- (100.0)% -- -- --
Site abandonment costs ..................... 4.9 -- (100.0)% -- -- --
----- ----- ---- ------ ----- ---
Total operating expenses ............. 132.5 149.3 12.7% 99.9 108.9 9.0%
----- ----- ---- ------ ----- ---
Operating income (loss) .............. $(15.0) $ (9.9) 34.0% $ 13.6 $ 19.0 39.7%
====== ====== ==== ====== ====== ====
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 year ended December 31, 2000 (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).
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
stores 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%.
21
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 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 these 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
22
year of depreciation associated with the 20 owned residences that commenced
operations during the 1999 Period.
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 1999, the Company wrote-off $4.9 million of
capitalized cost relating to the abandonment of all remaining development sites,
with the exception of 10 sites where the Company owns 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.
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.
23
Year ended December 31, 1999 compared to year ended December 31, 1998:
CONSOLIDATED SAME STORE RESIDENCES
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------- --------------------------------
INCREASE/ INCREASE/
1998 1999 (DECREASE) 1998 1999 (DECREASE)
---- ---- ---------- ---- ---- ----------
(IN MILLIONS) (IN MILLIONS)
Revenue ........................................... $ 89.4 $117.5 31.4% $ 70.9 $ 77.9 9.9%
Operating expenses:
Residence operating expenses ..................... 57.4 81.8 42.5% 43.7 52.2 19.5%
Corporate general and administrative ............. 11.1 21.2 91.0% -- -- --
Building rentals ................................. 12.8 15.4 20.3% 12.4 14.8 19.4%
Depreciation and amortization .................... 6.3 9.0 42.9% 3.5 3.1 (11.4)%
Terminated merger expense ........................ 1.1 0.2 (81.8)% -- -- --
Site abandonment costs ........................... 2.4 4.9 104.2% -- -- --
Write off of impaired assets and
related expenses ............................... 8.5 -- (100.0)% -- -- --
------ ------ ------ ------ ------ ------
Total operating expenses ..................... 99.6 132.5 33.0% 59.6 70.1 17.6%
------ ------ ------ ------ ------ ------
Operating income (loss) ...................... $(10.2) $(15.0) 47.1% $ 11.3 $ 7.8 (31.0)%
====== ====== ====== ====== ====== ======
We incurred 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") as compared to a net loss (after the cumulative effect of
change in accounting principle and other charges as described below) of $20.7
million, or $1.27 per basic and diluted share, on revenue of $89.4 million for
the year ended December 31, 1998 (the "1998 Period").
We had certificates of occupancy for 185 residences, all of which were
included in the operating results as of the end of the 1999 Period as compared
to certificates of occupancy for 173 residences, 165 of which were included in
the operating results as of the end of the 1998 Period. Of the residences
included in operating results as of the end of the 1999 Period, we owned 115
residences and leased 70 residences (all of which were operating leases) as
compared to 95 owned residences and 70 leased residences (54 of which were
operating leases and 16 of which were accounted for as financings) as of the end
of the 1998 Period.
Revenue. Revenue was $117.5 million for the 1999 Period as compared to
$89.4 million for the 1998 Period, an increase of $28.1 million or 31.4%.
The increase includes:
- $20.8 million related to the full year impact of the 57
residences (2,302 units) which opened during the 1998 Period;
- $3.9 million related to the opening of an additional 20
residences (798 units) during the 1999 Period; and
- $7.0 million was attributable to the 108 Same Store Residences
(4,048 units).
These increases were offset by:
- a reduction in revenues from home health operations of $3.1
million in the 1999 Period (the Company exited all home health
operations in 1998 and did not earn any revenues for such
services during the 1999 Period); and
- a reduction of $558,000 in revenues for a residence the
Company leased and operated for nine months of the 1998
Period. The lease was terminated September 30, 1998.
Revenue from the Same Store Residences was $77.9 million for the 1999
Period as compared to $70.9 million for the 1998 Period, an increase of $7.0
million or 9.9%. The increase in revenue from Same Store Residences was
attributable to a combination of an increase in average occupancy to 84.7% and
average
24
monthly rental rate to $1,873 for the 1999 Period as compared to average
occupancy of 80.5% and average monthly rental rate of $1,823 for the 1998
Period.
Residence Operating Expenses. Residence operating expenses were $81.8
million for the 1999 Period as compared to $57.4 million for the 1998 Period, an
increase of $24.4 million or 42.5%.
The increase includes:
- $13.9 million related to the full year impact of the 57
residences (2,302 units) which opened during the 1998 Period;
- $4.3 million related to the opening of an additional 20
residences (798 units) during the 1999 Period; and
- $8.5 million was attributable to the 108 Same Store Residences
(4,048 units).
These increases were offset by a reduction in expenses associated with
our home health operations of $2.3 million. We exited our home health operations
during the 1998 Period. Expenses incurred during the 1999 Period for home health
operations were related to the closure of the home health operations and are
included in Corporate, General and Administrative expenses.
Residence operating expenses for the Same Store Residences were $52.2
million for the 1999 Period as compared to $43.7 million for the 1998 Period, an
increase of $8.5 million or 19.4%. This increase results from the additional
expenses incurred in connection with the increase in occupancy at the Same Store
Residences during the period.
Corporate General and Administrative. Corporate general and
administrative expenses as reported were $21.2 million for the 1999 Period as
compared to $11.1 million for the 1998 Period. Our corporate general and
administrative expenses before capitalized payroll costs were $21.8 million for
the 1999 Period as compared to $12.9 million for the 1998 Period, an increase of
$8.9 million. Of the increase:
- $1.7 million, or 19.1%, related to increased payroll costs,
including severance costs of $1.0 million for certain
terminated corporate employees including costs associated with
severance and consulting agreements between us and our former
chief executive officer;
- $4.3 million, or 48.3%, related to additional professional
fees primarily associated with increased 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;
- $1.8 million, or 20.2%, related to the final operations of our
home health business, including provision for bad debt of
$510,000;
- $1.1, or 12.4% related to an increase in travel and other
related expenses associated with the increase in number of
regional offices from three to five.
We capitalized $1.8 million and $617,000 of payroll costs associated
with the development of new residences for each of the 1998 Period and the 1999
Period.
Building Rentals. Building rentals were $15.4 million for the 1999
Period as compared to $12.8 million for the 1998 Period, an increase of $2.6
million. This increase was primarily attributable to $2.5 million of additional
rental expense associated with the March amendment of 16 of our leases, as
discussed above, which were previously accounted for as financings. As a result
of the amendment, the leases have been reclassified as operating leases for the
last nine months of the 1999 Period.
As of the end of the 1999 Period we had 70 operating leases as compared
to 54 operating leases as of the end of the 1998 Period.
25
Depreciation and Amortization. Depreciation and amortization was $9.0
million for the 1999 Period as compared to $6.3 million for the 1998 Period, an
increase of $2.7 million. Depreciation expense was $8.7 million and amortization
expense was $294,000 for the 1999 Period as compared to $5.9 million and
$398,000, respectively, for the 1998 Period. The increase in depreciation is the
result of:
- the full year effect of depreciation on the 53 owned
residences which commenced operations during the 1998 Period;
and
- depreciation associated with the 20 owned residences that
commenced operations during the 1999 Period.
The increase in depreciation was offset by the impact of the March
amendment of 16 of our leases, as discussed above, which were previously
accounted for as financings. As a result of this amendment, the 1999 Period
reflects 3 months of depreciation expense associated with these facilities as
compared to 12 months in the 1998 Period.
Terminated Merger Expense. During the fourth quarter of the 1998
Period, we recorded a $1.1 million charge relating to our terminated merger with
American Retirement Corporation ("ARC"). On February 1, 1999 we agreed with
ARC to terminate our previously announced merger agreement, which had been
entered into during November 1998. We incurred approximately $228,000 of
additional merger related expenses during the first quarter of 1999.
Site Abandonment Costs. As a result of our decision to reduce the
number of new residence openings during the 1998 Period and beyond, we wrote-off
$2.4 million of capitalized costs during the 1998 Period relating to the
abandonment of certain development sites. In 1999, the Company wrote-off $4.9
million of capitalized cost relating to the abandonment of all remaining
development sites, with the exception of 10 sites where the Company owns the
land.
Write-Off of Impaired Assets and Related Expenses. In the 1998 Period,
we recorded an $8.5 million charge consisting of a $7.5 million write-off of
unamortized goodwill resulting from the exit from our home health operations and
a $1.0 million provision for exit costs associates with closing such home health
care operations. We recorded no such charges for the 1999 Period.
Interest Expense. Interest expense was $15.2 million for the 1999
Period as compared to $11.0 million for the 1998 Period. Gross interest expense
for the 1999 Period was $17.2 million as compared to $17.0 million for the 1998
Period, a net increase of $200,000.
Interest expense increased by:
- $1.4 million due to interest expense related to the April 1998
issuance of 5.625% Debentures; and
- $2.3 million related to the new mortgage financing entered
into during the 1998 Period.
This increase was offset by decreases in interest expense of:
- $616,000 as a result of the redemption in August 1998 of the
7.0% Convertible Subordinated Debentures due 2005 (the "7.0%
Debentures");
- $2.5 million as a result of the amendment of the 16 leases
resulting in a change from financing obligations to operating
leases; and
- $380,000 as a result of the termination of the joint venture
agreements in February, 1999.
We capitalized $6.0 million of interest expense for the 1998 Period
compared to $2.0 million for the 1999 Period.
Interest Income. Interest income was $1.6 million for the 1999 Period
as compared to $3.9 million for the 1998 Period, a decrease of $2.3 million. The
decrease is related to interest income earned on lower average cash balances
during the 1999 Period primarily resulting from the completion of construction
on 20 residences which opened during 1999.
26
Loss on Sale of Assets. Loss on sale of assets was $127,000 for the
1999 Period as compared to $651,000 for the 1998 Period. The loss during the
1999 Period was related to the disposal of leasehold improvements associated
with relocating our corporate offices in January 1999. Of the loss on sale of
assets recorded during the 1998 Period, $547,000 resulted from losses pertaining
primarily to additional capital costs incurred during the 1998 Period on sale
and leaseback transactions completed in the 1997 Period and $75,000 related to
losses incurred in connection with terminating one operating lease during the
1998 Period. The remainder of the loss on sale of assets was attributable to
losses incurred in connection with one sale and leaseback transaction completed
during the 1998 Period.
Other Income (Expense). Other expense was $260,000 for the 1999 Period
as compared to $1.2 million for the 1998 Period. 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. Other expense during the 1998 Period included
$907,000 of financing costs which were expensed during the period. Of such
amount, $614,000 related to financing costs which had been previously
capitalized in association with a financing commitment that was terminated
during the fourth quarter 1998 and the remaining $293,000 was associated with
the termination of a swap agreement at the end of the third quarter of the 1998
Period. In addition, other expenses during the 1998 Period included $210,000 of
administrative fees incurred in connection with our repurchase of the joint
venture partner's interest in the operations of 21 residences during the period.
Cumulative Effect of Change in Accounting Principle. We adopted AICPA
Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP
98-5") effective January 1, 1998. Under SOP 98-5, start-up costs associated
with the opening of new residences are expensed as incurred. We recognized a
charge of $1.5 million during the 1998 Period associated with adopting such
provision. We had no changes in accounting principle during the 1999 Period.
Net Loss. As a result of the above, net loss (after the cumulative
effect of change in accounting principle and other charges as described above)
was $28.9 million or $1.69 per basic and diluted share for the 1999 Period,
compared to a net loss of $20.7 million or $1.27 loss per basic and diluted
share for the 1998 Period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had a working capital deficit of $17.0 million
(including current portion of settlement payable of $7.8 million) and
unrestricted cash and cash equivalents of $9.9 million.
Net cash provided by operating activities was $700,000 during the year
ended December 31, 2000.
Net cash used in investing activities totaled $808,000 during the year
ended December 31, 2000. The primary sources of cash were $1.6 million related
to the sale of marketable securities and a decrease of $1.1 million of
restricted cash due to the release of funds restricted per the terms of
agreements with U.S. Bank. We used $3.5 million of cash in investing activities
related to capital expenditures.
Net cash provided by financing activities totaled $2.4 million during
the year ended December 31, 2000. Proceeds of $4.0 were received on a short-term
bridge loan secured by three previously encumbered assets. The use of cash in
financing activities was due to principal payments on long term debt of $1.6
million.
On March 12, 2001, we amended certain loan documents with U.S. Bank.
Pursuant to the amendment, we agreed to pay fees of $34,700 in exchange for the
following: the modification of certain financial covenants, and the waiver of
U.S. Bank's right to declare an event of default for our failure to comply with
certain financial covenants as of December 31, 2000 and for our anticipated
failure to comply with certain financial covenants for the three months ending
March 31, 2001. The amendment also provides the following: approval for us to
repurchase for cash up to $25.0 million in face value of our convertible
debentures prior to maturity; a requirement that we 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; and the
requirement that U.S. Bank release such deposits to us upon satisfactory
resolution of the regulatory action. 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. In addition, certain of our leases and
27
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.
In November 2000, we entered into a short-term bridge loan with Red
Mortgage in the amount of $4.0 million secured by three previously unencumbered
properties. This loan matures on August 1, 2001, requires monthly interest-only
payments and bears interest at the greater of 10% or LIBOR plus 3.5%. We intend
to replace this loan with long-term HUD financing prior to its maturity.
On March 2, 2001, we entered into an agreement with Heller for a $45.0
million line of credit, under which five wholly owned subsidiaries are the
jointly and severally liable borrowers of any funds drawn. This line matures on
August 31, 2002 and requires monthly interest-only payments until maturity. This
line bears an interest rate of 3.85% over the three-month LIBOR rate floating
monthly and will be secured by up to 32 properties owned by the borrowers and
leased to another of our affiliates or us. We guaranteed the line. In addition
to having paid a commitment fee of $450,000, we are to pay funding fees of 0.5%
of the principal amount funded at the time of funding and pay an exit fee of
1.0% of the principal being repaid. The borrowers may elect to exercise up to
three six-month extensions of the maturity date, subject to the satisfaction of
certain conditions. We intend to replace a substantial portion of this financing
with long-term HUD financing to the extent the processing time and increasing
limitations by HUD on submission of applications and amount financed permit.
While the line remains outstanding, we have agreed that we will not sell or
grant mortgages on our remaining unencumbered properties, except one, unless the
net proceeds are used to repurchase our convertible debentures or otherwise
reduce our indebtedness (if approved by Heller). Proceeds of the line may be
used for the payment of our shareholders' litigation settlement, the repurchase
of 16 of our leased properties and the repurchase of some of our convertible
debentures. Our initial draw on this line was $1.3 million on March 2, 2001.
Our ability to satisfy our obligations, including payments with respect
to our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations, and to
a certain extent, general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We made two payments
of approximately $2.3 million each towards our litigation settlement on October
23, 2000 and January 23, 2001 and on November 1, 2000 we made our $4.7 million
semi-annual interest payment on our convertible subordinated debentures. We are
obligated to pay the remaining $5.6 million related to the litigation settlement
in two installments of approximately $2.3 million each, due on April 23, 2001
and July 23, 2001, with final payment of $1.0 million due within 90 days
following the July 23, 2001 payment. Additionally, our next $4.7 million
semi-annual interest payment on our convertible subordinated debentures is due
on May 1, 2001. We may also be required to reimburse our insurance carriers for
up to $4.0 million of costs incurred by the carriers in connection with the
securityholder litigation, depending on the outcome of a pending dispute over
coverage (see Part I, Item 3 of this report).
We believe that our current cash on hand, cash available from
operations and financing by Heller will be sufficient to meet our working
capital needs through July 2002. However, we will have up to $45.0 million in
principal from the Heller financing maturing on August 31, 2002 (unless the five
wholly owned subsidiaries, which are the borrowers, are able to and do extend
the maturity dates for up to three six-month extensions), and have $161.3
million (less any amounts repurchased with the Heller line of credit) in
principal amount of convertible debentures maturing between November 2002 and
May 2003. We also expect the cost to maintain our long-lived assets in their
present condition to increase; however, we cannot yet estimate the financial
impact since our experience is limited due to the newness of these assets.
Approximately $27.2 million of our indebtedness was secured by letters
of credit as of December 31, 2000 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.
28
We are currently exploring various alternatives to address our
financing needs and the maturities of our long-term debt. The Heller and Red
Mortgage financings have been sought to fund potential working capital needs, to
fund the cost of our shareholders' litigation settlement, the repurchase of 16
of our leased properties and the repurchase of some of our convertible
debentures in the open market. We expect to replace the Red Mortgage financing
with long-term HUD mortgage loans and we also expect to replace a substantial
portion of the Heller financing with long-term HUD mortgage loans, to the extent
the processing time and increasing limitations by HUD on submission of
applications and amount financed permit. In addition, we are also considering
issuing new securities with longer maturities to the holders of our convertible
debentures in exchange for some or all of their convertible debentures. We have
48 unencumbered residences available to use as collateral for these various
alternatives, 47 of which are subject to negative covenants not to encumber them
except under certain circumstances, including the use of the net proceeds of the
financing which they secure for the reduction of our indebtedness to our
convertible debenture holders. No commitments are currently in place and there
can be no assurance that our efforts will be successful, in which event we will
have to consider other alternatives, including reorganization under the
bankruptcy laws or raising highly dilutive capital through the issuance of
equity or equity-related securities.
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
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instrument and Hedging Activities, as amended, which establishes
accounting and reporting standards for derivative instruments and hedging
activities by requiring that all derivatives be recognized into the balance
sheet and measured at fair value. The effective date for SFAS No. 133 for the
Company is January 1, 2001. At the current time, we do not have any derivative
financial instruments.
RISK FACTORS
Set forth below are the risks that we believe are material. This report
on Form 10-K, including the risks discussed below, 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 degree to which our future
operating results and financial condition will be affected by litigation
described in this report, (iii) the possibility that we will experience slower
fill-up of our newer residences and/or declining occupancy in our stabilized
residences, either of which would adversely affect residence revenues and
operating margins, (iv) our ability to operate our facilities in compliance with
evolving regulatory requirements and (v) the possibility that we will not be
able to obtain financing needed to fund our future operations and retire our
6.0% Debentures and our 5.625% Debentures due in 2002 and 2003, respectively. In
light of such risks and uncertainties, our actual results could differ
materially from such forward-looking statements. Except as may be required by
law, 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.
29
WE ARE HIGHLY LEVERAGED; OUR LOAN AND LEASE AGREEMENTS CONTAIN FINANCIAL
COVENANTS.
We are highly leveraged. We had total indebtedness, including short
term portion, of $237.3 million as of December 31, 2000. In addition, we had
shareholders' equity of $63.9 million as of December 31, 2000. The degree to
which we are leveraged could have important consequences, including:
- making it more 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 or leases, thereby reducing the availability of such
cash flow to fund working capital, capital expenditures or
other general corporate purposes;
- 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. On March 12, 2001, we amended
certain loan documents with U.S. Bank. Pursuant to the amendment, we agreed to
pay fees of $34,700 in exchange for the following: the modification of certain
financial covenants, and the waiver of U.S. Bank's right to declare an event of
default for our failure to comply with certain financial covenants as of
December 31, 2000 and for our anticipated failure to comply with certain
financial covenants for the three months ending March 31, 2001. The amendment
also provides for the following: approval for us to repurchase for cash up to
$25.0 million in face value of our convertible debentures prior to maturity; a
requirement that we 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; and the requirement that U.S. Bank
release such deposits to us satisfactory resolution of the regulatory action. 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.
In addition, 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, we could
experience a material adverse effect on our financial condition if any lender or
lessor notifies us that we are in any such cross-default under any debt
instrument or lease.
WE WILL REQUIRE ADDITIONAL FINANCING.
Our ability to satisfy our obligations, including payments with respect
to our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations, and to
a certain extent, general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We made two payments
of approximately $2.3 million each towards our litigation settlement on October
23, 2000 and January 23, 2001 and on November 1, 2000 we made our $4.7 million
semi-annual interest payment on our convertible subordinated debentures. We are
obligated to pay the remaining $5.6 million related to the litigation settlement
in two installments of approximately $2.3 million each, due on April 23, 2001
and July 23, 2001, with final payment of $1.0 million due within 90 days
following the July 23, 2001 payment. Additionally, our next $4.7 million
semi-annual interest payment on our convertible subordinated debentures is due
on May 1, 2001. We may also be required to reimburse our
30
insurance carriers for up to $4.0 million of costs incurred by the carriers in
connection with the securityholder litigation, depending on the outcome of a
pending dispute over coverage (see Part I, Item 3 of this report).
We believe that our current cash on hand, cash available from
operations and financing by Heller will be sufficient to meet our working
capital needs through July 2002. However, we will have up to $45.0 million in
principal from the Heller financing maturing on August 31, 2002 (unless the five
wholly owned subsidiaries, which are the borrowers, are able to and do extend
the maturity dates for up to three six-month extensions), and have $161.3
million (less any amounts repurchased with the Heller line of credit) in
principal amount of convertible debentures maturing between November 2002 and
May 2003. We also expect the cost to maintain our long-lived assets in their
present condition to increase; however, we cannot yet estimate the financial
impact since our experience is limited due to the newness of these assets.
We are currently exploring various alternatives to address our
financing needs and the maturities of our long-term debt. The Heller and Red
Mortgage financings have been sought to fund potential working capital needs, to
fund the cost of our shareholders' litigation settlement, the repurchase of 16
of our leased properties and the repurchase of some of our convertible
debentures in the open market. We expect to replace the Red Mortgage financing
with long-term HUD mortgage loans and we also expect to replace a substantial
portion of the Heller financing with long-term HUD mortgage loans, to the extent
the processing time and increasing limitations by HUD on submission of
applications and amount financed permit. In addition, we are also considering
issuing new securities with longer maturities to the holders of our convertible
debentures in exchange for some or all of their debentures. We have 48
unencumbered residences available to use as collateral for these various
alternatives, 47 of which are subject to negative covenants not to encumber them
except under certain circumstances, including the use of the net proceeds of the
financing which they secure for the reduction of our indebtedness to our
convertible debenture holders. No commitments are currently in place and there
can be no assurance that our efforts will be successful, in which event we will
have to consider other alternatives, including reorganization under the
bankruptcy laws or raising highly dilutive capital through the issuance of
equity or equity-related securities.
Approximately $27.2 million of our indebtedness was secured by letters
of credit as of December 31, 2000 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.
POSSIBLE AMERICAN STOCK EXCHANGE DELISTING.
Our common stock currently is listed on the AMEX under the symbol
"ALF," our 5.625% Debentures currently are listed on AMEX under the symbol
"ALS5E03" and our 6.0% Debentures currently are listed on AMEX under the
symbol "ALS6K02." AMEX recently notified us that we had fallen below certain
of AMEX's continued listing guidelines and that it was reviewing our listing
eligibility. In particular, we have incurred losses from continued operations
for each of its past six fiscal years ending December 31, 2000, and the price
per share of our common stock as quoted on AMEX recently has been below the
minimum bid price of $1.00 per share. We may choose to effect a reverse stock
split in the event that the price of our common stock does not otherwise meet
the minimum bid requirement. However, we reported a net loss of $1.51 per basic
and diluted share for the year ended December 31, 2000, and may not report net
income in the near future. We have provided AMEX with additional information and
have been involved in ongoing discussions with AMEX in connection with its
review of our listing eligibility. While AMEX has decided not to delist us at
this time, they will continue to review our listing status on a quarterly basis.
If AMEX were to delist our securities, it is possible that the
securities would continue to trade on the over-the-counter market. However, the
extent of the public market for the securities and the availability of
quotations would depend upon such factors as the aggregate market value of each
class of the securities, the interest in maintaining a market in such securities
on the part of securities firms and other factors. There can
31
be no assurance that any public market for our securities will exist in the
event that such securities are delisted.
WE MAY INCUR SIGNIFICANT COSTS AND LIABILITY AS A RESULT OF LITIGATION.
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our 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
subsequently dismissed from the litigation with prejudice.
The total cost of the settlement was approximately $10,020,000 (less
$1.0 million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Although we believe we have strong defenses regarding our dispute with
the insurance carriers, we cannot predict the outcome of this litigation and
currently are unable to evaluate the likelihood of success or the range of
possible loss. However, if such litigation was determined adversely to us, such
a determination could have a material adverse effect on our financial condition,
results of operations, cash flow and liquidity.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health
("ISDH") had alleged that we were operating our Logansport, Indiana facility
known as McKinney House as a residential care facility without a license. We
believe our services have been consistent with those of a "Housing with
Services Establishment" (which is not required to be licensed) pursuant to
Indiana Code Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the residents in our facilities and the services to be provided to them. We
agreed that prior to March 20, 2001, we will provide in-service training
regarding the Program Description throughout our Indiana facilities. Under the
Program Description, we must discharge residents who require certain types or
levels of care that we agreed not to provide in Indiana. We are currently
implementing the Program Description and, while its full impact is
32
not now known, we do not expect the impact to be material to our financial
condition, results of operations, cash flow and liquidity. Without admitting
liability, we paid a civil penalty of $10,000. The State dismissed the lawsuit
against us with prejudice.
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. However, if these matters were determined
adversely to us, such a determination could have a material adverse effect on
our financial condition, results of operations, cash flow and liquidity.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION.
The operation of assisted living facilities and the provision of health
care services are subject to 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.
Our cost to comply 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 that we had 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 "Confidentiality of Medical Information," "Restrictions imposed by laws
benefiting disabled persons" and "Medical waste."
In the ordinary course of our 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, we 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. These adverse actions can include:
- the imposition of fines, of which we paid $16,000 in the
aggregate in 2000;
- temporary stop placement of admission of new residents, or
imposition of other conditions to admission of new residents
to the facility, which included 4 residences (2 in Washington
and 2 in Idaho) in 2000, 2 of which are still in stop
placement as of this date;
- termination of a facility's Medicaid contract;
33
- conversion of license to provisional status; and
- suspension or revocation of a facility's license, which in
2000 included one residence in Washington against which the
state has commenced license revocation procedures. This matter
is still pending at the time of this filing.
To date, these adverse actions have resulted in minimal fines and
temporary suspension of admissions at certain residences. Because regulations
vary from one jurisdiction to another and because determinations regarding
whether to make a license provisional, to suspend or revoke a license, or to
impose a fine, are subject to administrative discretion, it is difficult for us
to predict whether a particular remedy will be sought or obtained in any given
case. These types of regulatory enforcement actions may adversely affect
residence occupancy levels, revenues and costs of operation. We cannot guarantee
that federal, state, or local governments will not impose additional
restrictions on our activities that could materially adversely affect us.
The operation of our residences is subject to federal and state 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 provisions is a felony punishable by up to five
years imprisonment and/or $25,000 fines. Civil provisions prohibit the knowing
filing of a false claim or the knowing use of false statements to obtain
payment. The penalties for such a violation are fines of not less than $5,000 or
more than $10,000, plus treble damages, for each claim filed.
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.
OVERBUILDING IN THE ASSISTED LIVING INDUSTRY.
We believe that many assisted living markets have become or are on the
verge of becoming 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
development of new assisted living facilities could outpace demand. The effects
of such overbuilding include (a) significantly longer fill-up periods, (b)
pressure to lower or refrain from increasing rates, (c) competition for workers
in already tight labor markets and (d) 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 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 have opened residences will not adversely
affect our operations.
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. We also depend upon the available
labor pool of low-wage employees. 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 program directors at assisted living residences and others may adopt similar
requirements. 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.
34
OUR PROPERTIES ARE GEOGRAPHICALLY CONCENTRATED AND WE DEPEND ON THE ECONOMIES OF
THE SPECIFIC AREAS IN WHICH WE OPERATE OUR PROPERTIES.
We depend significantly on the economies of Texas, Indiana, Oregon,
Ohio and Washington. As of December 31, 2000, 21.6% of our 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 regulatory environment in any of these states could have
a material adverse effect on our financial condition and results of operations.
WE DEPEND ON REIMBURSEMENT BY THIRD-PARTY PAYORS.
Although revenue at a majority of our residences come primarily from
private payors, a portion of our revenues depend upon reimbursements from
third-party government payors, including state Medicaid waiver programs. For the
years ended December 31, 1998, 1999 and 2000, direct payments received from
Medicaid funded programs accounted for approximately 10.7%, 10.4% and 11.1%
respectively, of our revenue. Also, our tenant-paid portion of Medicaid revenue
accounted for approximately 5.8%, 5.9% and 6.2% respectively, of our revenue
during the years ended December 31, 1998, 1999 and 2000. We expect that state
Medicaid waiver programs will continue to constitute a significant source of our
revenue in the future. Furthermore, we cannot guarantee that our proportionate
percentage of revenue received from Medicaid waiver programs will not increase.
There are continuing efforts by governmental and private third-party payors to
contain or reduce the costs of health care by lowering reimbursement rates,
increasing case management review of services and negotiating reduced contract
pricing. Recent changes include the development and implementation of a
prospective payment system ("PPS") for reimbursement of various healthcare
services. While it is unclear what effects PPS will have on our reimbursement
from state Medicaid waiver programs, it is possible that our revenues and
profitability may be affected adversely. Also, there has been, and our
management expects that there will continue to be, additional proposals
attempting to reduce the federal and some state budget deficits by limiting
Medicaid reimbursement in general. Adoption of any of these proposals at either
the federal or the state level could have a material adverse effect on our
business, financial condition, results of operations and prospects.
We anticipate that revenues at a majority of our residences will
continue to come from private pay sources. However, we believe that by having
located 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 or more aggressively seek limits on reimbursement rates.
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. Under the 1996 law, Congress required the Department
of Health and Human Services to promulgate regulations. The requirements set
forth in the regulations are extensive and may require to us to significantly
change the way we maintain and transmit healthcare information for our
residents.
Healthcare providers must take "reasonable steps" to ensure that the
provider, as well as the provider's business partners, comply with the law's
requirements. Therefore, we may be required to ensure that the other entities
with which we do business are also in compliance with these laws. HIPAA also
created certain consumer rights with which we may be required to comply,
including a right of notice regarding our information practices, a right of
access to inspect and copy such individual's protected medical information, and
a right to receive an accounting of all disclosures made by us, with certain
exceptions. It is anticipated that significant changes in the regulations will
occur prior to finalization; however, we do not expect that the costs
35
to comply with the final regulations will have an adverse effect on our
financial position, results of operations or cash flows.
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 our 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.
MEDICAL WASTE.
Our facilities generate potentially infectious waste due to the illness
or physical condition of the residents, including, for example, 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 various
laws, both federal and state. These laws and regulations set forth the
management requirements, 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 we do not currently operate may subject us to additional
restrictions on the manner in which we operate our facilities.
WE MAY BE LIABLE FOR LOSSES NOT COVERED BY OR IN EXCESS OF OUR 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
the primary targets of these insurers, 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 year ending December
31, 2001 this deductible has been replaced with a retention level of $250,000,
except in Florida and Texas in which the retention level is $500,000. 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.
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
36
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 our 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 lease the property, or to borrow using our
property as collateral.
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 we
hold or operate could have an adverse effect on our business, financial
condition or results of operations.
ITEM 7A. 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.
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 $27.2 million outstanding
at December 31, 2000 with a weighted average interest rate of 4.2%. Assuming
that our balance of variable rate debt remains constant at $27.2 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 $272,000.
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 $272,000.
The table below presents principal cash flows and related weighted
average interest rates by expected maturity dates (in thousands).
DECEMBER 31, EXPECTED MATURITY DATE
------------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- --------
Long-term debt:
Fixed rate .................. $1,085 $ 1,119 $ 1,105 $ 1,140 $1,210 $ 39,218 $ 44,877
Average interest rate ....... 7.93% 7.93% 7.93% 7.93% 7.93% 7.93% 7.93%
Variable rate ............... $ 605 $ 674 $ 728 $ 786 $ 852 $ 23,575 $ 27,220
Average interest rate ....... 4.15% 4.15% 4.15% 4.15% 4.15% 4.15% 4.15%
------ ------- ------- ------- ------ --------- --------
Total long-term debt .. $1,690 $ 1,793 $ 1,833 $ 1,926 $2,062 $ 62,793 $ 72,097
Convertible debentures:
6.0% debentures ............. $ -- $86,250 $ -- $ -- $ -- $ -- $ 86,250
Average interest rate ....... 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
5.625% debentures ........... $ -- $ -- $75,000 $ -- $ -- $ -- $ 75,000
Average interest rate ....... 5.625% 5.625% 5.625% 5.625% 5.625% 5.625% 5.625%
------ ------- ------- ------- ------ --------- --------
Total convertible
debentures ........... $ -- $86,250 $75,000 $ -- $ -- $ -- $161,250
------ ------- ------- ------- ------ --------- --------
Total long-term debt
and convertible
debentures ........... $1,690 $88,043 $76,833 $ 1,926 $2,062 $ 62,793 $233,347
====== ======= ======= ======= ====== ========= ========
DECEMBER 31, DECEMBER 31,
1999 2000
FAIR VALUE FAIR VALUE
------------ ------------
Long-term debt:
Fixed rate .................. $ 44,690 $ 44,877
Average interest rate .......
Variable rate ............... $ 28,753 $ 27,220
Average interest rate .......
-------- --------
Total long-term debt .. $ 73,443 $ 72,097
Convertible debentures:
6.0% debentures ............. $ 50,888 $ 36,225
Average interest rate .......
5.625% debentures ........... $ 43,500 $ 29,250
Average interest rate .......
-------- --------
Total convertible
debentures ........... $ 94,388 $ 65,475
-------- --------
Total long-term debt
and convertible
debentures ........... $167,831 $137,572
======== ========
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
37
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.
We do not use foreign currency exchange forward contracts or commodity
contracts and do not have foreign currency exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are
set forth as indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
GENERAL
We have provided below certain information regarding our directors and
executive officers:
NAME AGE(1) POSITION
---- ------ --------
Wm. James Nicol(4) .......... 57 President, Chief Executive Officer and Chairman of the Board
of Directors
John M. Gibbons(2)(3)(4) .... 52 Director, Vice Chairman of the Board of Directors
Richard C. Ladd(2) ........... 62 Director
Jill M. Krueger(2)(3)(4) ...... 41 Director
Bruce E. Toll(2).............. 57 Director
Leonard Tannenbaum(3)....... 29 Director
Sandra Campbell.............. 54 Senior Vice President, General Counsel and Secretary
Nancy Gorshe ................ 50 Senior Vice President of Community Relations
Drew Q. Miller ............... 48 Senior Vice President, Chief Financial Officer and Treasurer
M. Catherine Maloney ......... 38 Vice President, Controller and Chief Accounting Officer
(1) As of December 31, 2000.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Special Committee for Securityholder Litigation.
Wm. James Nicol was appointed to the Board of Directors as Chairman of
the Board on March 3, 2000. Mr. Nicol has over 20 years experience of senior
executive management, including finance and corporate development in health care
service organizations. Mr. Nicol has most recently served as the Chief Financial
Officer of HemoTherapies, Inc., a San Diego based medical device start-up
company. Prior to joining HemoTherapies, he served in various senior executive
roles for numerous companies, including Chief Operating Officer of Laguna
Medical Systems, President and Chief Executive Officer of Health Management,
Inc. and Chief Financial Officer of Careline, Inc. and Quantum Health Resources,
Inc. Mr. Nicol has served as a senior officer and/or member of the Board of
Directors of six publicly-traded companies.
John M. Gibbons was appointed to the Board of Directors in March 2000.
He brings over 17 years of public company senior management experience in
finance and executive management positions. From July 2000 to the present, he
has served as President and Vice chairman of TMC Communications, Inc., a
telecommunications services provider. From February 1994 until February 2000, he
was employed at The Sports Club Company, a developer and operator of luxury
sports and fitness clubs, Mr. Gibbons held a number of positions, including
Chief Financial Officer, Chief Operating Officer and most recently President and
Chief Executive Officer. He was a director of The Sports Club from 1995 through
February 2000. Prior to joining The Sports Club, Mr. Gibbons was employed by
Com-Systems, a publicly-traded long-distance telecommunications company, where
he served in multiple capacities, including as Senior Vice-President, General
Manager and Chief Financial Officer. Since July 2000, he has served on the board
of Deckers Outdoor Corporation (AMEX-DECK).
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
39
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.
Jill M. Krueger was elected to the Board of Directors in April 1999,
and presently serves as Chairman of our Audit Committee. Since 1996, Ms. Krueger
has served as President and Chief Executive Officer of Health Resources
Alliance, an organization which provides rehabilitative and fitness services,
pharmacy services, an extensive outcome measurement system and innovative
programming and consulting services designed to optimize the health and well
being of the elderly population. From 1988 to 1996 Ms. Krueger was a partner at
KPMG LLP where she served as its Partner in Charge of the firm's National Long
Term Care and Retirement Housing Practice.
Bruce E. Toll was elected to the Board of Directors in January 2001.
Mr. Toll serves on the Board of Directors of UbiquiTel, Inc., a publicly traded
company which provides Sprint PCS digital communication services to mid-size
markets in the western and mid-western United States. He is the owner of BET
Investments, Inc., which owns, develops, and manages commercial and industrial
properties in the Philadelphia area. He is also the owner and operator of an
automobile agency, Robert Auto Mall in Downingtown, Pennsylvania and the
Chairman of Puresyn Corp., a biotech company located in Malvern, Pennsylvania.
In addition, he is the President of Toll Management Company, which owns and
manages commercial and apartment properties on the Philadelphia area. Mr. Toll
is Vice-Chairman, founder, and director of Toll Brothers, Inc., which today is
the leading builder of luxury homes in the nation and recipient of a number of
awards. He is the father-in-law of Leonard Tannenbaum.
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. He is the son-in-law of Bruce E. Toll.
Sandra Campbell joined us as Senior Vice President, General Counsel and
Secretary in January of 1998. Ms. Campbell has almost 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 December 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 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 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 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.
40
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 and the
American Stock Exchange 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, 2000, each of our officers, directors
and 10% stockholders complied with all Section 16(a) filing requirements
applicable to them.
41
ITEM 11. EXECUTIVE COMPENSATION
We have set forth in the following table information concerning the
compensation paid during the fiscal year ended December 31, 2000 to Mr. Nicol
and Dr. Wilson, each of whom served as our Chief Executive Officer during a
portion of 2000 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(2) COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- ------ -------- ------------ ------- ------------
Wm. James Nicol(4) .......... 2000 $ 46,000 - - 50,000 -
President and Chief Executive
Officer and Chairman
Keren Brown Wilson(5) ....... 2000 $ 200,000 - $800,000(3) 100,000 -
Founder, Former President, 1999 200,000 $(100,000) $187,500(3) 7,500 -
Chief Executive Officer and 1998 203,000 100,000 - - -
Vice Chairman
Leslie Mahon(4) ............. 2000 $ 70,000 - $350,000 10,000 -
Senior Vice President and 1999 141,300 17,500 - 30,000 -
Chief Operating Officer
Drew Q. Miller(4) ........... 2000 $ 145,000 - - 150,000 -
Senior Vice President, Chief
Financial Officer and Treasurer
Sandra Campbell ............. 2000 $ 195,000 - - 50,000 -
Senior Vice President, 1999 150,000 51,250 - - -
General Counsel and 1998 141,600 25,000 - 15,000 -
Secretary
Nancy Gorshe(6) ............. 2000 $ 150,000 $ 12,500 - - -
Senior Vice President 1999 125,000 15,000 - - -
of Community Relations 1998 101,300 - - 55,000 -
----------
(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) Dr. Wilson was paid a bonus of $100,000 in 1998 related to the
execution of the ARC merger agreement. Payments made to her subsequent
to December 31, 1998 were reduced by $100,000 to reflect repayment of
this bonus payments. Severance payment was made to Mr. Mahon during
2000 for $350,000 in accordance with his employment agreement in April,
2000 when Mr. Mahon's position was eliminated.
(3) During 1999 Dr. Wilson agreed to forfeit 50,000 shares of restricted
stock held by her for $187,500. During 2000, we restructured our
relationship with Dr. Wilson and agreed to pay Dr. Wilson the amount of
$800,000 to which she may have been entitled under her employment
agreement, of which approximately $182,000 was paid in 2000 and the
remainder to be paid through monthly salary through December 31, 2001,
and quarterly installments through September 30, 2001.
(4) Mr. Nicol and Mr. Miller began their employment with us in November
2000 and March 2000, respectively. Mr. Nicol was appointed President
and Chief Executive Officer in November 2000. Mr. Mahon began his
employment with us in March 1999 and resigned as Chief Operating
Officer in April 2000.
(5) Dr. Wilson served as President and Chief Executive Officer during 2000
until October 2000.
(6) Ms. Gorshe began her employment with us in February 1998.
42
We have provided in the following table information on stock options
granted during 2000 to the Named Executive Officers.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS % OF TOTAL
------------------------------------------------- VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATE OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED YEAR ($/SH) DATE 5% 10%
---- ------- ---- ------ ---- -------- ---------
Wm. James Nicol .. 50,000 4.8% $ 1.81 2/29/10 $ 95,025 $ 99,550
Keren Brown Wilson 100,000 9.6% 1.44 3/29/10 151,200 158,400
Leslie Mahon ..... 10,000 1.0% 1.44 3/29/10 15,120 15,840
Drew Q. Miller ... 150,000 14.4% 1.44 3/29/10 226,800 237,600
Sandra Campbell .. 50,000 4.8% 1.44 3/29/10 75,600 79,200
Nancy Gorshe ..... 40,000 3.9% 1.44 3/29/10 60,480 63,360
(1) In accordance with rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated
by the rules of the Commission and do not represent our estimate or
projection of future Common Stock prices.
We have provided in the following table information with respect to the
Named Executive Officers concerning unexercised stock options held as of
December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
SHARES ------------------ ---------------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------- -------------
Wm. James Nicol .. - - 0/ 50,000 $0/$0
Keren Brown Wilson - - 122,500/105,000 $0/$0
Leslie Mahon ..... - - 0/ 0 $0/$0
Drew Q. Miller ... - - 33,334/116,666 $0/$0
Sandra Campbell .. - - 0/ 50,000 $0/$0
Nancy Gorshe ..... - - 0/ 40,000 $0/$0
(1) The closing trading price on the American Stock Exchange for the Common
Stock on December 31, 2000 was $0.31.
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 non-qualified options to purchase 20,000 shares of 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 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.
43
During 2000, each non-employee director received a fee of $12,000 per
year for services as a director, plus $1,000 for attendance in person, or $500
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.
During 2000, those outside directors serving on the Executive Committee earned
$5,000 per month for such services and on February 29, 2000, Mr. Nicol and Mr.
Gibbons each received non-qualified options to purchase 30,000 shares of common
stock at $1.81 per share for acting in such capacity. In January, 2001 the Board
of Directors disbanded the Executive Committee and Mr. Gibbons was appointed
Vice Chairman of the Board of Directors. Mr. Gibbons will receive $5,000 per
month for such services.
Mr. Nicol and Mr. Gibbons each received new non-employee director
options to purchase 20,000 shares of Common Stock under the 1994 Stock Option
Plan at $1.81 per share on February 29, 2000. In addition, on February 29, 2000,
Ms. Krueger, Mr. Ladd and Ms. Cavanaugh received nonqualified options to
purchase at $1.81 per share, 30,000, 10,000 and 10,000 shares of Common Stock,
respectively.
EMPLOYMENT AGREEMENTS
Employment Agreements with Current Officers
Set forth below are summaries of employment and consulting agreements
with certain individuals who were Named Executive Officers during 2000.
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. The agreement provides for such employment on a
month-to-month basis, at a salary of not less than $30,000 per month. Mr. Nicol
will also be eligible for bonus payments and incentive compensation awards based
on certain performance targets to be agreed between us and Mr. Nicol. Under the
agreement, in the event of a termination of employment by us for any reason
other than "Cause" (as defined), Mr. Nicol will be entitled to four months of
pay, as well as a pro-rated bonus payment. In connection with his employment
agreement, we agreed to indemnify Mr. Nicol to the extent permitted under Nevada
law against liability and expenses incurred by him in any proceeding in which he
is involved due to his role as officer or director.
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 the
employment agreement as of January 1, 2000. The amendment effectuated no changes
in Ms. Campbell's total annual compensation from the Company; it merely
recharacterized the amounts. The agreement, as amended, provides for an initial
two and one-half-year term, which expired without having been terminated,
consequently the agreement is automatically extended on a continuous basis. We
may terminate the agreement by providing Ms. Campbell with two and one-half
years' prior notice of our intention to terminate her employment, and Ms.
Campbell may terminate the agreement by providing us with four months' prior
notice of her intention to resign. In addition, we may terminate the agreement
at any time for "Cause" and Ms. Campbell may terminate the agreement for ""Good
Reason" (each as defined), and the agreement automatically terminates upon Ms.
Campbell's death or permanent disability. If we terminate Ms. Campbell's
employment other than for Cause and without providing the notice referred to
above, or if Ms. Campbell terminates the agreement for Good Reason, then we must
make a lump-sum payment to Ms. Campbell equal to two times her then-annual
salary plus $10,000. In addition, if there is a Change in Control (as defined),
regardless of whether she remains in our employ, Ms. Campbell is entitled to
receive an additional amount equal to two times her then-annual salary plus
$10,000, and all options exercisable for common stock automatically vest and
become exercisable. The agreement provides that Ms. Campbell's salary is
$195,000. In addition, Ms. Campbell received options to purchase 50,000 shares
of Common Stock, to become exercisable in annual installments of 16,666 shares
commencing December 31, 1998, at an exercise price of $16.50, equal to the fair
market value of the Common Stock on the date of grant. These options were
44
cancelled in 2000. The agreement includes an agreement to indemnify Ms. Campbell
to the extent permitted 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.
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. The agreement provides for an initial two-year term, subject to
automatic one year extensions unless we notify Ms. Gorshe during the 90-day
period ending on February 3 of each year that we wish to terminate the agreement
on February 3 of the following year. We may terminate the agreement at any time
for "Cause" (as defined). If we terminate Ms. Gorshe's employment without Cause
and without offering Ms. Gorshe comparable employment (employment with us or any
affiliated company that is not materially different in level of responsibility,
at the same or higher salary level, with same or similar title or rank and
within a 20-mile radius of her immediately prior position with us) or if within
one year following a Change of Control (as defined) we either terminate Ms.
Gorshe without Cause or she voluntarily resigns (and we have not offered her
comparable employment in either case), then we must make a lump-sum payment to
Ms. Gorshe in an amount equal to twice her then annual salary. In addition, if
we terminate Ms. Gorshe within one year following a Change in Control, all
Common Stock options held by Ms. Gorshe will automatically become immediately
exercisable. The agreement provides that our President or Chief Executive
Officer will determine Ms. Gorshe's annual compensation subject to adjustment
from time to time at the discretion of the Board of Directors. Ms. Gorshe's
current salary is $150,000. The agreement further provides that Ms. Gorshe is
subject to confidential information, and non-competition provisions until one
year after the termination of Ms. Gorshe's employment. In addition, Ms. Gorshe
received options to purchase 20,000 shares of Common Stock, to become
exercisable in annual installments of 6,667 shares commencing on July 27, 1999,
at an exercise price of $16.50, equal to the fair market value of the Common
Stock on the date of grant. These options were cancelled in 2000.
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. The agreement provides that Mr. Miller's annual
base salary shall equal $190,000. The agreement provides for an initial two-year
term. If the agreement has not been terminated prior to the expiration of the
initial term, then the agreement is automatically extended on a continuous
basis. We may terminate the agreement by providing Mr. Miller with one and
one-half years' prior notice of our intention to terminate his employment, and
Mr. Miller may terminate the agreement by providing us with 45-days' prior
notice of his intention to resign. In addition, we may terminate the agreement
at any time for "Cause" (as defined) or Mr. Miller's permanent disability, and
Mr. Miller may terminate the agreement in the event there is a Change of Control
(as defined) or a material reduction in the scope and/or authority of his
duties. The agreement automatically terminates upon Mr. Miller's death. If we
terminate Mr. Miller's employment other than in connection with Mr. Miller's
death or disability or for Cause, or if Mr. Miller terminates the agreement as a
result of a Change of Control or a material reduction in the scope and/or
authority of his duties, we will continue to be obligated to pay Mr. Miller's
base salary until March 16, 2002 and all of Mr. Miller's options exercisable for
common stock shall automatically vest and become exercisable. Pursuant to the
agreement, Mr. Miller received options to purchase 150,000 shares of Common
Stock, to become exercisable in monthly installments of 4,167 shares commencing
April 16, 2000, at an exercise price of $1.44, equal to the fair market value of
the Common Stock on the date of grant. The agreement includes an agreement to
indemnify Mr. Miller to the extent permitted 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.
45
Agreements with Former Officers
Keren Brown Wilson
On October 19, 2000, as part of a restructuring of our relationship
with Dr. Keren Brown Wilson, Dr. Wilson resigned from the Board of Directors and
from her position as President and Chief Executive Officer. Effective on this
date, Dr. Wilson and we agreed among other things to the following: (i) Dr.
Wilson will be an at-will employee until December 31, 2001, and her base salary
is to be $16,666.67 per month, with a total of $200,000 to be paid in any event;
(ii) when Dr. Wilson's employment terminates, her stock options will vest, if
not already vested, and she will have one year from that date to exercise the
stock options; and, (iii) we will pay Dr. Wilson $559,677.37, plus 10% interest
per annum from October 19, 2000, until fully paid, to be paid in four (4) equal
quarterly installments commencing December 31, 2000.
In addition, we and Dr. Wilson agreed to the termination of Dr. Wilson's
employment agreement effective October 19, 2000. The employment agreement
provided for Dr. Wilson's services as President and Chief Executive Officer. The
employment agreement provided for an initial four-year term, subject to
automatic extension absent notice of termination under the terms of the
employment agreement.
Under the employment agreement, in the event of a termination of
employment for any reason other than "Cause" (as defined), Dr. Wilson was
entitled to the payment of an amount equal to four times her annual salary. In
the event of a termination within one year of a Change in Control (as defined)
for any reason other than the death or disability or a termination by us for
Cause, Dr. Wilson would be entitled to a $3.0 million termination payment. The
employment agreement also contained "gross-up" provisions to compensate Dr.
Wilson in the event that any payment under the employment agreement was subject
to an excise tax imposed under Section 4999 of the Internal Revenue Code. The
employment agreement provided that Dr. Wilson was entitled to compensation at an
annual rate of $200,000.
In connection with her employment agreement, we agreed to indemnify Dr.
Wilson to the extent permitted under Nevada law against liability and expenses
incurred by her in any proceeding in which she is involved due to her role as
officer or director.
James Cruckshank
Effective as of March 3, 2000, we entered into a separation and
consulting agreement with Mr. Cruckshank which provided, among other things, for
the termination of Mr. Cruckshank's employment agreement, entered into on March
15, 1999.
Pursuant to the separation and consulting agreement, Mr. Cruckshank
agreed to provide us consulting services through December 31, 2000, for which we
paid him a bi-weekly amount equal to $3,000.
Pursuant to Mr. Cruckshank's employment agreement, Mr. Cruckshank was
granted options exercisable for 30,000 shares of Common Stock. In connection
with the termination of employment, Mr. Cruckshank agreed to the termination, as
of March 2, 2000, of his options to purchase 20,000 shares of Common Stock,
which were to vest on March 15, 2001 and March 15, 2002. We also agreed with Mr.
Cruckshank that his options to purchase 10,000 shares of Common Stock, which
have an exercise price of $3.813 per share, will expire March 31, 2001.
Leslie Mahon
On March 15, 1999, we entered into an employment agreement with Leslie
Mahon providing for Mr. Mahon's services as Vice President and Chief Operating
Officer. On April 21, 2000, the position of Vice President and Chief Operating
Officer was eliminated and we paid Mr. Mahon a lump-sum payment of $350,000 in
accordance with his employment agreement. Except with respect to such payment
and the termination of Mr. Mahon's employment, the provisions of Mr. Mahon's
employment agreement remain in effect. The employment agreement provides that
Mr. Mahon is subject to confidential information restrictions for as long as Mr.
Mahon possesses any confidential information, and non-competition provisions
until one year after the termination of Mr. Mahon's employment. In addition, Mr.
Mahon received options to purchase
46
30,000 shares of Common Stock, exercisable in annual installments of 10,000
shares commencing March 15, 2000, at an exercise price of $5.00, equal to the
fair market value of the Common Stock on the date of the grant. Mr. Mahon agreed
to the cancellation of these options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At December 31, 2000, the Compensation Committee was comprised of John
Gibbons, Bradley Razook, and Gloria Cavanaugh. From January 1, 2000 to March 28,
2000, the Compensation Committee was comprised of Mr. Razook, Ms. Cavanaugh, and
Ms. Krueger. On March 28, 2000, Mr. Nicol replaced Ms. Krueger on the
Compensation Committee. In November 2000, Mr. Gibbons replaced Mr. Nicol on the
Compensation Committee following Mr. Nicol's October 19, 2000 appointment as
President and Chief Executive Officer. Mr. Razook served as Chair of the
Compensation Committee throughout 2000. From January 17, 2001 to the present,
the Compensation Committee was comprised of John Gibbons (Chairman), Jill
Krueger and Leonard Tannenbaum.
Mr. Razook, is President and Managing Director at Cohen & Steers
Capital Advisors LLC ("C&S Advisors"). On January 24, 2000, we entered into an
agreement with C&S Advisors pursuant to which we paid C&S Advisors $471,000
through December 31, 2000 for financial advisory services. This agreement
terminated on December 31, 2000, except that we are required to pay C&S Advisors
fees under this agreement if we complete certain financing and merger
transactions on or prior to December 31, 2001. We are currently exploring
various financing alternatives and the closing of any such financing could
result in the payment of fees to C&S Advisors. On March 2, 2001, we closed the
Heller financing and paid C&S Advisors $457,000 in relation to this transaction.
In December 2000, we entered into an agreement with MYFM Capital LLC
under which we 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, 2000, we terminated the agreement and paid MYFM $50,000 in connection with
such termination. Bruce E. Toll, our largest shareholder, and a current member
of our Board of Directors, 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 a current member of our Board of Directors.
47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENENFICIAL OWNERS AND MANAGEMENT
We have set forth in the following table information as of February 16,
2001 with respect to the beneficial ownership of our Common Stock (based upon
information provided by such persons) by:
(1) each of our directors;
(2) each person who is known by us to own beneficially more than
5% of our common stock;
(3) each of the Named Executive Officers for the fiscal year ended
December 31, 2000; and
(4) our directors and executive officers as a group.
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) CLASS
---------------------------------------- -------- -----
Wm. James Nicol .................................................... 17,501 -
Richard C. Ladd .................................................... 21,111 *
John M. Gibbons .................................................... 17,501 *
Jill Krueger ....................................................... 26,668 *
Bruce E. Toll(3) ................................................... 3,105,698.65 17.5%
3103 Philmont Avenue
Huntington Valley, Pennsylvania 19006
Leonard Tannenbaum ................................................. 469,603 2.7%
16 School St., 2nd Floor
Rye, NY 10580-2952
Les Mahon .......................................................... 11 *
Sandra Campbell .................................................... 24,476 *
Nancy Gorshe ....................................................... 18,945 *
Drew Q. Miller ..................................................... 54,166 *
Keren Brown Wilson(4) .............................................. 882,912 5.2%
John W. Adams(5) ................................................... 1,635,600 9.6%
885 Third Avenue, 34th Floor
New York, New York 10022
Greenlight Capital, L.L.C.(6) ...................................... 1,566,012 8.8%
420 Lexington Avenue, Suite 875
New York, New York 10170
Capital Group International, Inc. and Capital Guardian Trust(7) .... 1,645,000 9.6%
11800 Santa Monica Blvd.
Los Angeles, CA 90025
All directors and executive officers as a group (15 persons) ....... 243,352 1.4%
----------
* 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) Includes options to purchase 17,501 shares held by Mr. Nicol, 21,111
shares held by Mr. Ladd, 17,501 shares held by Mr. Gibbons, 26,668
shares held by Ms. Krueger, 24,476 shares held by Ms. Campbell, 54,166
shares held by Mr. Miller, 18,945 shares held by Ms. Gorshe, and 62,984
shares held collectively by the executive officers not named above,
which are exercisable within 60 days of February 16, 2001. Beneficial
ownership is determined in accordance with the rules and regulations of
the Securities and Exchange Commission. Shares of Common Stock subject
to currently exercisable options, or options that will become
exercisable within 60 days of February 16, 2001, and shares issuable on
conversion of debentures are deemed to be outstanding for purposes of
computing the percentage of the person holding the options or
debentures, but are not outstanding for purposes of computing the
percentage of any other person or entity.
48
(3) Based on the Form 13D/A as filed on November 22, 2000. 575,098.65 of
such shares are issuable upon the conversion of $12.1 million of our
6.0% Debentures and $1.0 million of our 5.625% Debentures to BET
Associates, L.P., a partnership controlled by Mr. Toll, and 2,530,600
of such shares are held by BRU Holding Company Inc., LLC, a limited
liability company controlled by Mr. Toll.
(4) Based on the Form 13G as filed on April 12, 2000.
(5) Based on the Form 13G/A as filed on February 16, 2001. These shares are
held by JWA Investment Corp. and Tempe Wicke investments L.P., which in
turn are controlled by Mr. Adams.
(6) Based on the Form 13D as filed on December 30, 1999. 667,412 of such
shares are issuable upon the conversion of the Company's 6.0%
Debentures.
(7) Based on the Form 13G/A as filed on February 12, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, Supportive Housing Services, Inc. ("SHS") provided
services to us for market feasibility analysis, site pre-acquisition services,
field construction supervision, construction management oversight and building
setup in conjunction with our development activities. We terminated the
agreement for these services effective January 2000. At that time SHS was owned
75% by Dr. Wilson's spouse. In fiscal 2000, we paid SHS approximately $69,000
for services performed in 1999.
In June 1999 we entered into a agreement with Concepts in Community
Living, Inc. ("CCL"), a company owned by Dr. Wilson's spouse, pursuant to which
CCL provided market research, demographic review and competitor analysis in many
of our current markets. This agreement was terminated on December 12, 1999. In
fiscal 2000, we paid CCL $69,000 for services performed in 1999.
We lease six residences from Assisted Living Facilities, Inc. of which
Dr. Wilson's spouse owns a 25% interest. During 2000, we paid Assisted Living
Facilities, Inc. approximately $1.3 million for building rent and escrow
reserves.
For information regarding certain other relationships and related
transactions, see Item 11 ""Compensation Committee Interlocks and Insider
Participation."
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Consolidated Financial Statements and Financial Statement
Schedules
The financial statements and financial statement schedules listed in
the accompanying index to financial statements and financial statement schedules
are filed as part of this Annual Report.
3. Exhibits
Those Exhibits required to be filed by Item 601 of Regulation S-K are
listed on the accompanying index immediately following the signature page and
are filed as part of this Report.
(b) Reports on Form 8-K
On October 19, 2000, we filed a report on Form 8-K announcing that we
had restructured our relationship with Keren Brown Wilson, our former President,
Chief Executive Officer and Vice Chairman of the Board.
50
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(a))
PAGE
----
1. FINANCIAL STATEMENTS:
Independent Auditors' Report ........................................................ 52
Consolidated Balance Sheets, December 31, 1999 and 2000 ............................. 53
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss, Years Ended December 31, 1998, 1999 and 2000 ................. 54
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1998, 1999 and 2000 ................................................. 55
Consolidated Statements of Cash Flows, Years Ended December 31,
1998, 1999 and 2000 .............................................................. 56
Notes to Consolidated Financial Statements .......................................... 57
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts ..................................... 83
51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Assisted Living Concepts, Inc. and subsidiaries as of December 31, 1999 and
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, 2000. 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, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Portland, Oregon
March 12, 2001
52
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------------
1999 2000
--------- ---------
Current assets:
Cash and cash equivalents ............................................................... $ 7,606 $ 9,889
Marketable securities, available for sale ............................................... 1,680 -
Accounts receivable, net of allowance for doubtful accounts of $1,062 at 1999
and $1,399 at 2000 ................................................................... 4,069 2,448
Prepaid insurance ....................................................................... 282 1,765
Prepaid expenses ........................................................................ 666 1,042
Other current assets .................................................................... 3,419 2,729
--------- ---------
Total current assets ................................................................. 17,722 17,873
--------- ---------
Restricted cash ........................................................................... 7,555 6,466
Property and equipment, net ............................................................... 305,648 298,744
Goodwill, net ............................................................................. 5,077 4,785
Other assets, net ......................................................................... 10,186 8,590
--------- ---------
Total assets ......................................................................... $ 346,188 $ 336,458
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 1,318 $ 2,708
Construction payable .................................................................... 1,078 -
Accrued real estate taxes ............................................................... 4,466 4,835
Accrued interest expense ................................................................ 1,940 1,937
Accrued payroll expense ................................................................. 2,773 4,017
Other accrued expenses .................................................................. 2,030 4,229
Bridge loan payable ..................................................................... - 4,000
Litigation settlement payable ........................................................... - 7,765
Tenant security deposits ................................................................ 2,245 2,484
Related party payable ................................................................... - 626
Other current liabilities ............................................................... 341 565
Current portion of long-term debt and capital lease obligation .......................... 1,494 1,690
--------- ---------
Total current liabilities ............................................................ 17,685 34,856
--------- ---------
Other liabilities ......................................................................... 5,960 6,059
Long-term debt and capital lease obligation, net of current portion ....................... 71,949 70,407
Convertible subordinated debentures ....................................................... 161,250 161,250
--------- ---------
Total liabilities .................................................................... 256,844 272,572
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; None issued or
outstanding ........................................................................... - -
Common Stock, $.01 par value; 80,000,000 shares authorized; issued and
outstanding 17,120,745 shares at December 31, 1999 and 2000 ........................... 171 171
Additional paid-in capital .............................................................. 144,443 144,451
Fair market value in excess of historical cost of acquired net assets attributable
to related party transactions ......................................................... (239) (239)
Accumulated other comprehensive loss .................................................... (320) -
Accumulated deficit ..................................................................... (54,711) (80,497)
--------- ---------
Total shareholders' equity ........................................................... 89,344 63,886
--------- ---------
Total liabilities and shareholders' equity ........................................... $ 346,188 $ 336,458
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
53
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000
---- ---- ----
Revenue ...................................................... $ 89,384 $ 117,489 $ 139,423
Operating expenses:
Residence operating expenses ............................... 57,443 81,767 95,032
Corporate general and administrative ....................... 11,099 21,178 18,365
Building rentals ........................................... 11,400 14,103 14,734
Building rentals to related party .......................... 1,364 1,264 1,270
Depreciation and amortization .............................. 6,339 8,981 9,923
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 ................................ 99,611 132,433 149,344
--------- --------- ---------
Operating loss ............................................... (10,227) (14,944) (9,921)
--------- --------- ---------
Other income (expense):
Interest expense ........................................... (11,039) (15,200) (16,363)
Interest income ............................................ 3,869 1,598 786
Gain (loss) on sale of assets .............................. (651) (127) 13
Loss on sale of marketable securities ...................... - - (368)
Other income (expense), net ................................ (1,174) (260) 67
--------- --------- ---------
Total other expense ..................................... (8,995) (13,989) (15,865)
--------- --------- ---------
Loss before cumulative effect of change in accounting principle (19,222) (28,933) (25,786)
Cumulative effect of change in accounting principle .......... (1,523) - -
--------- --------- ---------
Net loss ..................................................... $ (20,745) $ (28,933) $ (25,786)
========= ========= =========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in accounting principle $ (1.18) $ (1.69) $ (1.51)
Cumulative effect of change in accounting principle ........ (0.09) - -
--------- --------- ---------
Basic and diluted net loss per common share .................. $ (1.27) $ (1.69) $ (1.51)
========= ========= =========
Basic and diluted weighted average common shares outstanding . 16,273 17,119 17,121
========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
---- ---- ----
Net loss ................................................. $(20,745) $(28,933) $(25,786)
Other comprehensive loss:
Unrealized loss on investments ......................... - (320) -
Reclassification adjustment for loss included in net loss - - 320
-------- -------- --------
Comprehensive loss ....................................... $(20,745) $(29,253) $(25,466)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
54
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FAIR MARKET
VALUE IN
COMMON STOCK ADDITIONAL UNEARNED EXCESS OF
------------------------- PAID-IN COMPENSATION HISTORICAL
SHARES AMOUNT CAPITAL EXPENSE COST
------ ------ ------- ------- ----
Balance at December 31, 1997 . 15,646 $ 156 $ 141,460 $ (4,100) $ (239)
Common stock repurchased ..... (529) (5) (7,057) -- --
Conversion of subordinated
debentures ................. 1,855 19 13,387 -- --
Exercise of employee stock
options .................... 122 1 745 -- --
Issuance of restricted stock . 250 2 (2) -- --
Compensation expense earned
on restricted stock ........ -- -- -- 608 --
Net loss ..................... -- -- -- -- --
------ --------- --------- --------- ---------
Balance at December 31, 1998 . 17,344 173 148,533 (3,492) (239)
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 . 17,121 171 144,443 -- (239)
Compensation expense on
issuance of consultant
options .................... -- -- 8 -- --
Reclassification adjustment for
loss included in net loss .. -- -- -- -- --
Net loss ..................... -- -- -- -- --
------ --------- --------- --------- ---------
Balance at December 31, 2000 . 17,121 $ 171 $ 144,451 $ -- $ (239)
====== ========= ========= ========= =========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
LOSS DEFICIT EQUITY
---- ------- ------
Balance at December 31, 1997 . -- $ (5,033) $ 132,244
Common stock repurchased ..... -- -- (7,062)
Conversion of subordinated
debentures ................. -- -- 13,406
Exercise of employee stock
options .................... -- -- 746
Issuance of restricted stock . -- -- --
Compensation expense earned
on restricted stock ........ -- -- 608
Net loss ..................... -- (20,745) (20,745)
-------- --------- ---------
Balance at December 31, 1998 . -- (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 . (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 . $ -- $ (80,497) $ 63,886
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
55
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000
---- ---- ----
OPERATING ACTIVITIES:
Net loss ....................................................................... $ (20,745) $ (28,933) $ (25,786)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................ 6,339 8,981 9,923
Provision for doubtful accounts .............................................. 359 883 1,932
Site abandonment costs ....................................................... 2,377 4,912 --
Write-off of impaired assets and related expenses ............................ 8,521 -- --
Loss on the sale of marketable securities .................................... -- -- 368
Loss (gain) on sale of assets ................................................ 651 127 (13)
Cumulative effect of change in accounting principle .......................... 1,523 -- --
Compensation expense earned on restricted stock .............................. 608 180 --
Compensation expense on issuance of consultant options ....................... -- -- 8
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable .......................................................... (3,302) 175 (311)
Prepaid expenses ............................................................. (88) 44 (1,859)
Other current assets ......................................................... (909) 953 690
Other assets ................................................................. 1,314 564 1,596
Accounts payable ............................................................. (237) (304) 1,390
Accrued expenses ............................................................. 2,840 245 3,809
Other current liabilities .................................................... 2,922 (2,271) 8,854
Other liabilities ............................................................ 823 2,545 99
--------- --------- ---------
Net cash provided by (used in) operating activities ....................... 2,996 (11,899) 700
--------- --------- ---------
INVESTING ACTIVITIES:
Sale of marketable securities, available for sale .............................. -- 2,000 1,632
Purchase of marketable securities, available for sale .......................... (4,000) -- --
Restricted cash ................................................................ -- (7,555) 1,089
Funds held in trust ............................................................ 1,956 -- --
Proceeds from sale and leaseback transactions .................................. 8,113 -- --
Proceeds from sale of property and equipment ................................... -- 19 14
Purchases of property and equipment ............................................ (117,972) (27,824) (3,543)
Acquisitions, net of cash, debt acquired and issuance of common stock .......... (11,366) -- --
--------- --------- ---------
Net cash used in investing activities ..................................... (123,269) (33,360) (808)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from bridge loan ...................................................... -- -- 4,000
Proceeds from long-term debt ................................................... 49,004 -- --
Payments on long-term debt and capital lease obligation ........................ (289) (1,491) (1,609)
Proceeds from issuance of common stock, net .................................... 746 158 --
Repurchase of common stock ..................................................... (7,062) -- --
Debt issuance costs of offerings and long-term debt ............................ (5,359) -- --
Proceeds from issuance of convertible subordinated debentures .................. 75,000 -- --
Retirement of restricted stock ................................................. -- (838) --
--------- --------- ---------
Net cash provided by (used in) financing activities ....................... 112,040 (2,171) 2,391
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ........................... (8,233) (47,430) 2,283
Cash and cash equivalents, beginning of year ................................... 63,269 55,036 7,606
--------- --------- ---------
Cash and cash equivalents, end of year ......................................... $ 55,036 $ 7,606 $ 9,889
========= ========= =========
Supplemental disclosure of cash flow information:
Cash payments for interest ................................................... $ 16,480 $ 15,528 $ 14,945
Cash payments for income taxes ............................................... $ -- $ -- $ --
Non-cash transactions:
Decrease in construction payable and property and equipment .................. $ (11,941) $ (5,864) $ (1,078)
Conversion of subordinated debentures (net of $509 of unamortized
financing costs in 1998) ................................................... 13,406 -- --
Purchase of equipment with capital lease obligation ............................ -- -- 263
Conversion of construction financing to sale leaseback ......................... 2,150 -- --
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 --
The accompanying notes are an integral part of these consolidated financial
statements.
56
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. The accompanying financial statements reflect the operating
results of 165, 185 and 185 residences for the years ended December 31, 1998,
1999 and 2000, respectively. Residences are included in operating results as of
the first day of the month following licensure.
On November 22, 1994, the Company sold 4,000,000 shares of common stock
at $4.625 per share in an initial public offering realizing net proceeds of
approximately $16.4 million after underwriter discounts, commissions and other
expenses.
In August 1995, the Company completed the offering of $20.0 million 7%
Convertible Subordinated Debentures ("7% Debentures") due August, 2005
realizing net proceeds of approximately $19.2 million after discounts,
commissions and other expenses. In September 1996, $6.1 million of the 7%
Debentures were converted into 811,333 shares of the Company's common stock
which resulted in $13.9 million of 7% Debentures outstanding. In August 1998,
the Company called for redemption all of the remaining $13.9 million of the 7%
Debentures. All of the 7% Debentures were converted into shares of the Company's
common stock, resulting in the issuance of 1,855,334 additional shares of common
stock.
In July 1996, the Company sold 4,192,500 shares of common stock at $9.50
per share in a public offering realizing net proceeds of $37.3 million, after
underwriter discounts, commissions and other expenses.
In June 1997 the Company's Board of Directors declared a dividend
distribution of one preferred share purchase right ("Preferred Share Purchase
Right") on each outstanding share of the Company's common stock. In the event
that a person or group of persons acquires or announces a tender offer to
acquire 15% or more of the common stock (the "Acquiring Person"), the Preferred
Stock Purchase Rights, subject to certain limited exceptions, will entitle each
shareholder (other than the Acquiring Person) to buy one one-hundredth of a
share of newly created Series A Junior Participating Preferred Stock of the
Company at an exercise price of $54. The Company may redeem the rights at one
cent per right at any time before a person or group has acquired 15% or more of
the outstanding common stock. The record date for Preferred Share Purchase Right
distribution was June 30, 1997.
In October 1997 the Company sold 4,140,000 shares of common stock at
$18.50 per share in a public offering realizing net proceeds of $72.1 million,
after underwriter discounts, commissions and other expenses.
In October 1997, the Company completed the public offering of $86.3
million of 6% Convertible Subordinated Debentures ("6% Debentures") due
November 2002 realizing net proceeds of $82.9 million after underwriter
discounts, commissions and other expenses. The 6% Debentures are convertible at
any time at or prior to maturity, unless previously redeemed, at a conversion
price of $22.57 per common share, which equates to an aggregate of 3,821,444
shares of the Company's common stock.
In April 1998, the Company completed the offering of $75.0 million of
5.625% Convertible Subordinated Debentures ("5.625% Debentures") due May 2003
realizing net proceeds of $72.2 million after discounts, commissions and other
expenses. The 5.625% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $26.184 per
common share, which equates to an aggregate of 2,864,345 shares of the Company's
common stock.
57
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1998, the Company purchased
approximately 529,000 shares of its common stock for a total purchase price of
approximately $7.1 million in accordance with a stock repurchase plan initiated
in May 1998. The Board of Directors terminated the stock repurchase plan in
November, 1998.
On November 8, 2000, the Company modified and amended its Rights
Agreement to provide that the acquisition of up to $15.0 million in face value
of the Company's convertible debentures is not to be considered "beneficially
owned," as defined under the Rights Agreement, for purposes of calculating
whether a beneficial owner owns 15% or more of the Company's common shares then
outstanding, in which event certain rights as described in the Rights Agreement
would arise.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Assisted
Living Concepts Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents of $6.0 million and $4.6 million at December 31, 1999
and 2000, 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 reevaluates 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.
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 (See Note 5). Other liabilities
included $1.9 million of such amount at December 31, 1999 and 2000.
58
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Buildings and building improvements ..... 40 years
Furniture and equipment ................. 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 estimated useful life of 5 years.
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, 2000.
Interest and certain payroll costs incurred during construction periods
are capitalized as part of the building costs. Maintenance and repairs are
charged to expense as incurred, and significant betterments and improvements are
capitalized. Construction in process includes pre-acquisition costs and other
direct costs related to acquisition, development and construction of residences.
If a project is abandoned, any costs previously capitalized are expensed.
GOODWILL
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 are being amortized over periods ranging between 15 and 20 years on
a straight-line basis. Amortization of goodwill was $398,000, $294,000, and
$292,000 respectively, for the years ended December 31, 1998, 1999 and 2000.
Accumulated amortization of goodwill at December 31, 1999 and 2000 was $629,000
and $922,000, respectively. The Company assesses the recoverability of its
goodwill by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through the undiscounted future operating
cash flows of the acquired operations. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The assessment
of the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
During the year ended December 31, 1998, the Company wrote-off all the
unamortized goodwill (approximately $7.5 million) associated with Pacesetter
Home Health Care, Inc. ("Pacesetter"), a wholly owned subsidiary of Home and
Community Care, Inc. The shut-down of Pacesetter operations was a result of a
change in the regulatory reimbursement environment during the quarter ended June
30, 1998 (See Note 10).
PRE-OPENING COSTS
Prior to the adoption of American Institute of Certified Public
Accountants ("AICPA") Statement of Position 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"), pre-opening costs associated with newly
developed residences were capitalized and amortized over 12 months. As a result
of the Company's adoption of SOP 98-5 (effective as of January 1, 1998),
pre-opening costs are expensed as incurred.
59
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $368,000, $853,000
and $612,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted SOP 98-5, which requires
that pre-opening costs be expensed as incurred. In connection with such
adoption, $1.5 million of previously capitalized, unamortized pre-opening costs
were written off as of January 1, 1998 and presented in the accompanying
statement of operations for fiscal year 1998 as the cumulative effect of a
change in accounting principle.
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.
Amortization of deferred financing costs were $978,000, $1.6 million, and $1.6
million, respectively, for the years ended December 31, 1998, 1999 and 2000.
Accumulated amortization of deferred financing costs at December 31, 1999 and
2000 were $3.1 million and $4.7 million, respectively.
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 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.
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.
COMPREHENSIVE LOSS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive loss consists of net loss and several other
items that current accounting standards require to be recognized outside of net
loss and is presented in the consolidated statements of shareholders' equity and
comprehensive loss. The Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or net loss.
60
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Vested options to purchase 833,000, 983,000 and 477,000 shares of common
stock were outstanding during the years ended December 31, 1998, 1999 and 2000,
respectively. These options were excluded from the respective computations of
diluted loss per share, as their inclusion would be antidilutive.
Also excluded from the computations of diluted loss per share, for the
years ended December 31, 1998, 1999 and 2000 were, 6,685,789 shares of common
stock issuable upon conversion of the Company's convertible subordinated
debentures (see Note 9) and 250,000 shares of restricted stock for the year
ended December 31, 1998 (see Note 14) as their inclusion would be antidilutive.
SEGMENT REPORTING
Financial Accounting Standards Board 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.
WORKER'S COMPENSATION
The Company utilizes third-party insurance for losses and liabilities
associated with worker's 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.
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
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, construction 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. The carrying amount of
the
61
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's long-term debt approximates fair value as the interest rates
approximate the current rates available to the Company. The following table sets
forth the carrying amount and approximate fair value (based on quoted market
values) of the Company's subordinated debentures as of December 31, 1999 and
2000 (in thousands):
1999 2000
------------------------ -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
6% Debentures .......................... $86,250 $50,888 $86,250 $36,225
5.625% Debentures ...................... 75,000 43,500 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 Amended and Restated 1994 Employee Stock Option Plan (the "1994
Plan") combines an incentive and nonqualified stock option plan, a stock
appreciation rights ("SAR") plan and a stock award plan (including restricted
stock). The 1994 Plan is 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") is a non-qualified stock option plan intended as a
long-term incentive compensation plan designed to provide a competitive and
balanced incentive and reward programs for participants.
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.
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 December 31, 2000, 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, 1998, 1999 and
2000, direct payments received from state Medicaid agencies accounted for
approximately 10.7%, 10.4%, and 11.1% respectively, of the Company's revenue
while the tenant paid portion received from Medicaid residents accounted for
approximately 5.8%, 5.9% and 6.2%,
62
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. ACQUISITIONS AND JOINT VENTURE
Acquisitions
Effective October 23, 1997, the Company acquired 98.8% of the outstanding
capital stock of Home and Community Care, Inc. ("HCI") that it did not already
own. The Company had acquired an initial 1.2% interest in HCI as a result of
HCI's acquisition of Pacesetter, a home health care agency in which the Company
had made an investment in November 1996. Several employees of the Company,
including members of the Board of Directors, owned collectively approximately
40.0% of the outstanding common stock in HCI (See Note 13). The HCI purchase was
completed at a purchase price of approximately $4.0 million in cash (which
reflects approximately $5.3 million of cash paid net of (i) approximately
$250,000 in cash acquired, (ii) approximately $850,000 in fees from HCI for
services rendered during 1997, and (iii) $150,000 in dividends received from HCI
during 1997), and the assumption of approximately $6.6 million in liabilities.
HCI stockholders were entitled to receive certain "earnout" payments over a
two-year period based on the number of HCI's assisted living residence sites,
which the Company elected to complete. At the time of the acquisition, HCI had
20 sites under development. For each completed residence, HCI stockholders
received an additional $7,500 per unit (approximately $300,000 per residence) in
cash. During the years ended December 31, 1998 and 1999, the Company paid
earnout payments of $1.7 million and $1.5 million, respectively, and capitalized
such payments in property and equipment.
The acquisition was accounted for as a purchase, and the operating
results of HCI have been included in the Company's consolidated financial
statements since the date of acquisition. The cost of the acquisition was
allocated based on the estimated fair value of the net assets acquired of
approximately $3.4 million. The excess of the aggregate purchase price over the
fair market value of net assets acquired of approximately $7.5 million was
recorded as goodwill.
During the second quarter of 1998 the Company announced a plan to exit
all home health business operations being conducted by Pacesetter. During the
year ended December 31, 1998, the Company incurred a $8.5 million charge to
earnings associated with exiting the Pacesetter operations. Such charge
consisted of (i) a $7.5 million write-off of all unamortized goodwill associated
with Pacesetter and (ii) a $1.0 million provision for exit costs expected to be
incurred during the phase out of the Pacesetter business. During the fourth
quarter 1998, the $1.4 million provision for exit costs was reduced by $400,000
to $1.0 million as a result of a change in the estimate for such exit costs. In
addition, the Company incurred a $1.0 million charge recorded as site
abandonment expense during second quarter 1998 for previously capitalized
development costs relating to 11 sites acquired in the HCI acquisition that it
had determined not to develop (See Notes 6 and 10).
Effective October 23, 1997, the Company acquired the 90.1% of the
outstanding capital stock of Carriage House Assisted Living Inc. ("Carriage
House") it did not already own. Several employees of the Company, including
members of the Board of Directors, owned collectively approximately 23.0% of the
outstanding common stock of Carriage House (See Note 13). The Company had
acquired its initial 9.9% ownership in Carriage House's outstanding capital
stock during 1996. The acquisition was completed at a purchase price of $5.2
million with the exchange of 337,460 shares of Common Stock (based on a stock
price of $15.41 per share) for all of the outstanding common stock of Carriage
House and the assumption of approximately $3.2 million in liabilities.
The acquisition was accounted for as a purchase and the operating results
of Carriage House have been included in the Company's consolidated financial
statements since the acquisition date. The cost of the acquisition has been
allocated based on the estimated fair value of the net assets acquired of
approximately
63
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$3.4 million. The excess of the aggregate purchase price over the fair market
value of net assets acquired of approximately $4.7 million has been recorded as
goodwill and is being amortized on a straight-line basis over 20 years.
On April 30, 1998, the Company completed the acquisitions of two
assisted living residences in Plano and McKinney, Texas, having units of 64 and
50, respectively. The residences were acquired for a total purchase price of
approximately $5.2 million. The acquisitions were accounted for as purchases and
the operating results of the facilities have been included in the Company's
consolidated financial statements since the acquisition date. The cost of the
acquisitions has been allocated based on the estimated fair value of the net
assets acquired of approximately $5.2 million. No goodwill was recorded.
On July 1, 1998, the Company completed the acquisition of an assisted
living residence in Alexandria, Louisiana having 48 units. The residence was
acquired for a purchase price of approximately $2.8 million. The acquisition was
accounted for as a purchase and the operating results of the facility have been
included in the Company's consolidated financial statements since the
acquisition date. The cost of the acquisition has been allocated based on the
estimated fair value of the net assets acquired of approximately $2.8 million.
No goodwill was recorded.
On December 1, 1998, the Company completed the acquisition of an
assisted living residence in Paris, Texas, having 50 units. The residence was
acquired for a purchase price of approximately $3.4 million. The acquisition was
accounted for as a purchase and the operating results of the facility have been
included in the Company's consolidated financial statements since the
acquisition date. The cost of the acquisition has been allocated based on the
estimated fair value of the net assets acquired of approximately $3.0 million.
The excess of the aggregate purchase price over the fair market value of net
assets acquired is approximately $432,000 and has been recorded as goodwill and
is being amortized on a straight-line basis over 20 years.
Joint Venture
During 1997, the Company entered into joint venture agreements with a
joint venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997. Of
the $2.3 million of total capital raised by the joint venture partner to invest
in such arrangements, the Company contributed $300,000 and recorded such
investment in other non-current assets. In addition, certain members of
management held interests in the joint venture partner. Pursuant to the joint
venture agreements, the Company entered into irrevocable management agreements
under which the Company managed the residences operated by the joint venture for
an amount equal to the greater of 8% of gross revenues or $2,000 per month per
residence. Because the Company retained direct control of the residences
operated by the joint venture, the Company consolidated the operations of the
residences subject to the joint venture agreements in its consolidated financial
statements. The joint venture partner reimbursed the Company for 90.0% of the
start-up losses of the joint venture, and the Company recognized such
reimbursements as loans included in other liabilities. The Company also
reflected amounts paid to repurchase the joint venture partner's interest in
excess of reimbursed losses as interest and other expense. Interest was
calculated based on the average loan balance using an imputed 20.0% interest
rate and other expense was calculated based on a $10,000 administrative fee per
residence. The Company received loss reimbursements of $4.7 million for the year
ended December 31, 1998. The Company repaid $4.0 million of these loans in 1998,
and incurred interest and other expense of $687,000 in connection with these
loans, for the year ended December 31, 1998. As of December 31, 1998, 17
residences owned or leased by the Company were being operated by the joint
venture. During the first quarter of 1999 the Company announced that it had
negotiated with the joint venture partner to purchase, for approximately $3.8
million, all of the joint venture partner's interest in the remaining 17
residences subject to the joint venture agreements (See Note 13).
64
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRICTED CASH
Restricted cash consists of $4.4 million related to loan agreements
(see Note 8) with U.S. Bank National Association ("U.S. Bank"), $1.0 million
related to certain lease agreements (See Note 5), and $1.1 related to required
workers compensation insurance deposits.
4. MARKETABLE SECURITIES
Marketable securities consist of U.S. Treasury securities and other
highly liquid marketable debt securities. The aggregate market value of
securities held at December 31, 1999 was $1.7 million. The investments held at
December 31, 1999 had a historical cost of $2.0 million and were classified as
available for sale in accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investment in Debt and Equity
Securities. As a result, unrealized investment losses of $320,000 are included
as a component of comprehensive loss and shareholders' equity at December 31,
1999. These investments were sold during the year ended December 31, 2000 for
$1.6 million, resulting in realized losses of $368,000.
5. LEASES
A summary of leases that the Company has entered into is as follows:
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, 1997 ... 7 44 51 16 1,906 563
Leases entered into during 1998 -- 4 4 -- 139 --
Lease expansions during 1998 .. -- -- -- -- 47 10
Leases terminated during 1998 . (1) -- (1) -- (45) --
---- ---- ---- ---- ----- ---
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 .. -- -- -- -- -- --
---- ---- ---- ---- ----- ---
Leases at December 31, 2000 ... 6 64 70 -- 2,634 --
==== ==== ==== ==== ===== ===
The Company has entered into agreements to lease six assisted living
residences in Oregon from Assisted Living Facilities, Inc., a related party (the
"Oregon Leases"). During 1998 the Company terminated a lease with Oregon
Heights Partners ("OHP"). 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 Assisted Living Facilities,
Inc., 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 8). 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,
1999 and 2000 were $126,000 which are reflected in other assets.
During 1998 the Company completed the sale of 4 residences under sale
and leaseback arrangements. The Company sold the residences for approximately
$10.3 million and leased them back over initial terms ranging from 12 to 15
years. The Company did not enter into any sale and leaseback agreements in 1999
or 2000.
65
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recognized losses of $651,000 on the above sale and
leaseback transactions for the year ended December 31, 1998. The losses are
presented in the Consolidated Statements of Operations as net loss on sale of
assets. Gains on sale and leaseback transactions of $508,000 for the year ended
December 31, 1998, have been recorded as deferred income included in other
liabilities and are being amortized over the initial terms of the corresponding
leases.
In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases (see Note
6).
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 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.
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, 2000 but has subsequently received a
waiver of the right to declare an event of default (See Note 8).
As of December 31, 2000, future minimum annual lease payments under
operating leases are as follows (in thousands):
2001...................................... $ 16,805
2002...................................... 16,805
2003...................................... 16,805
2004...................................... 16,805
2005...................................... 16,805
Thereafter................................ 96,888
--------
$180,913
========
6. PROPERTY AND EQUIPMENT
As of December 31, 1999 and 2000, property and equipment, stated at
cost, consist of the following (in thousands):
1999 2000
---- ----
Land ......................................... $ 21,329 $ 21,378
Buildings and building improvements .......... 286,347 287,178
Equipment .................................... 5,344 7,149
Furniture .................................... 8,602 8,638
-------- --------
Total property and equipment ........... 321,622 324,343
Less accumulated depreciation and amortization 15,974 25,599
-------- --------
Property and equipment-net ................... $305,648 $298,744
======== ========
66
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Land, buildings and certain furniture and equipment relating to 51
residences serve as collateral for the litigation payable (See Note 16), bridge
loan payable (See Note 7) and for long-term debt (See Note 8). The Company also
encumbered the land, buildings and certain furniture and equipment relating to
16 additional properties in March, 2001 in relation to the Heller Healthcare
Finance, Inc., ("Heller") financing (See Note 19).
Depreciation and amortization expense was $5.9 million, $8.7 million
and $9.6 million, for the years ended December 31, 1998, 1999 and 2000,
respectively.
In 2000, the Company entered into a capital lease agreement to finance
information technology equipment. The lease expires on March 30, 2003. The gross
amount of equipment and related accumulated amortization recorded under this
capital lease was $263,000 and $18,000, respectively at December 31, 2000.
During the years ended December 31, 1998 and 1999 the Company
capitalized interest costs of $6.0 million and $2.0 million, respectively,
relating to financing of construction in process. In addition, the Company
capitalized payroll costs that were directly related to the construction and
development of the residences of $1.8 million and $617,000 for the years ended
December 31, 1998 and 1999, respectively. No interest or payroll costs were
capitalized in 2000.
As a result of the Company's decision to reduce the number of new
residence openings during the year ended December 31, 1998 and beyond, the
Company wrote-off $2.4 million of capitalized costs during 1998 relating to the
abandonment of 36 development sites. In 1999, the Company wrote-off $4.9 million
of capitalized costs relating to the abandonment of all remaining development
sites, with the exception of 10 sites where the Company owns the land. Of these
10 sites, 7 are being held for future development ($1.0 million) and are
included in land, and 3 sites ($452,000) are listed for sale and included in
other current assets.
The Company had certificates of occupancy for 185 residences, all of
which were included in the operating results as of December 31, 2000. Of the
residences with certificates of occupancy, the Company owned 115 residences and
leased 70 residences (all of which are operating leases).
During 1996 and 1997 the Company entered into 16 sale and leaseback
transactions which contained purchase options entitling the Company to purchase
the properties at fair market value at the end of initial lease terms ranging
from 14 to 15 years. As a result of the purchase options the Company accounted
for these sale and leaseback transactions using the financing method in SFAS No.
98, Accounting for Leases. In March 1999, the Company amended these leases. The
amendments eliminated the Company's purchase option; therefore, the leases were
reclassified as operating leases at that date. As a result of the amendments,
the Company recorded (i) the disposal of net property and equipment in the
amount of $29.5 million, (ii) the extinguishment of long-term debt in the amount
of $31.5 million and (iii) a deferred gain of $2.0 million. The deferred gain is
included in other non-current liabilities and is being amortized over the
remaining initial lease term as an offset to rent expense.
7. BRIDGE LOAN PAYABLE
In November 2000, the Company entered into a short-term bridge loan
with Red Mortgage ("Red Mortgage") in the amount of $4.0 million secured by
three previously unencumbered properties. This loan matures on August 1, 2001,
requires monthly interest-only payments and bears annual interest at the greater
of 10% or LIBOR plus 3.5% (10.3% at December 31, 2000).
67
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT
As of December 31, 1999 and 2000, long-term debt consists of the
following (in thousands):
1999 2000
---- ----
Trust Deed Notes, payable to the State of Oregon Housing and
Community Services Department (OHCS) through 2028 ................. $10,025 $ 9,890
Variable Rate Multifamily Revenue Bonds, payable to the Washington
State Housing Finance Commission Department through 2028 .......... 8,235 7,900
Variable Rate Demand Revenue Bonds, Series 1997 payable to the Idaho
Housing and Finance Association through 2017 ...................... 7,120 6,875
Variable Rate Demand Revenue Bonds, Series A-1 and A-2 payable to the
State of Ohio Housing Finance Agency through 2018 ................. 12,845 12,445
Capital lease obligation ............................................ - 212
Mortgages payable ................................................... 35,218 34,775
------- -------
Total long-term debt ................................................ $73,443 $72,097
Less current portion ................................................ 1,494 1,690
------- -------
Long-term debt ...................................................... $71,949 $70,407
======= =======
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, 2000
were secured by an $8.7 million letter of credit and 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 4.24% during
2000.
The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable
to the State of Idaho Housing and Finance Association and at December 31, 2000
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 4.27% during 2000.
In July 1998, the Company 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 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 4.20% during 2000.
In April 1998, the Company obtained $14.6 million in mortgage financing
at a fixed interest rate of 7.73% and secured by a mortgage encumbering each of
seven Texas residences. The mortgage terms include monthly payments of $110,000
over 25 years with a balloon payment of $11.8 million due at maturity in May
2008.
In July 1998, the Company obtained $6.6 million in mortgage financing
at a fixed interest rate of 7.58% and secured by a mortgage encumbering each of
three Oregon residences. The mortgage terms include monthly payments of $49,000
over 25 years with a balloon payment of $5.3 million due at maturity in August
2008.
In September 1998, the Company obtained $5.9 million in mortgage
financing at a fixed interest rate of 8.79% and secured by one Pennsylvania
residence and one South Carolina residence. The mortgage terms include monthly
payments of $43,000 over 25 years with a balloon payment of $5.9 million due at
maturity in September 2008.
68
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1998, the Company obtained $8.7 million in mortgage
financing at a fixed interest rate of 8.65% and secured by a mortgage
encumbering each of three New Jersey residences. The mortgage terms include
monthly payments of $71,000 over 25 years with a balloon payment of $7.2 million
due at maturity in December 2008.
As of December 31, 2000, the following annual principal payments are
required (in thousands):
2001................................................ $ 1,690
2002................................................ 1,793
2003................................................ 1,833
2004................................................ 1,926
2005................................................ 2,062
Thereafter.......................................... 62,793
-------
Total $72,097
=======
The Company's credit agreements with U.S. Bank contain restrictive
covenants which include compliance with certain financial ratios. During the
third quarter of 1999, the Company amended certain loan agreements with U.S.
Bank. Pursuant to the amendment, the Company agreed to provide $8.3 million of
additional cash collateral in exchange for the waiver of certain possible
defaults related to the delivery of financial statements and compliance with
financial covenants, including an amendment to certain financial covenants. The
amendment 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 Company achieved
certain of these specified targets during the fourth quarter of fiscal 1999 and
the first quarter of fiscal 2000 resulting in the release of $1.2 million and
$1.1 million of the restricted cash, respectively.
On July 21, 2000, the Company finalized an agreement with U.S. Bank
whereby U.S. Bank agreed to modify and waive certain financial covenants with
which the Company would have otherwise failed to comply as of June 30, 2000. In
exchange for the modification and waiver of financial covenants through the
quarters ended June 30, 2000 and September 30, 2000, the Company provided three
previously unemcumbered Washington state properties as additional collateral.
The agreement also provided for the release of $1.8 million of cash collateral
currently held by U.S. bank upon the satisfaction of certain conditions, which
were satisfied in August 2000.
The Company determined that it would not meet the U.S. Bank covenants
at December 31, 2000. On March 12, 2001, the Company amended certain loan
documents with U.S. Bank. Pursuant to the amendment, the Company agreed to pay
fees of $34,700 in exchange for the following: the modification of certain
financial covenants, and the waiver of U.S. Bank's right to declare an event of
default for the Company's failure to comply with certain financial covenants as
of December 31, 2000 and for its anticipated failure to comply with certain
financial covenants for the three months ending March 31, 2001. The amendment
also provides the following: approval for the Company to repurchase for cash up
to $25.0 million in face value of its convertible debentures prior to maturity;
a requirement that the Company deposit $500,000 in cash collateral with U.S.
Bank in the event certain regulatory actions are commenced with respect to the
properties securing its obligations to U.S. Bank; and the requirement that U.S.
Bank release such deposits to the Company upon satisfactory resolution of the
regulatory action. 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. In addition, certain
of the Company's leases and loan agreements contain
69
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
agreements.
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, 1999 and 2000 was $378,000 and $422,000, 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 as of December 31,
1999 and 2000, 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.
As of December 31, 1999 and 2000, the Company was restricted from
distributing $233,000 and $278,000 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.
9. CONVERTIBLE SUBORDINATED DEBENTURES
In August 1995, the Company completed the offering of $20.0 million of
7% Debentures due August 2005 realizing net proceeds of approximately $19.2
million. The 7% Debentures were convertible at any time at or prior to maturity,
unless previously redeemed, at a conversion price of $7.50 per common share.
In September 1996, $6.1 million of the 7% Debentures were converted
into 811,333 shares of the Company's common stock which resulted in $13.9
million of 7% Debentures remaining outstanding. In August 1998, the Company
called for redemption of all of the remaining $13.9 million of the 7%
Debentures. All of the 7% Debentures were converted into shares of the Company's
Common Stock, resulting in the issuance of 1,855,334 additional shares of common
stock.
In October 1997, the Company completed the offering of $86.3 million of
6% Debentures due November 2002, realizing net proceeds of approximately $82.9
million. The 6% Debentures are convertible at any time at or prior to maturity,
unless previously redeemed, at a conversion price of $22.57 per common share,
which equates to an aggregate of 3,821,444 shares of the Company's common stock
and bear interest payable semi-annually on May 1 and November 1 of each year,
commencing May 1, 1998. The 6% Debentures are unsecured and subordinated to all
senior indebtedness of the Company. The 6% Debentures are subject to redemption,
as a whole or in part, at any time from time to time commencing on or after
November 15, 2000 at the Company's option at a redemption price equal to 100% of
the principal amount thereof, plus accrued and unpaid interest to the redemption
date.
In April 1998, the Company completed the private placement of $75.0
million of 5.625% Debentures due May 2003, realizing net proceeds of
approximately $72.2 million. The 5.625% Debentures are convertible at any time
at or prior to maturity, unless previously redeemed, at a conversion price of
$26.184 per common share, which equates to an aggregate of approximately
2,864,345 shares of the Company's common stock and
70
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
bear interest payable semiannually on May 1 and November 1 of each year,
commencing November 1, 1998. The 5.625% Debentures are unsecured and
subordinated to all senior indebtedness of the Company. The 5.625% Debentures
are subject to redemption, as a whole or in part, at any time from time to time
on or after May 15, 2001 at the Company's option at a redemption price equal to
100% of the principal amount thereof, plus accrued and unpaid interest to the
redemption date.
10. WRITE-OFF OF IMPAIRED ASSETS AND RELATED EXPENSES
In June 1998, the Company announced a plan to exit all home health
business operations being conducted by Pacesetter. The decision to exit
Pacesetter's operations was a result of certain laws becoming effective that
adversely affected the prospective payment system for home health care services.
Based on this decision, the Company recorded a $8.9 million charge to earnings
during the second quarter 1998. Such charge consisted of (i) a $7.5 million
write-off of all unamortized goodwill associated with Pacesetter and (ii) a $1.4
million provision for estimated exit costs expected to be incurred during the
phase out period. Of this $1.4 million provision, $560,000 related to severance,
salaries and benefits incremental to the shut down effort; $720,000 related to
leases, equipment and related costs of closing offices; and $150,000 related to
travel and moving costs. During the fourth quarter 1998, the $1.4 million
provision for exit costs was reduced by $400,000 to $1.0 million as a result of
a change in the estimate for such exit costs. During the years ended December
31, 1998 and 1999, approximately $760,000 and $154,000, respectively of this
reserve was utilized. The remaining reserve of approximately $86,000 and $54,000
at December 31, 1999 and 2000, respectively, consists primarily of lease
termination costs. Expenses related to Pacesetter's final operations of $430,000
and $1.8 million for the six month period of June 1998 through December 1998 and
for the year ended December 31, 1999 have been expensed as incurred. The phase
out period concluded during 1999. The $1.8 million in 1999 includes bad debt
expense of $510,000, recorded in the fourth quarter, and is included in
corporate, general and administrative expense.
11. TERMINATION OF MERGER AGREEMENT
On February 1, 1999, the Company agreed with American Retirement
Corporation ("ARC") to terminate its previously announced merger agreement,
which had been entered into during November 1998. The Company recorded charges
of approximately $1.1 million and $228,000 in 1998 and 1999, respectively, for
costs relating to the terminated merger agreement.
12. INCOME TAXES
The Company incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1998, 1999, and 2000 and, as such,
there was no current or deferred tax provision.
The provision for income taxes differs from the amount of loss
determined by applying the applicable U.S. statutory federal rate to pretax loss
as a result of the following items at December 31:
1998 1999 2000
---- ---- ----
Statutory federal tax rate ............ (34.0)% (34.0)% (34.0)%
Non deductible goodwill ............... 12.4% 0.3% 0.3%
Losses for which no benefit is provided 21.5% 33.6% 26.9%
Litigation settlement ................. -% -% 6.6%
Other ................................. 0.1% 0.1% 0.2%
---- ---- ----
Effective tax rate .................... -% -% -%
==== ==== ====
71
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
An analysis of the significant components of deferred tax assets and
liabilities, consists of the following as of December 31 (in thousands):
1999 2000
---- ----
Deferred tax assets:
Net operating loss carryforward ..................... $ 19,876 $ 27,846
Investment in joint venture operations .............. 2,815 1,741
Deferred gain on sale and leaseback transactions .... 1,555 1,480
Other ............................................... 3,836 3,470
-------- --------
Total deferred tax assets ....................... 28,082 34,537
Valuation allowance .................................... (19,422) (25,530)
Deferred tax liabilities:
Property and equipment, primarily due to depreciation (8,316) (8,210)
Other ............................................... (344) (797)
-------- --------
Total deferred tax liabilities .................. (8,660) (9,007)
-------- --------
Net deferred tax asset (liability) .................. $ -- $ --
======== ========
The valuation allowance for deferred tax assets as of December 31, 1999
and 2000 was $19.4 million and $25.5 million, respectively. The increase in the
total valuation allowance for the years ended December 31, 1998, 1999 and 2000
was $6.1 million, $10.5 million, and $6.1 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.
At December 31, 2000, the Company had net operating loss carryforwards
of approximately $73.7 million and $59.0 million available to reduce future
federal and state taxable income, respectively. The carryforwards expire at
various dates beginning in the year 2009 through the year 2021.
The portion of the valuation allowance for deferred tax assets for
which subsequently recognized tax benefits will be applied directly to
contributed capital is $1.4 million as of December 31, 2000. This amount is
attributable to differences between financial and tax reporting of employee
stock option transactions.
13. RELATED PARTY TRANSACTIONS
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, 1998, 1999 and 2000, the Company incurred lease rental expense of $1.2
million, $1.3 million, and $1.3 million, respectively. In addition, in 1997 the
Company leased one residence from Oregon Heights Partnership ("OHP") in which
the former president and chief executive officer's spouse owns an interest. The
Company paid OHP $195,000 in rent payments in 1998. The lease with OHP was
terminated in September 1998, effective October 1, 1998.
In 1997, the Company contracted with Supportive Housing Services, Inc.
("SHS") to provide services to the Company for market feasibility analysis,
site pre-acquisition services, field construction supervision and construction
management oversight in conjunction with the Company's development activities.
SHS was owned 75% by the former president and chief executive officer's spouse.
The Company paid $3.8 million, $1.6 million, and $69,000 during the years ended
December 31, 1998, 1999, and 2000, respectively, (including
72
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the amounts paid to CCL (as defined below)) for such development services. The
Company capitalized such payments as construction in process. In July 1999 the
Company delivered 180 days' written notice terminating their agreement with SHS
for such consulting services.
Commencing in 1995, the Company contracted with Concepts in Community
Living, Inc. ("CCL"), directly and through its developers, to perform
feasibility studies and pre-development consulting services for the developers
on the Company's behalf. CCL is owned 100% by the former president and chief
executive officer's spouse. For the years ended December 31, 1998, 1999 and
2000, the Company paid CCL indirectly through SHS for these services fees of
$566,000, $255,000, and $0, respectively, which were capitalized in construction
in process on the consolidated balance sheets. In June 1999 the Company entered
into a new agreement with CCL pursuant to which CCL provided market research,
demographic review and competitor analysis in many of our current markets. The
agreement provided that Company pay CCL a retainer of $10,000 per month, plus
fees in excess of the retainer, if any, in connection with specific projects
that the Company authorizes under the agreement. The Company paid CCL $157,000
and $17,000 for such services in 1999 and 2000, respectively. The Company
terminated the June 1999 agreement by notice dated December 12, 1999.
The Company acquired HCI and Carriage House in October of 1997 (See
Note 2). Several employees of the Company, including members of the Board of
Directors, owned collectively 40.0% of the outstanding common stock in HCI and
approximately 23.0% of the outstanding common stock of Carriage House. Pursuant
to the HCI acquisition agreement, during 1998 and 1999 related parties (current
or former officers, directors, or employees) received ""earnout" payments from
the Company of $428,000 and $416,000, respectively, related to HCI sites the
Company elected to develop. There were no such payments in 2000.
During 1997, the Company entered into joint venture agreements with a
joint venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997 (See
Note 2). The Company, Mr. McBride, the Company's former Chairman and Chief
Executive Officer, Dr. Wilson, the Company's former President and Chief
Executive Officer, and Dr. Wilson's spouse each acquired interests in the joint
venture partner. During 1998, Mr. McBride owned a $400,000 or 16.6% interest,
and Dr. Wilson's spouse owned a $200,000 or 8.3% interest, in the joint venture.
On February 10, 1999, the Company announced with respect to these joint venture
agreements that it had negotiated with the joint venture partner to purchase,
for approximately $3.8 million, all of the joint venture partner's interests in
the operation of the remaining 17 residences subject to the joint venture
agreements. As a result of such purchases, Mr. McBride and Dr. Wilson's spouse
received distributions of approximately $537,000 and $269,000, respectively in
1999. The Company has no current intention of entering into similar arrangements
in the future.
During 1998 Mr. Razook, one of the Company's former directors, was
Managing Director and Head of the Health Care Industry Group of Schroder & Co.
Inc. ("Schroders"), an investment banking firm. During 1998 Schroders served as
the initial purchaser of our $75.0 million offering of 5.625% Debentures for
which Schroders received a customary commission. Also during 1998, Schroders
provided financial advisory services and delivered a fairness opinion in
connection with a proposed merger for which the Company paid Schroders a fee of
$200,000. In March 1999, Mr. Razook became President and Managing Director at
Cohen & Steers Capital Advisors LLC ("C&S Advisors"). Pursuant to an agreement
with Cohen & Steers Capital Management, Inc., an affliate of C&S Advisors
("CSCM"), the Company paid CSCM and C&S Advisors $1.3 million in 1999 for
financial advisory services. On January 24, 2000, the Company's agreement with
CSCM was terminated by mutual consent, and a new agreement with C&S Advisors was
entered into. Pursuant to the new agreement, the Company paid C&S Advisors
approximately $471,000 for financial advisory services in connection with
certain financing and merger and acquisition transactions. The new agreement
terminated on December 31, 2000, except that even after the expiration or
termination of the new agreement the Company is required to pay C&S Advisors
fees under the new agreement if the Company
73
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
completes certain financing, including the Heller financing discussed in Note
18, and merger and acquisition transactions on or prior to December 31, 2001. On
March 2, 2001, the Company closed the Heller financing and paid C&S Advisors
$457,000 in relation to this transaction (See Note 20).
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, 2000, 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 our common shares, and a current member
of the Company's Board of Directors, 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 also a current member of the Company's Board of
Directors.
14. STOCK OPTION PLANS AND RESTRICTED STOCK
The Company has two Stock Option Plans (the "Plans") which provide 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 Plans are administered by the Compensation Committee of the Board
of Directors which establish the terms and provisions of options granted under
the Plans, not otherwise provided under the Plans. Incentive options may be
granted only to officers or other full-time employees of the Company, while
non-qualified options may be granted to directors, officers or other employees
of the Company, or consultants who provide services to the Company.
The Amended and Restated 1994 Stock Option Plan combines an incentive
and nonqualified stock option plan, a stock appreciation rights ("SAR") plan
and a stock award plan (including restricted stock). The 1994 Plan is a
long-term incentive compensation plan and is 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 may 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 equals the market price 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. Options typically vest three years
from the date of issuance and typically are exercisable within seven years from
the date of vesting. Each option is 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 cannot be less than the fair market value of the common stock
on the date of grant. All options are nontransferable and subject to adjustment
upon changes in the Company's capitalization. The Board of Directors, at its
option, may discontinue or amend the 1994 Plan at any time, provided that
certain conditions are satisfied.
Under the Non-Executive Employee Equity Participation Plan of Assisted
Living Concepts, Inc. (the ""Non-Officer Plan") the Company may 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 are not eligible to participate in the
Non-Officer Plan.
74
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The per share weighted-average fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants as of December 31:
1998 1999 2000
---- ---- ----
Expected dividend yield ........ -- -- --
Expected volatility ............ 45.12% 73.70% 98.57%
Risk-free interest rate ........ 5.56% 6.14% 5.26%
Expected life (in years) ....... 10 3 3
The Company applies APB Opinion No. 25 in accounting for its 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)
1998 1999 2000
---- ---- ----
Net loss as reported .................................. $ (20,745) $ (28,933) $ (25,786)
Net loss pro forma .................................... (23,990) $ (31,772) $ (27,586)
Basic and diluted net loss per common share as reported $ (1.27) $ (1.69) $ (1.51)
Basic and diluted net loss per common share pro forma . $ (1.47) $ (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
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.
A summary of the status of the Company's stock options as of December
31, 1998, 1999 and 2000 and changes during the years ended on those dates is
presented below:
1998 1999 2000
-------------------------- -------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
1998 AVERAGE 1999 AVERAGE 2000 AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options at beginning of the year ..... 1,629,967 $ 10.82 1,867,169 $ 12.07 1,744,420 $ 9.78
Granted .............................. 674,132 15.76 460,250 3.71 1,038,850 1.34
Exercised ............................ (121,606) 6.00 (26,934) 5.83 -- --
Canceled ............................. (315,324) 15.82 (556,065) 12.65 (1,309,372) 10.21
--------- --------- ---------
Options at end of the year ........... 1,867,169 $ 12.07 1,744,420 $ 9.78 1,473,898 $ 3.38
========= ========= =========
Options exercisable at end of year ... 833,465 982,973 476,686
Weighted-average fair value of options
granted during the year .............. $ 10.22 $ 2.52 $ 1.32
75
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarized information about stock options outstanding at
December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- -------------- ----------- --------------
$ 0.00 to 0.38 51,000 9.85 $ 0.38 -- $ 0.00
$ 1.00 to 1.13 346,148 9.33 1.12 9,666 1.10
$ 1.31 to 1.44 383,500 9.00 1.44 44,503 1.44
$ 1.50 to 1.69 44,834 8.87 1.67 15,171 1.67
$ 1.75 to 1.81 156,500 9.15 1.81 32,727 1.81
$ 2.19 to 2.88 131,837 8.44 2.86 45,196 2.86
$ 3.19 to 4.63 154,668 3.05 4.56 151,339 4.57
$ 4.88 to 16.50 166,826 6.53 11.38 146,577 11.35
$16.75 to 20.75 38,085 7.18 17.55 31,173 17.60
$21.25 500 7.25 21.25 334 21.25
--------- -------
1,473,898 $ 3.38 476,686 $ 6.71
========= =======
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.
15. WORKER'S COMPENSATION
The Company utilizes third-party insurance for losses and liabilities
associated with worker's 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,
other current liabilities includes worker's compensation claims payable of
approximately $1.0 million relating to outstanding 2000 claims.
76
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. LEGAL PROCEEDINGS
Securityholder Litigation Settlement
In September, 2000, the Company reached an agreement to settle the
class action litigation relating to the restatement of its 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 subsequently dismissed from the litigation with
prejudice.
The total cost of the settlement was approximately $10,020,000 (less
$1.0 million of legal fees and expenses reimbursed by the Company's corporate
liability insurance carriers and other reimbursements of approximately
$193,000). The Company made two payments of $2.3 million each on October 23,
2000 and January 23, 2001 towards the settlement. The remaining amount due will
be paid in two payments of $2.3 million each, due on April 23, 2001 and July 23,
2001, and a final payment of $1.0 million due within 90 days following the July
23, 2001 payment.
The settlement had been pending the approval of the Company's corporate
liability insurance carriers who had raised certain coverage issues that
resulting the filing of litigation between the Company and the carriers. These
carriers consented to the settlement, and the Company and the carriers agreed to
dismiss the litigation regarding coverage issues and to resolve those issues
through binding arbitration. The arbitration proceeding is pending. To the
extent that the carriers are successful, the Company and the carriers have
agreed that the carriers' recovery is not to exceed $4.0 million. The parties
further agreed that payment of any such amount awarded or agreed to will not be
due in any event until 90 days after the Company has satisfied its obligations
to the plaintiffs in the class action, with any such amount to be subordinated
to new or refinancing of existing obligations. The Company believes it has
strong defenses regarding this dispute and consequently has not recorded a
liability in relation to this matter.
As a result of the class action settlement, the Company recorded a
charge of approximately $10,020,000, which was partially offset by a reduction
in general, and administrative expenses of approximately $1,193,000 as a result
of the reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Although the Company believes it has strong defenses regarding its
dispute with the insurance carriers, the Company cannot predict the outcome of
this litigation and currently is unable to evaluate the likelihood of success or
the range of possible loss. However, if such litigation was determined adversely
to the Company, such a determination could have a material adverse effect on its
financial condition, results of operations, cash flow and liquidity.
Indiana Litigation Settlement
The Company was served with a complaint, filed May 30, 2000 in the
Marion (Indiana) Superior Court on behalf of the Commissioner of the Indiana
State Department of Health ("ISDH"). ISDH had alleged that the Company was
operating its Logansport, Indiana facility known as McKinney House as a
residential care facility without a license. The Company believes that its
services were consistent with those of a "Housing with Services Establishment"
(which is not required to be licensed) pursuant to Indiana Code Section
12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because the Company wished to assure the State that it operates in a manner that
is consistent with Indiana law, the Company agreed to the following settlement
on behalf of all facilities owned and operated by the Company in the State of
Indiana. The Company and the State agreed upon a Program Description that
clarifies the services that the Company can provide without requiring licensure
as a residential care facility. This Program Description provides
77
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
guidelines regarding the physical and medical condition of the residents in the
Company's facilities and the services to be provided to them. The Company agreed
that prior to March 20, 2001, it would provide in-service training regarding the
Program Description throughout its Indiana facilities. Under the Program
Description, the Company must discharge residents who require certain types or
levels of care that the Company agreed not to provide in Indiana. The Company is
currently implementing the Program Description and, while its full impact is not
now known, the Company does not expect the impact to be material to its
financial condition, results of operations, cash flow and liquidity. Without
admitting liability, the Company paid a civil penalty of $10,000. The State
dismissed the lawsuit against the Company with prejudice.
Other Litigation
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.
17. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Company implemented a 401(k) Savings
Plan ("the Plan"). The Plan 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 $10,000),
as defined in the 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 plan.
Effective November 5, 1998, the Company implemented a Severance Pay
Plan for Program Directors, Associate Program Directors, 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 year ended December 31, 1999, the Company paid out
benefits of $19,000 under this plan. No such benefits were paid during the years
ended December 31, 1998 and 2000.
18. LIQUIDITY
The Company's ability to satisfy its obligations, including payments
with respect to its outstanding indebtedness and lease obligations, will depend
on future performance, which is subject to its ability to stabilize its
operations, and to a certain extent, general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. The
Company made two payments of approximately $2.3 million each towards its
litigation settlement on October 23, 2000 and January 23, 2001 and on November
1, 2000 made its $4.7 million semi-annual interest payment on its convertible
subordinated debentures. The Company is obligated to pay the remaining $5.6
million related to the litigation settlement in two installments of
approximately $2.3 million each, due on April 23, 2001 and July 23, 2001, with
final payment of $1.0 million due within 90 days following the July 23, 2001
payment. Additionally, the Company's next $4.7 million semi-annual interest
payment on its convertible subordinated debentures is due on May 1, 2001. The
Company may also be required to reimburse its insurance carriers for up to $4.0
million of costs incurred by the carriers in connection with the securityholder
litigation, depending on the outcome of a pending dispute over coverage (See
Note 16).
The Company believes that its current cash on hand, cash available from
operations and financing by Heller (obtained subsequent to year end) will be
sufficient to meet its working capital needs through July 2002. However, the
Company will have up to $45.0 million in principal from the Heller financing
maturing on
78
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
August 31, 2002 (unless the five wholly owned subsidiaries, which are the
borrowers, are able to and do extend the maturity dates for up to three
six-month extensions), and have $161.3 million (less any amounts repurchased
with the Heller line of credit) in principal amount of convertible debentures
maturing between November 2002 and May 2003. The Company also expects the cost
to maintain its long-lived assets in their present condition to increase;
however, the Company cannot yet estimate the financial impact since its
experience is limited due to the newness of these assets (See Note 19).
The Company is currently exploring various alternatives to address its
financing needs and the maturities of its long-term debt. The Heller and Red
Mortgage financings have been sought to fund potential working capital needs, to
fund the cost of the Company's shareholder litigation settlement, the repurchase
of 16 of the Company's leased properties and the repurchase of some of its
convertible debentures in the open market. The Company expects to replace the
Red Mortgage financing with long-term HUD mortgage loans and also expects to
replace a substantial portion of the Heller financing with long-term HUD
mortgage loans, to the extent the processing time and increasing limitations by
HUD on submission of applications and amount financed permit. In addition, the
Company is also considering issuing new securities with longer maturities to the
holders of its convertible debentures in exchange for some or all of their
debentures. The Company has 48 unencumbered residences available to use as
collateral for these various alternatives, 47 of which are subject to negative
covenants not to encumber them except under certain circumstances, including the
use of the net proceeds of the financing which they secure for the reduction of
the Company's indebtedness to its convertible debenture holders. No commitments
are currently in place and there can be no assurance that the Company's efforts
will be successful, in which event the Company will have to consider other
alternatives, including reorganization under the bankruptcy laws or raising
highly dilutive capital through the issuance of equity or equity-related
securities.
19. SUBSEQUENT EVENTS
Equipment Financing
Effective February 22, 2001, the Company entered into a loan agreement
to finance technology equipment in the amount of $550,000. The agreement
required an initial payment of $150,000 (which has been paid) and monthly
payments of $25,000 (principal and interest) until maturity on August 31, 2002.
The loan bears an interest rate of 12.5% and is secured by the related
technology equipment which had been purchased in 2000.
Heller Financing
On March 2, 2001, the Company entered into an agreement with Heller
Healthcare Finance, Inc. for a $45.0 million line of credit, under which five
wholly owned subsidiaries are the jointly and severally liable borrowers of any
funds drawn. This line matures on August 31, 2002, requires monthly
interest-only payments until maturity. This line bears an interest rate of 3.85%
over the three-month LIBOR rate floating monthly and will be secured by up to 32
properties owned by the borrowers and leased to the Company or another of its
wholly owned subsidiaries. The Company guaranteed the line. In addition to
having paid a commitment fee of $450,000, the Company is to pay funding fees of
0.5% of the principal amount funded at the time of funding and pay an exit fee
of 1.0% of the principal being repaid. The borrowers may elect to exercise up to
three six-month extensions of the maturity date, subject to the satisfaction of
certain conditions. The Company intends to replace a substantial portion of this
financing with long-term HUD financing to the extent the processing time and
increasing limitations by HUD on submission of applications and amount financed
permit. While the line remains outstanding, the Company has agreed that it will
not sell or grant mortgages on its remaining unencumbered properties, except
one, unless the net proceeds are used to repurchase the Company's convertible
debentures or otherwise reduce its indebtedness (if approved by Heller).
Proceeds of the line may be used for the payment of the Company's shareholders'
litigation settlement, the repurchase of 16 of its
79
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
leased properties and the repurchase of some of its convertible debentures. The
Company made an initial draw of $1.3 million on this line on March 2, 2001.
20. LISTING STATUS WITH AMERICAN STOCK EXCHANGE (UNAUDITED)
The Company's common stock currently is listed on the American Stock
Exchange ("AMEX") under the symbol "ALF," its 5.625% Convertible Subordinated
Debentures currently are listed on AMEX under the symbol "ALS5E03" and its 6.0%
Convertible Subordinated Debentures currently are listed on AMEX under the
symbol "ALS6K02." AMEX recently notified the Company that the Company had
fallen below certain of AMEX's continued listing guidelines and that it was
reviewing the Company's listing eligibility. In particular, the Company has
incurred losses from continued operations for each of its past six fiscal years
ending December 31, 2000, and the price per share of the Company's common stock
as quoted on AMEX recently has been below the minimum bid price of $1.00 per
share. The Company may choose to effect a reverse stock split in the event that
the price of its common stock does not otherwise meet the minimum bid
requirement. However, the Company reported a net loss of $1.51 per basic and
diluted share for the year ended December 31, 2000. The Company has provided
AMEX with additional information and has been involved in ongoing discussions
with AMEX in connection with its review of the Company's listing eligibility.
While AMEX has decided not to delist the Company at this time, they will
continue to review its listing status on a quarterly basis.
If AMEX were to delist the Company's securities, it is possible that
the securities would continue to trade on the over-the-counter markets. However,
the extent of the public market for the securities and the availability of
quotations would depend upon such factors as the aggregate market value of each
class of the securities, the interest in maintaining a market in such securities
on the part of securities firms and other factors. There can be no assurance
that any public market for the Company's securities will exist in the event that
such securities are delisted.
80
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ASSISTED LIVING CONCEPTS INC.
Registrant
March 13, 2000 By: /s/ DREW Q. MILLER
-------------------------------------
Name: Drew Q. Miller
Title: Senior Vice President,
Chief Financial Officer and Treasurer
March 13, 2000 By: /s/ M. CATHERINE MALONEY
-------------------------------------
Name: M. Catherine Maloney
Title: Vice President, Controller
and Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Assisted Living
Concepts, Inc. do hereby constitute and appoint Wm. James Nicol or Drew Q.
Miller, and each of them, the lawful attorney and agent or attorneys and agents
with power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents, or either of them,
determine may be necessary or advisable or required to enable to comply with the
Securities and Exchange Act of 1934, as amended, and any rules or regulations or
requirements of the Securities and Exchange Commission in connection with this
Annual Report on Form 10-K. Without limiting the generality of the foregoing
power and authority, the powers granted include the power and authority to sign
the names of the undersigned officers and directors in the capacities indicated
below to this Annual Report on Form 10-K or amendment or supplements thereto,
and each of the undersigned hereby ratifies and confirms all that said attorneys
and agent, or either of them, shall do or cause to be done by virtue hereof.
This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the dated indicated opposite his or her name.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF
1934, THE REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WM. JAMES NICOL Chairman, President and March 13, 2001
------------------------------ Chief Executive Officer
Wm. James Nicol
/s/ DREW Q. MILLER Senior Vice President, Chief Financial March 13, 2001
------------------------------ Officer and Treasurer
Drew Q. Miller
/s/ M. CATHERINE MALONEY Vice President, Controller and March 13, 2001
------------------------------ Chief Accounting Officer
M. Catherine Maloney
81
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN M. GIBBONS Director and Vice Chairman March 13, 2001
------------------------------
John M. Gibbons
/s/ RICHARD C. LADD Director March 13, 2001
------------------------------
Richard C. Ladd
/s/ JILL M. KRUEGER Director March 13, 2001
------------------------------
Jill M. Krueger
/s/ BRUCE E. TOLL Director March 13, 2001
------------------------------
Bruce E. Toll
/s/ LEONARD TANNENBAUM Director March 13, 2001
------------------------------
Leonard Tannenbaum
82
SCHEDULE II
ASSISTED LIVING CONCEPTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
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, 1998:
Valuation accounts deducted from assets:
Allowance for doubtful receivables ..... $ 79 $ 359 $ 259 $ 179
------ ------ ------ ------
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
------ ------ ------ ------
----------
(1) Represents amounts written off.
(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.
83
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Articles of Incorporation of the Company (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on Form
S-1, File No. 33-83938).
3.2 By laws of the Company (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1, File No.
33-83938).
4.1 Indenture, dated as of October 2, 1997 by and between the Company and
Harris Trust and Savings Bank, as Trustee providing for Issuance of
Securities in Series. (Incorporated by reference to Exhibit 4.1 to the
Company's Report on Form 8-K, dated October 20, 1997, File No.
1-13498).
4.2 Rights Agreement dated as of June 12, 1997, between Assisted Living
Concepts, Inc. and American Stock Transfer & Trust Company, as Rights
Agent, which includes the form of Certificate of Resolution
Establishing Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of Assisted Living Concepts Inc. as
Exhibit A, the form of Right Certificate as Exhibit B and the Summary
of Rights to Purchase Preferred Shares as Exhibit C (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
8-K, dated July 24, 1997, File No. 1-83938).
4.3 Amendment to Registration Rights Agreement, dated as of June 12, 1997,
effective as of November 8, 2000.
4.4 Indenture, dated as of April 13, 1998, by and between the Company and
Harris Trust and Savings Bank, as Trustee (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on Form
S-3, dated May 11, 1998, Registration No. 333-52297).
4.5 Form of Debenture (Incorporated by reference to the same titled exhibit
to the Company's Registration Statement on Form S-3, dated May 11,
1998, Registration No. 333-52297).
10.1 Indemnification Agreement dated October 3, 1997 by and between the
Company and Keren Brown Wilson. (Incorporated by reference to the same
titled exhibit to the Company's Report on Form 8-K, dated October 20,
1997, File No. 1-13498).
10.2 Amended and Restated 1994 Stock Option Plan of the Company
(Incorporated by reference to the same titled exhibit to the Company's
Report on Form 8-K, dated October 20, 1997, File No. 1-13498).
10.3 Non-Executive Employee Equity Participation Plan of the Company
(Incorporated by reference to the same titled exhibit to the Company's
Registration Statement on Form S-8, dated July 13, 1998, Registration
No. 333-58953).
10.4 Deferred Compensation Plan of the 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 Amended and Restated Employment Agreement, dated October 1999, as
amended as of March 15, 1999, by and between the Company and Keren
Brown Wilson (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 Employment Agreement, dated as of December 31, 1997, 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 fiscal year
ended December 31, 1998).
10.7 Employment Agreement, dated as of February 3, 1998, by and between the
Company and Nancy Gorshe (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 Separation and Consulting Agreement, dated as of March 3, 2000, by and
between the Company and James Cruckshank (Incorporated by reference to
the same titled exhibit to the Company's Report on Form 8-K dated March
3, 2000 File No. 001-13498).
84
EXHIBIT
NO. DESCRIPTION
------- -----------
10.10 Employment Agreement, dated as of March 15, 1999, by and between the
Company and Leslie Mahon (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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the 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).
10.18 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the 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).
10.19 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).
10.20 Modification and Amendment to Employment Agreement, dated as of January
19, 2000, by and between the Company and Nancy Inez Gorshe.
10.21 Modification and Amendment to Employment Agreement, dated as of January
1, 2000, by and between the Company and Sandra Campbell.
10.22 Employment Agreement, dated as of November 1, 2000, by and between the
Company and Wm. James Nicol.
10.23 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).
10.24 Guaranty, dated as of February 20, 2001, by Assisted Living Concepts,
Inc., 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).
10.25 Third Amendment and Modification of Reimbursement Agreement, dated as
of March 12, 2001, between the Company and U.S. Bank National
Association.
85
EXHIBIT E
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 1-83938
ASSISTED LIVING CONCEPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 93-1148702
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11835 NE GLENN WIDING DRIVE, BUILDING E
PORTLAND, OREGON 97220
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(503) 252-6233
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether Registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that Registrants was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
The Registrant had 17,120,745 shares of common stock, $.01 par value,
outstanding at August 6, 2001.
================================================================================
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
JUNE 30, 2001
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, December 31, 2000 and June 30, 2001 ..... 1
Consolidated Statements of Operations, Three and Six Months Ended
June 30, 2000 and 2001 ............................................... 2
Consolidated Statements of Cash Flows, Six Months ended June 30, 2000
and 2001 ............................................................. 3
Notes to Consolidated Financial Statements ........................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 10
Risk Factors ......................................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk and
Risk Sensitive Instruments ........................................... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 26
Item 6. Exhibits and Reports on Form 8-K ..................................... 26
Signatures .................................................................... 27
Exhibit Index ................................................................. 28
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, JUNE 30,
2000 2001
------------ ----------
(UNAUDITED)
ASSETS
Current assets:
Cash, cash equivalents and cash held for tenant security deposits ............ $ 9,889 $ 5,679
Accounts receivable, net of allowance for doubtful accounts of $1,399 and
$353, respectively ......................................................... 2,448 2,207
Prepaid insurance ............................................................ 1,765 1,094
Prepaid expenses ............................................................. 1,042 485
Other current assets ......................................................... 2,729 3,121
-------- --------
Total current assets ................................................... 17,873 12,586
-------- --------
Restricted cash ................................................................ 6,466 8,474
Property and equipment, net .................................................... 298,744 294,669
Goodwill, net .................................................................. 4,785 4,639
Other assets, net .............................................................. 8,590 11,030
-------- --------
Total assets ........................................................... $336,458 $331,398
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 2,708 $ 1,525
Accrued real estate taxes .................................................... 4,835 3,969
Accrued interest expense ..................................................... 1,937 2,013
Accrued payroll expense ...................................................... 4,017 4,379
Other accrued expenses ....................................................... 4,855 3,775
Bridge loan payable .......................................................... 4,000 --
Litigation settlement payable ................................................ 7,765 3,256
Tenant security deposits ..................................................... 2,484 2,453
Insurance premium obligation ................................................. -- 1,228
Other current liabilities .................................................... 565 421
Current portion of long-term debt and capital lease obligation ............... 1,690 11,827
-------- --------
Total current liabilities .............................................. 34,856 34,846
-------- --------
Other liabilities .............................................................. 6,059 5,751
Long-term debt and capital lease obligation, net of current portion ............ 70,407 74,474
Convertible subordinated debentures ............................................ 161,250 161,250
-------- --------
Total liabilities ...................................................... 272,572 276,321
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; none issued or
outstanding ................................................................ -- --
Common Stock, $.01 par value; 80,000,000 shares authorized; issued and
outstanding 17,120,745 shares in 2000 and 2001 ............................. 171 171
Additional paid-in capital ................................................... 144,212 144,212
Accumulated deficit .......................................................... (80,497) (89,306)
-------- --------
Total shareholders' equity ............................................. 63,886 55,077
-------- --------
Total liabilities and shareholders' equity ............................. $336,458 $331,398
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
1
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -------------------
2000 2001 2000 2001
------- ------- ------- -------
Revenue ....................................................... $34,146 $37,371 $67,278 $74,248
Operating expenses:
Residence operating expenses ................................ 22,305 24,891 44,987 50,449
Corporate general and administrative ........................ 5,066 4,440 9,114 8,708
Building rentals ............................................ 3,685 4,151 7,330 8,322
Building rentals to related party ........................... 317 -- 634 --
Depreciation and amortization ............................... 2,339 2,571 4,751 5,123
Debt and lease restructure costs ............................ -- 1,063 -- 1,366
------- ------- ------- -------
Total operating expenses .............................. 33,712 37,116 66,816 73,968
------- ------- ------- -------
Operating income .............................................. 434 255 462 280
------- ------- ------- -------
Other income (expense):
Interest expense ............................................ (4,090) (4,905) (8,118) (9,307)
Interest income ............................................. 180 139 389 287
Gain (loss) on sale and disposal of assets .................. 13 (52) 13 (88)
Loss on sale of marketable securities ....................... (368) -- (368) --
Other income (expense), net ................................. 10 (48) 10 19
------- ------- ------- -------
Total other expense ................................... (4,255) (4,866) (8,074) (9,089)
------- ------- ------- -------
Net loss ...................................................... $(3,821) $(4,611) $(7,612) $(8,809)
======= ======= ======= =======
Basic and diluted net loss per common share ................... $ (0.22) $ (0.27) $ (0.44) $ (0.51)
======= ======= ======= =======
Basic and diluted weighted average common shares outstanding .. 17,121 17,121 17,121 17,121
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
2
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 2001
-------- --------
OPERATING ACTIVITIES:
Net loss ................................................................................ $ (7,612) $ (8,809)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................................... 4,751 5,123
Provision for doubtful accounts ....................................................... 291 (21)
Loss on sale of marketable securities ................................................. 368 --
Compensation expense on issuance of consultant options ................................ 8 --
Loss on disposal of assets ............................................................ (13) 88
Changes in assets and liabilities:
Accounts receivable ................................................................... (267) 262
Prepaid expenses ...................................................................... (95) 1,228
Other current assets .................................................................. 387 (444)
Other assets .......................................................................... 889 694
Accounts payable ...................................................................... (462) (1,183)
Accrued expenses ...................................................................... (915) (1,211)
Insurance premium obligation .......................................................... -- 1,228
Other current liabilities ............................................................. 240 (4,981)
Other liabilities ..................................................................... 18 (308)
-------- --------
Net cash used in operating activities ........................................... (2,412) (8,334)
-------- --------
INVESTING ACTIVITIES:
Restricted cash ......................................................................... (941) (2,008)
Sale of investment securities ........................................................... 1,632 --
Purchases of property and equipment ..................................................... (1,679) (938)
-------- --------
Net cash used in investing activities ........................................... (988) (2,946)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................................................ -- 14,777
Payments on long-term debt and capital lease obligation ................................. (328) (573)
Payments on bridge loan payable ......................................................... -- (4,000)
Debt issuance costs ..................................................................... -- (3,134)
-------- --------
Net cash (used in) provided by financing activities ............................. (328) 7,070
-------- --------
Net decrease in cash, cash equivalents and cash held for tenant security deposits ....... (3,728) (4,210)
Cash, cash equivalents and cash held for tenant security deposits, beginning of
period ................................................................................ 7,606 9,889
-------- --------
Cash, cash equivalents and cash held for tenant security deposits, end of period ........ $ 3,878 $ 5,679
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest ............................................................ $ 7,500 $ 7,819
Decrease in construction payable and property and equipment ........................... $ (794) $ --
Reclassification of other current and other liabilities to current and non-current
long-term debt and capital lease obligation ........................................ $ -- $ 550
The accompanying notes are an integral part of these consolidated
financial statements.
3
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
Assisted Living Concepts, Inc., a Nevada Corporation, (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.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared without being
audited, as allowed by the rules and regulations of the Securities and Exchange
Commission. The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries that own, lease and
operate assisted living residences. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures that are normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted as allowed by rules and regulations of
the Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
The financial information included in these financial statements contain
all adjustments (which consist of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of results for the
quarterly periods. The results of operations for the three and six month periods
ended June 30, 2001 do not necessarily indicate the results that are expected
for the full year.
Reclassifications
Certain reclassifications have been made in the prior period's financial
statements to conform to the current period's presentation. Such
reclassifications had no effect on previously reported net loss or total
shareholders' equity.
2. DEBT AND LEASE RESTRUCTURE COSTS
Debt and lease restructure costs include legal, financial advisory and
other professional fees related to the potential restructuring of the Company's
under-performing loans and leases, and convertible debentures maturing in 2002
and 2003. Since the Company does not expect to raise any new capital as a result
of such restructuring, these amounts are expensed as incurred in the
accompanying financial statements. Costs were $1.1 million and $1.4 million for
the three and six months ended June 30, 2001, respectively.
4
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. CASH, CASH EQUIVALENTS AND CASH HELD FOR TENANT SECURITY DEPOSITS
The Company's cash, cash equivalents and cash held for tenant security
deposits consist of the following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
------ ------
Cash .......................................................... $2,863 $2,097
Cash equivalents .............................................. 4,581 1,169
Cash held for tenant security deposits ........................ 2,445 2,413
------ ------
Total cash, cash equivalents and cash held for tenant
security deposits .................................... $9,889 $5,679
====== ======
Cash held for tenant security deposits is a general unrestricted asset of
the Company.
4. RESTRICTED CASH
Restricted cash consists of the following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
------ ------
Cash held for loan agreements with U.S. Bank National
Association ("U.S. Bank") ...................................... $4,354 $4,418
Cash held in accordance with lease agreements .................... 1,001 1,022
Workers' compensation deposits ................................... 1,072 2,994
State regulated restricted tenant security deposits .............. 39 40
------ ------
Total restricted cash ....................................... $6,466 $8,474
====== ======
5. PROPERTY AND EQUIPMENT
The Company's property and equipment, stated at cost, consists of the
following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
-------- --------
Land and improvements ................................. $ 21,378 $ 21,383
Buildings and improvements ............................ 287,178 287,251
Equipment ............................................. 7,149 7,385
Furniture ............................................. 8,638 8,679
-------- --------
Total property and equipment ..................... 324,343 324,698
Less accumulated depreciation ......................... 25,599 30,029
-------- --------
Property and equipment, net ........................... $298,744 $294,669
======== ========
6. INSURANCE PREMIUM OBLIGATION
During the six months ended June 30, 2001, the Company entered into
several short-term agreements to finance its annual insurance premiums. These
are nine month agreements and bear interest at annual fixed rates of
approximately 8% to 9%.
5
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. LONG-TERM DEBT
Equipment Financing
Effective February 22, 2001, the Company entered into a loan agreement to
finance technology equipment in the amount of $550,000. The agreement required
an initial payment of $150,000 (which has been paid) and monthly payments of
$25,000 (principal and interest) until maturity on August 31, 2002. This loan
bears an interest rate of 12.5% and is secured by the related technology
equipment which the Company purchased during the year ended December 31, 2000.
Heller Financing
On March 2, 2001, the Company entered into an agreement with Heller
Healthcare Finance, Inc. ("Heller") for a line of credit facility up to $45.0
million. This line was scheduled to mature on August 31, 2002 and would have
been secured by up to 32 properties.
As of June 27, 2001, the Company amended its line of credit facility with
Heller, reducing the aggregate line of credit available from $45.0 million to
$20.0 million. This amended line bears an interest rate of 3.85% Over the
three-month LIBOR rate floating monthly and requires monthly interest-only
payments until maturity. The amended line is secured by 26 properties. The
maturity date for the amended line is September 28, 2001; accordingly, the
outstanding balance is included in current portion of long-term debt in the
accompanying financial statements. If the Company or any of the borrower
subsidiaries is not subject to Chapter 11 of the U.S. Bankruptcy Code before
such date, the borrower subsidiaries may extend the maturity date to the earlier
of May 31, 2002, or the earliest date on which the Company or any of the
borrower subsidiaries is subject to such a petition. Fees incurred to date,
including commitment fees, funding fees, closing fees and professional fees
associated with the establishment of this line of credit and amendment were $2.9
million. The balance outstanding on this line is $10.1 million at June 30, 2001
($12.2 million at August 6, 2001).
As amended, the facility may be used to pay trade payables, certain
professional fees relating to its debt and lease restructuring, closing costs
and other anticipated costs, and to fund an interest reserve and tenant deposit
account. As amended, the line of credit facility may no longer be used to fund
interest payments on the Company's convertible debentures, to repurchase leased
facilities or debentures, or to fund future payments in connection with the
Company's class action litigation settlement. While the line remains
outstanding, the Company has agreed that it will not sell or grant mortgages on
all but one of its remaining unencumbered properties, unless the net proceeds
are used to repurchase the Company's convertible debentures or otherwise reduce
its indebtedness (if approved by Heller).
The line of credit is guaranteed by the Company; however, as amended, the
filing of a petition under Chapter 11 of the U.S. Bankruptcy Code by the Company
no longer triggers an event of default under the loan agreement.
Housing and Urban Development ("HUD") Insured Financing
On June 14, 2001, the Company entered into two loan agreements for $1.8
million and $2.7 million with Red Mortgage Capital, Inc. ("Red Mortgage") for
long-term HUD insured financing. Each loan is secured by a property in Texas,
each loan matures on July 1, 2036 and together require monthly principal and
interest payments of $31,000. Each of these loans bears a fixed annual interest
rate of 7.40%. Of the $4.5 million in proceeds, $4.0 million was used to pay off
bridge financing provided by Red Mortgage, $200,000 was used for loan closing
costs, $190,000 was used to pay down the Heller line of credit and the remaining
proceeds were used to fund escrow accounts.
6
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On July 19, 2001, the Company entered into a $3.0 million loan agreement
with Red Mortgage for long-term HUD insured financing. This loan is secured by
one property in Texas, matures on July 1, 2036 and requires monthly principal
and interest payments of $20,000. This loan bears a fixed annual interest rate
of 7.55%. $2.8 million of the proceeds were used to pay down the Heller line of
credit and the remaining proceeds were used for loan closing fees and to fund
escrow accounts.
U.S. Bank Loan Amendment
On March 12, 2001, in exchange for a waiver of U.S. Bank's right to
declare an event of default for the Company's failure to comply with certain
financial covenants as of December 31, 2000 and March 31, 2001, and for the
modification of certain financial covenants, the Company agreed to maintain
minimum cash balances of $11.0 million at the end of each fiscal quarter, except
for the fiscal quarter ending June 30, 2001 which has a required minimum balance
of $8.0 million. The amendment also requires the Company 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 its 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. 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.
In May, 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 March 31, 2001
cash balance requirements set forth in the March 12, 2001 U.S. Bank loan
amendment.
Additionally, 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 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.
Many of the Company's 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, the Company could
experience a material adverse effect on its financial condition.
8. LITIGATION
Arbitration of 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. Although the Company has been dismissed from the litigation with
prejudice, an outstanding dispute regarding coverage exists with the Company's
corporate liability insurance carriers. The Company and the insurance carriers
agreed to resolve this dispute through binding arbitration. To the extent that
the carriers are successful, they have agreed that their recovery is not to
exceed $4.0 million. The carriers further agreed that payment of any such amount
awarded or agreed to will not be due in any event until 90 days after the
Company has satisfied its obligations to the plaintiffs in the class action,
with any such amount to be subordinated to new or refinancing of existing
obligations. The Company believes it has strong defenses regarding this dispute
and consequently has not recorded a liability in relation to this matter.
Although the Company believes it has strong defenses regarding its dispute
with the insurance carriers, the Company cannot predict the outcome of this
arbitration and currently is unable to evaluate the likelihood
7
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
of success or the range of possible loss. However, if such arbitration were
determined adversely to the Company, such a determination could have a material
adverse effect on its financial condition, results of operations, cash flow and
liquidity.
Other Litigation
In addition to the matter referred to above, the Company is involved in
various lawsuits and claims arising in the normal course of business. In the
aggregate, settlement of such suits and claims should not have a material
adverse effect on the Company's financial condition, results of operations, cash
flow and liquidity.
9. LIQUIDITY
The Company will have to pay all outstanding balances under the Heller
line of credit maturing on September 28, 2001 (which the borrower subsidiaries
may extend, if the Company or any borrower subsidiaries is not subject to
chapter 11 of the U.S. Bankruptcy Code before such date, to the earlier of May
31, 2002 or the date on which the Company or any of the borrower subsidiaries is
subject to Chapter 11) and $161.3 million in principal amount of convertible
debentures maturing in November 2002 and May 2003. The Company does not have
sufficient liquidity to pay these amounts as they mature and is currently
exploring various refinancing and restructuring alternatives. The Company has 38
unencumbered residences, 37 of which are subject to negative covenants not to
encumber them unless the net proceeds are used to repurchase the Company's
convertible debentures or otherwise reduce its indebtedness (if approved by
Heller). If the Company makes its final payment on the litigation payable on
October 23, 2001, the Company will have 8 additional unencumbered residences,
none of which will be subject to negative covenants.
The Company has retained a financial advisor to explore possible
restructuring options with respect to its convertible debentures. The Company's
financial advisors and the financial advisors of an unofficial committee (the
"Committee") of the holders of 64% in principal amount of the Company's two
series of convertible debentures (collectively, the "Debentures") worked
together from March, 2001 to July, 2001, negotiating restructuring options with
respect to the Debentures. On July 2, 2001, the Company announced that the
Committee had not accepted a proposal concerning a restructuring of the
Debentures that the Company made to the Committee's advisors on April 12, 2001,
nor had the Committee reached a consensus on any counteroffer. A confidentiality
agreement and agreement to restrict trading of securities, dated May 24, 2001
(the "Confidentiality Agreement"), between the Company and the individual
Committee members, expired June 30, 2001. The Company had entered into the
Confidentiality Agreement to facilitate negotiations with the Debenture holders
concerning a restructure.
The Company has continued its negotiations with certain members of the
original Committee. The Company believes that such negotiations will lead to a
consensual restructuring of the Debentures which will result in a significant
reduction in principal amount of the Debentures and a substantial dilution, or
elimination of, the Company's existing common stock ownership. The Company is
also in negotiations with lenders and lessors of certain of the Company's loans
and leases associated with under-performing properties. If the Company reaches
an agreement with the Debenture holders, it is anticipated that the
restructuring will be implemented through a "prenegotiated" plan of
reorganization under Chapter 11 of the United States Bankruptcy Code through
which certain under-performing leases may be rejected and certain under-
performing properties subject to mortgages may be conveyed in full satisfaction
of the indebtedness due. However, no agreement is currently in place and there
can be no assurance that the Company will reach an agreement with the Debenture
holders, lenders and lessors on a consensual restructuring of these obligations.
If the Company is unable to implement a prenegotiated plan, it will likely
seek protection under Chapter 11 of the United States Bankruptcy Code. If it
does so, no event of default will be triggered under the Heller line of credit,
as amended.
8
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In either event, the Company expects to incur substantial costs for
financial advisory, legal, accounting and lender fees that are currently
estimated to exceed $6.0 million.
10. SUBSEQUENT EVENTS
HUD Insured Financing
On July 19, 2001, the Company borrowed $3.0 million under a loan agreement
with Red Mortgage for long-term HUD insured financing (Note 7).
Amendment of Shareholder Rights Agreement
On July 26, 2001, the Company modified and amended its Rights Agreement by
and between it and American Stock Transfer and Trust Company, dated June 12,
1997, as previously modified and amended on November 8, 2000 (the "Rights
agreement"), by changing the expiration date from June 12, 2007 to July 26,
2001. As a result of this action, the preferred share purchase rights granted
under the Rights Agreement also expired on July 26, 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
References in this section to "ALC," the "Company," "us" or "we" refer to
Assisted Living Concepts, Inc. and its wholly-owned subsidiaries.
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 June 30, 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, opening our last
twenty residences in 1999. 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. As of June 30, 2001, we operated 185 residences (7,149
units), of which we owned 115 residences (4,515 units) and leased 70 residences
(2,634 units).
We derive our revenues primarily from resident fees for room, board and
care. 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 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;
- depreciation and amortization; and
- debt and lease restructure costs.
We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located 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 limit, or more aggressively seek limits on, reimbursement rates. See
"Risk Factors -- We Depend on Reimbursement by Third-Party Payors."
10
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, results of
operations (in millions), operating expenses as a percentage of revenue, the
number of total residences and units operated, average occupancy and rental
rates and the sources of our revenue. 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 resident paid portion."
THREE MONTHS ENDED JUNE 30, THREE MONTHS
----------------------------------------- ENDED
PERCENTAGE JUNE 30,
INCREASE/ INCREASE/ ----------------
2000 2001 DECREASE DECREASE 2000 2001
------ ------ --------- ---------- ------ ------
(IN MILLIONS, EXCEPT PERCENTAGES) (AS PERCENTAGE OF
REVENUE)
Revenue .............................................. $ 34.1 $ 37.4 $ 3.3 9.7% 100.0% 100.0%
Operating expenses:
Residence operating expenses ..................... 22.3 24.9 2.6 11.7 65.4 66.6
Corporate general and administrative ............. 5.1 4.4 (0.7) (13.7) 15.0 11.8
Building rentals ................................. 4.0 4.1 0.1 3.0 11.7 11.2
Depreciation and amortization .................... 2.3 2.6 0.3 13.0 6.7 7.0
Debt and lease restructure costs ................. -- 1.1 1.1 100.0 -- 2.9
------ ------ ------ ------ ----- -----
Total operating expenses ..................... 33.7 37.1 3.4 10.1 98.8 99.5
------ ------ ------ ------ ----- -----
Operating income ..................................... 0.4 0.3 (0.1) 0.3 1.2 0.5
------ ------ ------ ------ ----- -----
Other income (expense):
Interest expense ................................. (4.1) (4.9) (0.8) (19.5) (12.0) (13.1)
Interest income .................................. 0.2 0.1 (0.1) 0.4 0.6 0.3
Gain (loss) on sale and disposal of assets ....... -- (0.1) (0.1) (100.0) -- (0.3)
Loss on sale of marketable securities ............ (0.4) -- 0.4 100.0 (1.2) --
Other income (expense), net ...................... .1 -- (0.1) (100.0) (1.2) --
------ ------ ------ ------ ----- -----
Total other expense .......................... (4.3) (4.9) 0.6 14.0 (12.6) (13.1)
------ ------ ------ ------ ----- -----
Net loss ............................................. $ (3.8) $ (4.6) $ (0.8) (20.5)% (11.4)% (12.6)%
====== ====== ====== ====== ===== =====
Other Data:
Residences operated (end of period) .................. 185 185
Units operated (end of period) ....................... 7,148 7,149
Average occupancy rate (based on occupied units) ..... 79.8% 83.9%
End of period occupancy rate (based on occupied units) 82.2% 84.2%
Average monthly rental rate .......................... $1,965 $2,056
Sources of revenue:
Medicaid state paid portion ...................... 10.6% 12.7%
Medicaid resident paid portion ................... 5.9 6.6
Private resident paid portion .................... 83.5 80.7
----- -----
Total ........................................ 100.0% 100.0%
===== =====
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000:
We incurred a net loss of $4.6 million, or $0.27 per basic and diluted
common share, on revenue of $37.4 million for the three months ended June 30,
2001 (the "June 2001 Quarter") as compared to a net loss of $3.8 million or
$0.22 per basic and diluted common share, on revenues of $34.1 million for the
three months ended June 30, 2000 (the "June 2000 Quarter").
Revenues. Revenues were $37.4 million for the June 2001 Quarter as
compared to $34.1 million for the June 2000 Quarter, a net increase of $3.3
million. The increase in revenue was attributable to a combination of an
increase in average occupancy to 83.9% and average monthly rental rate to $2,056
for the June 2001 Quarter as compared to average occupancy of 79.8% and average
monthly rental rate of $1,965 for June 2000 Quarter.
Residence Operating Expenses. Residence operating expenses were $24.9
million for the June 2001 Quarter as compared to $22.3 million for the June 2000
Quarter, a net increase of $2.6 million.
11
The principal elements of the increase in operating expenses include:
- $2.2 million related to an increase in payroll costs as a result of
increases in occupancy, wages and benefits;
- $300,000 related to a 13% increase in utility costs;
- $400,000 related to an increase in kitchen expense as a result of
increases in occupancy, and
- $500,000 related to increases in professional and property liability
insurance premiums and deductibles or retentions.
These increases were offset by the following decreases:
- a decrease of $600,000 in property tax expense as a result of
changes in assessments and related estimates; and
- a decrease of $300,000 in bad debt expense due to more timely
collection of aged accounts receivables.
Corporate, General and Administrative. Corporate, general and
administrative expenses were $4.4 million for the June 2001 Quarter compared
to $5.1 million for the June 2000 Quarter, decrease of approximately $700,000.
The principal elements of the decrease include:
- $500,000 related to legal fees associated with the class action
litigation incurred during the June 2000 quarter;
- $50,000 decrease in travel and entertainment expenses; and
- $150,000 decrease in payroll and related expenses.
Building Rentals. Building rentals were $4.2 million for the June 2001
Quarter as compared to $4.0 million for the June 2000 Quarter, an increase of
$200,000. The increase was due to annual rent escalators.
Depreciation and Amortization. Depreciation and amortization expense was
$2.6 million in the June 2001 Quarter as compared to $2.3 million in the June
2000 Quarter. The increase is due to depreciation expense related to the
equipment acquired to support our communications infrastructure.
Debt and Lease Restructure Costs. Debt and lease restructure costs were
$1.1 million for the June 2001 Quarter. These are professional fees, including
legal and financial advisory fees, related to the potential restructuring of our
under-performing loans and leases, and our convertible debentures maturing in
2002 and 2003. Since we do not expect to raise any new capital as a result of
such restructuring, these amounts are expensed as incurred in the accompanying
financial statements.
Interest Expense. Interest expense was $4.9 million for the June 2001
quarter compared to $4.1 million for the June 2000 Quarter, an increase of
$800,000. The increase was related to interest incurred on our $4.0 million
bridge loan entered into in November 2000, interest costs associated with our
draws of $10.3 million on the Heller line of credit and the related amortization
of financing fees associated with this line which was entered into in March
2001.
Interest Income. Interest income was $139,000 for the June 2001 Quarter
compared to $180,000 for the June 2000 Quarter, a decrease of $41,000. This
decrease is the result of decreased balances in cash and cash equivalents.
Net Loss. As a result of the above, we incurred a net loss of $4.6 million
or $0.27 per basic and diluted common share for the June 2001 Quarter, compared
to a net loss of $3.8 million, or $0.22 per basic and diluted common share, for
the June 2000 Quarter.
12
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000:
The following table sets forth, for the periods presented, results of
operations (in millions), operating expenses as a percentage of revenue, the
number of total residences and units operated, average occupancy and rental
rates and the sources of our revenue. 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 resident paid portion."
SIX MONTHS
ENDED
SIX MONTHS ENDED JUNE 30, JUNE 30,
----------------------------------------- ----------------
PERCENTAGE
INCREASE/ INCREASE/
2000 2001 (DECREASE) DECREASE 2000 2001
------ ------ ---------- ---------- ------ ------
(IN MILLIONS, EXCEPT PERCENTAGES) (AS PERCENTAGE OF
REVENUE)
Revenue .............................................. $ 67.3 $ 74.2 $ 6.9 10.3% 100.0% 100.0%
Operating expenses:
Residence operating expenses ..................... 45.0 50.4 5.4 12.0 66.9 67.9
Corporate general and administrative ............. 9.1 8.7 (0.4) (4.4) 13.5 11.7
Building rentals ................................. 8.0 8.3 0.3 3.8 11.9 11.2
Depreciation and amortization .................... 4.8 5.1 0.3 6.3 7.1 6.9
Debt and lease restructure costs ................. -- 1.4 1.4 100.0 -- 1.9
------ ------ ------ ------ ------ ------
Total operating expenses ..................... 66.9 73.9 7.0 10.5 99.4 99.6
------ ------ ------ ------ ------ ------
Operating income ..................................... 0.4 0.3 (0.1) (25.0) 0.6 0.4
------ ------ ------ ------ ------ ------
Other income (expense):
Interest expense ................................. (8.1) (9.3) (1.2) (14.8) (12.0) (12.5)
Interest income .................................. 0.4 0.3 (0.1) (25.0) 0.6 0.4
Gain (loss) on sale and disposal of assets ....... -- (0.1) (0.1) (100.0) -- (0.1)
Loss on sale of marketable securities ............ (0.4) -- 0.4 100.0 (0.6) --
Other income (expense), net ...................... 0.1 -- (0.1) (100.0) (0.6) --
------ ------ ------ ------ ------ ------
Total other expense .......................... (8.0) (9.1) 1.1 (12.3) (12.0) (12.3)
------ ------ ------ ------ ------ ------
Net loss ............................................. $ (7.6) $ (8.8) $ (1.1) (14.3)% (11.4)% (11.9)%
====== ====== ====== ====== ====== ======
Other Data:
Residences operated (end of period) .................. 185 185
Units operated (end of period) ....................... 7,148 7,149
Average occupancy rate (based on occupied units) ..... 79.2% 83.6%
End of period occupancy rate (based on occupied units) 82.2% 84.2%
Average monthly rental rate .......................... $1,959 $2,048
Sources of revenue:
Medicaid state paid portion ...................... 10.8% 12.3%
Medicaid resident paid portion ................... 6.1 6.8
Private resident paid portion .................... 83.1 80.7
----- -----
Total ........................................ 100.0% 100.0%
===== =====
We incurred a net loss of $8.8 million, or $0.51 per basic and diluted
common share, on revenue of $74.2 million for the six months ended June 30, 2001
(the "June 2001 YTD Period") as compared to a net loss of $7.6 million or $0.44
per basic and diluted common share, on revenues of $67.3 million for the six
months ended June 30, 2000 (the "June 2000 YTD Period").
Revenues. Revenues were $74.2 million for the June 2001 YTD Period as
compared to $67.3 million for the June 2000 YTD Period, a net increase of $6.9
million. The increase in revenue was attributable to a combination of an
increase in average occupancy to 83.6% and average monthly rental rate to $2,048
for the June 2001 YTD Period as compared to average occupancy of 79.2% and
average monthly rental rate of $1,959 for June 2000 YTD Period.
Residence Operating Expenses. Residence operating expenses were $50.4
million for the June 2001 YTD Period as compared to $45.0 million for the June
2000 YTD Period, a net increase of $5.4 million.
13
The principal elements of the increase in operating expenses include:
- $4.1 million related to an increase in payroll costs as a result of
increases in occupancy, wages and benefits;
- $700,000 related to a 17% increase in utility costs;
- $150,000 related to increased hiring expenses;
- $500,000 related to an increase in kitchen expense as a result of
increases in occupancy; and
- $950,000 related to increases in professional and property liability
insurance premiums and deductibles or retentions.
These increases were offset by the following decreases:
- decrease of $700,000 in property tax expense as a result of changes
in assessments and related estimates; and
- decrease in bad debt of $300,000 due to more timely collection of
aged receivables.
Corporate, General and Administrative. Corporate, general and
administrative expenses were $8.7 million for the June 2001 YTD Period compared
to $9.1 million for the June 2000 YTD Period, decrease of approximately
$400,000.
The principal elements of the decrease include:
- $350,000 of legal and accounting fees associated with the class
action litigation incurred during the June 2000 YTD Period;
- $200,000 related to decrease in director and officer insurance
premium for the 2001 renewal period; and
- $150,000 related to decreased payroll expenses.
The decrease was offset by increases in corporate, general and
administrative expense of:
- $130,000 as a result of implementation of communication
infrastructure and decrease in dial-up related charges; and
- $160,000 related to hiring and retention consulting.
Building Rentals. Building rentals were $8.3 million for the June 2001 YTD
Period as compared to $8.0 million for the June 2000 YTD period, an increase of
$300,000. The increase was due to annual rent escalators and to a retroactive
rent increase of $145,000 paid to one lessor during the March 2001 Quarter.
Depreciation and Amortization. Depreciation and amortization expense was
$5.1 million in the June 2001 YTD Period as compared to $4.8 million in the June
2000 YTD Period, an increase of $300,000. The increase is due to depreciation
expense related to the equipment acquired to support our communications
infrastructure.
Debt and Lease Restructure Costs. Debt and lease restructure costs were
$1.4 million for the June 2001 YTD Period. These are professional fees,
including legal and financial advisory fees, related to the potential
restructuring of our under-performing loans and leases, and our convertible
debentures maturing in 2002 and 2003. Since we do not expect to raise any new
capital as a result of such restructuring, these amounts are expensed as
incurred in the accompanying financial statements.
Interest Expense. Interest expense was $9.3 million for the June 2001 YTD
Period compared to $8.1 million for the June 2000 YTD Period, an increase of
$1.2 million. The increase was related to interest incurred on our $4.0 million
bridge loan entered into in November 2000, interest costs associated with our
draws of $10.3 million on the Heller line of credit and the related amortization
of financing fees associated with this line which was entered into in March
2001.
Interest Income. Interest income was $287,000 for the June 2001 YTD Period
compared to $389,000 for the June 2000 YTD Period, a decrease of $102,000. This
decrease is the result of decreased balances in cash and cash equivalents.
14
Net Loss. As a result of the above, we incurred a net loss of $8.8 million
or $0.51 Per basic and diluted common share for the June 2001 YTD Period,
compared to a net loss of $7.6 million, or $0.44 Per basic and diluted common
share, for the June 2000 YTD period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had a working capital deficit of $22.3 million
(including current portion of litigation settlement payable of $3.3 million and
Heller line of credit of $10.1 million) and unrestricted cash, cash equivalents
and cash held for tenant security deposits of $5.7 million.
Net cash used in operating activities was $8.3 million during the six
months ended June 30, 2001. The primary uses were reductions of $1.2 million in
accrued liabilities, $1.2 million in accounts payable and $5.0 million in other
current liabilities consisting primarily of payments of $4.5 million on our
class action litigation settlement payable. These uses were offset by an
increase of $1.2 million in prepaid expenses.
Net cash used in investing activities was $2.9 million during the six
months ended June 30, 2001. The primary use was an increase of $2.0 million in
restricted cash related 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.
Net cash provided by financing activities was $7.1 million during the six
months ended June 30, 2001. We received proceeds of $4.5 million in connection
with long-term HUD insured financing secured by two Texas properties and $10.3
million in draws on our Heller line of credit during the six months ended June
30, 2001. Costs associated with the closing of the HUD insured financings and
the establishment of the Heller line of credit were $200,000 and $2.9 million,
respectively. Of the $4.5 million in proceeds we received from the HUD insured
financing, $4.0 million was used to pay off our $4.0 million bridge loan
payable, $200,000 was used for HUD insured loan closing costs, $190,000 was used
to pay down the Heller line of credit and the remaining proceeds were used to
fund escrow accounts. Principal payments on long term debt and capital lease
obligations were $573,000 for the six months ended June 30, 2001.
On March 12, 2001, in exchange for a waiver of U.S. Bank's right to
declare an event of default for our failure to comply with certain financial
covenants as of December 31, 2000 and March 31, 2001, and for the modification
of certain financial covenants, we agreed to maintain minimum cash balances of
$11.0 million at the end of each fiscal quarter, except for the fiscal quarter
ending June 30, 2001, which had a required minimum balance of $8.0 million. The
amendment 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.
In May, 2001, we received a waiver of U.S. Bank's right to declare an
event of default for our failure to meet the March 31, 2001 cash balance
requirements set forth in the March 12, 2001 U.S. Bank loan amendment.
Additionally, 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 June 30, 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.
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.
On March 2, 2001, we entered into an agreement with Heller Healthcare
Finance, Inc. ("Heller") for a line of credit facility up to $45.0 million.
This line was scheduled to mature on August 31, 2002 and would have been secured
by up to 32 properties.
15
As of June 27, 2001, we amended the line of credit facility with Heller,
reducing the aggregate line of credit available from $45.0 million to $20.0
million. This amended line bears an interest rate of 3.85% Over the three-month
LIBOR rate floating monthly and requires monthly interest-only payments until
maturity. The amended line is secured by 26 properties. The maturity date for
the amended line is September 28, 2001; accordingly, the outstanding balance is
included in current portion of long-term debt in the accompanying financial
statements. If the Company or any of our borrower subsidiaries is not subject to
Chapter 11 of the U.S. Bankruptcy Code before such date, the borrower
subsidiaries may extend the maturity date to the earlier of May 31, 2002, or the
earliest date on which the Company or any of our borrower subsidiaries files
such a petition. Fees incurred to date, including commitment fees, funding fees,
closing fees and professional fees associated with the establishment of this
line of credit and amendment were $2.9 million. The balance outstanding on this
line is $10.1 million at June 30, 2001 ($12.2 million at August 6, 2001).
On June 14, 2001, we entered into two loan agreements for $1.8 million and
$2.7 million with Red Mortgage capital, Inc. ("Red Mortgage") for long-term
HUD insured financing. Each loan is secured by a property in Texas, each loan
matures on July 1, 2036 and together require monthly principal and interest
payments of $31,000. Each loan bears a fixed annual interest rate of 7.40%.
We made four payments of $2.3 million each towards our class action
litigation settlement on October 23, 2000, January 23, 2001, April 23, 2001 and
July 23, 2001, and on May 31, 2001 we made our $4.7 million semi-annual interest
payment on our convertible subordinated debentures. We are obligated to pay the
remaining $1.0 million related to the litigation settlement on October 23, 2001.
Eight properties currently secure our class action litigation settlement payable
which will become unencumbered upon final payment on October 23, 2001.
Additionally, our next $4.7 million semi-annual interest payment on our
convertible subordinated debentures is due on November 1, 2001. If our corporate
liability insurance carriers were to prevail in the pending coverage dispute,
now subject to binding arbitration, we could also be required to pay our
insurance carriers up to $4.0 million in damages (see Part II, Item 1 of this
report).
Approximately $27.2 million of our indebtedness was secured by letters of
credit as of June 30, 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 will have to pay all outstanding balances under the Heller line of
credit maturing on September 28, 2001 (which the borrower subsidiaries may
extend if we or any borrower subsidiary is not subject to Chapter 11 of the U.S.
Bankruptcy Code before such date to the earlier of May 31, 2002 or the date on
which we or any borrower subsidiary is subject to Chapter 11) and $161.3 million
in principal amount of convertible debentures maturing in November 2002 and May
2003. We do not have sufficient liquidity to pay these amounts as they mature
and are currently exploring various refinancing and restructuring alternatives.
We have 38 unencumbered residences, 37 of which are subject to negative
covenants not to encumber them unless the net proceeds are used to repurchase
our convertible debentures or otherwise reduce our indebtedness (if approved by
Heller). If we make our final payment on the litigation payable on October 23,
2001, we will have 8 additional unencumbered residences, none of which will be
subject to negative covenants.
We have retained a financial advisor to explore possible restructuring
options with respect to our convertible debentures. Our financial advisors and
the financial advisors of an unofficial committee (the "Committee") of the
holders of 64% in principal amount of the Company's two series of convertible
debentures (collectively, the "Debentures") have worked together from March,
2001 to July, 2001, negotiating restructuring options with respect to our
Debentures. On July 2, 2001, we announced that the Committee had not accepted a
proposal concerning a restructuring of the Debentures that we had made to the
Committee's advisors on April 12, 2001, nor had the Committee reached a
consensus on any counteroffer. A confidentiality agreement and agreement to
restrict trading of securities, dated May 24, 2001 (the "Cofindentiality
Agreement"), between us and the individual Committee members, expired June 30,
2001. We had
16
entered into the Confidentiality agreement to facilitate negotiations with the
debenture holders concerning a restructure.
We have continued our negotiations with certain members of the original
Committee. We believe that such negotiations will lead to a consensual
restructuring of the Debentures which will result in a significant reduction in
principal amount of our Debentures and a substantial dilution, or elimination
of, our existing common stock ownership. We are also in negotiations with
lenders and lessors of certain of our loans and leases associated with
under-performing properties. If we reach an agreement with the Debenture
holders, it is anticipated that the restructuring would be implemented through a
"prenegotiated" plan of reorganization under Chapter 11 of the United States
Bankruptcy Code through which certain under-performing leases may be rejected
and certain properties subject to under-performing mortgages may be conveyed in
full satisfaction of the indebtedness due. However, no agreement is currently in
place and there can be no assurance that we will reach an agreement with the
Debenture holders, lenders and lessors on a consensual restructuring of these
obligations.
If we are unable to implement a prenegotiated plan, we will likely seek
protection under Chapter 11 of the United states Bankruptcy Code. If we do so,
no event of default will be triggered under the Heller line of credit, as
amended.
In either event, we expect to incur substantial costs for financial
advisory, legal, accounting and lender fees that are currently estimated to
exceed $6.0 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards board (FASB) issued FASB
Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and
"Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. FAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under FAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective
for all business combinations initiated after June 30, 2001.
Upon adoption of FAS 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under FAS 141 will be reclassified to goodwill. Companies are required to adopt
FAS 142 for fiscal years beginning after December 15, 2001. The Company will
adopt FAS 142 on January 1, 2002. In connection with the adoption of FAS 142,
the Company will be required to perform a transitional goodwill impairment
assessment. The Company has not yet determined the impact these standards will
have on its results of operations and financial position.
17
RISK FACTORS
Set forth below are the risks that we believe are material. This report on
Form 10-Q, including the risks discussed below, 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 degree to which our future
operating results and financial condition will be affected by litigation
described in this report, (iii) the possibility that we will experience a
decrease in occupancy in our residences, which would adversely affect residence
revenues and operating margins, (iv) our ability to operate our residences in
compliance with evolving regulatory requirements (v) the degree to which our
future operating results and financial condition may be affected by a reduction
in Medicaid reimbursement rates, and (vi) the possibility that we will not be
able to restructure our $161.3 million of convertible debentures due in November
2002 and May 2003, in which event we are likely to seek protection under Chapter
11 of the United States Bankruptcy Code. In light of such risks and
uncertainties, our actual results could differ materially from such
forward-looking statements. Except as may be required by law, 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.
WE WILL NEED TO RESTRUCTURE OUR OBLIGATIONS AND ARE CONSIDERING A PRENEGOTIATED
PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE.
We will have to pay all outstanding balances under the Heller line of
credit maturing on September 28, 2001 (which the borrower subsidiaries may
extend, if we or any of the borrower subsidiaries is not subject to Chapter 11
of the U.S. Bankruptcy Code before such date, to the earlier of May 31, 2002 or
the date on which we or any borrower subsidiary is subject to Chapter 11) and
$161.3 million in principal amount of convertible debentures maturing in
November 2002 and May 2003. We do not have sufficient liquidity to pay these
amounts as they mature and are currently exploring various refinancing and
restructuring alternatives. We have 38 unencumbered residences, 37 of which are
subject to negative covenants not to encumber them unless the net proceeds are
used to repurchase our convertible debentures or otherwise reduce our
indebtedness (if approved by Heller). If we make our final payment on the
litigation payable on October 23, 2001, we will have 8 additional unencumbered
residences, none of which will be subject to negative covenants.
We have retained a financial advisor to explore possible restructuring
options with respect to our convertible debentures. Our financial advisors and
the financial advisors of an unofficial committee (the "Committee") of the
holders of 64% in principal amount of our two series of convertible debentures
(collectively, the "Debentures") worked together from March, 2001 to July,
2001, negotiating restructuring options with respect to our Debentures. On July
2, 2001, we announced that the Committee had not accepted the proposal
concerning a restructuring of the Debentures that we had made to the Committee's
advisors on April 12, 2001, nor had the Committee reached a consensus on any
counteroffer. A confidentiality agreement and agreement to restrict trading of
securities, dated May 24, 2001 (the "Confidentiality Agreement"), between us
and the individual committee members, expired June 30, 2001. We had entered into
the Confidentiality Agreement to facilitate negotiations with the Debenture
holders concerning a restructure.
We have continued our negotiations with certain members of the original
Committee. We believe that such negotiations will lead to a consensual
restructuring of the Debentures which will result in a significant reduction in
principal amount of our Debentures and a substantial dilution, or elimination
of, our existing common stock ownership. We are also in negotiations with
lenders and lessors of certain of our loans and leases associated with
under-performing properties. If we reach an agreement with the Debenture
holders, it is anticipated that the restructuring will be implemented through a
"prenegotiated" plan of reorganization under Chapter 11 of the United States
Bankruptcy Code through which certain under-performing leases may be rejected
and certain properties subject to under-performing mortgages may be conveyed in
full satisfaction of the indebtedness due. However, no agreement is currently in
place and there can be no assurance that we will reach an agreement with the
convertible debenture holders, lenders and lessors on a consensual restructuring
of these obligations.
18
If we are unable to implement a prenegotiated plan, we will likely seek
protection under Chapter 11 of the United States Bankruptcy Code.
In either event, we expect to incur substantial costs for financial
advisory, legal, accounting and lender fees that are currently estimated to
exceed $6.0 million.
WE ARE HIGHLY LEVERAGED; OUR LOAN AND LEASE AGREEMENTS CONTAIN FINANCIAL
COVENANTS.
We are highly leveraged. We had total indebtedness, including short term
portion, of $250.8 million as of June 30, 2001. In addition, we had
shareholders' equity of $55.1 million as of June 30, 2001. The degree to which
we are leveraged could have important consequences, including:
- making it more 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;
- 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. On March 12, 2001, in exchange
for a waiver of U.S. Bank's right to declare an event of default for our failure
to comply with certain financial covenants as of December 31, 2000 and March 31,
2001, and for the modification of certain financial covenants, we agreed to
maintain minimum cash balances of $11.0 million at the end of each fiscal
quarter, except for the fiscal quarter ending June 30, 2001 which has a required
minimum balance of $8.0 million. The amendment 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 May, 2001, we received a waiver of U.S. Bank's right to declare an
event of default for our failure to meet the quarterly cash balance requirements
set forth in the March 12, 2001 U.S. Bank loan amendment.
Additionally, 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 quarterly cash
balance requirements and other financial covenants set forth in the amended U.S.
Bank loan agreements.
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.
19
WE HAVE INCURRED SIGNIFICANT INCREASES IN UTILITY COSTS RELATED TO INCREASES IN
UTILITY RATES DURING THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND ARE
ADVISED THAT WE SHOULD ANTICIPATE SUBSTANTIAL FUTURE INCREASES.
During the three and six months ended June 30, 2001 we experienced
significant increases in utility rates, and have been advised that we should
anticipate substantial increases in the future which could have a material
adverse effect on our financial condition, results of operations or cash flows.
We may attempt to add utility surcharges to our rental rates; however, there can
be no assurance that we will be successful in doing so or that such surcharges
will be high enough to cover rate increases we may incur. See Part I, Item 2 of
this report.
POSSIBLE AMERICAN STOCK EXCHANGE DELISTING.
Our common stock currently is listed on the AMEX under the symbol "ALF,"
our 5.625% Debentures currently are listed on AMEX under the symbol "ALS5E03"
and our 6.0% Debentures currently are listed on AMEX under the symbol
"ALS6K02." AMEX has notified us that we have fallen below certain of AMEX's
continued listing guidelines and that it is reviewing our listing eligibility.
In particular, we have incurred losses from continued operations for each of our
past six fiscal years ending December 31, 2000, and last two fiscal quarters
ending June 30, 2001, and the price per share of our common stock as quoted on
AMEX recently has been below the minimum bid price of $1.00 per share. We have
provided AMEX with additional information and have been involved in ongoing
discussions with AMEX in connection with its review of our listing eligibility.
While AMEX has decided not to delist us at this time, they will continue to
review our listing status.
If AMEX were to delist our securities, it is possible that the securities
would continue to trade on the over-the-counter market. However, the extent of
the public market for the securities and the availability of quotations would
depend upon such factors as the aggregate market value of each class of
securities, the interest in maintaining a market in such securities on the part
of securities firms and other factors. There can be no assurance that any public
market for our securities will exist in the event that our securities are
delisted.
WE MAY INCUR SIGNIFICANT COSTS AND LIABILITY AS A RESULT OF LITIGATION.
Arbitration of Insurance Coverage Dispute
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our 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. Although we have been dismissed
from the litigation with prejudice, an outstanding dispute regarding coverage
exists with our corporate liability insurance carriers and us. We have agreed
with our insurance carriers to resolve this dispute through binding arbitration.
To the extent that the carriers are successful, they have agreed that their
recovery will not exceed $4.0 million. The carriers further agreed that payment
of any such amount awarded will not be due in any event until 90 days after we
have satisfied our obligations to the plaintiffs in the class action, with any
such amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
Although we believe we have strong defenses regarding our dispute with our
insurance carriers, we cannot predict the outcome of this arbitration and
currently are unable to evaluate the likelihood of success or the range of
possible loss. However, if such arbitration were determined adversely to us,
such a determination could have a material adverse effect on our financial
condition, results of operations, cash flow and liquidity.
Other Litigation
In addition to the matter referred above, we are involved in various
lawsuits and claims arising in the normal course of business. In the aggregate,
settlement of such suits and claims should not have a material adverse effect on
our financial condition, results of operations, cash flow and liquidity.
However, if these
20
matters were determined adversely to us, such a determination could have a
material adverse effect on our financial condition, results of operations, cash
flow and liquidity.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION.
The operation of assisted living facilities and the provision of health
care services are subject to 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.
Our cost to comply 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 that we had 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 "Confidentiality of Medical Information," "Restrictions Imposed by Laws
Benefiting Disabled Persons" and "Medical Waste."
In the ordinary course of our 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, we 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. These adverse actions can include:
- the imposition of fines - we paid $16,000 and $8,800, respectively,
in the aggregate for the year ended December 31, 2000 and the six
months ended June 30, 2001;
- temporary stop placement of admission of new residents, or
imposition of other conditions to admission of new residents to the
facility - four residences (two in Washington and two in Idaho) in
2000, two continued into 2001, one of which is still in stop
placement as of this date;
- termination of a facility's Medicaid contract;
- conversion of license to provisional status; and
- suspension or revocation of a facility's license, which in both 2000
and 2001 included one residence in Washington against which the
state has commenced license revocation procedures. This matter is
still pending at the time of this filing.
To date, these adverse actions have resulted in minimal fines and
temporary suspension of admissions at certain residences. Because regulations
vary from one jurisdiction to another and because determinations
21
regarding whether to make a license provisional, to suspend or revoke a license,
or to impose a fine, are subject to administrative discretion, it is difficult
for us to predict whether a particular remedy will be sought or obtained in any
given case. These types of regulatory enforcement actions may adversely affect
residence occupancy levels, revenues and costs of operation. We cannot guarantee
that federal, state, or local governments will not impose additional
restrictions on our activities that could materially adversely affect us.
The operation of our residences is subject to federal and state 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 provisions is a felony punishable by up to five
years imprisonment and/or $25,000 fines. Civil provisions prohibit the knowing
filing of a false claim or the knowing use of false statements to obtain
payment. The penalties for such a violation are fines of not less than $5,000 or
more than $10,000, plus treble damages, for each claim filed.
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") (see
"Confidentiality of Medical Information") 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.
OVERBUILDING IN THE ASSISTED LIVING INDUSTRY.
We believe that many assisted living markets have been overbuilt.
Regulation and other barriers to entry into the assisted living industry are not
substantial. The effects of such overbuilding include (a) significantly longer
fill-up periods, (b) pressure to lower or refrain from increasing rates, (c)
competition for workers in already tight labor markets and (d) 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 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 residences
will not adversely affect our operations.
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. We also depend upon the available
labor pool of low-wage employees. 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 program directors at assisted living residences and others may adopt similar
requirements. 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.
OUR PROPERTIES ARE GEOGRAPHICALLY CONCENTRATED AND WE DEPEND ON THE ECONOMIES OF
THE SPECIFIC AREAS IN WHICH WE OPERATE OUR PROPERTIES.
We depend significantly on the economies of Texas, Indiana, Oregon, Ohio
and Washington. As of June 30, 2001, 21.6% Of our 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 regulatory environment in any of these states could have
a material adverse effect on our financial condition and results of operations.
22
WE DEPEND ON REIMBURSEMENT BY THIRD-PARTY PAYORS.
Although revenues at a majority of our residences come primarily from
private payors, a portion of our revenues depend upon reimbursements from
third-party government payors, including state Medicaid waiver programs. For the
years ended December 31, 1998, 1999 and 2000 and the six months ended June 30,
2000 and June 30, 2001, direct payments received from Medicaid funded programs
accounted for approximately 10.7%, 10.4%, 11.1%, 10.7% and 12.3% respectively,
of our revenue. Also, our tenant-paid portion of Medicaid revenue accounted for
approximately 5.8%, 5.9%, 6.2%, 6.0% and 6.8% respectively, of our revenue
during the years ended December 31, 1998, 1999 and 2000 and the six months ended
June 30, 2000 and June 30, 2001. We expect that state Medicaid waiver programs
will continue to constitute a significant source of our revenue in the future.
Furthermore, we cannot guarantee that our proportionate percentage of revenue
received from Medicaid waiver programs will not increase. There are continuing
efforts by governmental and private third-party payors 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 has
been, and our management expects that there will continue to be, additional
proposals attempting to reduce the federal and some state budget deficits by
limiting Medicaid reimbursement in general. Adoption of any of these proposals
could have a material adverse effect on our business, financial condition,
results of operations and prospects. The State of Oregon recently proposed a
substantial reduction in Medicaid funding which was ultimately not adopted.
We anticipate that revenues at a majority of our residences will continue
to come from private pay sources. However, we believe that by having located
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.
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."
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 2001
------------------------------ ------------------------------
MEDICAID PRIVATE MEDICAID PRIVATE
------------------- ------- ------------------ -------
STATE TENANT TENANT STATE TENANT TENANT
PAID PAID PAID PAID PAID PAID
PORTION PORTION PORTION PORTION PORTION PORTION
------- ------- ------- ------- ------- -------
Oregon ................................ 27.8% 15.4% 56.8% 28.7% 16.6% 54.7%
Washington ............................ 26.6% 13.9% 59.5% 30.0% 17.1% 52.9%
Idaho ................................. 5.0% 1.5% 93.5% 15.8% 10.7% 73.5%
Arizona ............................... 9.6% 6.7% 83.7% 14.6% 12.5% 72.9%
New Jersey ............................ 15.1% 7.6% 77.3% 19.5% 6.3% 74.2%
Texas ................................. 12.9% 8.2% 78.9% 15.3% 7.9% 76.8%
Nebraska .............................. 8.0% 4.1% 87.9% 9.1% 5.5% 85.4%
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.
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. Under the 1996 law, Congress required the Department
of Health and Human Services to promulgate regulations. The requirements set
forth in the regulations are extensive and may require us to significantly
change the way we maintain and transmit healthcare information for our
residents.
23
Healthcare providers must take "reasonable steps" to ensure that the
provider, as well as the provider's business partners, comply with the law's
requirements. Therefore, we may be required to ensure that the other entities
with which we do business are also in compliance with these laws. HIPAA also
created certain consumer rights with which we may be required to comply,
including a right of notice regarding our information practices, a right of
access to inspect and copy such individual's protected medical information, and
a right to receive an accounting of all disclosures made by us, with certain
exceptions. Significant changes in these regulations have recently occurred but
enforcement is not expected until April, 2003. The costs to comply with these
final regulations could have an adverse effect on our financial position,
results of operations, cash flows and prospects.
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 our 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.
MEDICAL WASTE.
Our facilities generate potentially infectious waste due to the illness or
physical condition of the residents, including, for example, 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 various
laws, both federal and state. These laws and regulations set forth the
management requirements, 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 we do not currently operate may subject us to additional
restrictions on the manner in which we operate our facilities.
WE MAY BE LIABLE FOR LOSSES NOT COVERED BY OR IN EXCESS OF OUR 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
the primary targets of these insurers, 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 year ending December
31, 2001 this deductible has been replaced with a retention level of $250,000,
except in Florida and Texas in which the retention level is $500,000. 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.
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 our 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 lease the property, or to
borrow using our property as collateral.
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 we
hold or operate could have an adverse effect on our business, financial
condition or results of operations.
ITEM 3. 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.
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 $37.3 million outstanding at June
30, 2001 with a weighted average interest rate of 4.9%. Assuming that our
balance of variable rate debt remains constant at $37.3 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 $373,000.
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 $373,000.
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.
We do not use foreign currency exchange forward contracts or commodity
contracts and do not have foreign currency exposure.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Arbitration of Insurance Coverage Dispute
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our 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. Although we have been dismissed
from the litigation with prejudice, an outstanding dispute regarding coverage
exists with our corporate liability insurance carriers and us. We have agreed
with our insurance carriers to resolve this dispute through binding arbitration.
To the extent that the carriers are successful, they have agreed that their
recovery will not exceed $4.0 million. The carriers further agreed that payment
of any such amount awarded will not be due in any event until 90 days after we
have satisfied our obligations to the plaintiffs in the class action, with any
such amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
Although we believe we have strong defenses regarding our dispute with the
insurance carriers, we cannot predict the outcome of this arbitration and
currently are unable to evaluate the likelihood of success or the range of
possible loss. However, if such arbitration were determined adversely to us,
such a determination could have a material adverse effect on our financial
condition, results of operations, cash flow and liquidity.
Other Litigation
In addition to the matter referred to above, we are involved in various
lawsuits and claims arising in the normal course of business. In the aggregate,
settlement of such suits and claims should not have a material adverse effect on
our financial condition, results of operations, cash flow and liquidity.
However, if these matters were determined adversely to us, such a determination
could have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
EXHIBIT
NUMBER
4.1 Amendment to Rights Agreement
10.1 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.
12 Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K.
On April 27, 2001, we filed a report on Form 8-K announcing that we
entered into discussions with our convertible debenture holders and major
lessors and that we planned to defer our May 1, 2001 interest payment on our
convertible debentures.
On May 25, 2001, we filed a report on Form 8-K announcing that we made our
interest payment on our convertible debentures and that we entered into
confidentiality and standstill agreements with certain debenture holders.
On July 2, 2001, we filed a report on Form 8-K announcing the June 30,
2001 expiration of a confidentiality and trading agreement with the debenture
holder committee; disclosing confidential information provided to the committee
members; and no agreement had been reached on debenture restructuring.
26
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ASSISTED LIVING CONCEPTS, INC.
Registrant
August 8, 2001 BY: /s/ DREW Q. MILLER
---------------------------------
Name: Drew Q. Miller
Title: Senior Vice President,
Chief Financial Officer and
Treasurer
August 8, 2001 BY: /s/ M. CATHERINE MALONEY
---------------------------------
Name: M. Catherine Maloney
Title: Vice President and
Chief Accounting Officer
27
EXHIBIT INDEX
EXHIBIT
NUMBER
4.1 Amendment to Rights Agreement
10.1 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.
12 Ratio of Earnings to Fixed Charges
28
EXHIBIT F
UNAUDITED
ASSISTED LIVING CONCEPTS, INC. (CONSOLIDATED)
LIQUIDATION ANALYSIS
BEST INTEREST COMPARISON
AS OF JULY 31, 2001
ESTIMATED LIQUIDATION RECOVERY ESTIMATED
------------------------------- CHAPTER 11
CLASS SCENARIO I SCENARIO II RECOVERY
----- ---------- ----------- --------
SECURED CLAIMS
Real property mortgages 71% * 63% * 100%
Line of credit- Heller 100% 100% 100%
HUD loan 50% ** 42% ** 100%
Shareholder litigation settlement 100% 100% 100%
Equipment loans and notes payable 100% 100% 100%
Workers' compensation claims 100% 100% 100%
Financed insurance premiums - Cananwill 100% 100% 100%
ADMINISTRATIVE CLAIMS 100% 100% 100%
PRIORITY CLAIMS 100% 100% 100%
GENERAL UNSECURED CLAIMS
Trade claims 26% 20% 100%
Lease rejection claims 26% 20% 43%
Deficiency claims 26% 20% N/A
Old subordinated debentures 26% *** 20% *** 43%
* Includes average recovery on both secured claims and deficiency claims.
** The obligor on this loan is a non-Debtor subsidiary, and there is no
corporate guarantee or other recourse.
*** For purposes of estimating recoveries in this analysis, the outstanding
principal and interest on the old subordinated debentures are assumed
to be equivalent in priority to the deficiency claims and other general
unsecured claims.
Privileged and Confidential
Prepared at the Direction of Counsel
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UNAUDITED
ASSISTED LIVING CONCEPTS, INC. (CONSOLIDATED)
LIQUIDATION ANALYSIS
ASSET ANALYSIS
AS OF JULY 31, 2001
($000S)
UNAUDITED ESTIMATED RECOVERY
NOTE BOOK VALUE ------------------------------------
REF JULY 31, 2001 SCENARIO I SCENARIO II
--- ------------- ---------- -----------
ASSETS
Cash and cash equivalents [A] $ 5,714 $ 5,714 100% $ 5,714 100%
Accounts receivable, net [B] 2,279 1,991 87% 1,763 77%
Prepaid expenses [C] 906 - 0% - 0%
Other current assets [D] 4,070 2,261 56% 2,162 53%
-------- -------- -- -------- --
Total Current Assets 12,970 9,966 77% 9,640 74%
-------- -------- -- -------- --
Restricted cash [E] 10,892 10,892 100% 10,892 100%
Sale of operating entity proceeds [F] 120,119 N/A 102,959 N/A
Property and equipment, net [G] 294,011 695 N/A 438 N/A
Goodwill, net [H] 4,615 - 0% - 0%
Other non-current assets [I] 11,179 739 7% 739 7%
Avoidance and contingency claims [J] unknown unknown
-------- -------- -- -------- --
Total Assets $333,666 $142,411 43% $124,667 37%
======== ======== == ======== ==
Privileged and Confidential
Prepared at the Direction of Counsel
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UNAUDITED
ASSISTED LIVING CONCEPTS, INC. (CONSOLIDATED)
LIQUIDATION ANALYSIS
CLAIM RECOVERY ANALYSIS
AS OF JULY 31, 2001
($000s)
SCENARIO I SCENARIO II
---------------------------- ------------------------------
NOTE ESTIMATED ESTIMATED ESTIMATED ESTIMATED
REF CLAIMS RECOVERY CLAIMS RECOVERY
--- ------ -------- ------ --------
PROCEEDS FROM LIQUIDATION $142,411 $124,667
LESS: SECURED CLAIMS
Real property mortgages [K] 71,491 42,981 60% 71,491 38,320 54%
Line of credit- Heller [L] 12,346 12,346 100% 12,346 12,346 100%
HUD loan [M] 7,510 3,733 50% 7,510 3,180 42%
Shareholder litigation settlement [N] 956 956 100% 956 956 100%
Equipment loans and notes payable [O] 67 67 100% 67 67 100%
Workers' compensation claims [P] 2,941 2,941 100% 2,941 2,941 100%
Financed insurance premiums
- Cananwill [Q] 334 334 100% 334 334 100%
-------- ------- --- -------- ------- ---
TOTAL SECURED CLAIMS 95,646 63,359 66% 95,646 58,145 61%
-------- ------- --- -------- ------- ---
BALANCE AVAILABLE FOR
ADMINISTRATIVE CLAIMS 79,053 66,523
------- -------
LESS: ADMINISTRATIVE CLAIMS
Trustee's fees [R] 4,272 4,272 3,740 3,740
Professional fees [S] 9,000 9,000 9,000 9,000
Liquidation costs net of cash
from operations [T] 1,292 1,292 1,292 1,292
-------- ------- --- -------- ------- ---
TOTAL ADMINISTRATIVE CLAIMS 14,564 14,564 100% 14,032 14,032 100%
-------- ------- --- -------- ------- ---
BALANCE AVAILABLE FOR PRIORITY CLAIMS 64,488 52,491
------- -------
LESS: PRIORITY CLAIMS
Employee claims [U] 4,055 4,055 4,055 4,055
Tenant security deposits [V] 2,534 2,534 2,534 2,534
Tax claims [W]
Property taxes 4,392 4,392 4,392 4,392
State taxes 95 95 95 95
-------- ------- --- -------- ------- ---
TOTAL PRIORITY CLAIMS 11,076 11,076 100% 11,076 11,076 100%
-------- ------- --- -------- ------- ---
BALANCE AVAILABLE FOR GENERAL
UNSECURED CLAIMS 53,412 41,415
------- -------
LESS: GENERAL UNSECURED CLAIMS
Trade claims [X] 4,326 1,136 26% 4,326 861 20%
Lease rejection claims [Y] 6,941 1,823 26% 6,941 1,382 20%
Deficiency claims [Z] 28,510 7,488 26% 33,171 6,603 20%
Old subordinated debentures [AA] 163,598 42,966 26%* 163,598 32,568 20%*
-------- ------- --- -------- ------- ---
TOTAL GENERAL UNSECURED CLAIMS $203,376 $53,412 26% $208,036 $41,415 20%
======== ======= === ======== ======= ===
* For purposes of estimating recoveries in this analysis, the outstanding
principal and interest on the old subordinated debentures are assumed
to be equivalent in priority to the deficiency claims and other general
unsecured claims.
Privileged and Confidential
Prepared at the Direction of Counsel
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO LIQUIDATION ANALYSIS
GENERAL ASSUMPTIONS
1. This liquidation analysis was prepared in accordance with Section 1129 (a)
(7) (A) (ii) of the U.S. Bankruptcy Code to determine that the Plan of
Reorganization is in the best interest of each holder of a Claim or
Interest.
2. The liquidation analysis is based upon a number of estimates and assumptions
that, although developed and considered reasonable by the management of
Assisted Living Concepts, Inc. (the "Debtor" or the "Company"), are
inherently subject to significant economic, business, regulatory and
competitive uncertainties and contingencies beyond the control of the Debtor
or its management. The liquidation analysis is also based upon assumptions
with regard to liquidation decisions that are subject to change.
Accordingly, there can be no assurance that the values reflected in this
liquidation analysis would be realized if the Debtor were, in fact, to
undergo such a liquidation, and actual results could vary materially and
adversely from those contained herein.
3. This analysis assumes the conversion of the Chapter 11 proceeding to a
Chapter 7 proceeding with the liquidation of the Company's assets being
performed over a six-month period. A Chapter 7 Trustee would be appointed by
the Bankruptcy Court to administer the estate. The Chapter 7 Trustee is
independent and would be entitled to make all of his or her own decisions
regarding the liquidation of the estate, the hiring of professionals, the
pursuit of claims or litigation, the payment of or objection to claims and
the distribution of any ultimate recoveries. The Chapter 7 Trustee would be
compensated in accordance with Section 326 of the U.S. Bankruptcy Code.
4. This liquidation analysis includes all assets of the Company, including
investments in subsidiaries not currently in bankruptcy. It is assumed that
the Trustee would dispose of all operating assets through sale, liquidation
and/or termination as appropriate.
5. The liquidation analysis utilizes the Debtor's unaudited and estimated
financial statements as of July 31, 2001 and other estimates by the Debtor's
management.
6. The Debtor operates assisted living facilities (the "facilities"). This
analysis assumes that the majority of these facilities would be sold as a
going-concern over the six-month liquidation period, and that those
facilities generating negative earnings would be closed. The Debtor believes
that a six-month liquidation period is sufficient to allow for an orderly
transfer of
Privileged and Confidential
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO LIQUIDATION ANALYSIS
operations to acquirers. However, there can be no assurances made that all
assets would be completely liquidated during this time period.
7. It is assumed that certain personnel would be retained by the Chapter 7
Trustee as necessary to support the completion of the sale and liquidation
process.
8. For purposes of this analysis, management has assumed a high and low range
of liquidation scenarios entitled Scenario I and II.
NOTES TO ASSET ACCOUNTS:
A. CASH AND CASH EQUIVALENTS. It is assumed that cash and cash equivalents
would be fully available for distribution to creditors.
B. ACCOUNTS RECEIVABLE. The Debtor is assumed to retain ownership of the
accounts receivable for all entities when they are sold. For purposes of
this analysis, management anticipates that a Chapter 7 Trustee would recover
between 77% and 87% of net accounts receivable. These percentages are based
upon a review of the detailed aging for the various payors. Management has
assessed the potential recoverability for these receivables based on payor
mix and the days outstanding of these receivables.
Below are the recovery percentages applied to net accounts receivable for
the facilities:
Tenant (Private Pay) Medicaid
-------------------- --------
Scenario I Scenario II Scenario I Scenario II
---------- ----------- ---------- -----------
Current 85% 75% 90% 80%
1-30 70% 60% 90% 80%
31-60 60% 50% 80% 70%
61-90 50% 40% 80% 70%
Over 90 25% 15% 70% 60%
C. PREPAID EXPENSES. This asset account consists of prepaid insurance. The
prepaid insurance balance is assumed to be used for coverage during the
liquidation period and would generate no cash proceeds from liquidation.
D. OTHER CURRENT ASSETS. This account includes a variety of receivables,
deposits, prepayments, inventory, escrow accounts and other items. The
significant items include a $954,000 inventory estimate made by management
of supplies on hand at the facilities. For purposes on this
Privileged and Confidential
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ASSISTED LIVING CONCEPTS, INC.
NOTES TO LIQUIDATION ANALYSIS
analysis, it is assumed that inventory will be included in the sale of
operating entities (See Note F). Approximately $1.6 million represents funds
held in escrow for insurance, property taxes and maintenance of facilities
subject to the Heller and HUD financing agreements. The escrow balances are
assumed to have a 100% recovery value in liquidation. Approximately $567,000
represents refundable deposits required by certain key vendors, for which
management assumes a recovery of 75% to 85%. Land held for sale of $188,000
represents two parcels of land currently on the market with an assumed
recovery in liquidation between 70% and 80%. Approximately $500,000
represents prepaid dues for each facility's membership in the Assisted
Living Federation of America (ALFA), which are assumed to be transferred in
the sale of the facilities. For the remaining other current assets,
management estimates that they would have little liquidation value, thus a
5% to 15% recovery in liquidation is assumed.
E. RESTRICTED CASH. This amount includes $5.6 million in cash pledged as
security for letters of credit required as cash collateral for the Company's
revenue bond issues and mortgages. Cash proceeds from liquidation are
assumed to be 100%; however, these balances are assumed to be used first to
pay secured claims for deficiencies in collateral value for the specific
mortgaged properties. An additional $2.9 million of this balance represents
funds restricted in the Company's workers' compensation plan. Approximately
$1.1 million has been restricted for claims for injuries occurring during
2000 and $1.9 million for injuries occurring during 2001. Workers'
compensation reserves are assumed to be fully recoverable but available only
for payment of workers' compensation claims. Cash of $2.3 million has been
restricted for payment of tenant security deposits, which are classified as
unsecured priority claims. Cash held for tenant security deposits is assumed
to have a 100% recovery in liquidation.
F. PROCEEDS FROM THE SALE OF OPERATING ENTITIES.
The proceeds from the distressed sale of all going concern operations are
estimated to range from $103.0 million to $120.1 million. The facilities
assumed to be sold primarily include the Debtor's assisted living facilities
which have positive earnings, including both owned and leased facilities,
and related assets.
The enterprise value for these facilities was determined by applying a range
of discount rates and multiples for distressed going concern operations to a
normalized cash flow for the Company. The normalized cash flow was based on
management's projections through 2005, which incorporate actual results
through June 30, 2001 and adjustments for facilities assumed to be rejected
or closed.
Management has identified 21 leases and two mortgaged properties that would
be rejected or closed for purposes of this analysis. It is assumed that the
ownership interests in the mortgaged properties would be returned to the
mortgagor in exchange for the execution of leases on the properties.
Privileged and Confidential
Prepared at the Direction of Counsel
3 of 6
ASSISTED LIVING CONCEPTS, INC.
NOTES TO LIQUIDATION ANALYSIS
G. PROPERTY, PLANT & EQUIPMENT.
I. FACILITIES: Property, plant and equipment are assumed to be included in
the sale as a going concern.
II. CORPORATE DIVISION: No corporate land and buildings are owned by the
Company. The liquidation recovery as a percentage of cost is assumed to
be the following:
Leasehold Improvements 0%
Building Equipment 10% - 20%
Furniture 10% - 20%
Office Equipment 10% - 20%
Computer Equipment 10% - 15%
H. GOODWILL, NET. Goodwill is estimated to have no liquidation recovery value.
I. OTHER NON-CURRENT ASSETS. This asset account is comprised primarily of net
deferred financing costs of $9.0 million that would generate no cash
proceeds in liquidation. Lease security deposits of $1.4 million are assumed
to be transferred in the sale of operating entities or offset against
damages for rejected leases (See Note F). Funds held in escrow of
approximately $739,000 for repairs and maintenance as required by mortgage
agreements are assumed to be 100% recoverable in liquidation.
J. AVOIDANCE & CONTINGENCY CLAIMS. The Debtor may have certain rights to assert
avoidance actions and other contingency claims that may benefit the estate.
It is unknown at this time the total benefit that these claims may generate
for the estate if the Trustee were successful in litigating these matters.
NOTES TO SECURED CLAIMS: Secured claims include principal and related interest
outstanding at July 31, 2001. Payments on account of secured claims have been
estimated based on allocated value for each property and other collateral.
K. REAL PROPERTY MORTGAGES. The mortgage debt outstanding as of July 31, 2001
is secured by 36 facilities pledged to various parties.
L. LINE OF CREDIT - HELLER. The $20.0 million line of credit from Heller
Healthcare Finance is secured by 26 facilities.
Privileged and Confidential
Prepared at the Direction of Counsel
4 of 6
ASSISTED LIVING CONCEPTS, INC.
NOTES TO LIQUIDATION ANALYSIS
M. HUD LOAN. The HUD loan is secured by three facilities; the obligor on this
loan is a non-Debtor subsidiary, and there is no corporate guarantee or
other recourse.
N. SHAREHOLDER LITIGATION SETTLEMENT. The balance represents the remaining
liability in the shareholder litigation settlement and is secured by eight
facilities.
O. EQUIPMENT LOANS AND NOTES PAYABLE. This liability primarily includes
equipment notes.
P. WORKERS' COMPENSATION CLAIMS. The Debtor is self-insured for workers'
compensation claims and has been required to post cash collateral to secure
the potential liability for claims. For purposes of this analysis, it is
assumed that the amount of potential claims related to operations before and
during the liquidation period is equal to the related balance of restricted
cash.
Q. FINANCED INSURANCE PREMIUMS - CANANWILL. This balance represents the
remaining liability for insurance premiums financed by a third party and is
secured by the unused portion of the prepaid insurance premiums.
NOTES TO ADMINISTRATIVE CLAIMS:
R. TRUSTEE'S FEES. Trustee's fees are assumed to be approximately 3% of cash
distributed as calculated according to Section 326(a) of the Bankruptcy
Code.
S. PROFESSIONAL FEES. Professional fees represent the costs of the liquidation
related to attorneys, investment bankers, accountants, appraisers and other
professionals retained in the case. Based on management's review of the
nature of these costs and the outcomes of similar liquidations, fees are
estimated at $9.0 million.
T. LIQUIDATION COSTS NET OF CASH FROM OPERATIONS. For purposes of this
analysis, it is assumed that operations would continue for the first three
months of the six-month liquidation period and that all facilities would be
sold at the end of the third month. Cash generated by operation of the
facilities during the first three months is assumed to decline at a rate of
10% per month and to offset the general and administrative costs incurred
for corporate during the liquidation. Corporate costs are estimated to be
reduced by 10% in each of the first three months and 30% in each of the
subsequent months. As part of the costs of liquidation, management estimates
that retention payments of approximately $800,000 would be required to
retain the facility employees prior to the sale and the required corporate
employees throughout the liquidation period. Severance of approximately $2.6
million has been calculated in accordance with existing policies and
employment contracts. These retention and severance payments are assumed to
replace any bonuses or incentive compensation otherwise payable to such
employees.
Privileged and Confidential
Prepared at the Direction of Counsel
5 of 6
ASSISTED LIVING CONCEPTS, INC.
NOTES TO LIQUIDATION ANALYSIS
NOTES TO PRIORITY CLAIMS:
U. EMPLOYEE CLAIMS. Employee claims entitled to priority, including wages,
vacation, and other related compensation, have been estimated at the related
liability balances as of July 31, 2001.
V. TENANT SECURITY DEPOSITS. Security and related deposits paid by tenants are
classified as priority claims.
W. TAX CLAIMS. Estimated priority tax claims are assumed to include accrued
property taxes and state income tax liability as of July 31, 2001. Property
tax liabilities related to the facilities are assumed to be paid as a
condition of the sale.
NOTES TO GENERAL UNSECURED CLAIMS:
X. TRADE CLAIMS. This amount represents trade creditor debt, accrued expenses
and other miscellaneous unsecured liabilities as of July 31, 2001.
Y. LEASE REJECTION CLAIMS. Management has identified 21 facility leases that
are assumed to be rejected for purposes of this analysis and has assumed the
estimated maximum potential lease claims for damages calculated in
accordance with Bankruptcy Code section 502(b)(6). Outstanding lease
security deposits have been offset against calculated damages. It is assumed
that real property leases of the remaining facilities would be assumed and
assigned to the acquiring entity. Claims for the rejection of executory
contracts and other contingent liabilities have not been estimated for
purposes of this analysis.
Z. DEFICIENCY CLAIMS. The estimated deficiency for secured claims results from
comparing the amount realized from the liquidation of collateral to the
total debt outstanding for that debt with corporate guarantees or other
recourse to the Debtor's unencumbered assets.
AA. OLD SUBORDINATED DEBENTURES. Under the terms of the old subordinated
debenture agreement, in no case shall old subordinated debenture holders be
paid prior to the settlement of all "Senior Debt." However, for purposes of
estimating recoveries in this analysis, the outstanding principal and
interest on the old subordinated debentures are assumed to be equivalent in
priority to the deficiency claims and other general unsecured claims.
Privileged and Confidential
Prepared at the Direction of Counsel
6 of 6
EXHIBIT G
ASSISTED LIVING CONCEPTS, INC.
PROJECTED INCOME STATEMENTS (a)
($ IN THOUSANDS)
ACTUAL PRO FORMA PROJECTED PRO FORMA FULL
THREE MO'S ENDED THREE MONTHS ENDED YEAR
3/31/01 6/30/01 9/30/01 12/31/01 2001
------- ------- ------- -------- ----
Revenue $ 35,883 $ 36,358 $ 37,753 $ 39,287 $ 149,282
Operating expenses:
Residence operating expenses 24,353 23,617 25,054 25,254 98,277
Unallocated operating expenses 400 500 334 337 1,571
Corporate general and administrative 4,268 4,440 4,440 4,440 17,588
Building rentals 2,773 2,855 2,844 2,860 11,332
--------- --------- --------- --------- ---------
EBITDA 4,089 4,946 5,081 6,396 20,513
Other costs (b) 1,160 1,059 1,058 1,058 4,335
Restructuring costs 303 1,063 2,475(c) 825(c) 4,666
Heller financing fees -- -- 653 37 689
Other Senior Debt financing fees -- -- 2 2 3
Depreciation 2,479 2,498 2,340 2,340 9,658
Amortization 73 73 73 73 292
--------- --------- --------- --------- ---------
Operating income 74 253 (1,519) 2,062 869
Other expenses (income)
Interest expense (d) 3,639 3,639 3,782 1,585 12,645
Junior Secured Amortization -- -- -- -- --
Junior Secured Accretion -- -- -- -- --
Interest income (99) (41) (57) (49) (246)
Lease & Mortgage Rejections -- -- -- 2,189 2,189
COD Income -- -- -- (82,823) (82,823)
Other expenses (income) (31) -- -- -- (31)
--------- --------- --------- --------- ---------
Total other expenses (income) 3,509 3,598 3,725 (79,098) (68,266)
Pre-tax income (loss) (3,436) (3,345) (5,245) 81,160 69,135
Income taxes @ 40% -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ($3,436) ($3,345) ($5,245) $ 81,160 $ 69,135
========= ========= ========= ========= =========
MARGIN INFORMATION
Residence operating expenses 67.9% 65.0% 66.4% 64.3% 65.8%
Corporate general and administrative 11.9% 12.2% 11.8% 11.3% 11.8%
Unallocated Operating Expenses 1.1% 1.4% 0.9% 0.9% 1.1%
Building rentals 7.7% 7.9% 7.5% 7.3% 7.6%
EBITDA 11.4% 13.6% 13.5% 16.3% 13.7%
KEY PROJECTION ASSUMPTIONS
Units 6,933 6,933 6,933 6,933 6,933
Average Rent $ 2,069 $ 2,103 $ 2,108 $ 2,142 $ 2,105
Average Rent Growth 0.0% 1.6% 0.2% 1.6% 1.8%
Occupancy 83.8% 84.1% 85.9% 87.9% 85.4%
Op. Expenses Growth -3.0% 6.1% 0.8%
Unallocated Exp. as a % of Op. Expenses 2.1% 1.3% 1.3%
Rent Expense Growth 2.9% 0.4% 0.6%
Corporate Overhead Growth 4.0% 0.0% 0.0%
PROJECTED QUARTER ENDING
----------------------------------------------------------
3/31/02 6/30/02 9/30/02 12/31/02
------- ------- ------- --------
Revenue $ 38,715 $ 38,908 $ 39,103 $ 39,298
Operating expenses:
Residence operating expenses 25,329 25,405 25,482 25,558
Unallocated operating expenses 507 508 510 511
Corporate general and administrative 4,453 4,467 4,480 4,494
Building rentals 2,869 2,878 2,886 2,895
--------- --------- --------- ---------
EBITDA 5,556 5,650 5,745 5,841
Other costs (b) -- -- -- --
Restructuring costs -- -- -- --
Heller financing fees 37 37 37 37
Other Senior Debt financing fees 2 2 2 2
Depreciation 1,312 1,312 1,312 1,312
Amortization -- -- -- --
--------- --------- --------- ---------
Operating income 4,206 4,300 4,395 4,490
Other expenses (income)
Interest expense (d) 3,035 2,955 2,912 2,865
Junior Secured Amortization 66 66 66 66
Junior Secured Accretion 305 305 317 317
Interest income (50) (50) (50) (50)
Lease & Mortgage Rejections -- -- -- --
COD Income -- -- -- --
Other expenses (income) -- -- -- --
--------- --------- --------- ---------
Total other expenses (income) 3,355 3,276 3,244 3,198
Pre-tax income (loss) 851 1,024 1,150 1,292
Income taxes @ 40% -- -- -- --
--------- --------- --------- ---------
Net income (loss) $ 851 $ 1,024 $ 1,150 $ 1,292
========= ========= ========= =========
MARGIN INFORMATION
Residence operating expenses 65.4% 65.3% 65.2% 65.0%
Corporate general and administrative 11.5% 11.5% 11.5% 11.4%
Unallocated Operating Expenses 1.3% 1.3% 1.3% 1.3%
Building rentals 7.4% 7.4% 7.4% 7.4%
EBITDA 14.4% 14.5% 14.7% 14.9%
KEY PROJECTION ASSUMPTIONS
Units 6,933 6,933 6,933 6,933
Average Rent $ 2,152 $ 2,163 $ 2,173 $ 2,184
Average Rent Growth 0.4% 0.5% 0.5% 0.5%
Occupancy 86.5% 86.5% 86.5% 86.5%
Op. Expenses Growth 0.3% 0.3% 0.3% 0.3%
Unallocated Exp. as a % of Op. Expenses 0.0% 2.1% 1.3% 1.3%
Rent Expense Growth 0.3% 0.3% 0.3% 0.3%
Corporate Overhead Growth 0.3% 0.3% 0.3% 0.3%
FISCAL YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
Revenue $ 156,024 $ 159,279 $ 164,010 $ 169,191 $ 174,514
Operating expenses:
Residence operating expenses 101,775 103,810 105,886 108,004 110,164
Unallocated operating expenses 2,035 1,354 1,381 1,409 1,437
Corporate general and administrative 17,894 18,251 18,617 18,989 19,369
Building rentals 11,527 11,758 11,993 12,233 12,478
--------- --------- --------- --------- ---------
EBITDA 22,792 24,105 26,133 28,556 31,067
Other costs (b) -- -- -- -- --
Restructuring costs -- -- -- -- --
Heller financing fees 147 147 110 -- --
Other Senior Debt financing fees 7 7 7 7 7
Depreciation 5,247 5,497 5,747 5,997 6,247
Amortization -- -- -- -- --
--------- --------- --------- --------- ---------
Operating income 17,392 18,455 20,269 22,552 24,812
Other expenses (income)
Interest expense (d) 11,767 11,264 10,402 11,627 10,547
Junior Secured Amortization 262 262 262 262 262
Junior Secured Accretion 1,244 1,346 1,456 -- --
Interest income (200) (200) (200) (200) (247)
Lease & Mortgage Rejections -- -- -- -- --
COD Income -- -- -- -- --
Other expenses (income) -- -- -- -- --
--------- --------- --------- --------- ---------
Total other expenses (income) 13,073 12,672 11,920 11,689 10,563
Pre-tax income (loss) 4,318 5,783 8,349 10,864 14,250
Income taxes @ 40% 1,629 2,313 3,340 4,345 5,700
--------- --------- --------- --------- ---------
Net income (loss) $ 2,690 $ 3,470 $ 5,009 $ 6,518 $ 8,550
========= ========= ========= ========= =========
MARGIN INFORMATION
Residence operating expenses 65.2% 65.2% 64.6% 63.8% 63.1%
Corporate general and administrative 11.5% 11.5% 11.4% 11.2% 11.1%
Unallocated Operating Expenses 1.3% 0.9% 0.8% 0.8% 0.8%
Building rentals 7.4% 7.4% 7.3% 7.2% 7.1%
EBITDA 14.6% 15.1% 15.9% 16.9% 17.8%
KEY PROJECTION ASSUMPTIONS
Units 6,933 6,933 6,933 6,933 6,933
Average Rent $ 2,168 $ 2,201 $ 2,240 $ 2,285 $ 2,331
Average Rent Growth 3.0% 1.5% 1.8% 2.0% 2.0%
Occupancy 86.5% 87.0% 88.0% 89.0% 90.0%
Op. Expenses Growth 3.6% 2.0% 2.0% 2.0% 2.0%
Unallocated Exp. as a % of Op. Expenses 1.6% 1.3% 1.3% 1.3% 1.3%
Rent Expense Growth 1.7% 2.0% 2.0% 2.0% 2.0%
Corporate Overhead Growth 1.7% 2.0% 2.0% 2.0% 2.0%
(a) Assumes 10/01/01 filing and a 12/31/01 confirmation. Assumes (i) buyout of
Meditrust properties, (ii) LTC rent reduction, (iii) rejection of 4 leases
and (iv) rejection of 2 mortgages.
(b) Represents four quarters of (i) negative EBITDA contribution from the houses
expected to be rejected, (ii) higher corporate overhead expenses and (iii)
rent expense associated with the Meditrust buyback.
(c) Includes restructuring fees of $0.45 million for Latham, $0.825 million for
Chanin, $0.45 million for Milbank Tweed, $0.20 million for KPMG and $1.375
million for Jefferies.
(d) Assumes average interest rate of 6.4% on Secured Debt, 8.5% on Heller debt,
10.0% on the Senior Secured Notes, 8.0% PIK through 2004 and 12.0%
thereafter on the Junior Secured Notes. Interest on the Convertible Notes
stop accruing at 9/30/01.
ASSISTED LIVING CONCEPTS, INC.
PROJECTED CASH FLOW STATEMENTS
($ IN THOUSANDS)
PROJECTED THREE MONTHS ENDED
----------------------------
9/30/01 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02
------- -------- ------- ------- ------- --------
OPERATING ACTIVITIES:
Net income (loss) ($5,245) $ 81,160 $ 851 $ 1,024 $ 1,150 $ 1,292
Deferred Taxes -- -- 0 0 0 0
Depreciation 2,340 2,340 1,312 1,312 1,312 1,312
Amortization 73 73 -- -- -- --
Heller Amortization 653 37 37 37 37 37
Other Senior Debt Amortization 2 2 2 2 2 2
Junior Secured Amortization -- -- 66 66 66 66
Junior Secured Accretion -- -- 305 305 317 317
Change in Goodwill & Other Assets -- 2,023 -- -- -- --
Changes in working capital:
Accounts receivable (813) (123) 46 (15) (16) (16)
Prepaid expenses -- (626) -- -- -- --
Other current assets -- -- -- -- -- --
Restricted cash -- -- -- -- -- --
Accounts payable (1,325) -- 1,800 -- -- --
Accrued real estate tax -- (1,985) -- -- -- --
Accrued interest expense 2,348 -- -- -- -- --
Accrued interest extinguishment -- (3,914) -- -- -- --
Accrued payroll expense (1,726) -- -- -- -- --
Other accrued expenses (1,488) -- -- -- -- --
Litigation settlement payable (2,300) (956) -- -- -- --
Tenant security deposits -- -- -- -- -- --
Other current liabilities -- -- -- -- -- --
Other liabilities -- (2,150) -- -- -- --
--------- --------- --------- --------- --------- ---------
Net cash from operating activities (7,480) 75,882 4,418 2,730 2,868 3,010
INVESTING ACTIVITIES:
Proceeds from sale and leaseback transactions -- -- -- -- -- --
Proceeds from sale of property and equipment -- 6,147 -- -- -- --
Meditrust buyback -- (23,500) -- -- -- --
Purchases of property and equipment (546) (546) (573) (573) (573) (573)
--------- --------- --------- --------- --------- ---------
Net cash from investing activities (546) (17,899) (573) (573) (573) (573)
FINANCING ACTIVITIES:
(Payments) on Senior Debt -- -- (448) (448) (448) (448)
Proceeds from Senior Debt 3,000 -- -- -- -- --
(Payments)/Proceeds on Heller Debt/DIP Financing 4,840 25,284 (3,396) (1,708) (1,846) (1,988)
(Payments)/Issuance of Senior Secured Notes -- 40,250 -- -- -- --
(Payments)/Issuance of Junior Secured Notes -- 12,628 -- -- -- --
Financing Fee on Heller Debt/DIP Financing (330) (450) -- -- -- --
Financing Fee on Other Senior Debt (240) -- -- -- -- --
Extinguishment of NHP Debt -- (5,855) -- -- -- --
Extinguishment of Sr. Sub. Debt -- (161,250) -- -- -- --
Other financing activities -- -- -- -- -- --
Change in Old Common Stock -- (171) -- -- -- --
Change in New Common Stock -- 125 -- -- -- --
Change in paid-in capital -- 31,533 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net cash from financing activities 7,270 (57,905) (3,844) (2,156) (2,295) (2,436)
Net increase (decrease) in cash ($756) $ 77 $ 0 $ 0 $ 0 $ 0
Cash at beginning of period 5,679 4,923 5,000 5,000 5,000 5,000
--------- --------- --------- --------- --------- ---------
Cash at end of period $ 4,923 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
========= ========= ========= ========= ========= =========
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
2003 2004 2005 2006
---- ---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 3,470 $ 5,009 $ 6,518 $ 8,550
Deferred Taxes 2,313 3,340 4,345 2,631
Depreciation 5,497 5,747 5,997 6,247
Amortization -- -- -- --
Heller Amortization 147 110 -- --
Other Senior Debt Amortization 7 7 7 7
Junior Secured Amortization 262 262 262 262
Junior Secured Accretion 1,346 1,456 -- --
Change in Goodwill & Other Assets -- -- -- --
Changes in working capital:
Accounts receivable (42) (95) (104) (106)
Prepaid expenses -- -- -- --
Other current assets -- -- -- --
Restricted cash -- -- -- --
Accounts payable -- -- -- --
Accrued real estate tax -- -- -- --
Accrued interest expense -- -- -- --
Accrued interest extinguishment -- -- -- --
Accrued payroll expense -- -- -- --
Other accrued expenses -- -- -- --
Litigation settlement payable -- -- -- --
Tenant security deposits -- -- -- --
Other current liabilities -- -- -- --
Other liabilities -- -- -- --
--------- --------- --------- ---------
Net cash from operating activities 13,000 15,836 17,026 17,590
INVESTING ACTIVITIES:
Proceeds from sale and leaseback transactions -- -- -- --
Proceeds from sale of property and equipment -- -- -- --
Meditrust buyback -- -- -- --
Purchases of property and equipment (2,408) (2,528) (2,655) (2,787)
--------- --------- --------- ---------
Net cash from investing activities (2,408) (2,528) (2,655) (2,787)
FINANCING ACTIVITIES:
(Payments) on Senior Debt (1,833) (1,926) (2,062) (2,062)
Proceeds from Senior Debt -- -- -- --
(Payments)/Proceeds on Heller Debt/DIP Financing (8,759) (11,382) (11,144) --
(Payments)/Issuance of Senior Secured Notes -- -- -- --
(Payments)/Issuance of Junior Secured Notes -- -- -- --
Financing Fee on Heller Debt/DIP Financing -- -- -- --
Financing Fee on Other Senior Debt -- -- -- --
Extinguishment of NHP Debt -- -- -- --
Extinguishment of Sr. Sub. Debt -- -- -- --
Other financing activities -- -- -- --
Change in Old Common Stock -- -- -- --
Change in New Common Stock -- -- -- --
Change in paid-in capital -- -- -- --
--------- --------- --------- ---------
Net cash from financing activities (10,592) (13,308) (13,206) (2,062)
Net increase (decrease) in cash $ 0 $ 0 $ 1,166 $ 12,741
Cash at beginning of period 5,000 5,000 5,000 6,166
--------- --------- --------- ---------
Cash at end of period $ 5,000 $ 5,000 $ 6,166 $ 18,907
========= ========= ========= =========
ASSISTED LIVING CONCEPTS, INC.
PROJECTED BALANCE SHEETS
($ IN THOUSANDS)
PRE-
ACTUAL ACTUAL ACTUAL CONFIRMATION
12/31/00 03/31/00 06/30/01 09/30/01 12/31/01
-------- -------- -------- -------- --------
ASSETS
Current assets:
Cash $ 9,889 $ 4,073 $ 5,679 $ 4,923 $ 222,236
Accounts receivable 2,448 2,458 2,207 3,020 3,143
Prepaid expenses 2,807 2,525 1,579 1,579 2,205
Other current assets 2,729 2,351 3,121 3,121 3,121
Total current assets 17,873 11,407 12,586 12,643 230,705
Capitalized Fees & Expenses -- -- -- (84) 327
Restricted cash 6,466 8,547 8,474 8,474 8,474
Property and equipment, net 298,744 296,718 294,669 292,875 291,080
Goodwill & other assets, net 13,375 15,128 15,669 15,596 15,523
--------- --------- --------- --------- ---------
Total assets $ 336,458 $ 331,800 $ 331,398 $ 329,504 $ 546,110
========= ========= ========= ========= =========
LIABILITIES & EQUITY
Current liabilities:
Accounts payable $ 3,334 $ 2,953 $ 1,525 $ 200 $ 200
Accrued real estate tax 4,835 3,850 3,969 3,969 1,985
Accrued interest expense 1,937 4,094 2,013 4,361 4,361
Accrued payroll expense 4,017 2,635 4,379 2,654 2,654
Other accrued expenses 4,229 3,098 3,775 2,288 2,288
Litigation settlement payable 7,765 5,511 3,256 956 --
Tenant security deposits 2,484 2,468 2,453 2,453 219,689
Other current liabilities 565 2,878 1,649 1,649 1,649
--------- --------- --------- --------- ---------
Total current liabilities 29,166 27,487 23,019 18,529 232,825
Other liabilities 6,059 5,766 5,751 5,751 5,751
Deferred Taxes -- -- -- -- --
Senior Debt 72,097 72,309 76,201 79,201 79,201
Heller Debt -- 1,300 10,100 14,940 16,724
Bridge Financing 4,000 4,000 -- -- --
Senior Secured Notes -- -- -- -- --
Junior Secured Notes -- -- -- -- --
Senior Subordinated Debt 161,250 161,250 161,250 161,250 161,250
--------- --------- --------- --------- ---------
Total liabilities 272,572 272,112 276,321 279,671 495,751
Shareholders' equity:
Old Common Stock 171 171 171 171 171
New Common Stock -- -- -- -- --
Additional Paid-In Capital 144,212 144,212 144,212 144,212 144,212
Retained earnings (80,497) (84,695) (89,306) (94,551) (94,024)
--------- --------- --------- --------- ---------
Total shareholders' equity 63,886 59,688 55,077 49,832 50,359
--------- --------- --------- --------- ---------
Total liab. & shareholders' equity $ 336,458 $ 331,800 $ 331,398 $ 329,504 $ 546,110
========= ========= ========= ========= =========
check 0.000 0.000 0.000 0.000 0.000
LEASE MEDITRUST STOCK &
REJECTIONS BUYBACK DEBT DISCHARGE 12/31/01 FRESH START
---------- ------- -------------- -------- -----------
ASSETS
Current assets:
Cash -- -- ($217,236) $ 5,000 --
Accounts receivable -- -- -- 3,143 --
Prepaid expenses -- -- -- 2,205 --
Other current assets -- -- -- 3,121 --
Total current assets -- -- (217,236) 13,469 --
Capitalized Fees & Expenses -- -- -- 327 --
Restricted cash -- -- -- 8,474 --
Property and equipment, net (6,147) 23,500 -- 308,434 (118,031)
Goodwill & other assets, net (227) -- (1,796) 13,500 (11,649)
------- --------- --------- --------- ---------
Total assets ($6,374) $ 23,500 ($219,032) $ 344,204 ($129,681)
======= ========= ========= ========= =========
LIABILITIES & EQUITY
Current liabilities:
Accounts payable -- -- -- $ 200 --
Accrued real estate tax -- -- -- 1,985 --
Accrued interest expense -- -- (3,914) 447 --
Accrued payroll expense -- -- -- 2,654 --
Other accrued expenses -- -- -- 2,288 --
Litigation settlement payable -- -- -- -- --
Tenant security deposits -- -- (217,236) 2,453 --
Other current liabilities 3,820 -- (3,820) 1,649 --
------- --------- --------- --------- ---------
Total current liabilities 3,820 -- (224,970) 11,675 --
Other liabilities (2,150) -- -- 3,601 --
Deferred Taxes -- -- -- -- --
Senior Debt (5,855) -- -- 73,346 --
Heller Debt -- 23,500 -- 40,224 --
Bridge Financing -- -- -- -- --
Senior Secured Notes -- -- 40,250 40,250 --
Junior Secured Notes -- -- 12,628 12,628 --
Senior Subordinated Debt -- -- (161,250) -- --
------- --------- --------- --------- ---------
Total liabilities (4,185) 23,500 (333,342) 181,724 --
Shareholders' equity:
Old Common Stock -- -- (171) -- --
New Common Stock -- -- 125 125 --
Additional Paid-In Capital -- -- 31,533 175,745 (143,071)
Retained earnings (2,189) -- 82,823 (13,390) 13,390
------- --------- --------- --------- ---------
Total shareholders' equity (2,189) -- 114,310 162,480 (129,681)
------- --------- --------- --------- ---------
Total liab. & shareholders' equity ($6,374) $ 23,500 ($219,032) $ 344,204 ($129,681)
======= ========= ========= ========= =========
check 0.000 0.000 0.000 0.000 0.000
REORGANIZED
12/31/01 3/31/02 06/30/02 09/30/02 12/31/02
-------- ------- -------- -------- --------
ASSETS
Current assets:
Cash $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Accounts receivable 3,143 3,097 3,113 3,128 3,144
Prepaid expenses 2,205 2,205 2,205 2,205 2,205
Other current assets 3,121 3,121 3,121 3,121 3,121
-------- -------- -------- -------- --------
Total current assets 13,469 13,423 13,439 13,454 13,470
Capitalized Fees & Expenses 327 289 251 212 174
Restricted cash 8,474 8,474 8,474 8,474 8,474
Property and equipment, net 190,402 189,664 188,925 188,187 187,448
Goodwill & other assets, net 1,851 1,851 1,851 1,851 1,851
-------- -------- -------- -------- --------
Total assets $214,523 $213,701 $212,939 $212,178 $211,417
======== ======== ======== ======== ========
LIABILITIES & EQUITY
Current liabilities:
Accounts payable $ 200 $ 2,000 $ 2,000 $ 2,000 $ 2,000
Accrued real estate tax 1,985 1,985 1,985 1,985 1,985
Accrued interest expense 447 447 447 447 447
Accrued payroll expense 2,654 2,654 2,654 2,654 2,654
Other accrued expenses 2,288 2,288 2,288 2,288 2,288
Litigation settlement payable -- -- -- -- --
Tenant security deposits 2,453 2,453 2,453 2,453 2,453
Other current liabilities 1,649 1,649 1,649 1,649 1,649
-------- -------- -------- -------- --------
Total current liabilities 11,675 13,475 13,475 13,475 13,475
Other liabilities 3,601 3,601 3,601 3,601 3,601
Deferred Taxes -- -- -- -- --
Senior Debt 73,346 72,898 72,450 72,001 71,553
Heller Debt 40,224 36,828 35,120 33,274 31,286
Bridge Financing -- -- -- -- --
Senior Secured Notes 40,250 40,250 40,250 40,250 40,250
Junior Secured Notes 12,628 12,999 13,369 13,752 14,135
Senior Subordinated Debt -- -- -- -- --
-------- -------- -------- -------- --------
Total liabilities 181,724 180,051 178,265 176,353 174,299
Shareholders' equity:
Old Common Stock -- -- -- -- --
New Common Stock 125 125 125 125 125
Additional Paid-In Capital 32,674 32,674 32,674 32,674 32,674
Retained earnings -- 851 1,875 3,026 4,318
-------- -------- -------- -------- --------
Total shareholders' equity 32,799 33,650 34,675 35,825 37,117
-------- -------- -------- -------- --------
Total liab. & shareholders' equity $214,523 $213,701 $212,939 $212,178 $211,417
======== ======== ======== ======== ========
check 0.000 0.000 0.000 0.000 0.000
12/31/03 12/31/04 12/31/05 12/31/06
-------- -------- -------- --------
ASSETS
Current assets:
Cash $ 5,000 $ 5,000 $ 6,166 $ 18,907
Accounts receivable 3,186 3,280 3,384 3,490
Prepaid expenses 2,205 2,205 2,205 2,205
Other current assets 3,121 3,121 3,121 3,121
--------- --------- --------- ---------
Total current assets 13,512 13,606 14,875 27,723
Capitalized Fees & Expenses 20 (97) (103) (110)
Restricted cash 8,474 8,474 8,474 8,474
Property and equipment, net 184,359 181,140 177,797 174,337
Goodwill & other assets, net 1,851 1,851 1,851 1,851
--------- --------- --------- ---------
Total assets $ 208,215 $ 204,974 $ 202,894 $ 212,274
========= ========= ========= =========
LIABILITIES & EQUITY
Current liabilities:
Accounts payable $ 2,000 $ 2,000 $ 2,000 $ 2,000
Accrued real estate tax 1,985 1,985 1,985 1,985
Accrued interest expense 447 447 447 447
Accrued payroll expense 2,654 2,654 2,654 2,654
Other accrued expenses 2,288 2,288 2,288 2,288
Litigation settlement payable -- -- -- --
Tenant security deposits 2,453 2,453 2,453 2,453
Other current liabilities 1,649 1,649 1,649 1,649
--------- --------- --------- ---------
Total current liabilities 13,475 13,475 13,475 13,475
Other liabilities 3,601 3,601 3,601 3,601
Deferred Taxes 2,313 5,653 9,998 12,629
Senior Debt 69,720 67,794 65,732 63,670
Heller Debt 22,526 11,144 -- --
Bridge Financing -- -- -- --
Senior Secured Notes 40,250 40,250 40,250 40,250
Junior Secured Notes 15,743 17,461 17,723 17,985
Senior Subordinated Debt -- -- -- --
--------- --------- --------- ---------
Total liabilities 167,628 159,378 150,779 151,610
Shareholders' equity:
Old Common Stock -- -- -- --
New Common Stock 125 125 125 125
Additional Paid-In Capital 32,674 32,674 32,674 32,674
Retained earnings 7,788 12,797 19,315 27,865
--------- --------- --------- ---------
Total shareholders' equity 40,587 45,596 52,115 60,664
--------- --------- --------- ---------
Total liab. & shareholders' equity $ 208,215 $ 204,974 $ 202,894 $ 212,274
========= ========= ========= =========
check 0.000 0.000 0.000 0.000
ASSISTED LIVING CONCEPTS, INC.
FRESH START ACCOUNTING ANALYSIS
($ IN THOUSANDS)
[A]
PRE-
CONFIRMATION LEASE MEDITRUST DEBT
12/31/01 REJECTIONS BUYBACK DISCHARGE
-------- ---------- ------- ---------
ASSETS
Current assets:
Cash 222,236 - (217,236) [2]
Accounts receivable 3,143
Prepaid expenses 2,205
Other current assets 3,121
------- ------ ------ --------
Total current assets 230,705 - - (217,236)
Capitalized Fees & Expenses 327
Restricted cash 8,474
Property and equipment, net 291,080 (6,147) [17] 23,500
Goodwill & other assets, net 15,523 (227) [22] - (1,796) [20]
------- ------ ------ --------
Total assets 546,110 (6,374) 23,500 (219,032)
======= ====== ====== ========
LIABILITIES & EQUITY
Current liabilities:
Accounts payable 200
Accrued real estate tax 1,985
Accrued interest expense 4,361 - (3,914) [C]
Accrued payroll expense 2,654
Other accrued expenses 2,288
Litigation settlement payable -
Tenant security deposits 219,689 - (217,236) [D]
Other current liabilities 1,649 3,820 [18] - (3,820) [E]
------- ------ ------ --------
Total current liabilities 232,825 3,820 - (224,970) [1]
Other liabilities 5,751 (2,150) [19]
Deferred taxes -
Senior Debt 79,201 (5,855) [16]
Heller Debt 16,724 23,500
Bridge Financing -
New Senior Secured Notes - - 40,250 [3]
New Junior Secured Notes - - 12,628 [4]
Senior Subordinated Debt 161,250 - (161,250) [1]
------- ------ ------ --------
Total liabilities 495,751 (4,185) 23,500 (333,342)
Shareholders' equity:
Old Common stock 171
New common stock - - 120 [5]
Additional paid-in capital 144,212 - 31,367 [6]
Retained earnings (94,024) (2,189) [15] - 82,823 [7]
Total shareholders' equity 50,359 (2,189) - 114,310
------- ------ ------ --------
Total liab. & shareholders' equity 546,110 (6,374) 23,500 (219,032)
======= ====== ====== ========
EXCHANGE FRESH REORGANIZED
OF STOCK START 12/31/01
-------- ----- --------
ASSETS
Current assets:
Cash 5,000
Accounts receivable 3,143
Prepaid expenses 2,205
Other current assets 3,121
-------- --------- -----------
Total current assets - - 13,469
Capitalized Fees & Expenses 327
Restricted cash 8,474
Property and equipment, net (118,031) [14] 190,402
Goodwill & other assets, net (11,649) [13] 1,851
-------- --------- -----------
Total assets - (129,681) 214,523
======== ========= ===========
LIABILITIES & EQUITY
Current liabilities:
Accounts payable 200
Accrued real estate tax 1,985
Accrued interest expense 447
Accrued payroll expense 2,654
Other accrued expenses 2,288
Litigation settlement payable -
Tenant security deposits 2,453
Other current liabilities 1,649
-------- --------- -----------
Total current liabilities - - 11,675
Other liabilities - [21] 3,601
Deferred taxes -
Senior Debt 73,346
Heller Debt 40,224
Bridge Financing -
New Senior Secured Notes 40,250
New Junior Secured Notes 12,628
Senior Subordinated Debt -
-------- --------- -----------
Total liabilities - - 181,724
Shareholders' equity:
Old Common stock (171) [8] -
New common stock 5 [9] 125
Additional paid-in capital 166 [10] (143,071) [11] 32,674
Retained earnings 13,390 [12] -
-------- --------- -----------
Total shareholders' equity - (129,681) 32,799
-------- --------- -----------
Total liab. & shareholders' equity - (129,681) 214,523
======== ========= ===========
ASSISTED LIVING CONCEPTS, INC.
FRESH START ACCOUNTING ANALYSIS
($ IN THOUSANDS)
New Capital Structure: Goes to:
Senior secured notes 40,250 100% 40,250 Unsecureds
Junior secured notes at 13% yield 12,628 [F] 100% 12,628 Unsecureds
New Common stock 32,799 [B] 96% 31,487 Unsecureds
4.0% 1,312 Old Equity
Senior Debt unimpaired
Heller unimpaired Surviving Interest Bearing Debt 166,448
Bridge financing (HUD) unimpaired Assumed Equity Value 32,799
-------
Trade Creditors unimpaired Implied Enterprise Value 199,248 [G]
=======
General Unsecured impaired
Subordinated Debentures impaired
NOTES:
[A] The planned confirmation date will be approximately 12/31/01; In addition,
prepetition liabilities subject to compromise have not been segregated. SOP
90-7 would require such prepetition liabilities subject to compromise to be
segregated and identified accordingly. For purposes of this analysis it is
assumed that Fresh Start accounting will apply to the Debtor entities as
well as all Non-Debtor entities.
[B] Assumes 12.5 million shares of $0.01 par value common stock.
[C] Amount is assumed to represent projected accrued interest as of September
30, 2001 on convertible subordinated debentures.
[D] Amount represents pro rata share of tenant security deposits associated with
6 rejected properties ($2.53 million per 7/31/01 trial balance for 70 leased
properties). The pro rata share is approximately $217,236 ($36,206 per
facility for 6 facilities).
[E] Amount represents the lease rejection claims to be discharged with general
unsecured claims.
[F] Amount represents a $15,250 junior note that has been discounted due to a 8%
PIK provision for the first 3 years and 12% interest for the remainder.
[G] Based on discounted cash flow analysis of the projections using a 12.5%
discount rate and 7.5x exit multipe/3.0% constant growth rate.
ASSISTED LIVING CONCEPTS, INC.
FRESH START ACCOUNTING ANALYSIS
ADJUSTING ENTRIES
($ IN THOUSANDS)
LEASE REJECTIONS (After petition date, before plan confirmation) DEBIT CREDIT
---------------------------------------------------------------- ----- ------
Restructuring Costs 2,999 [15]
Other Non-Current Liabilities (straight line rent expense) 727 [19]
Other Non-Current Liabilities (deferred gain on REIT sales) 1,423 [19]
PP&E (Leasehold improvements) 1,132 [17]
Lease rejection claims 3,820 [18]
Lease security deposits 198 [22]
---------------------------
5,149 5,149
RETURN OF MORTGAGED PROPERTIES (After petition date, before plan confirmation)
Senior Debt (Returned NHP Mortgages) 5,855 [16]
PP&E (NHP Properties) 5,015 [17]
Other Non-Current Assets (Deferred Financing Costs) 29 [20]
Gain on Debt Discharge (NHP Mortgages) 811 [15]
---------------------------
5,855 5,855
NOTES:
[16] The adjustment to senior debt represents the outstanding debt balance per
the July 31, 2001 trial balance for two NHP mortgage properties that are to
be turned back to NHP in accordance with the preliminary plan.
[17] The adjustment to PP&E represents the net book value of PP&E per the July
31, 2001 trial balance adjusted for depreciation through December 31, 2001
for the leases to be rejected as proposed by management and the net book
value for the two NHP mortgages to be turned back. The NHP properties are
assumed to be turned back in full satisfaction of the debt due.
[18] Lease rejection claims represents the maximum potential court obligations
for the proposed lease rejections, including the LTC claim.
[19] Deferred liabilities related to straight line rent and deferred gains on
REIT sales required under GAAP are adjusted for those leases rejected.
[20] Deferred financing costs recorded as assets related to debt are adjusted
when discharged.
[21] Fair market value of leases undetermined.
[22] Lease security deposits for rejected leases are netted against the
calculated lease rejection claims.
DEBT DISCHARGE (On plan confirmation date) DEBIT CREDIT
------------------------------------------ ----- ------
Prepetition Liabilities 386,220 [1]
Other Non-Current Assets (Deferred Financing Costs) 1,796 [20]
Cash (To pay off Tenant Security Deposits) 217,236 [2]
New Senior Secured Notes 40,250 [3]
New Junior Secured Notes 12,628 [4]
New Common Stock (see calculation below) 120 [5]
Additional Paid-In Capital (see calculation below) 31,367 [6]
Gain on Debt Discharge 82,823 [7]
-----------------------------
386,220 386,220
[2] Tenant deposits on rejected/closed facilities are assumed to be paid as a
priority claim at confirmation.
EXCHANGE OF STOCK (On plan confirmation date)
---------------------------------------------
Old Common Stock 171 [8]
New Common Stock (see calculation below) 5 [9]
Additional Paid-In Capital (see calculation below) 144,212 [10] 144,378 [10]
---------------------------
144,383 144,383
FRESH START (On plan confirmation date)
Additional Paid-In Capital (see calculation below) 143,071 [11]
Retained Earnings 13,390 [12]
Goodwill 4,493 [13]
Other Non-Current Assets (Deferred Financing Costs) 7,156 [13]
Other Non-Current Liabilities (over market value lease payments) - [21]
Property, plant and equipment 118,031 [14]
---------------------------
143,071 143,071
ASSISTED LIVING CONCEPTS, INC.
FRESH START ACCOUNTING ANALYSIS
ADJUSTING ENTRIES
($ IN THOUSANDS)
DETAIL CALCULATIONS SUPPORTING ENTRIES:
---------------------------------------
New Common stock at par value $ 0.01
Total number of shares 12,500,000
-----------
Total par value of new common stock $ 125
Debt Discharge pro rata share of new equity 96.0% 32,799 31,487
Less: par value common stock 96% 120
--------
Additional paid-in capital for debt discharge 31,367
** Exchange of stock pro rata share 4.0% $ 5
Additional paid-in capital for stock exchange 144,378
Net: Additional paid-in capital balance before fresh start 175,745
Less: Total additional paid-in capital value:
Total assumed equity value 32,799
Less: Total common stock par value 125
--------
32,674
-------
Adjustment to paid-in capital for fresh start 143,071
** The preliminary draft sheet includes a stratified percent (5%, 4% or 3%) of
total equity depending on timeliness of plan confirmation versus a set 4% of
total equity. For this analysis, 4% is assumed.
ASSISTED LIVING CONCEPTS, INC.
DISCOUNTED CASH FLOW ANALYSIS
($ IN MILLIONS)
MULTIPLES MODEL
--------------------------------------------------------------------------------
ANNUALIZED PROJECTED FISCAL YEAR ENDED DECEMBER 31,
PF RUN-RATE ------------------------------------------------- TERMINAL
Q2 2001 2002 2003 2004 2005 2006 PERIOD
------- ---- ---- ---- ---- ---- ------
OPERATING MODEL:
EBITDA $19.8 $ 22.8 $ 24.1 $ 26.1 $ 28.6 $ 31.1 $ 31.1
Dep. & Amort. 11.3 11.5 11.8 12.0 12.3
------ ------ ------ ------ ------
EBIT 11.5 12.6 14.4 16.5 18.8
Taxes (@ 40%) 4.6 5.0 5.7 6.6 7.5
------ ------ ------ ------ ------
Debt-free Net Income 6.9 7.6 8.6 9.9 11.3
add: Dep. & Amort. 11.3 11.5 11.8 12.0 12.3
(less): Capital Expenditures (2.3) (2.4) (2.5) (2.7) (2.8)
add/(less): Working Capital Changes 1.8 (0.0) (0.1) (0.1) (0.1)
------ ------ ------ ------ ------
Distributable Cash Flow 17.7 16.6 17.8 19.2 20.7
Discount Period 0.5 1.5 2.5 3.5 4.5 5.0
Discount Rate/Factor 12.5% 0.9428 0.8381 0.7449 0.6622 0.5886 0.5549
Exit Multiple or Growth Rate/Terminal Value 7.5x 233.0
------ ------ ------ ------ ------ ------
Present Values $16.7 $13.9 $13.2 $12.7 $12.2 $129.3
Sum of Discrete Present Values $68.7
Present Value of Terminal Value 129.3
-------
Implied Enterprise Value $ 198.0
Less Secured Debt (113.6)
Less Senior Secured Notes (40.3)
Less Junior Secured (12.6)
-------
Implied Equity Value $31.5
=======
Implied Run-Rate Multiple 10.0x
AVERAGE ENTERPRISE VALUE $ 199.2
AVERAGE EQUITY VALUE $ 32.8
CONSTANT GROWTH MODEL
--------------------------------------------------------------------------------
ANNUALIZED PROJECTED FISCAL YEAR ENDED DECEMBER 31,
PF RUN-RATE ----------------------------------------------- TERMINAL
Q2 2001 2002 2003 2004 2005 2006 PERIOD
------- ---- ---- ---- ---- ---- ------
OPERATING MODEL:
EBITDA $19.8 $ 22.8 $ 24.1 $ 26.1 $ 28.6 $ 31.1
Dep. & Amort. 11.3 11.5 11.8 12.0 12.3
------ ------ ------ ------ ------
EBIT 11.5 12.6 14.4 16.5 18.8
Taxes (@ 40%) 4.6 5.0 5.7 6.6 7.5
------ ------ ------ ------ ------
Debt-free Net Income 6.9 7.6 8.6 9.9 11.3
add: Dep. & Amort. 11.3 11.5 11.8 12.0 12.3
(less): Capital Expenditures (2.3) (2.4) (2.5) (2.7) (2.8)
add/(less): Working Capital Changes 1.8 (0.0) (0.1) (0.1) (0.1)
------ ------ ------ ------ ------
Distributable Cash Flow 17.7 16.6 17.8 19.2 20.7 21.3
Discount Period 0.5 1.5 2.5 3.5 4.5 4.5
Discount Rate/Factor 0.9428 0.8381 0.7449 0.6622 0.5886 0.5886
Exit Multiple or Growth Rate/Terminal Value 3.0% 223.9
------ ------ ------ ------ ------ ------
Present Values $16.7 $13.9 $13.2 $12.7 $12.2 $ 131.8
Implied Exit Multiple 7.2x
Sum of Discrete Present Values $68.7
Present Value of Terminal Value 131.8
------
Implied Enterprise Value $200.5
Less Secured Debt (113.6)
Less Senior Secured Notes (40.3)
Less Junior Secured (12.6)
------
Implied Equity Value $34.1
======
Implied Run-Rate Multiple 10.1x
AVERAGE ENTERPRISE VALUE
AVERAGE EQUITY VALUE
EXHIBIT H
PLAN SUPPORT AGREEMENT
This Plan Support Agreement ("Agreement"), dated as of
September 28, 2001, is entered into by and among Assisted Living Concepts, Inc.
("ALC"), Carriage House Assisted Living, Inc. ("Carriage House, and together
with ALC, the "Company"), the undersigned subsidiaries and affiliates of ALC
(the "Non-Filing Subsidiaries") and the undersigned holders ("Consenting
Holders") of the Company's $86,250,000, 6% Convertible Subordinated Debentures
due 2002 (the "6% Notes") and $75,000,000, 5.625% Convertible Subordinated
Debentures due 2003 (the "5.625% Notes," and collectively with the 6% Notes, the
"Notes").
WHEREAS, pursuant to an Indenture dated as of October 24, 1997
(the "6% Notes Indenture"), ALC issued the 6% Notes;
WHEREAS, pursuant to an Indenture dated as of April 13, 1998
(the "5.625% Notes Indenture," and collectively with the "6% Notes Indenture,"
the "Indentures"), ALC issued the 6% Notes;
WHEREAS each Consenting Holder is a direct holder of the Notes
or is an investment manager or advisor for certain discretionary accounts that
are holders or beneficial owners of the Notes, in either case in the principal
amount set forth on the signature page hereto with respect to such Consenting
Holder;
WHEREAS, certain of the Consenting Holders have formed an ad
hoc committee for the purpose of negotiating with the Company (the "Noteholders
Committee") and have engaged Milbank, Tweed, Hadley & McCloy LLP ("Milbank") as
legal counsel and Chanin Capital Partners ("Chanin") as financial advisors;
WHEREAS, the Company and the Noteholders Committee have
engaged in good faith negotiations with the objective of reaching an agreement
with regard to a financial reorganization of the Company;
WHEREAS, the Company and the Consenting Holders now desire to
implement a financial restructuring of the Company on the terms set forth in
this Agreement and in the Term Sheet ("Term Sheet") attached hereto as Schedule
1 (the "Financial Restructuring");
WHEREAS, in order to implement the Financial Restructuring,
the Company has determined: (i) to commence cases for the Company (collectively,
the "Chapter 11 Cases") under chapter 11 of the United States Bankruptcy Code
(the "Bankruptcy Code") in the United States Bankruptcy Court for the District
of Delaware or another district acceptable to the Company and the Committee (the
"Bankruptcy Court"); (ii) to prepare and file in the Chapter 11 Cases
concurrently with their commencement a plan of reorganization (the "Plan") and
accompanying disclosure statement (the "Disclosure Statement") for the purpose
of implementing the Financial Restructuring in accordance with this Agreement
and the Term Sheet; and (iii) to have the Disclosure Statement approved and
Plan confirmed by the Bankruptcy Court in accordance with the timetable
provided herein; and
WHEREAS, ALC has (or, as of the date the Chapter 11 Cases are
commenced (the "Petition Date") will have) obtained from T and F Properties,
L.P., Health Care Properties, Inc., Transatlantic Capital LLC and Heller
Healthcare Financial waivers with respect to any defaults that will exist as of
the Petition Date under their contracts or leases with the Non-Filing
Subsidiaries, or that will arise as a result of the commencement of the Chapter
11 Cases, and the Company represents and warrants that no other material
defaults will arise under contracts or leases of the Non-Filing Subsidiaries as
a result of the commencement of the Chapter 11 Cases;
WHEREAS, as a result of having obtained said waivers or
releases, the Non-Filing Subsidiaries will not commence chapter 11 cases;
WHEREAS, each of the Consenting Holders is prepared to commit
to vote its claims (as defined in the Bankruptcy Code) arising under the Notes
held by such Consenting Holder (for each such Consenting Holder, the "Note
Claims") and the amount of any other claim(s) against the Company that any
Consenting Holder may hold, as of the Petition Date, in a capacity other than as
a holder of Notes, to accept the Plan, subject to the terms and conditions of
this Agreement and the Term Sheet;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company, the Non-Filing Subsidiaries and the Consenting
Holders agree as follows:
1. Restriction on Transfer. Each Consenting Holder agrees that, so long
as this Agreement has not been terminated in accordance with Paragraph 7 hereof,
it will not sell, transfer or assign any of its Notes or Note Claims unless the
transferee thereof agrees in writing to be bound by all the terms of this
Agreement (the "Transferee Agreement"). The Consenting Holder shall deliver the
Transferee Agreement to the Company within five business days after the sale,
transfer or assignment, as appropriate, of any of its Notes or Note Claims. The
provisions of this paragraph are for the benefit of the Company and each
Consenting Holder. Any failure by LTC Healthcare, Inc., LTC Properties, Inc., or
National Health Investors, Inc. to obtain and deliver to the Company a
Transferee Agreement in connection with any transfer of Notes or Note Claims by
such entity shall render such transfer null and void.
2. Preparation of Restructuring Documents. As set forth in the Term
Sheet, the Company shall deliver to the Consenting Holders for their review and
approval the Plan, the Disclosure Statement, any motions that the Company
intends to file and have heard by the Bankruptcy Court within the first days
following the commencement of the Chapter 11 Cases, the Bankruptcy Court orders
to be prepared in connection therewith, and all other documents or agreements
to be executed or implemented in connection therewith, or otherwise contemplated
by, the Financial Restructuring, each of which documents and agreements shall be
consistent in all material respects with this Agreement and the Term Sheet
(collectively, the "Restructuring Documents"). The Company shall coordinate with
the Consenting Holders in preparing the Restructuring Documents and shall afford
Milbank a reasonable opportunity to review and comment upon the Restructuring
Documents prior to their filing with the Bankruptcy Court (as further described
in the Term Sheet). The Company and the Consenting Holders agree that (a) the
negotiation of this Agreement and the attached Term Sheet, and (b) the delivery
of any
2
information by the Company to the Consenting Holders in connection with this
Agreement and the attached Tern Sheet are not intended by the Company to be a
solicitation of the Consenting Holders' approval of any plan of reorganization
within the meaning of Section 1125 of the Bankruptcy Code. The Company and the
Consenting Holders further agree that this Agreement is not a financial
accommodation contract that would be unenforceable under Section 365(c)(2) of
the Bankruptcy Code, and each agrees not to take any contrary position in the
Chapter 11 Cases.
3. Covenants Regarding Timetable. The Company and the Consenting
Holders, as applicable, each agree that it will take all reasonable steps
necessary and desirable to adhere to the timetable set forth in the Term Sheet
for the delivery of documents, the commencement of the Chapter 11 Cases, the
filing of the Plan and Disclosure Statement, the scheduling of hearings to
approve the Disclosure Statement and confirm the Plan and the occurrence of the
Effective Date of the Plan.
4. Certain Other Covenants. The Company and the Non-Filing Subsidiaries
agree that they shall take all reasonable steps necessary and desirable to
obtain any and all required regulatory and/or third party approvals for the
Financial Restructuring.
5. Voting. Provided that no Agreement Termination Event (as defined
below) has occurred each Consenting Holder agrees that it shall timely vote (or
shall cause or instruct any custodial agent to so vote) its Note Claims, and any
other claims against the Company that it might possess, to accept the Plan and
shall not revoke or withdraw such vote.
6. Support of the Financial Restructuring; Additional Covenants. As
long as this Agreement has not been terminated in accordance with Paragraph 7
hereof, the Company will take all necessary and appropriate actions to achieve
confirmation of the Plan, including, upon approval of the Disclosure Statement
by the Bankruptcy Court, recommending to the holders of claims and interests
impaired under the Plan that they vote to approve the Plan. As long as this
Agreement has not been terminated in accordance with Paragraph 7 hereof, neither
the Company nor any Consenting Holder will (a) object to confirmation of the
Plan or otherwise commence or support in any way any proceeding to oppose or
alter the Plan or any of the Restructuring Documents in any way inconsistent
with this Agreement or the Term Sheet; (b) vote for, support or participate in
the formulation of any plan of reorganization or liquidation for the Company or
any of the Non-Filing Subsidiaries other than the Plan; (c) seek, solicit,
support or encourage any plan other than the Plan, or any sale, proposal or
offer of dissolution, winding up, liquidation, reorganization, merger or
restructuring of the Company or any of the Non-Filing Subsidiaries; (d) object
to the Disclosure Statement or the solicitation of consents to the Plan; or (e)
take any other action that is inconsistent with or be in derogation of this
Agreement, the Term Sheet or the Plan or that would delay confirmation of the
Plan. Notwithstanding the foregoing or anything else in this Agreement to the
contrary, no Consenting Holder shall be barred from objecting to (x) approval of
the Disclosure Statement if such Disclosure Statement contains a material
misstatement or omission or fails to contain adequate information for the
purposes of Bankruptcy Code Section 1125 or other applicable law, or (y)
confirmation of the Plan, or approval, execution or implementation of any
Restructuring Document, if such Plan or Restructuring Document contains terms
that are materially inconsistent with this Agreement or the Term Sheet. In
addition, except as expressly provided herein, nothing herein is intended to, or
does, in any
3
manner, waive, limit, impair, or restrict the ability of any Consenting Holder
to take steps to preserve and assert its claims against the Company.
7. Termination of Agreement. This Agreement shall terminate
automatically upon the occurrence of any "Agreement Termination Event" (as
hereinafter defined), unless the occurrence of such Agreement Termination Event
is waived in writing by the Consenting Holders. If any Agreement Termination
Event occurs (and has not been so waived) at the time when permission of the
Bankruptcy Court shall be required for the Consenting Holders to change or
withdraw (or cause to be changed or withdrawn) their votes to accept the Plan,
neither the Company or the Non-Filing Subsidiaries shall oppose any attempt by
any of the Consenting Holders to change or withdraw (or cause to be changed or
withdrawn) such votes at such time. Upon the occurrence of an Agreement
Termination Event, each Consenting Holder, the Company and each Non-Filing
Subsidiary shall have all rights that are available to it under the Notes, the
Indentures, applicable law or otherwise, including, without limitation, the
right to take action on account of any then existing default under the Notes or
Indentures.
An "Agreement Termination Event" shall mean any of the
following:
(a) The Chapter 11 Cases to implement the Financial
Restructuring are not commenced in accordance with the timetable
contained in the Term Sheet;
(b) The Company does not, upon commencement of the Chapter 11
Cases, request that the Bankruptcy Court schedule hearings to: (1)
approve the disclosure statement by no later than 30 days after the
Petition Late; and (2) confirm the plan by no later than 75 days
after the Petition Date;
(c) All of the members of the Noteholders Committee as of the
date of this Agreement (the "Initial Consenting Holders") provide
written notice (a "Termination Notice") to the Company that the Plan or
any of the Restructuring Documents as filed by the Company or approved
in the Chapter 11 Cases contains any term that is inconsistent in any
material respect with the Financial Restructuring contemplated by and
provided for in this Agreement or the Term Sheet, or has been modified,
amended or replaced in any respect that makes it inconsistent in any
material respect with this Agreement or the Term Sheet; provided,
however, that no Agreement Termination Event shall occur if, within 5
business days of delivery of a Termination Notice, the Company cures
any such inconsistencies to the satisfaction of the Initial Consenting
Holders;
(d) The Effective Date of the Plan has not occurred on or
before February 28, 2002;
(e) The Company or any Initial Consenting Holder breaches any
other provision of this Agreement;
(f) The Chapter 11 Case of the Company is converted to a case
under chapter 7 of the Bankruptcy Code;
(g) A chapter 11 trustee is appointed in the Chapter 11 Case;
4
(h) The Company suffers an Event of Default under the DIP
Facility and such Event of Default has not been waived or cured in
accordance with the terms of the DIP Facility;
(i) Any (a) written representation or warranty by the Company
or its advisors, (b) representation or warranty by Jim Nicol, Drew
Miller or Sandra Campbell, or (c) representation or warranty by any
members of the Company's Board of Directors in meetings between the
Company, the Board of Directors and the Noteholders Committee, in all
cases made to the Noteholders Committee or its representatives, or in
connection with this Agreement or the Term Sheet (including without
limitation representations relating to the Company's financial
performance), is false or misleading in any material respect when
made; or
(j) A material adverse change occurs or is discovered with
respect to the assets, liabilities, business operations or financial
condition of the Company or any of the Non-Filing Subsidiaries after
the date of this Agreement, but not including, however, any material
adverse change that occurs solely by reason of the filing of the
Chapter 11 Case.
8. Specific Performance. It is understood and agreed by each of the
parties hereto that money damages would not be a sufficient remedy for any
breach of this Agreement by any party and each non-breaching party shall be
entitled, in addition to any other remedies, to the remedy of specific
performance and injunctive or other equitable relief as a remedy for any such
breach, without the necessity of securing or posting a bond or other security in
connection with such equitable relief.
9. Good Faith Negotiation of Restructuring Documents. The Company and
each Consenting Holder covenants and agrees to negotiate in good faith the
Restructuring Documents, which the Company covenants will be, in all material
respects, consistent with this Agreement and the Term Sheet.
10. Representations and Warranties. The Company and each Non-Filing
Subsidiary, on the one hand, and each of the Consenting Holders, on the other,
represents and warrants to the other that the following statements are true,
correct and complete as of the date hereof:
(a) Corporate Power and Authority. It has all requisite power
and authority to enter into this Agreement and to carry out the transactions
contemplated by, and perform its respective obligations under, this Agreement;
(b) Authorization. The execution and delivery of this
Agreement and the performance of its obligations hereunder have been duly
authorized by all necessary action on its part, and the Company and each of the
Non-Filing Subsidiaries further represents that the Financial Restructuring,
this Agreement and the attached Term Sheet have been approved in writing by the
Boards of Directors or similar governing bodies of the Company and the
Non-Filing Subsidiaries;
(c) No Conflicts. The execution, delivery and performance by
it of this Agreement do not and shall not (i) violate any provision of law, rule
or regulation applicable to it or any of its subsidiaries or its certificate of
incorporation or by-laws or partnership agreements
5
or those of any of its subsidiaries or (ii) conflict with, result in a breach of
or constitute (with due notice or lapse of time or both) a default under any
material contractual obligation to which it or any of its subsidiaries is a
party or under its certificate of incorporation or by-laws and which has not
been waived as of the date hereof; except however that the fling of the Chapter
11 Cases, and the implementation of the Financial Restructuring, may constitute
events of default under certain of the Company's contracts.
(d) Governmental Consents. The execution, delivery and
performance by it of this Agreement do not and shall not require any
registration or filing with, consent or approval of, or notice to, or other
action to, with or by, any Federal, state or other governmental authority or
regulatory body, except such filings as may be necessary and/or required for
disclosure by the Securities and Exchange Commission, in connection with the
commencement of the Chapter 11 Cases and the approval of the Disclosure
Statement and confirmation of the Plan, and
(e) Binding Obligation. This Agreement is the legally valid
and binding obligation of it, enforceable against it in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability.
11. Employment, Consulting and Other Contracts. The Company shall not
enter into or assume (as that term is used in Section 365 of the Bankruptcy
Code) any employment, consulting or similar contracts ("Employment Contracts")
without the prior agreement of the Noteholders Committee; provided, however,
that the Company shall be permitted to enter into or assume any Employment
Contract the term of which is not more than six months and that provides for
aggregate compensation of not more than $50,000.
12. Further Acquisition of Securities. This Agreement shall in no way
be construed to preclude any of the Consenting Holders from acquiring additional
Notes. However, any and all rights and claims obtained by a Consenting Holder
with respect to, on account of or pursuant to any subsequently acquired Notes
shall automatically be deemed to be Note Claims and to be subject to the terms
of, and the obligations of such Consenting Holder under, this Agreement and the
Term Sheet.
13. Effectiveness; Amendments. This Agreement shall not become
effective and binding on the parties hereto unless and until counterpart
signature pages to this Agreement have been executed and delivered by the
Company, the Non-Filing Subsidiaries and the undersigned Consenting Holders.
Once effective, this Agreement may not be modified, amended or supplemented
except in writing signed by the Company, the Non-Filing Subsidiaries and the
undersigned Consenting Holder.
14. Disclosure of Individual Holdings. Prior to the commencement by the
Company of the Chapter 11 Cases, and unless required by applicable law or
regulation, neither the Company nor the Non-Filing Subsidiaries or their
respective representatives shall disclose the holdings of Note Claims of any of
the Consenting Holders without the prior written consent of such Consenting
Holder. If disclosure is so required by law or regulation, the Company and the
Non-Filing Subsidiaries shall afford each of the Consenting Holders a reasonable
opportunity to review and comment upon any such disclosure prior to the making
such disclosure. The
6
foregoing shall not prohibit the Company from disclosing the approximate
aggregate holdings of Notes of all Consenting Holders.
15. Accredited Investors. Each Consenting Holder represents that (a) it
is a sophisticated investor with respect to the transactions described herein
with sufficient knowledge and experience in owning and investing in securities
similar to the Notes held by such Consenting Holder to evaluate properly the
transactions contemplated by this Agreement and it has made its own analysis and
decision to enter in this Agreement; and (b) it is an "accredited investor"
within the meaning of Section 2(a)(15) of the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
16. Impact of Appointment to Creditors Committee. Notwithstanding
anything herein to the contrary, in the event that any Consenting Holder is
appointed to and serves on a committee of creditors in the Company's Chapter 11
Cases, the terms of this Agreement shall not be construed so as to limit such
Consenting Holder's exercise, in its sole discretion, of its fiduciary duties,
if any, to any person or entity arising from its service on such committee, and
any such exercise of such fiduciary duties shall not be deemed to constitute a
breach of the terms of this Agreement; provided, however, that the fact of such
service on such committee (a) shall not otherwise affect the continuing validity
or enforceability of this Agreement and (b) shall not modify or limit the
obligations of such individual Consenting Holder to vote its Subject Claims to
accept the Plan, provided that no Agreement Termination Event has occurred and
this Agreement remains in effect.
17. Official Unsecured Creditors Committee. In conjunction with the
Chapter 11 Case and pursuant to either Sections 1102(a)(1) or (a)(2) of the
Bankruptcy Code, the Company shall support the appointment of an official
committee comprised of Consenting Holders and such other holders of unsecured
claims as may be appointed by the Office of United States Trustee (the "Official
Committee"). The Official Committee shall, subject to compliance with the
applicable provisions of the Bankruptcy Code, be entitled to retain Milbank and
Chanin to represent the Official Committee and assist in the prosecution of the
Plan anal related matters. In the event that the Official Committee does not
retain Milbank or Chanin, the Company shall actively support the approval, under
Section 503(b) of the Bankruptcy Code, of the payment of the reasonable costs
and fees incurred by Milbank and Chanin on behalf of the Noteholders Committee.
18. Governing Law; Jurisdiction. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Oregon
without regard to any conflicts of law provision that would require the
application of the law of any other jurisdiction. By its execution and delivery
of this Agreement, each of the parties hereto hereby irrevocably and
unconditionally agrees for itself that any legal action, suit or proceeding
against it with respect to any matter under or arising out of or in connection
with this Agreement or for recognition or enforcement of any judgment rendered
in any such action, suit or proceeding, may be brought in the U. S. District
Court sitting in Portland Oregon. By execution and delivery of this Agreement,
each of the parties hereto hereby irrevocably accepts and submits itself to the
nonexclusive jurisdiction of such court, generally and unconditionally, with
respect to any such action, suit or proceeding. Notwithstanding the foregoing
consent to jurisdiction, upon the commencement of the Company's Chapter 11 Case,
each of the parties hereto hereby agrees that
7
the Bankruptcy Court shall have exclusive jurisdiction of all matters arising
out of or in connection with this Agreement.
19. Fees and Expenses. The Company shall perform and shall not
terminate its fee agreements with Milbank and Chanin except as otherwise
provided in the applicable engagement agreements. Five (5) business days prior
to the date that the Company commences the Chapter 11 Cases, the Company shall
pay in full any outstanding bills, plus an estimate of unbilled fees and costs
up to the filing of the voluntary chapter 11 petition, of Milbank and Chanin;
provided that Milbank's invoice(s) shall be accompanied by a written (or
electronic) confirmation from Milbank that the Consenting Holders have approved
payment of such invoice. Such confirmation shall simultaneously be delivered to
the Consenting Holders. If any party brings an action against any other party
based upon a breach by such other party of its obligations under this paragraph,
the prevailing party shall be entitled to all reasonable expenses incurred,
including reasonable attorneys', accountants' and financial advisors' fees in
connection with such action.
20. Notices. All notices and consents hereunder shall be in writing aid
shall be deemed to have been duly given if personally delivered by courier
service, messenger, or telecopy, or initially deposited in the mails, by
certified or registered mail, postage prepaid return receipt requested, to the
following addresses, or such other addresses as may be furnished hereafter by
notice in writing, to the following parties:
(a) if to the Company, to:
Assisted Living Concepts, Inc.
11835 NE Glenn Widing Drive, Building E
Portland, Oregon 97220-9057
Fax: (503) 252-6233
Attention: Wm. James Nicol
With a copy (which shall not constitute service) to:
Latham & Watkins
633 West Fifth Street
Los Angeles, California 90071
Fax: (213) 891-8763
Attention: Robert A. Klyman
(b) if to any Consenting Holder, to such Consenting Holder at
the address and fax number shown for such holder on the
applicable signature page hereto, to the attention of the
person who has signed this Agreement on behalf of such
holder,
8
With a copy to:
Milbank, Tweed, Hadley & McCloy LLP
601 S. Figueroa St., 30th Floor
Los Angeles, CA 90017
Fax: (213) 629-5063
Attention: Thomas R. Kreller, Esq.
Attention: David B. Zolkin, Esq.
21. Survival. Notwithstanding the sale of its Note Claims in accordance
with Paragraph 1 hereof or the termination of the Consenting Holders'
obligations hereunder in accordance with Paragraph 7 hereof, the Company and the
Non-Filing Subsidiaries' obligations and agreements set forth in Paragraphs 8,
14, 18, 19, 22 and 32 hereof shall survive such termination and shall continue
in full force and effect.
22. Reservation of Rights. This Agreement and the Term Sheet are part
of a proposed settlement of a dispute among the parties hereto. Except as
expressly provided in this Agreement and the Term Sheet: (a) nothing herein is
intended to, or does, in any manner waive, limit, impair or restrict the ability
of the Company, the Non-Filing Subsidiaries each Consenting Holder and any
trustee under the Notes and Indentures to protect and preserve its rights,
remedies and interests, including without limitation, its claims against the
other; and (b) nothing contained herein effects a modification of the rights of
the Company, the Non-Filing Subsidiaries and the Consenting Holders or any
trustee under the Notes and Indentures, unless and until the Plan is confirmed
and the Financial Restructuring becomes effective. If the transactions
contemplated herein are not consummated, or if this Agreement is terminated for
any reason, the parties hereto fully reserve any and all of their rights.
Pursuant to Federal Rule of Evidence 408 and any applicable state rules of
evidence, this Agreement and all negotiations relating thereto shall not be
admissible into evidence in any proceeding other than a proceeding to enforce
its terms.
23. Representation by Counsel. Each party hereto acknowledges that it
has been represented by counsel in connection with this Agreement and the
transactions contemplated by this Agreement. Accordingly, any rule of law or any
legal decision that would provide any party hereto with a defense to the
enforcement of the terms of this Agreement against such party based upon lack of
legal counsel, shall have no application and is expressly waived.
24. Consideration. It is hereby acknowledged by the parties hereto
that, other than the Company's and the Non-Filing Subsidiaries' agreements,
covenants, representations and warranties, as more particularly set forth herein
and in the Term Sheet, no consideration shall be due or paid to the Consenting
Holders for their agreement to vote to accept the Plan in accordance with the
terms and conditions of this Agreement.
25. Acknowledgment. This Agreement is not and shall not be deemed to be
a solicitation for the tender or exchange of the Notes, a solicitation for
waivers to the Notes or the Indenture, or a solicitation for consents to the
Plan. The acceptance of the Consenting Holders will not be solicited until such
Parties have received the Disclosure Statement and related ballots, as approved
by the Bankruptcy Court.
9
26. Headings. The headings of the paragraphs and subparagraphs of this
Agreement are inserted for convenience only and shall not affect the
interpretation hereof.
27. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of the parties and their respective successors, assigns,
heirs, executors, administrators and representatives.
28. Several, Not Joint, Obligations. The agreements, representations
and obligations of the Consenting Holders under this Agreement and the Term
Sheet are, in all respects, several and not joint.
29. Prior Negotiations. This Agreement and the Term Sheet constitute
the entire agreement and understanding between the parties hereto and supersede
all prior discussions, agreements and undertakings, written or oral, of any kind
and every nature, with respect to the subject matter hereof. Each party to this
Agreement represents that it has read this Agreement and the Term Sheet and has
had the terms used herein and the consequences hereof explained to it by legal
counsel.
30. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same.
31. Agreement. Delivery of an executed counterpart of a signature page
to this Agreement by facsimile transmission shall be effective as delivery of a
manually executed counterpart thereof.
32. No Third-Party Beneficiaries. Unless expressly stated herein, this
Agreement shall be solely for the benefit of the parties hereto, and no other
person or entity shall be a third party beneficiary hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered by its duly authorized officer as of the
date first above written.
THE COMPANY
ASSISTED LIVING CONCEPTS, INC. CARRIAGE HOUSE ASSISTED LIVING, INC.
By:__________________________________ By:__________________________________
Name: Name:
Title: Title:
10
THE NON-FILING SUBSIDIARIES
ALC IOWA, INC. [LIST TO BE CONFIRMED]
ALC MCKINNEY PARTNERS, LP
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALC NEBRASKA, INC. ALC NEW JERSEY, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALC OHIO, INC. ALC PARIS PARTNERS, LP
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALC PENNSYLVANIA, INC. ALC PLANO PARTNERS, LP
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ASSISTED LIVING CONCEPTS DMG NEW JERSEY ALC, INC.
SERVICES, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
DMG OREGON ALC, INC. DMG TEXAS ALC PARTNERS, LP
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
11
HOME AND COMMUNITY CARE, INC. TEXAS ALC PARTNERS, LP
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALC FLORIDA, INC. ALC NEVADA MCKINNEY, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALC NEVADA PARIS, INC. ALC NEVADA PLANO, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALC TEXAS MCKINNEY, INC. ALC TEXAS PARIS, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALC TEXAS PLANO, INC. ALCH NEVADA, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALCH TEXAS, INC. ALCH TEXAS PARTNERS, LP
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
12
ALFH NEVADA, INC. ALFH TEXAS, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
ALFH TEXAS PARTNERS, LP DMG NEVADA ALC, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
DMG TEXAS ALC, INC. ELDER CARE HOME HEALTH
SERVICES INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
NEVADA ALC, INC. NEVADA ALF, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
PACESETTER CAPITAL, INC. PACESETTER HOME CARE GROUP, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
PACESETTER HOME HEALTH CARE, INC. PACESETTER HOME HEALTH CARE
OF BLOOMINGTOM, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
13
PACESETTER HOME HEALTH CARE PACESETTER HOSPICE, INC.
OF MADISON, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
PRIME HOME CARE, INC. TEXAS ALC, INC.
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
TEXAS ALF, INC. ALF PARTNERS, LP
By: _____________________________ By: _____________________________
Name: Name:
Title: Title:
THE CONSENTING HOLDERS
LTC HEALTHCARE, INC. LTC PROPERTIES, INC.
By: /s/ Andre C. Dimitriadis By: /s/ Andre C. Dimitriadis
Andre C. Dimitriadis Andre C. Dimitriadis
Chairman and Chief Executive Chairman and Chief Executive
Officer Officer
Address: Address:
300 Esplanade Dr., #1860 300 Esplanade Dr., #1860
Oxnard, California 93030 Oxnard, California 93030
Fax: 805-981-8663 Fax: 805-981-8663
Principal amount of Principal amount of
6% Notes: $____________ 6% Notes: $____________
5.625% Notes: $____________ 5.625% Notes: $____________
14
SUN TRUST EQUITABLE SECURITIES
FOR THE ACCOUNT OF NATIONAL
HEALTH INVESTORS, INC.
By: /s/ W. Andrew Adams
W. Andrew Adams
President & CEO
Address:
National Health Investors, Inc.
100 Vine Street, Suite 1400
Oxnard, California 93030
Fax: (615) 890-0123
Principal amount of
6% Notes: $____________
5.625% Notes: $____________
15
DEEPHAVEN CAPITAL MANAGEMENT
By: /s/ Shawn Bergerson
-------------------------------
Shawn Bergerson
Senior Vice President
Address:
130 Cheshire Lane, Suite 102
100 Vine Street, Suite 1400
Minnetonka, Minnesota 55305
Fax: (952) 249-5563
Principal amount of
6% Notes: $____________
5.625% Notes: $____________
JMG CAPITAL PARTNERS TRITON CAPITAL INVESTMENTS, LTD.
By: /s/ Jonathan Glaser By: /s/ Jonathan Glaser
------------------------------- -----------------------------
Jonathan Glaser Jonathan Glaser
Managing Member Managing Member
Address: Address:
1999 Avenue of the Stars, Suite 2530 1999 Avenue of the Stars,
Los Angeles, California 90067 Suite 2530
Fax: (310) 201-2759 Los Angeles, California 90067
Fax: (310) 201-2759
Principal amount of Principal amount of
6% Notes: $____________ 6% Notes: $____________
5.625% Notes: $____________ 5.625% Notes: $____________
16
JMG CAPITAL MANAGEMENT MONEY
PURCHASE PENSION PLAN
By: /s/ Jonathan Glaser
-------------------------------
Jonathan Glaser
Managing Member
Address:
1999 Avenue of the Stars, Suite 2530
Los Angeles, California 90067
Fax: (310) 201-2759
Principal amount of
6% Notes: $____________
5.625% Notes: $____________
Insider Holders
17
SCHEDULE 1
TERM SHEET
18
Page 1
TERM SHEET
September 27, 2001
INTRODUCTION
The members (the "Noteholders") of the unofficial committee (the "Committee") of
holders of the $86,250,000, 6% Convertible Subordinated Debentures due 2002 (the
"6% Notes") issued by Assisted Living Concepts, Inc. ("Company" or the "Debtor")
pursuant to that Indenture dated as of October 24, 1997 (the "6% Notes
Indenture"), and the $75,000,000, 5.625% Convertible Subordinated Debentures due
2003 (the "5.625% Notes," and collectively with the 6% Notes, "Notes") issued by
the Company pursuant to that Indenture dated as of April 13, 1998 (the "5.625%
Notes Indenture," and collectively with the "6% Notes Indenture," the
"Indentures"), as identified in Exhibit 1 hereto, will agree to support a
restructuring transaction (the "Transaction") for Company and those subsidiaries
identified below ("Subsidiaries"; from time to time referred to collectively
with the Company as the "Debtors") that incorporates the terms set forth below.
The terms discussed herein are part of a comprehensive compromise, each element
of which is consideration for the other elements and an integral aspect of the
proposed restructuring. This Term Sheet is proffered in the nature of a
settlement proposal in furtherance of settlement discussions, and is intended to
be entitled to protection from any use or disclosure to any party or person
pursuant to Federal Rule of Evidence 408, California Evidence Code Section 1152,
and any other applicable statutes or doctrines protecting the use or disclosure
of confidential information and information exchanged in the context of
settlement discussions. Notwithstanding the foregoing, should Company, its
Subsidiaries and the Noteholders successfully negotiate a formal Lock-Up
Agreement (the "Agreement"), this Term Sheet shall be incorporated in, form a
part of and be subject to the terms and conditions set forth in the Agreement.
TREATMENT OF CLAIMS AND INTERESTS
The Transaction will be consummated by means of the filing of chapter 11
bankruptcy cases before a bankruptcy court in the District of Delaware or other
district acceptable to the Company and the Committee, and the confirmation of a
plan of reorganization that sets forth the Transaction. The Transaction will
provide treatment for claims against and interests in Company and Subsidiaries,
including the issuance of new securities, and certain other terms generally as
described below. Unless otherwise set forth herein, each class of claims will be
satisfied in full by the delivery of the consideration described below upon
consummation of the Transaction (the "Effective Date").
The Company will commence chapter 11 cases by filing or by causing the filing of
voluntary petitions for relief under chapter 11 of the Bankruptcy Code for at
least the following entities by no later than October 1, 2001 (the "Petition
Date"): (1) the Company, (2) Carriage House Assisting Living, Inc., and (3) any
other Subsidiary whose creditors have not waived all defaults existing as of the
Petition Date under contracts or leases or that will arise as a result of the
bankruptcy of the Company or a Subsidiary. The bankruptcy petitions shall be
filed with a draft disclosure statement and a draft plan of reorganization that
are acceptable to the Committee. Upon filing, the Company shall promptly request
that the bankruptcy court schedule hearings to: (1) approve the disclosure
statement no later than 30 days after the Petition Date, and (2) confirm the
plan by no later than 75 days after the Petition Date. The parties will use
their best efforts to ensure that the Effective Date occurs on or before January
31, 2002.
Page 2
TREATMENT of CLAIMS
MORTGAGE DEBT The Company and Committee shall jointly
examine the existing mortgage debt on a case
by case basis. The Company shall consult
with the Committee to determine which
mortgage debt should be impaired, unimpaired
or refinanced.
HELLER DEBT Subject to the terms set forth below, the
debt owed to Heller Healthcare Financing
Inc. ("Heller") shall be either (a)
refinanced upon exit from bankruptcy
pursuant to terms agreeable, to the
Committee or (b) amended or modified, in a
manner agreeable to the Committee, through a
plan of reorganization. The Committee agrees
that such post-petition DIP financing shall
not exceed $43.5 million, with $23.5 million
to be earmarked to finance the Company's
acquisition of the Meditrust properties;
provided, however that if the Company does
not acquire the Meditrust properties, the
DIP financing shall not exceed $20 million.
In addition, this Term Sheet and the
Agreement are expressly conditioned on the
execution of a term sheet agreement between
the Company and Heller for the provision by
Heller of DIP financing on terms no less
favorable to the Company as those terms
contained in the Heller draft term sheet
dated September 26, 2001.
OREGON TRUST DEED NOTES The Company and its Subsidiaries will use
WASHINGTON REVENUE BONDS commercially reasonable efforts to ensure
IDAHO REVENUE BONDS that no letters of credit ("L/C") are drawn
OHIO REVENUE BONDS down in their entirety ("L/C Draw") by or on
behalf of holders of or the representatives
of holders of housing bonds ("Housing
Bonds") that have been issued by or for the
benefit of the Company or its Subsidiaries.
With respect to each issue of Housing Bonds,
in the event that an L/C Draw does not
occur, such Housing Bonds shall remain
unimpaired by the Transaction, and debt
service will continue to be paid on such
Housing Bond obligations in the ordinary
course of business. Should an L/C Draw
occur, any remaining secured debt associated
with the L/C Draw shall be either refinanced
on terms agreeable to the Committee or
amended or modified, in a manner agreeable
to the Committee.
GENERAL UNSECURED CLAIMS Except as set forth below, on the Effective
Date, holders of allowed general unsecured
claims against the Debtors, including
allowed general unsecured claims arising
from the Notes and from the Debtors'
rejection of executory contracts and
unexpired leases, shall receive, on a pro
rata basis, a combination of new issues of
senior secured notes ("New Senior Secured
Notes"), junior secured notes ("New Junior
Secured Notes" and, collectively with the
New Senior Secured Notes, "New Notes") and
common stock ("New Common Stock") of the
restructured Company ("Newco").
TRADE CLAIMS Unsecured trade debt will not be impaired
and will be paid in the ordinary course of
business.
Page 3
OLD EQUITY Holders of existing equity of the Company
("Old Equity") shall exchange their Old
Equity for New Common Stock representing 4%
of the equity of Newco.
THE NEW NOTES AND NEW COMMON STOCK
NEW SENIOR SECURED NOTES
PRINCIPAL AMOUNT $40,250,000
COLLATERAL Senior security interest in the collateral
pledged for the benefit of the holders of
New Notes (the "Note Collateral"),
consisting of:
(a) a first security interest in all
presently unencumbered real property
owned by Company and by each
Subsidiary for whom a chapter 11
bankruptcy case is commenced;
(b) a first security interest in all
real property owned by Company and by
each Subsidiary for whom a chapter 11
bankruptcy case is commenced that
becomes unencumbered before or as of
the Effective Date;
(c) a first security interest in
certain real property owned by Home
and Community, Inc. that is or
becomes unencumbered before or as of
the Effective Date; and
(d) to the extent the Note Collateral
has a fair market value (as
calculated below) of less than $75
million, a junior security interest
in all of Heller's collateral (as
defined in that certain exit
financing term sheet between the
Company and Heller, dated September
26, 2001), junior only to Heller's
senior security interests therein,
sufficient such that the Note
Collateral has a fair market value of
at least $75 million.
For purposes of valuing the Note Collateral,
fair market value shall be derived using a
6.5x EBITDA multiple with a minimum value
for any facility that constitutes part of
the Note Collateral of $10,000/unit.
MATURITY Seven years from the Effective Date.
INTEREST RATES 10.00% per annum, cash pay, payable
semi-annually in arrears.
AMORTIZATION None.
MANDATORY REDEMPTION Newco will redeem the New Senior Secured
Notes in whole or in part (on a pro rata
basis or by pro rata offer) in cash with the
net proceeds from sales of Note Collateral.
OPTIONAL REDEMPTIONS Newco must offer to purchase the New Senior
Secured Notes in whole or in part (on a pro
rata basis) in cash, with net proceeds of
sales of assets other than Note Collateral
and Heller collateral, and from net proceeds
of refinancings of Note Collateral or other
borrowings. In addition Newco, at its
option, can redeem all the New Senior
Secured Notes at any time after the
Effective Date in cash.
Page 4
COVENANTS Standard for this type of security.
NEW JUNIOR SECURED NOTES
PRINCIPAL AMOUNT $15,250,000
COLLATERAL Junior security interest in the Note
Collateral.
MATURITY 10 years from the Effective Date.
INTEREST RATE 8.00% pay-in-kind (PIK) for the first three
years post Effective Date and thereafter
cash pay at 12.00%, payable semi-annually in
arrears.
AMORTIZATION None.
MANDATORY REDEMPTION Newco will redeem the New Junior Secured
Notes after all New Senior Secured Notes in
whole or in part (on a pro rata basis) in
cash with the net proceeds from sales of
Note Collateral.
OPTIONAL REDEMPTION Newco must offer to purchase the New Junior
Secured Notes after extending an offer first
to the New Senior Secured Notes in whole or
in part (on a pro rata basis) in cash, with
net proceeds of sales of assets other than
Note Collateral and Heller collateral, and
froze net proceeds of refinancings of Note
Collateral or other borrowings. In addition
the Newco, at its option, can redeem all the
Junior Notes at any time after the Effective
Date in cash provided any outstanding Senior
Notes are redeemed concurrently.
NEW COMMON STOCK New Common Stock representing all equity in
Newco not issued to holders of Old Equity.
MANAGEMENT/CORPORATE GOVERNANCE/MISC.
HIRING OF OPERATIONS CONSULTANT The Company shall immediately employ Senior
Services of America ("Consultant") as an
operational consultant on terms and
conditions acceptable to the Committee;
provided however that the employment of
Consultant shall not be cause to delay the
Petition Date.
MANAGEMENT TDB in a manner acceptable to the Committee.
MANAGEMENT INCENTIVES Management shall receive incentives in the
form of options and other compensation to be
determined by NEWCO's Board of Directors.
CORPORATE GOVERNANCE OF NEWCO Newco's Board of Directors will consist of 7
members, one of whom shall be either Bruce
Toll or Leonard Tannenbaum, one of whom
shall be another member of the Company's
existing Board of Directors selected by the
Committee, one of whore shall be NEWCO's
Chief Executive Officer, and four of whose
shall be designated by the Committee. Newco
shall provide a reasonable amount of
compensation and Directors and Officers
liability insurance coverage for each board
member. The Committee shall identify its
designated members prior to the disclosure
statement hearing.
Page 5
OTHER MATERIAL TERMS
RESTRUCTURING EXPENSES The Company and its Subsidiaries will pay
all reasonable expenses of the Committee and
its members in connection with the
restructuring: including (i) individual
Committee members' reasonable out-of-pocket
expenses (excluding attorneys' fees)
associated with the negotiation and, to the
extent an agreement is reached, facilitation
of the anticipated restructuring; (ii) the
Committee's professionals' reasonable fees
and expenses; and (iii) the reasonable fees
and expenses of the Trustee under each
Indenture and its counsel.
COMPANY'S COOPERATION IN The Transaction is conditioned upon the
COMMITTEE'S DUE DILIGENCE Company's cooperation in the continuing
financial and legal due diligence review by
the Committee.
DOCUMENTATION All of the documents necessary or
appropriate to facilitate the restructuring
of the Company will be in form and substance
satisfactory to the Company and the
Committee.
MATERIAL CHANGES There shall have been no material adverse
change to the assets, liabilities or
business prospects of the Company or its
Subsidiaries or in the ability of the
Company or its Subsidiaries to perform their
respective obligations hereunder. Neither
the Company or its Subsidiaries shall engage
in transactions outside the ordinary course
of business, including the incurrence of any
new indebtedness for borrowed money, amend
in any negative way any terms of any
existing indebtedness for borrowed money or
a any payments or transfers to shareholders.
Page 6
EXHIBIT 1
MEMBERS OF UNOFFICIAL COMMITTEE OF HOLDERS OF THE $86,250,000 6% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2002 END THE $75,000,000, 5.625% CONVERTIBLE
SUBORDINATED DEBENTURES DUE 2003 ISSUED BY ASSISTED LIVING CONCEPTS, INC.
LTC HEALTHCARE, INC.
LTC PROPERTIES, INC.
SUN TRUST EQUITABLE SECURITIES FOR THE ACCOUNT OF NATIONAL HEALTH INVESTORS,
INC.
DEEPHAVEN CAPITAL MANAGEMENT
JMG CAPITAL PARTNERS
TRITON CAPITAL INVESTMENTS, LTD
JMG CAPITAL MANAGEMENT MONEY PURCHASE PENSION PLAN
EXHIBIT I
TO THE DISCLOSURE STATEMENT
DESCRIPTION OF THE JUNIOR NOTES
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 Junior Notes will be issued under an indenture, dated as of the
Effective Date (the "Junior Note Indenture"), to be executed by the Company, the
Subsidiary Guarantors and an indenture trustee to be agreed upon between the
Company and the Informal Bondholders' Committee, as the trustee under the Junior
Note Indenture (the "Junior Note Trustee") in a transaction that is not subject
to the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act").
The following description is a summary of the material provisions of the
Junior Note Indenture, the Collateral Documents and the Registration Rights
Agreement. It does not restate the Junior Note Indenture, the Collateral
Documents and the Registration Rights Agreement in their entirety. The Debtors
urge you to read the Junior Note Indenture, the Collateral Documents and the
Registration Rights Agreement because they, and not this description, define the
rights of the holders of the Junior Notes. Copies of the Junior Note Indenture,
the Collateral Documents and the Registration Rights Agreement will be available
upon request to the address specified under the caption "Additional Information"
no later than 10 days prior to the Confirmation Hearing in a form reasonably
satisfactory to the Informal Bondholders' Committee.
BRIEF DESCRIPTION OF THE JUNIOR NOTES AND THE JUNIOR NOTE GUARANTEES
THE JUNIOR NOTES
The Junior Notes:
- will be junior secured obligations of the Company,
- will be subordinated in right of payment to all current and future Senior
Indebtedness of the Company, including the Senior Notes,
- will rank pari passu in right of payment with all current and future senior
indebtedness of the Company (other than Senior Indebtedness),
- will rank senior in right of payment to all future subordinated indebtedness
of the Company,
- will be 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:
- will be a secured obligation of each Subsidiary Guarantor,
- will be subordinated in right of payment to all current and future Senior
Indebtedness of the Subsidiary Guarantors, including the Senior Note
Guarantees, and any Guarantees in respect of the Indebtedness under the
Heller Loan Agreement,
- will rank 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),
- will rank senior in right of payment to all future subordinated indebtedness
of each Subsidiary Guarantor, and
- will be secured by the Note Collateral owned by the Subsidiary Guarantors.
As of the Effective Date, if all of the Company's Subsidiaries (other than
the Heller Debtor Subsidiaries) are Subsidiary Guarantors, the Company and the
Subsidiary Guarantors are expected to have total senior borrowings, including
the Senior Notes and the Heller Loan Agreement, of approximately $155 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 Effective Date, all of our Subsidiary Guarantors will be
"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 the tenth anniversary of the Effective
Date. The Junior Notes will be limited to $15.25 million aggregate principal
amount and will bear interest payable semiannually in arrears. Until the
interest payment date immediately preceding 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 the first
day of the month in each year that is six months and twelve months,
respectively, after the Effective Date, commencing on the first day of the sixth
month after the Effective Date. The Company will pay interest on the Junior
Notes to the Persons who are registered holders of
2
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 will be issued
in the form of one or more global junior notes (the "Global Junior Notes"). The
Global Junior Notes will be deposited on the Effective Date or 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").
Junior Notes that are issued as described below under " -- Certificated
Notes" will be issued in the form of registered definitive certificates (the
"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.
3
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
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
4
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.
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 following the third anniversary of
the Effective Date) or any multiples thereof (except that the initial issuance
of Junior Notes to each noteholder shall be in a principal amount equal to such
noteholder's Pro Rata Share of its Allowed Class 4 Claim(s) multiplied by
$15,250,000). 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
5
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 will be guaranteed by each of the Subsidiary Guarantors.
The Junior Note Guarantees will be joint and several obligations of the
Subsidiary Guarantors. Each Junior Note Guarantee will be 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
will be 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.
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 will be secured, subject
to certain permitted liens, by a second priority security interest in the
following Note Collateral:
6
- each assisted living facility owned by the Company and its Subsidiaries
and that is unencumbered as of October 1, 2001, and
- each assisted living facility owned by the Company and its Subsidiaries
that becomes unencumbered before or as of the Effective Date.
In addition, to the extent the Note Collateral has a fair market value on
the Effective Date of less than $75.0 million, the Company will, or will cause
one or more of its Subsidiaries to, grant security interests in all of the
Heller Collateral in order to provide holders of the Junior Notes with Note
Collateral having a total fair market value of at least $75.0 million. For
purposes of the immediately preceding sentence, the fair market value of any
real property included in the Note Collateral shall be equal to 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
Effective Date multiplied by 2.0, and (2) the product of $10,000 multiplied by
the number of units in such property. The Company will attach to the Junior Note
Indenture a schedule agreed upon with the Informal Bondholders' Committee
listing the number of units in each real property included in the Note
Collateral.
The Company, the Subsidiary Guarantors and the Heller Debtor Subsidiaries
will enter into Collateral Documents providing for the grant by the Company, the
Subsidiary Guarantors and the Heller Debtor Subsidiaries for the benefit of the
holders of the Junior Notes, of a security interest in the Note Collateral. A
collateral agent (the "Collateral Agent") will be appointed to hold the security
interests in the Note Collateral for the benefit of the holders of the Senior
Notes and Junior Notes. These security interests will secure the payment and
performance when due of all of the obligations of (1) the Company under the
Junior Note Indenture, the Junior Notes and the Collateral Documents to which
the Company or any Heller Debtor Subsidiary is a party, and (2) the Subsidiary
Guarantors under the Junior Note Guarantees and the Collateral Documents to
which the Subsidiary Guarantors are party.
INTERCREDITOR ARRANGEMENTS
In the event that any of the Heller Collateral is included in the Note
Collateral as described under the caption " -- Security" above, the Company, the
Subsidiary Guarantors, the Heller Debtor Subsidiaries, the Senior Note Trustee
and the Junior Note Trustee will enter into an intercreditor agreement with the
holders of the indebtedness under the Heller Loan Agreement or a representative
on their behalf. That intercreditor agreement will be in form and substance
reasonably satisfactory to the Informal Bondholders' Committee. It will, among
other things, limit the exercise of remedies by the holders of the Senior Notes
and the Junior Notes against Note Collateral to the extent that it constitutes
Heller Collateral and against any Subsidiary Guarantor or Heller Debtor
Subsidiary that directly or indirectly owns Heller Collateral.
Although the Junior Notes will be secured by a second priority security
interest in the Note Collateral, the interests of the holders of Junior Notes
will be 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:
7
(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 shall
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 shall 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 shall 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", shall
deliver to the Junior Note Trustee an amount sufficient to allow the Junior Note
Trustee, on behalf of the 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:
8
(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 after the Effective Date,
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 shall 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 shall 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.
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
9
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 shall
identify in writing to the Collateral Agent, provided that:
(1) no Note Collateral shall 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 shall 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 shall 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
10
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 date (the
"Repurchase Date") that is 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. On or 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
11
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 shall receive
Net Proceeds from an incurrence of Indebtedness (other than Excluded
Indebtedness) 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," shall 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") shall
be the date that is 75 days after the date the Company gives notice of such
incurrence of Indebtedness. On or 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.
12
Notwithstanding the preceding paragraphs, the Company shall 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 shall 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," shall 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") shall
be the date that is 60 days after the date the Company gives notice of such
Asset Sale. On or 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.
13
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 shall 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 Company's then existing financial resources.
See "Risk Factors -- Risks Related to the New Notes -- The Company may not have
the ability to raise the funds necessary to finance the change in control offer
required by the Senior Note Indenture and the Junior Note Indenture" and "Risk
Factors -- Risks Related to the New Notes -- The Company may not have the
ability to repurchase the New Notes upon an asset sale."
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;
14
(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.
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:
15
(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 the Company's senior indebtedness, including the Senior Notes.
Further, the Junior Note Guarantees will be junior to certain of the 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 -- The Company
may not have the ability to raise the funds necessary to finance the change in
control offer required by the Senior Note Indenture and the Junior Note
Indenture" and "Risk Factors -- Risks Related to the New Notes -- The Company
may not have the ability to repurchase the New Notes upon an asset sale."
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
16
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
(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
17
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
18
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 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
19
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;
(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
20
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 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
21
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
(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
22
(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
(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;
23
(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 shall 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 shall
have occurred and be continuing; and
(4) the Company shall 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 shall 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 shall 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 shall authenticate and shall
deliver any Junior Notes which previously shall have been signed and delivered
by officers of the Company to the Junior Note Trustee for authentication, and
any Junior Notes which such successor corporation thereafter shall cause to be
signed and delivered to the Junior Note Trustee for that purpose. All the Junior
Notes so issued shall 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
24
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;
(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;
25
(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.
26
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
(a) 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 (b) 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
27
(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".
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.
28
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.
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 shall 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 shall 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.
29
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 shall
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 shall 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 Securities and Exchange 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 Securities and Exchange Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange 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
30
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 Securities
and Exchange 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 Securities and Exchange
Commission, the Company will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the Securities and Exchange
Commission for public availability within the time periods specified in the
Securities and Exchange Commission's rules and regulations (unless the
Securities and Exchange 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);
31
(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:
(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;
32
(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.
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.
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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, 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 U.S.
dollars, non-callable Government Securities, or a combination of cash in
U.S. 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
34
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;
(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
35
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 shall 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 after the offering. The
Junior Notes are being sold pursuant to exemptions from registration under the
Securities Act. See "Risk Factors -- Risks Related to the New Notes -- The
Company may be delisted by the American Stock Exchange (AMEX)" and "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 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 U.S. dollars,
non-callable Government
36
Securities, or a combination of cash in U.S. 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 Securities and Exchange 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 following description is a summary of the material provisions of the
Registration Rights Agreement. It does not restate that agreement in its
entirety. The Debtors urge holders of Junior Notes to read the proposed form of
the Registration Rights Agreement in its entirety
37
because it, and not this description, defines the registration rights of the
Qualified Junior Noteholders. See " -- Additional Information."
The Company and the Qualified Junior Noteholders will enter into the
Registration Rights Agreement on or prior to the Effective Date. Pursuant to the
Registration Rights Agreement, the Company will agree to file a shelf
registration statement and grant the Qualified Junior Noteholders certain demand
registration rights and piggyback registration rights with respect to the Junior
Notes held by Qualified Junior Noteholders. The Registration Rights Agreement
will be in a form reasonably satisfactory to the Informal Bondholders'
Committee.
Qualified Junior Noteholders will be 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 Junior Notes included in that registration statement. By
acquiring Junior Notes, a Qualified Junior Noteholder will be deemed to have
agreed to indemnify the Company against certain losses arising out of
information furnished by that Qualified Junior Noteholder in writing for
inclusion in any such registration statement. Qualified Junior Noteholders will
also be required to suspend their use of the prospectus included in a
registration statement under certain circumstances upon receipt of written
notice to that effect from the Company.
Holders of Junior Notes that are not Qualified Junior Noteholders will not
be parties to the Registration Rights Agreement and will not have any of the
rights or obligations of Qualified Junior Noteholders under the Registration
Rights Agreement.
RESERVE
Not all of the New Common Stock, the Senior Notes and the Junior Notes
will be issued on the Effective Date. This is because the total amount of the
Allowed Class 4 Claims will not be known until after the Effective Date, either
because certain Class 4 Claims will be disputed claims or because those Claims
will not have been made by their holders prior to the Effective Date. As a
result, the Company will hold back from the initial issuance of New Common
Stock, Senior Notes and Junior Notes on the Effective Date a percentage of the
New Common Stock, the Senior Notes and the Junior Notes (the "Reserve") to be
issued to holders of Class 4 Claims. The initial distribution with respect to
Class 4 Claims will be made only to the holders of Class 4 Claims that have been
allowed prior to the Effective Date (the "Cutoff Date"). Once the total amount
of the Allowed Class 4 Claims has been determined, the shares of New Common
Stock, the Senior Notes and the Junior Notes held in Reserve will be distributed
pro rata among the holders of the Allowed Class 4 Claims (the date of this
distribution, the "Subsequent Distribution Date").
If the Reserve is insufficient to cover Class 4 Claims allowed after the
Cutoff Date, the Company and its subsidiaries will have no further liability
with respect to those Class 4 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 holders of Class 4 Claims allowed prior
to the Cutoff Date.
38
If the Reserve exceeds the distributions necessary to cover Class 4 Claims
allowed after the Cutoff Date, the additional securities remaining in the
Reserve will be distributed among all holders of Class 4 Claims so as to ensure
that each holder of an allowed Class 4 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 holders of Class 4 Claims allowed prior to the Cutoff Date will
receive distributions of securities both on the Effective Date and on the
Subsequent Distribution Date.
The right of the holders of Class 4 Claims allowed prior to the Cutoff
Date 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 such holders will be freely
transferable upon issuance.
ADDITIONAL INFORMATION
Anyone who receives this document may obtain a copy of the Junior Note
Indenture, the Registration Rights Agreement and the Collateral Documents
without charge by writing to counsel to the Debtors: Latham & Watkins, 633 West
Fifth Street, Suite 4000, Los Angeles, California, USA, 90071, Attention: Robert
A. Klyman, Esq.
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% 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.
"Allowed Class 4 Claim" has the meaning given that term in the Plan.
"Asset Sale" means:
39
(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
(3) with respect to any other Person, the board or committee of such Person
serving a similar function.
40
"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 the Effective Date 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:
41
(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:
42
(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 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
43
(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 shall 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:
(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.
44
"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) Amanda House, which is located in the State of Ohio;
(4) Floyd House, which is located in the State of Iowa; and
(5) 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;
45
(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
(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 the Effective Date.
"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; provided that if the Meditrust Acquisition shall not have
taken place on or before the Effective Date the aggregate principal amount of
such Indebtedness shall not exceed (1) $118.0 million minus (2) the difference
between $44.0 million and the aggregate principal amount of the Indebtedness
under the Heller Loan Agreement.
"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
46
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.
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;
47
(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, 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.
"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.
48
"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.
"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
49
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.
"Meditrust Acquisition" means the acquisition by the Company and/or one or
more of its Subsidiaries of sixteen properties located in Texas currently leased
from T and F Properties, L.P., pursuant to an option granted by T and F
Properties, L.P. to Texas ALC Partners, L.P. or its assignee on September 25,
2001.
"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
50
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, 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.
"New Common Stock" means the common stock of the Company to be issued on
or after the Effective Date pursuant to the Plan.
"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
51
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.
"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
52
(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;
(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;
53
(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
(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 shall be
required by GAAP shall have been made therefor;
54
(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), (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;
55
(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" has the meaning given that term in the Plan.
"Qualified Junior Noteholders" means the holders of Senior Notes, Junior
Notes or New Common Stock on the Effective Date that are "Qualified Holders" as
defined in the Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Effective Date, 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.
"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).
56
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
(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,
57
(2) HCI, and
(3) 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 shall 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 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
58
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.
59
EXHIBIT I
TO THE DISCLOSURE STATEMENT
DESCRIPTION OF THE SENIOR NOTES
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 Senior Notes will be issued under an indenture, dated as of the
Effective Date (the "Senior Note Indenture"), to be executed by the Company, the
Subsidiary Guarantors and an indenture trustee to be agreed upon between the
Company and the Informal Bondholders' Committee, as the trustee under the Senior
Note Indenture (the "Senior Note Trustee") in a transaction that is not subject
to the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act").
The following description is a summary of the material provisions of
the Senior Note Indenture, the Collateral Documents and the Registration Rights
Agreement. It does not restate the Senior Note Indenture, the Collateral
Documents and the Registration Rights Agreement in their entirety. The Debtors
urge you to read the Senior Note Indenture, the Collateral Documents and the
Registration Rights Agreement because they, and not this description, define the
rights of the holders of the Senior Notes. Copies of the Senior Note Indenture,
the Collateral Documents and the Registration Rights Agreement will be available
upon request to the address specified under the caption "Additional Information"
no later than 10 days prior to the Confirmation Hearing in a form reasonably
satisfactory to the Informal Bondholders' Committee.
BRIEF DESCRIPTION OF THE SENIOR NOTES AND THE SENIOR NOTE GUARANTEES
THE SENIOR NOTES
The Senior Notes:
- will be senior secured obligations of the Company,
- will rank senior in right of payment to the Junior Notes and to
all future subordinated indebtedness of the Company,
- will 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,
- will be 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:
- will be a senior secured obligation of each Subsidiary Guarantor,
- will rank senior in right of payment to the Junior Note Guarantees
and to all future subordinated indebtedness of each Subsidiary
Guarantor,
- will rank pari passu in right of payment with all current and
future senior indebtedness of each Subsidiary Guarantor, including
any Guarantees in respect of the indebtedness under the Heller
Loan Agreement, and
- will be secured by the Note Collateral owned by the Subsidiary
Guarantors.
As of the Effective Date, all of the Subsidiary Guarantors will be
"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 the seventh anniversary of the
Effective Date. The Senior Notes will be limited to $40.25 million aggregate
principal amount and will bear interest payable semiannually in arrears at the
per annum rate of 10.0%. The interest payment dates will be the first day of the
month in each year that is six months and twelve months, respectively, after the
Effective Date, commencing on the first day of the sixth month after the
Effective Date. 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
2
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 will be
issued in the form of one or more global senior notes (the "Global Senior
Notes"). The Global Senior Notes will be deposited on the Effective Date or 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").
Senior Notes that are issued as described below under " -- Certificated
Notes" will be issued in the form of registered definitive certificates (the
"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.
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).
3
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
(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
4
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 shall be in a principal amount equal
to such noteholder's Pro Rata Share of its Allowed Class 4 Claim(s) multiplied
by $40,250,000). 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 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 will be guaranteed by each of the Subsidiary
Guarantors. The Senior Note Guarantees will be joint and several obligations of
the Subsidiary Guarantors. The obligations of each Subsidiary Guarantor under
its Senior Note Guarantee will be 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."
5
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 will be secured,
subject to certain permitted liens, by a first priority security interest in the
following Note Collateral:
- each assisted living facility owned by the Company and its Subsidiaries
and that is unencumbered as of October 1, 2001, and
- each assisted living facility owned by the Company and its Subsidiaries
that becomes unencumbered before or as of the Effective Date.
In addition, to the extent the Note Collateral has a fair market value
on the Effective Date of less than $75.0 million, the Company will, or will
cause one or more of its Subsidiaries to, grant security interests in all of the
Heller Collateral in order to provide holders of the Senior Notes with Note
Collateral having a total fair market value of at least $75.0 million. For
purposes of the immediately preceding sentence, the fair market value of any
real property included in the Note Collateral shall be equal to 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
6
ending immediately prior to the Effective Date multiplied by 2.0, and (2) the
product of $10,000 multiplied by the number of units in such property. The
Company will attach to the Senior Note Indenture a schedule agreed upon with the
Informal Bondholders' Committee listing the number of units in each real
property included in the Note Collateral.
The Company, the Subsidiary Guarantors and the Heller Debtor
Subsidiaries will enter into Collateral Documents providing for the grant by the
Company, the Subsidiary Guarantors and the Heller Debtor Subsidiaries for the
benefit of the holders of the Senior Notes, of a security interest in the Note
Collateral. A collateral agent (the "Collateral Agent") will be appointed to
hold the security interests in the Note Collateral for the benefit of the
holders of the Senior Notes and Junior Notes. These security interests will
secure the payment and performance when due of all of the obligations of (1) the
Company under the Senior Note Indenture, the Senior Notes and the Collateral
Documents to which the Company or any Heller Debtor Subsidiary is a party, and
(2) the Subsidiary Guarantors under the Senior Note Guarantees and the
Collateral Documents to which the Subsidiary Guarantors are party.
INTERCREDITOR ARRANGEMENTS
In the event that any of the Heller Collateral is included in the Note
Collateral as described under the caption " -- Security" above, the Company, the
Subsidiary Guarantors, the Heller Debtor Subsidiaries, the Senior Note Trustee
and the Junior Note Trustee will enter into an intercreditor agreement with the
holders of the indebtedness under the Heller Loan Agreement or a representative
on their behalf. That intercreditor agreement will be in form and substance
reasonably satisfactory to the Informal Bondholders' Committee. It will, among
other things, limit the exercise of remedies by the holders of the Senior Notes
and the Junior Notes against Note Collateral to the extent that it also
constitutes Heller Collateral and against any Subsidiary Guarantor or Heller
Debtor Subsidiary that directly or indirectly owns Heller Collateral.
Although the Junior Notes will be secured by a second priority security
interest in the Note Collateral, the interests of the holders of Junior Notes
will be 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
7
(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
shall 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 shall 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 shall receive
Net Proceeds from any Asset Sale of Note Collateral, then within 10 days after
the receipt of such Net Proceeds, the Company shall 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
(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 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
8
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 after the Effective Date,
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 shall 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 interests in such Note Collateral as the Company shall identify in
writing to the Collateral Agent, provided that:
(1) no Note Collateral shall 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
9
(3) the Collateral Agent shall 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 shall 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 after
the date of issuance of the Senior Notes and on or prior to maturity, 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 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. On or 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,
- 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.
10
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 shall
receive Net Proceeds from an incurrence of Indebtedness (other than Excluded
Indebtedness) occurring after the date of issuance of the Senior Notes and on or
prior to maturity, the Company shall 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") shall be the date that is 75 days after
the date the Company gives notice of such incurrence of Indebtedness. On or
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
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- 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.
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 shall 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 shall
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 Senior
Notes and on or prior to maturity, the Company shall 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") shall be the date that
is 75 days after the date the Company gives notice of such Asset Sale. On or
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,
12
- 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.
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 shall 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 -- The Company may not have
the ability to raise the funds necessary to finance the change in control offer
required by the Senior Note Indenture and the Junior Note Indenture" and "Risk
Factors -- Risks Related to the New Notes -- The Company may not have the
ability to repurchase the New Notes upon an asset sale."
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
13
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 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
14
(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
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
15
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 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
16
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:
(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);
17
(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 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
18
(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;
19
(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
20
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;
(3) immediately after giving effect to such transaction no Default or Event
of Default shall 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
shall have occurred and be continuing; and
(4) the Company shall 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 shall 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 shall 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 shall authenticate and shall
deliver any Senior Notes which previously shall 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 shall cause to be
signed and delivered to the Senior Note Trustee for that purpose. All the Senior
Notes so issued shall 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
21
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 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;
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(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 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
23
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 (a) 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 (b) 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:
24
(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."
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 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.
25
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 shall 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 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.
26
TAXES
The Company will pay or discharge, and shall 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 shall 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 shall 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;
(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 Securities and Exchange Commission, so
long as any notes are outstanding, the Company will furnish to the Senior Note
Trustee and to the holders of
27
Senior Notes, within the time periods specified in the Securities and Exchange
Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Securities and Exchange 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
Securities and Exchange 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 Securities and Exchange
Commission, the Company will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the Securities and Exchange
Commission for public availability within the time periods specified in the
Securities and Exchange Commission's rules and regulations (unless the
Securities and Exchange 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;
(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
28
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:
29
(1) default in the payment of interest on the Senior Notes when due and
payable which continues for 30 days;
(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.
30
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 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 U.S.
dollars, non-callable Government Securities, or a combination of cash
in U.S. 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
31
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;
(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
32
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 shall 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 after the offering.
The Senior Notes are being sold pursuant to exemptions from registration under
the Securities Act. See "Risk Factors -- Risks Related to the New Notes -- The
Company may be delisted by the American Stock Exchange (AMEX)" and "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 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 U.S. dollars, non-callable Government
Securities, or a
33
combination of cash in U.S. 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 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 Securities and Exchange 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 following description is a summary of the material provisions of
the Registration Rights Agreement. It does not restate that agreement in its
entirety. The Debtors urge holders of Senior Notes to read the proposed form of
the Registration Rights Agreement in its entirety
34
because it, and not this description, defines the registration rights of the
Qualified Senior Noteholders. See " -- Additional Information."
The Company and the Qualified Senior Noteholders will enter into the
Registration Rights Agreement on or prior to the Effective Date. Pursuant to the
Registration Rights Agreement, the Company will agree to file a shelf
registration statement and grant the Qualified Senior Noteholders certain demand
registration rights and piggyback registration rights with respect to the Senior
Notes held by Qualified Senior Noteholders. The Registration Rights Agreement
will be in a form reasonably satisfactory to the Informal Bondholders'
Committee.
Qualified Senior Noteholders will be 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 included in that registration statement. By
acquiring Senior Notes, a Qualified Senior Noteholder will be deemed to have
agreed to indemnify the Company against certain losses arising out of
information furnished by that Qualified Senior Noteholder in writing for
inclusion in any such registration statement. Qualified Senior Noteholders will
also be required to suspend their use of the prospectus included in a
registration statement under certain circumstances upon receipt of written
notice to that effect from the Company.
Holders of Senior Notes that are not Qualified Senior Noteholders will
not be parties to the Registration Rights Agreement and will not have any of the
rights or obligations of Qualified Senior Noteholders under the Registration
Rights Agreement.
RESERVE
Not all of the New Common Stock, the Senior Notes and the Junior Notes
will be issued on the Effective Date. This is because the total amount of the
Allowed Class 4 Claims will not be known until after the Effective Date, either
because certain Class 4 Claims will be disputed claims or because those Claims
will not have been made by their holders prior to the Effective Date. As a
result, the Company will hold back from the initial issuance of New Common
Stock, Senior Notes and Junior Notes on the Effective Date a percentage of the
New Common Stock, the Senior Notes and the Junior Notes (the "Reserve") to be
issued to holders of Class 4 Claims. The initial distribution with respect to
Class 4 Claims will be made only to the holders of Class 4 Claims that have been
allowed prior to the Effective Date (the "Cutoff Date"). Once the total amount
of the Allowed Class 4 Claims has been determined, the shares of New Common
Stock, the Senior Notes and the Junior Notes held in Reserve will be distributed
pro rata among the holders of the Allowed Class 4 Claims (the date of this
distribution, the "Subsequent Distribution Date").
If the Reserve is insufficient to cover Class 4 Claims allowed after
the Cutoff Date, the Company and its subsidiaries will have no further liability
with respect to those Class 4 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 holders of Class 4 Claims allowed prior
to the Cutoff Date.
35
If the Reserve exceeds the distributions necessary to cover Class 4
Claims allowed after the Cutoff Date, the additional securities remaining in the
Reserve will be distributed among all holders of Class 4 Claims so as to ensure
that each holder of an allowed Class 4 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 holders of Class 4 Claims allowed prior to the Cutoff Date will
receive distributions of securities both on the Effective Date and on the
Subsequent Distribution Date.
The right of the holders of Class 4 Claims allowed prior to the Cutoff
Date 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 such holders will be freely
transferable upon issuance.
ADDITIONAL INFORMATION
Anyone who receives this document may obtain a copy of the Senior Note
Indenture, the Registration Rights Agreement and the Collateral Documents
without charge by writing to counsel to the Debtors: Latham & Watkins, 633 West
Fifth Street, Suite 4000, Los Angeles, California, USA, 90071, Attention: Robert
A. Klyman, Esq.
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.
"Allowed Class 4 Claim" has the meaning given that term in the Plan.
"Asset Sale" means:
36
(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;
(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.
37
"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 the Effective Date 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:
38
(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:
39
(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 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
40
(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 shall 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:
(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.
41
"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) Amanda House, which is located in the State of Ohio;
(4) Floyd House, which is located in the State of Iowa; and
(5) 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;
42
(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
(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 the Effective Date.
"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; provided that if the Meditrust Acquisition shall not have
taken place on or before the Effective Date the aggregate principal amount of
such Indebtedness shall not exceed (1) $118.0 million minus (2) the difference
between $44.0 million and the aggregate principal amount of the Indebtedness
under the Heller Loan Agreement.
"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
43
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.
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;
44
(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, 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:
45
(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,
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
46
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.
"Meditrust Acquisition" means the acquisition by the Company and/or one
or more of its Subsidiaries of sixteen properties located in Texas currently
leased from T and F Properties, L.P., pursuant to an option granted by T and F
Properties, L.P. to Texas ALC Partners, L.P. or its assignee on September 25,
2001.
"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
47
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.
"New Common Stock" means the common stock of the Company to be issued
on or after the Effective Date pursuant to the Plan.
"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
48
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";
49
(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:
50
(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
(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 shall be required by GAAP shall 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:
51
(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), (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" has the meaning given that term in the Plan.
Qualified Senior Noteholders" means the holders of Senior Notes, Junior
Notes or New Common Stock on the Effective Date that are "Qualified Holders" as
defined in the Registration Rights Agreement.
52
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Effective Date, 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.
"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, and
(3) 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:
53
(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 shall 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
54
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.
55
EXHIBIT I
TO THE DISCLOSURE STATEMENT
RISK FACTORS
In addition to the other information in this document and in the Plan,
the following factors should be considered. Capitalized terms used in this
description that are not otherwise defined have the meanings attributable to
them in the Plan.
RISKS RELATED TO THE DEBTORS' BANKRUPTCY PROCEEDINGS
FILING THE CHAPTER 11 CASES MAY DISRUPT THE DEBTORS' OPERATIONS.
The commencement of the Chapter 11 Cases, even in connection with a
prenegotiated plan, could adversely affect the Debtors' relationships with trade
creditors, landlords, equipment vendors, employees and residents and their
families. If those relationships are adversely affected, the Debtors' operations
could be materially affected. Weakened operating results could adversely affect
the Debtors' ability to obtain confirmation of the Plan and maintain their
operations. To preserve these relationships, the Debtors expect to continue to
pay vendors in the ordinary course of business.
IF THE DEBTORS RECEIVE INSUFFICIENT VOTES REGARDING THE PLAN, THEY WILL SEEK
CONFIRMATION OF THE PLAN UNDER THE CRAMDOWN PROVISIONS OF THE BANKRUPTCY CODE.
In the event that sufficient votes are not received by holders of Class
4 Claims and Class 8 Claims and Equity Interests eligible to vote on the Plan,
the Debtors intend to seek confirmation of the Plan under the cramdown
provisions of section 1129(b) of the Bankruptcy Code. In order to confirm the
Plan using a cramdown, the Court must determine that, in addition to satisfying
all the other requirements of confirmation, the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to each Impaired Class which
does not accept the Plan. Although the Debtors believe the Plan satisfies the
requirements of Section 1129(b), there can be no assurance that the Court will
decide that all of these requirements have been satisfied. If the Plan is not
confirmed, the Debtors may seek to accomplish an alternative restructuring of
their capitalization and their obligations to creditors and equity holders.
There can be no assurance that the terms of any such alternative restructuring
would be similar to or as favorable to the Debtors' creditors and equity holders
as those proposed in the Plan.
THE PLAN MAY NOT BE CONFIRMED BY THE COURT.
Although the Debtors believe that the Plan satisfies all the
requirements for confirmation by the Court, there can be no assurance that the
Court will reach the same conclusion. The Court may refuse to confirm the Plan
or may require modifications to the Plan. In addition, the Court may require the
Debtors to resolicit votes from creditors and equity holders if the Plan is
modified.
THE TIMING OF THE EFFECTIVE DATE IS UNCERTAIN.
Although the Debtors intend that the Effective Date of the Plan will be
11 days after the entry of the Confirmation Order, there can be no assurance as
to the timing of the Effective Date or that the conditions precedent to the
Effective Date will ever be met.
THE CHAPTER 11 CASES MAY AFFECT THE DEBTORS' NON-DEBTOR SUBSIDIARIES.
Certain creditors may have the legal right to take actions with respect
to the Debtors' non-Debtor subsidiaries due to the commencement of the Chapter
11 Cases. In the event that any of those creditors takes action, those
subsidiaries will not have the benefit of the "automatic stay," and, as a
result, any such actions could have a material adverse effect on the business or
financial condition of the non-Debtor subsidiaries, and therefore on the
Debtors.
THE DEBTORS MAY NOT BE PERMITTED TO BORROW UNDER THE DIP FINANCING.
The Company and certain of its subsidiaries have entered into a
debtor-in-possession facility with Heller in an anticipated approximate
principal amount of up to $4.4 million (the "DIP Facility"). This facility will
mature upon the earlier of the Effective Date or twelve months following the
effective date of the DIP Facility. The DIP Facility will supplement the
Debtors' cash position in order to ensure that all on-going working capital
needs are met. There can be no guarantee that the borrowers under the DIP
Facility will satisfy the terms of the DIP Facility or the final financing order
to permit borrowings under the DIP Facility. If the Debtors are not permitted to
borrow under the DIP Facility, they may not have sufficient cash to operate
their businesses during the bankruptcy proceeding which could have a material
adverse effect on the business of the Debtors and their ability to obtain
confirmation of the Plan.
RISKS RELATED TO THE NEW NOTES
THE COMPANY'S SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT ITS FINANCIAL
HEALTH AND PREVENT IT FROM FULFILLING ITS OBLIGATIONS UNDER THE NEW NOTES.
Assisted Living Concepts, Inc. (the "Company") has now and, after the
offering of the New Notes and the incurrence of the indebtedness under a loan
agreement entered into by the Company and certain of its subsidiaries with
Heller and certain other lenders party thereto (the "Heller Loan Agreement"),
will continue to have a significant amount of indebtedness. The following chart
shows certain important credit statistics and is presented assuming the Company
had completed the offering of the New Notes, the issuance of the New Common
Stock and the incurrence of the indebtedness under the Heller Loan Agreement as
of the dates or at the beginning of the periods specified below and applied the
proceeds as intended:
AT JUNE 30, 2001
($ IN MILLIONS)
---------------
Total indebtedness...................... $247.6
Stockholders' equity.................... $55.1
Debt to equity ratio.................... 4.49x
2
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, 2000 ENDED JUNE 30, 2001
----------------- -------------------
($ IN THOUSANDS)
Amount by which fixed charges exceed $25.8 $8.8
earnings:
The Company's substantial indebtedness could have important
consequences for noteholders. For example, it could:
- make it more difficult for the Company to satisfy its
obligations with respect to the New Notes;
- increase the Company's vulnerability to general adverse
economic and industry conditions;
- limit the Company's ability to fund future working capital,
capital expenditures and other general corporate requirements;
- require the Company to dedicate a substantial portion of its
cash flow from operations to payments on its indebtedness,
thereby reducing the availability of its cash flow to fund
working capital, capital expenditures and other general
corporate purposes;
- limit the Company's flexibility in planning for, or reacting
to, changes in its business and the industry in which it
operates;
- place the Company at a competitive disadvantage compared to
its competitors that have less debt; and
- limit, along with the financial and other restrictive
covenants in the Company's indebtedness, among other things,
the ability of the Company and its subsidiaries to borrow
additional funds. And, 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 the Company
and its subsidiaries.
DESPITE CURRENT INDEBTEDNESS LEVELS, THE COMPANY AND ITS SUBSIDIARIES MAY STILL
BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE
RISKS ASSOCIATED WITH THE COMPANY'S AND ITS SUBSIDIARIES' SUBSTANTIAL LEVERAGE.
The Company and its subsidiaries may be able to incur substantial
additional indebtedness in the future. The terms of the New Senior Note
Indenture and the New Junior
3
Note Indenture do not fully prohibit the Company or its subsidiaries from doing
so. In addition, the Heller Loan Agreement would permit certain additional
borrowings after completion of the offering of the New Notes and all of those
borrowings would rank pari passu with the New Notes and the respective
subsidiary guarantees. If new debt is added to the Company's or its
subsidiaries' current debt levels, the related risks that the Company and its
subsidiaries now face could intensify.
TO SERVICE THE COMPANY'S INDEBTEDNESS AND TO PAY ITS LEASE OBLIGATIONS WILL
REQUIRE A SIGNIFICANT AMOUNT OF CASH. THE COMPANY'S ABILITY TO GENERATE CASH
DEPENDS ON MANY FACTORS BEYOND ITS CONTROL.
The Company's ability to make payments on and to refinance its
indebtedness, including the New Notes, to satisfy its lease obligations and to
fund planned capital expenditures will depend on its 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 the Company's control. In addition, the Company's ability to borrow funds
under the Heller Loan Agreement may depend on the Company meeting the financial
covenants in the Heller Loan Agreement, as well as satisfying certain other
conditions to borrowing.
The Company's 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 its services.
Based on its current level of operations and anticipated cost savings
and operating improvements, the Company believes its cash flow from operations,
available cash and the amounts borrowed under the Heller Loan Agreement will be
adequate to meet its future liquidity needs for at least the next few years.
There can be no assurance, however, that the Company's business will
generate sufficient cash flow from operations, that currently anticipated cost
savings and operating improvements will be realized on schedule or that the
Company will satisfy the conditions to borrowing under the Heller Loan Agreement
in an amount sufficient to enable the Company to pay its indebtedness, including
the New Notes, to satisfy its lease obligations or to fund its other liquidity
needs. As a result, the Company may need to refinance all or a portion of its
indebtedness, including the New Notes on or before maturity. There can be no
assurance that the Company will be able to refinance any of its 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 WILL
BE STRUCTURALLY SUBORDINATED TO ANY INDEBTEDNESS OF THE COMPANY'S NON-GUARANTOR
SUBSIDIARIES.
Some but not all of the Company's subsidiaries will guarantee the New
Notes. None of the subsidiaries that is party to the Heller Loan Agreement will
guarantee the New Notes. Any indebtedness, including trade payables, incurred by
any of the Company's subsidiaries that are not subsidiary guarantors will be
structurally senior to the indebtedness under the New Senior Notes, the New
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
subsidiary that
4
is prior to the claims of the holders of the New Senior Notes and the New Junior
Notes on those assets.
Assuming the Company had completed the offering of the New Notes and
borrowed the available $44.4 million under the Heller Loan Agreement on June 30,
2001, if all of the Company's subsidiaries (other than the subsidiaries that are
party to the Heller Loan Agreement) guaranteed the New Notes, the New Notes
would have been effectively junior to $34.2 million of indebtedness and other
liabilities (including trade payables) of the non-guarantor subsidiaries. The
non-guarantor subsidiaries generated 1.4% of the Company's and its subsidiaries'
consolidated revenues in the twelve-month period ended June 30, 2001 and held
1.2% of the Company's and its subsidiaries' consolidated assets as of June 30,
2001.
THE COMPANY MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE
OFFERS TO REDEEM NEW NOTES REQUIRED BY THE NEW SENIOR NOTE INDENTURE AND THE NEW
JUNIOR NOTE INDENTURE.
Upon the occurrence of certain specific kinds of change of control
events, the Company will be required to offer to repurchase all outstanding New
Notes. If the Company incurs new indebtedness or sells certain assets that do
not secure the New Notes, it will be required to offer to repurchase some or all
of the New Senior Notes and it may be required to offer to repurchase some or
all of the New Junior Notes. However, it is possible that the Company 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 in
the Heller Loan Agreement or in the Company's or its 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."
THE COMPANY MAY NOT HAVE THE ABILITY TO REPURCHASE THE NEW NOTES UPON AN ASSET
SALE OF COLLATERAL.
If the Company sells certain of the collateral securing the New Notes,
it will be required to repurchase some or all of the New Senior Notes and it may
be required to repurchase some or all of the New Junior Notes. However, it is
possible that restrictions in the Heller Loan Agreement or the Company's or its
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."
THE RIGHTS OF THE HOLDERS OF THE NEW NOTES TO ENFORCE REMEDIES AGAINST CERTAIN
COLLATERAL MAY BE LIMITED AS LONG AS THE HELLER LOAN AGREEMENT IS OUTSTANDING.
If the fair market value of the collateral pledged to secure the New
Notes and the related guarantees on the effective date is less than $75.0
million, as determined using an agreed upon formula, the Company and/or certain
of its subsidiaries will grant a security interest in the properties pledged to
secure the Heller Loan Agreement.
5
That security interest will be subordinated to the security interests
in favor of the holders of the indebtedness under the Heller Loan Agreement. The
Company, the subsidiary guarantors, the senior note trustee, the junior note
trustee and a representative of the holders of the indebtedness under the Heller
Loan Agreement will enter into an intercreditor agreement with respect to this
collateral. The intercreditor agreement will be in form and substance reasonably
satisfactory to the Informal Bondholders' Committee, and will, among other
things, limit the exercise of remedies by the holders of the New Notes against
note collateral to the extent it also constitutes collateral for the Heller Loan
Agreement and against any subsidiary guarantor that directly or indirectly holds
collateral securing the Heller Loan Agreement. The holders of the indebtedness
under the Heller Loan Agreement may have interests that are different from the
interests of holders of the New Notes.
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.
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.
6
After giving effect to the restructuring of their indebtedness
described in the Disclosure Statement and other factors, the Debtors 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. The Debtors 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.
Unless the holders of the New Notes at the time of issuance are
"underwriters" as that term is defined in Section 1145 of the Bankruptcy Code,
the New Notes will be freely tradable without restriction in the public market.
In addition, under the terms of a registration rights agreement, the Company
will agree to file a shelf registration statement and grant certain holders of
the New Common Stock on the Effective Date demand registration rights and
piggyback registration rights with respect to their New Notes and New Common
Stock.
Nonetheless, for various reasons, including those discussed below, the
Debtors are unable to predict whether an active trading market will develop or
be sustained for the New Notes. If no active trading market develops,
noteholders 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. The Debtors are not aware of any securities firm that intends to
make a market in the New Notes after this offering is completed, 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 the financial
performance or prospects of the Company and its subsidiaries or in the prospects
for companies in the Company's industry generally. While the Company does not
anticipate that the Company or its securities will be rated by any rating
agency, if the Company or its securities are rated and are subsequently
downgraded by any rating agency, the trading price of the New Notes may be
adversely effected.
In addition, on October 11, 2001, the Company received notice from AMEX
that it had filed an application with the Securities and Exchange Commission
(the "SEC") to strike the Company's existing common stock and convertible
subordinated debentures from listing and registration on AMEX. AMEX indicated
that the Company has fallen below the AMEX listing guidelines as a result of the
net losses sustained by the Company in its five most recent fiscal years and the
continued low trading price of the Company's common stock. The Company does not
intend to appeal the delisting of its securities and, as of the Effective Date,
the Company believes it will not satisfy the requirements for listing its
securities, including the New Notes, on AMEX, any other U.S. exchange or NASDAQ.
7
RISKS RELATED TO THE NEW JUNIOR NOTES
THE NOTEHOLDERS' RIGHT TO RECEIVE PAYMENTS ON THE NEW JUNIOR NOTES IS JUNIOR TO
THE CERTAIN OF THE COMPANY'S SENIOR INDEBTEDNESS, INCLUDING THE NEW SENIOR
NOTES. FURTHER, THE NEW JUNIOR NOTE GUARANTEES WILL BE JUNIOR TO CERTAIN OF THE
SUBSIDIARY GUARANTORS' SENIOR INDEBTEDNESS, INCLUDING THE NEW SENIOR NOTE
GUARANTEES.
The New Junior Notes and the New Junior Note guarantees rank behind all
of the Company's and the subsidiary guarantors' debt incurred under the New
Senior Notes, the New Senior Note guarantees, the Heller Loan Agreement and the
related guarantees given by the subsidiary guarantors. As a result, upon any
distribution to the Company's creditors or the creditors of the Junior Notes
Guarantors in a bankruptcy, liquidation or reorganization or similar proceeding
relating to the Company or the subsidiary guarantors or of their respective
property, the holders of the New Senior Notes will be entitled to be paid in
full in cash before any payment may be made with respect to the New Junior Notes
or the New Junior Note guarantees.
In addition, under certain circumstances, if the Company defaults on
the New Senior Notes or on the Heller Loan Agreement, the Company and the
subsidiary guarantors will be prohibited from paying amounts due on the New
Junior Notes and the New Junior Note guarantees or from purchasing or otherwise
retiring the New Junior Notes.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to the Company or the subsidiary guarantors, holders of the
New Junior Notes will participate with trade creditors and all other holders of
subordinated indebtedness of the Company and the subsidiary guarantors in the
assets remaining after the Company and the subsidiary guarantors have paid all
of the New Senior Notes and the indebtedness under the Heller Loan Agreement.
However, because the New Junior Note Indenture requires that amounts otherwise
payable to holders of the New Junior Notes in a bankruptcy or similar proceeding
be paid to holders of the New Senior Notes and the indebtedness under the Heller
Loan Agreement instead, holders of the New Junior Notes may receive less,
ratably, than holders of trade payables in any such proceeding. In any of these
cases, the Company and the subsidiary guarantors may not have sufficient funds
to pay all of their respective creditors and holders of New Junior Notes may
receive less, ratably, than the holders of New Senior Notes.
Assuming the Company had completed this offering and incurred the
indebtedness under the Heller Loan Agreement on June 30, 2001, the New Junior
Notes and the New Junior Note guarantees would have been subordinated to $40.25
million of New Senior Notes and $44.0 million of indebtedness 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 New Junior Notes with a
security interest in certain of the Company's and the subsidiary guarantors'
assets but that security interest is subordinated to the security interests in
favor of the holders of the New Senior Notes. An intercreditor agreement will
provide that the holders of the New Junior Notes will only be able to cause the
commencement of steps to realize upon their junior security interest in the
collateral if:
8
(1) the final maturity date of the New Senior Notes has passed and the New
Senior Note Trustee or the holders of New 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 New Senior Notes then outstanding
constitutes less than 10% of the remaining principal amount of New
Junior Notes then outstanding; or
(3) such time as:
(a) holders of New Junior Notes have not received interest or any
other amounts payable under the New Junior Notes for a period
of 181 days from the date of required payment, and
(b) the principal of the New Senior Notes has not been accelerated
and the New Senior Note Trustee or holders of the New Senior
Notes have not commenced steps to foreclose or otherwise
realize upon the security interest of holders of the New
Senior Notes in the collateral.
Until such time as the principal amount of New Senior Notes outstanding
is less than the amount of New Junior Notes outstanding, the holders of New
Senior Notes are given the exclusive right to control all decisions relating to
the enforcement of remedies under the collateral documents.
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
New Junior Notes will not be able to force a sale of the collateral securing the
New Junior Notes or otherwise independently pursue the remedies of a secured
creditor under the collateral documents in most circumstances. The holders of
the New Senior Notes may have interests that are different from the interests of
holders of the New 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 New Junior Notes to do so.
In addition, if the New Junior Notes are secured with a security
interest in any of the collateral securing the Heller Loan Agreement, the
ability of holders of New Junior Notes to, among other things, exercise remedies
against any such note collateral will be limited by an intercreditor agreement
that will bind the holders of the New Junior Notes. See " -- Risks Related to
the New Notes -- The rights of the holders of the New Notes to enforce remedies
against certain Collateral may be limited as long as the Heller Loan Agreement
is outstanding."
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.
Unless the holders of the New Common Stock at the time of issuance are
"underwriters" as that term is defined in Section 1145 of the Bankruptcy Code,
the New Common Stock will be
9
freely tradable without restriction in the public market. In addition, under the
terms of a registration rights agreement, the Company will agree to file a shelf
registration statement and grant certain holders of the New Common Stock on the
Effective Date demand registration rights and piggyback registration rights with
respect to their New Notes and New Common Stock.
Nonetheless, for various reasons, including those discussed below, the
Debtors are unable to predict whether an active trading market will develop or
be sustained for the New Common Stock. If no active trading market develops,
noteholders 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. The Debtors are not aware of any securities firm
that intends to make a market in the New Common Stock after this offering is
completed, 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 the financial performance or prospects of the Company and its
subsidiaries or in the prospects for companies in the Company's industry
generally. While the Company does not anticipate that the Company or its
securities will be rated by any rating agency, if the Company or its securities
are rated and are subsequently downgraded by any rating agency, the trading
price of the New Common Stock may be adversely effected.
In addition, on October 11, 2001, the Company received notice from AMEX
that it had filed an application with the SEC to strike the Company's existing
common stock and convertible subordinated debentures from listing and
registration on AMEX. AMEX indicated that the Company has fallen below the AMEX
listing guidelines as a result of the net losses sustained by the Company in its
five most recent fiscal years and the continued low trading price of the
Company's common stock. The Company does not intend to appeal the delisting of
its securities and, as of the Effective Date, the Company believes it will not
satisfy the requirements for listing its securities, including the New Common
Stock, on AMEX, any other U.S. exchange or NASDAQ.
THE COMPANY'S 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 the Old ALC Common Stock trades has fluctuated
significantly, and the price at which the New Common Stock trades may continue
to be volatile. From January 1, 2000 through June 30, 2001, the sales price of
the Old ALC Common Stock, as reported on the AMEX, has ranged from a low of
$0.09 to a high of $2.375. If the Company's 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.
Prior to this offering, there were 17,120,745 shares of Old ALC Common
Stock outstanding as of June 30, 2001. Upon cancellation of the Old ALC Common
Stock and completion of the offering of New Common Stock, the Company will have
6,500,000 shares of New Common Stock outstanding.
10
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 significantly. These sales also might
make it more difficult for the Company to sell securities in the future at a
time and price that the Company deems appropriate.
BECAUSE IT IS UNLIKELY THAT THE COMPANY WILL PAY DIVIDENDS, STOCKHOLDERS WILL
ONLY BE ABLE TO BENEFIT FROM HOLDING NEW COMMON STOCK IF THE STOCK PRICE
APPRECIATES.
The Company currently intends to retain any future earnings to pay
principal and interest on its indebtedness and to fund growth and, therefore,
does 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.
THE COMPANY MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY BE
UNAVAILABLE OR WHICH MAY RESULT IN DILUTION TO THE COMPANY'S STOCKHOLDERS AND
RESTRICT THE COMPANY'S OPERATIONS.
The Company may seek to sell additional equity or debt securities or
obtain a credit facility in order to finance its operations, which the Company
may not be able to do on favorable terms or at all. The Company's ability to
obtain additional debt and equity financing may be limited by restrictions in
the New Senior Note Indenture, the New Junior Note Indenture, the Heller Loan
Agreement and in its other debt agreements. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
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 the Company's and its subsidiaries' operations.
A MAJORITY OF THE NEW COMMON STOCK MAY BE HELD BY A SMALL NUMBER OF STOCKHOLDERS
WHO COULD HAVE INTERESTS THAT CONFLICT WITH THE INTERESTS OF THE OTHER
STOCKHOLDERS.
After giving effect to the issuance of New Common Stock contemplated by
the Plan, a majority of the New Common Stock will be held by a small number of
stockholders and their affiliates. This concentration of ownership will give
those stockholders, if they act together, the power to control the outcome of
matters requiring stockholder approval, including the election of directors, to
take corporate action by written consent, and to hinder or delay a change of
control of the Company.
RISKS RELATED TO THE BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES
INCREASES IN UTILITY COSTS COULD REDUCE THE PROFITABILITY OF THE COMPANY AND ITS
SUBSIDIARIES.
Utility costs represent a significant percentage of the operating costs
of the Company and its subsidiaries. The cost of utilities may continue to rise.
While the Company and its subsidiaries have not historically included utility
surcharges in the rental rates they charge to their residents, they may try to
do so in the future. There can be no assurance that the Company
11
and its subsidiaries will be able to do so. Increases in the costs of utilities
that the Company and its subsidiaries are unable to pass on to their residents
could significantly reduce their profits.
THE COMPANY IS INVOLVED IN AN ARBITRATION PROCEEDING WITH ITS CORPORATE
LIABILITY INSURANCE CARRIER.
In September 2000, the Company reached an agreement to settle the class
action litigation relating to the restatement of the Company's 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. Although the Company has been dismissed from the litigation with
prejudice, an outstanding dispute regarding coverage exists with the Company's
corporate liability insurance carriers and the Company. The Company agreed with
its insurance carriers to resolve this dispute through binding arbitration. To
the extent that the carriers were successful, they agreed that their recovery
would not exceed $4.0 million. The carriers further agreed that payment of any
such amount awarded would not be due in any event until 90 days after the
Company satisfied its obligations to the plaintiffs in the class action, which
occurred on September 28, 2001, with any such amount to be subordinated to new
or refinancing of existing obligations. Any claim by the carriers against ALC
will be considered a Class 4 Claim under the Plan. Although the Company believes
that it has strong defenses regarding this claim and consequently has not
recorded a liability in relation to this matter, the Company cannot predict the
outcome of such a disputed claim.
THE COMPANY AND ITS SUBSIDIARIES ARE PARTY TO OTHER LEGAL PROCEEDINGS.
Participants in the senior living and long-term care industry,
including the Company and its subsidiaries, 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 the Company and its subsidiaries may result in
higher operating expenses. Those higher operating expenses could have a material
adverse effect on the business, financial condition, results of operations, cash
flow or liquidity of the Company and its subsidiaries.
In April 1999 the Company received a preliminary inquiry from the SEC
regarding the restatement of its financial statements for the years ended
December 31, 1996 and 1997 and the first three quarters of 1998 and related
matters. The Company has provided the SEC with information and documents in
response to the inquiry, and has received no correspondence from the SEC
regarding the inquiry since March 2000. The SEC has never alleged any violation
of law in connection with the inquiry. There can be no assurance that the SEC
will not resume its inquiry.
THE COMPANY AND ITS SUBSIDIARIES MAY BE LIABLE FOR LOSSES NOT COVERED BY OR IN
EXCESS OF THEIR INSURANCE.
In order to protect themselves against the lawsuits and claims made
against them, the Company and its subsidiaries currently maintain insurance
policies in amounts and covering
12
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 the Company and its subsidiaries,
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 year ending December
31, 2001, this deductible has been replaced with a retention level of $250,000,
except in Florida and Texas in which the retention level is $500,000. In certain
states, particularly Florida and Texas, many long-term care providers are facing
very difficult renewals. There can be no assurance that the Company and its
subsidiaries will be able to obtain liability insurance in the future on
commercially reasonable terms or at all. A claim against the Company or any of
its subsidiaries not covered by, or in excess of, their insurance, could have a
material adverse affect on them.
THE COMPANY MAY NOT BE ABLE TO EXTEND ITS DIRECTOR AND OFFICER CORPORATE
LIABILITY INSURANCE POLICY OR OBTAIN A NEW POLICY.
The Company's director and officer corporate liability insurance policy
expires on January 31, 2002. There is no guarantee that the policy will be
extended or that the Company can obtain a new policy. If the Company fails to
extend the policy or obtain a new policy, there is no assurance that it can
retain its directors and officers. Also, if the Company fails to extend the
policy or obtain a new policy, it may be required to cover the cost of any
liability under its current indemnification arrangements with its directors and
officers, which could have a material adverse effect on the Company.
THE COMPANY AND ITS SUBSIDIARIES ARE SUBJECT TO SIGNIFICANT GOVERNMENT
REGULATION.
The operation of assisted living facilities and the provision of health
care services are subject to 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;
13
- confidentiality of medical information;
- safe working conditions;
- family leave; and
- disposal of medical waste.
The cost of compliance with these regulations is significant for the
Company and its subsidiaries. In addition, it could adversely affect the
financial condition or results of operations of the Company and its subsidiaries
if a court or regulatory tribunal were to determine that the Company or any
subsidiary had failed to comply with any of these laws or regulations. Because
these laws and regulations are amended from time to time, the Company and its
subsidiaries cannot predict when and to what extent liability may arise. See "
-- The Company and its subsidiaries must comply with laws and regulations
regarding the confidentiality of medical information," " -- The Company and its
subsidiaries must comply with restrictions imposed by laws benefiting disabled
persons", " -- The Company and its subsidiaries may incur significant costs and
liability as a result of medical waste" and " -- The Company and its
subsidiaries may incur significant costs related to environmental remediation or
compliance."
In the ordinary course of business, the Company and its subsidiaries
receive and have received notices of deficiencies for failure to comply with
various regulatory requirements. The Company and its subsidiaries 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, the Company and its subsidiaries may dispute the matter and
sometimes will seek a hearing if they 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 and its subsidiaries paid $16,000
and $8,800, respectively, in the aggregate for the year ended December
31, 2000 and the six months ended June 30, 2001;
- TEMPORARY STOP PLACEMENT OF ADMISSION OF NEW RESIDENTS, OR IMPOSITION
OF OTHER CONDITIONS TO ADMISSION OF NEW RESIDENTS TO A FACILITY - these
applied to four residences (two in Washington and two in Idaho) in
2000, and were continued for two residences into 2001, one of which is
still in stop placement;
- 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 both 2000
and 2001 included one residence in Washington against which the state
has commenced license revocation procedures. This matter is still
pending.
The operation of the Company's and its subsidiaries' residences is
subject to federal and state laws prohibiting fraud by health care providers,
including criminal provisions, which
14
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. The Company and its subsidiaries may be subject to
fines and treble damages claims if they 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. The
Company and its subsidiaries have established policies and procedures that they
believe are sufficient to ensure that their facilities will operate in
substantial compliance with these anti-fraud and abuse requirements. While the
Company and its subsidiaries believe that their 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 the financial position, results of operations or cash flows of
the Company and its subsidiaries.
THE COMPANY AND ITS SUBSIDIARIES 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 the Company and its subsidiaries
may have to significantly change the way they maintain and transmit healthcare
information for their residents to comply with these regulations.
Healthcare providers must take "reasonable steps" to ensure that the
provider, as well as the provider's business partners, comply with the law's
requirements. Therefore, the Company and its subsidiaries may be required to
ensure that the other entities with which they do business are also in
compliance with these laws. HIPAA also created certain consumer rights with
which the Company and its subsidiaries may be required to comply, including a
right of notice regarding their information practices, a right of access to
inspect and copy such individual's protected medical information, and a right to
receive an accounting of all disclosures made by the Company and its
subsidiaries, with certain exceptions. Significant changes in these regulations
have recently occurred but enforcement is not expected until April 2003. The
costs to comply with these final regulations could have an adverse effect on the
financial position, results of operations, cash flows and prospects of the
Company and its subsidiaries.
THE COMPANY AND ITS SUBSIDIARIES 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 the Company and
15
its subsidiaries to modify existing residences to allow disabled persons to
access the residences. The Company and its subsidiaries 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, the Company and its subsidiaries 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.
THE COMPANY AND ITS SUBSIDIARIES MAY INCUR SIGNIFICANT COSTS AND LIABILITY AS A
RESULT OF MEDICAL WASTE.
The Company's and its subsidiaries' 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 the Company or any of its subsidiaries is not in
compliance with these laws and regulations could adversely affect the business
operations and financial condition of the Company and its subsidiaries. Because
these laws and regulations are amended from time to time, the Company and its
subsidiaries cannot predict when and to what extent liability may arise. In
addition, because these environmental laws vary from state to state, expansion
of the operations of the Company or any of its subsidiaries to states where they
do not currently operate may subject the Company and its subsidiaries to
additional restrictions on the manner in which they operate their facilities.
The Company and its subsidiaries 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, the Company and
its subsidiaries 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 their properties, the Company and its
subsidiaries 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 the
knowledge of the Company or its subsidiaries, at any property held or operated
by the Company or any of its subsidiaries could have an adverse effect on the
business, financial condition or results of operations of the Company and its
subsidiaries.
THE COMPANY AND ITS SUBSIDIARIES COULD INCUR SIGNIFICANT COSTS RELATED TO
ENVIRONMENTAL REMEDIATION OR COMPLIANCE.
The Company and its subsidiaries 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 the Company or any of
its subsidiaries knew of, or were responsible for, the presence of the hazardous
or toxic
16
substances. The costs of any required remediation or removal of these substances
could be substantial. Furthermore, there is no limit to the liability of the
Company and its subsidiaries under such laws and regulations. As a result, the
liability of the Company and its subsidiaries 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 the ability of the
Company and its subsidiaries to sell or lease their property, or to borrow using
their property as collateral.
MANY ASSISTED LIVING MARKETS HAVE BEEN OVERBUILT.
Many assisted living markets have been or are currently being
overbuilt, including certain markets in which the Company and its subsidiaries
currently operate or may operate in the future. In addition, the barriers to
entry into the assisted living industry are not substantial. The effects of
overbuilding include:
- it takes significantly longer for the Company's and its
subsidiaries' residences to fill up,
- newly opened facilities may attract residents from some or all
of the Company's current facilities,
- there is pressure to lower or not increase rates paid by
residents in the Company's and its subsidiaries' residences,
- there is increased competition for workers in already tight
labor markets, and
- the profit margins of the Company and its subsidiaries are
lower until vacant units in their residences are filled.
If the Company and its subsidiaries are unable to compete effectively
in markets as a result of overbuilding, they will suffer lower revenue and may
suffer a loss of market share.
THE COMPANY AND ITS SUBSIDIARIES MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED
EMPLOYEES AND CONTROL LABOR COSTS.
The Company and its subsidiaries compete with other providers of
long-term care with respect to attracting and retaining qualified personnel. A
shortage of qualified personnel may require the Company and its subsidiaries to
enhance their wage and benefits packages in order to compete. Some of the states
in which the Company and its subsidiaries operate impose licensing requirements
on individuals serving as program directors at assisted living residences, and
others may adopt similar requirements. The Company and its subsidiaries also
depend upon the available labor pool of low-wage employees. The Company and its
subsidiaries cannot guarantee that their labor costs will not increase, or that,
if they do increase, they can be matched by corresponding increases in revenues.
17
THE BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES RELIES HEAVILY ON CERTAIN
MARKETS AND AN ECONOMIC DOWNTURN OR CHANGES IN THE LAWS AFFECTING THEIR BUSINESS
IN THOSE MARKETS COULD HAVE A MATERIAL ADVERSE EFFECT ON THEIR RESULTS.
The business of the Company and its subsidiaries depends significantly
on their properties located in Texas, Indiana, Oregon, Ohio and Washington. As
of June 30, 2001, 21.6% of their properties were located in Texas, 11.4% in
Indiana, 10.3% in Oregon, 9.7% in Ohio and 8.6% in Washington. An economic
downturn, or changes in the laws affecting their business, in these markets
could have a material adverse effect on the operating results of the Company and
its subsidiaries. In addition, there can be no assurance that the economy in any
of these markets will continue to grow.
THE COMPANY AND ITS SUBSIDIARIES DEPEND ON REIMBURSEMENT BY GOVERNMENTAL PAYORS
AND OTHER THIRD PARTIES FOR A SIGNIFICANT PORTION OF THEIR REVENUES.
Although revenues at a majority of their residences come primarily from
private payors, the Company and its subsidiaries derive a substantial portion of
their revenues from reimbursements by third-party governmental payors, including
state Medicaid waiver programs. The Company and its subsidiaries expect that
state Medicaid waiver programs will continue to constitute a significant source
of their revenues in the future, and it is possible that the proportionate
percentage of revenue received by the Company and its subsidiaries 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
the Company and its subsidiaries 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 the business, financial condition, results of operations and
prospects of the Company and its subsidiaries. The state of Oregon recently
proposed a substantial reduction in Medicaid funding which was ultimately not
adopted.
In addition, although the Company and its subsidiaries manage the mix
of private paying tenants and Medicaid paying tenants residing in their
facilities, any significant increase in the Medicaid population of the Company
and its subsidiaries could have an adverse effect on their 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.
THE FORWARD LOOKING STATEMENTS CONTAINED IN THE DISCLOSURE STATEMENT MAY NOT
PROVE TO BE ACCURATE.
The Disclosure Statement includes "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended, including, in particular,
the statements about the plans, strategies, and prospects of the Company and its
subsidiaries under the headings "Description of the Debtors' Business," "The
Future Business of Reorganized ALC," "Projections and Valuation Analysis,"
18
and "Alternatives to Confirmation and Consummation of the Plan." Although the
Company and its subsidiaries believe that their plans, intentions and
expectations reflected in or suggested by these forward-looking statements are
reasonable, the Company and its subsidiaries can give no assurance that their
plans, intentions or expectations will be achieved. Important factors that could
cause actual results to differ materially from the forward looking statements
the Company and its subsidiaries made in the Disclosure Statement are set forth
above in this "Risk Factors" section and elsewhere in the Disclosure Statement,
and include the Company's ability to complete the restructuring in a timely
fashion, the Company's ability to control costs and improve operating margins,
the degree to which the Company's future operating results and financial
condition will be affected by any litigation, the possibility that the Company
will experience a decrease in occupancy in its residences, which would adversely
affect residence revenues and operating margins, the Company's ability to
operate its residences in compliance with evolving regulatory requirements, the
degree to which the Company's future operating results and financial condition
may be affected by a reduction in Medicaid reimbursement rates, and other risks
described in the Company's filings with the SEC. All forward-looking statements
attributable to the Company and its subsidiaries or persons acting on their
behalf are expressly qualified in their entirety by these cautionary statements.
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, the Company files
reports, proxy statements and other information with the SEC. Copies of these
materials can be obtained at prescribed rates from the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
Information on the operation of the Public Reference Room can be obtained by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site
(http://www.sec.gov) that makes available reports, proxy statements and other
information regarding the Company.
19
EXHIBIT I
TO THE DISCLOSURE STATEMENT
DESCRIPTION OF THE COMPANY'S 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 and of certain amendments to Carriage House's
certificate of incorporation. 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 Debtors urge 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, the Company Bylaws and the Restated Carriage Certificate will be
available upon request at the address specified under the caption "Additional
Information" no later than 10 days prior to the Confirmation Hearing in a form
reasonably satisfactory to the Informal Bondholders' Committee.
GENERAL
As of the Effective Date, the Company will adopt the Restated Company
Articles, which will authorize 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 the Effective Date, after giving effect to the distributions of New
Common Stock contemplated by the Plan, the Company will have 6,500,000 shares of
New Common Stock issued and outstanding and 3,250,000 shares of classified but
not issued and outstanding shares of Preferred Stock.
NEW COMMON STOCK
As of the Effective Date, all of the shares of Old Common Stock issued
and outstanding or held in treasury will be cancelled and retired and, pursuant
to the Plan, shares of New Common Stock will be issued to holders of Allowed
Class 4 Claims and Allowed Class 8 Claims and Equity Interests.
Each holder of New Common Stock will be 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 will require 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 will be, when issued in exchange for Allowed
Class 4 Claims and Allowed Class 8 Claims and Equity Interests, 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.
On October 11, 2001, the Company received notice from AMEX that it had
filed an application with the Securities and Exchange Commission to strike the
Company's existing common stock and convertible subordinated debentures from
listing and registration on AMEX. AMEX indicated that the Company has fallen
below the AMEX listing guidelines as a result of the net losses sustained by the
Company in its five most recent fiscal years and the continued low trading price
of the Company's common stock. The Company does not intend to appeal the
delisting of its securities and, as of the Effective Date, the Company believes
it will not satisfy the requirements for listing its securities, including the
New Common Stock, on AMEX, any other U.S. exchange or NASDAQ. See "Risk Factors
- Risks Related to the New Common Stock - The Company's securities will be
delisted by the American Stock Exchange (AMEX)." and "Risk Factors - 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." 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.
2
RESTATED COMPANY ARTICLES
Pursuant to the Plan, the Company will adopt the Restated Company
Articles on the Effective Date pursuant to section 78.622 of the Nevada Revised
Statutes and section 1123(a)(6) of the Bankruptcy Code. The Restated Company
Articles will, among other things:
(1) authorize the issuance of New Common Stock; and
(2) prohibit the issuance of non-voting equity securities to the extent
required by Section 1123(a)(6) of the Bankruptcy Code.
COMPANY BYLAWS
The Company Bylaws will not be amended in connection with the Plan.
RESTATED CARRIAGE CERTIFICATE
Pursuant to the Plan, Carriage House will adopt the Restated Carriage
Certificate on the Effective Date pursuant to Title 8 of the General Corporation
Law of the State of Delaware and section 1123(a)(6) of the Bankruptcy Code. The
Restated Carriage Certificate will, among other things, prohibit the issuance of
non-voting equity securities to the extent required by Section 1123(a)(6) of the
Bankruptcy Code.
CARRIAGE HOUSE BYLAWS
The Carriage House Bylaws will not be amended in connection with the
Plan.
RESERVE
Not all of the New Common Stock, the Senior Notes and the Junior Notes
will be issued on the Effective Date. This is because the total amount of the
Allowed Class 4 Claims will not be known until after the Effective Date, either
because certain Class 4 Claims will be disputed claims or because those Claims
will not have been made by their holders prior to the Effective Date. As a
result, the Company will hold back from the initial issuance of New Common
Stock, Senior Notes and Junior Notes on the Effective Date a percentage of the
New Common Stock, the Senior Notes and the Junior Notes (the "Reserve") to be
issued to holders of Class 4 Claims. The initial distribution with respect to
Class 4 Claims will be made only to the holders of Class 4 Claims that have been
allowed prior to the Effective Date (the "Cutoff Date"). Once the total amount
of the Allowed Class 4 Claims has been determined, the shares of New Common
Stock, the Senior Notes and the Junior Notes held in Reserve will be distributed
pro rata among the holders of the Allowed Class 4 Claims (the date of this
distribution, the "Subsequent Distribution Date").
If the Reserve is insufficient to cover Class 4 Claims allowed after
the Cutoff Date, the Company and its subsidiaries will have no further liability
with respect to those Class 4 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 holders of Class 4 Claims allowed prior
to the Cutoff Date.
3
If the Reserve exceeds the distributions necessary to cover Class 4
Claims allowed after the Cutoff Date, the additional securities remaining in the
Reserve will be distributed among all holders of Class 4 Claims so as to ensure
that each holder of an allowed Class 4 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 holders of Class 4 Claims allowed prior to the Cutoff Date will
receive distributions of securities both on the Effective Date and on the
Subsequent Distribution Date.
The right of the holders of Class 4 Claims allowed prior to the Cutoff
Date 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 such holders will be freely
transferable upon issuance.
ADDITIONAL INFORMATION
Anyone who receives this document may obtain a copy of the Restated
Company Articles, the Company Bylaws and the Restated Carriage Certificate
without charge by writing to counsel to the Debtors: Latham & Watkins, 633 West
Fifth Street, Suite 4000, Los Angeles, California, USA, 90071, Attention: Robert
A. Klyman, Esq.
CERTAIN DEFINITIONS
"AMEX" means the American Stock Exchange.
"Carriage House" means Carriage House Assisted Living, Inc., a Delaware
corporation.
"Carriage House Bylaws" means the Bylaws of Carriage House currently in
effect.
"Company Bylaws" means the Bylaws of the Company currently in effect.
"Confirmation Hearing" means the hearing to consider confirmation of
the Plan pursuant to section 1128 of the Bankruptcy Code.
"Confirmation Order" means the order entered by the Court confirming
the Plan pursuant to section 1129 of the Bankruptcy Code.
"Restated Carriage Certificate" means the Restated Certificate of
Incorporation of Carriage House Assisted Living, Inc., a Delaware corporation,
as adopted on the Effective Date.
"Restated Company Articles" means the Restated Articles of
Incorporation of the Company, as adopted on the Effective Date.
4
EXHIBIT K
[ASSISTED LIVING LOGO]
[ASSISTED LIVING CONCEPTS LETTERHEAD]
October 24, 2001 Via FAX & Federal Express
Mr. R. Bruce Andrews
President and Chief Executive Officer
Nationwide Health Properties, Inc.
610 Newport Center Drive, Suite 1150
Newport Beach, CA 92660
Re: Assisted Living Concepts, Inc. ("ALC")/MLD Delaware Trust and Nationwide
Health Properties, Inc. (collectively, "Nationwide" or "NHP").
Dear Bruce:
This letter will summarize our discussions earlier this week regarding the
renegotiation of ALC's Ashley House and Langston House leases with MLD Delaware
Trust and the conversion of our Pinewood House and Moorehead House mortgages
held by MLD Delaware Trust to leaseholds (via sale and leaseback). When
countersigned by Nationwide Health Properties, Inc. and MLD Delaware Trust and
taken together with your letters of July 23, 2001 and August 21, 2001, both of
which are incorporated by this reference, the combined documents will (subject
to the matters set forth herein) form the basis for a mutually acceptable formal
agreement which will be prepared by ALC's counsel, Latham & Watkins. This
agreement will only take effect on the effective date of ALC's plan of
reorganization (the "Plan") to be filed in ALC's bankruptcy case (the
"Bankruptcy Case").
As we discussed, the modified proposal contained in your letter of August 21st
provided adequate reductions on a current basis but the future period increases
in lease rate, either through stipulated schedule (Pinewood House) or revenue
sharing agreement (Ashley and Langston Houses) left ALC exposed to declining
contribution as our share of incremental revenue would be outstripped by cost
increases facing the industry. Accordingly, we have reached the following
supplemental understanding:
Confidential Settlement Discussions Covered by FRE 408 and Applicable State Law
WJ Nicol Page 1 10/25/01
Mr. R. Bruce Andrews
October 24, 2001
1. ASHLEY HOUSE, GREENWOOD, SC AND LANGSTON HOUSE, CLINTON, SC:
- Base rental will be $2,000.00 per month.
- Additional rental terms in these leases will be changed to a
percentage of monthly revenue format. No additional rent will be
due until the revenues exceed $57,500.00 per month during
calendar year 2002. In each of the succeeding years throughout
the lease term, the target monthly revenue amount will be
increased by 3.0% to accommodate ALC's expected cost increases
(e.g., for calendar 2003, no additional rent will be due until
the revenues exceed $59,225.00).
- All revenues derived from the facilities current regimen of
services in excess of $57,500.00 per month (adjusted each year as
noted above) will create an additional rental obligation equal to
50% of the revenues in excess of $57,500.00 (or the adjusted
amount) per month. It is understood that, as used herein,
revenues used to calculate additional rent refer to "gross
revenues" as determined pursuant to GAAP.
- New services or products that we develop or acquire and implement
and for which we charge separate fees over and above the current
regimen of services and products will be excluded from the
additional rent calculation. We will provide you with adequate
documentation to demonstrate that these are, in fact, new
services or products.
- The current lease term will be shortened from December 31, 2013
to December 31, 2006.
- Rental expenses will be limited to no more than $22,000.00 per
month for the remainder of the initial lease term.
2. PINEWOOD HOUSE, GOOSECREEK, SC:
- Nationwide will receive the fee ownership of this facility and
enter into a lease arrangement with the similar terms (except for
rental rates) as Ashley and Langston House. The monthly rental
obligation for the duration of the initial lease term (December
31, 2006) will be as follows:
<Table>
<Caption>
From Effective Date
--------------------------------------
Until December 31, 2002 $19,000 per month
Until December 31, 2003 $20,000 per month
Until December 31, 2004 $21,000 per month
And thereafter until end of lease term $21,667 per month
</Table>
Confidential Settlement Discussions Covered by FRE 408 and Applicable State Law
WJ Nicol Page 2 10/25/01
Mr. R. Bruce Andrews
October 24, 2001
3. Moorehead House, Indiana, PA:
- Nationwide will receive the fee ownership in this facility
and a new lease will be entered into with the same terms
(except for rental rates as Ashley House and Langston House.
The rental obligations of this lease will be equal to
$5,000,000 less than the current debt service of the
mortgage currently on this property for the duration of the
initial lease term.
The fee title to the Pinewood and Moorehead properties to be conveyed to NHP
per the above shall be insured at ALC expense subject only to those title
exceptions which currently appear in NHP's lender title policies for such
properties.
In addition, we discussed and I have agreed that when this agreement becomes
effective, the two existing leases as modified and the two new leases that
replace the current mortgages will be packaged as a "master lease."
Although we have previously discussed the potential that some sort of "property
renegotiation fee" would accrue as a result of these negotiations, we have
ultimately agreed that there will be no such fee.
Finally, I have advised you that I have been assured by the bondholder
committee's advisor, Chanin Capital, that the committee will endorse the
modification of our relationship regarding the four properties as outlined
above.
Bruce, thanks again for your many courtesies and consideration during this
process.
Kindest Regards,
/s/ Wm. James Nicol
Wm. James Nicol
Chairman, President & CEO
cc: Robert L. Klyman
Drew Miller
Sandra Campbell
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WJ Nicol Page 3 10/25/01
\Mr. R. Bruce Andrews
October 24, 2001
Agreed that the foregoing reflects the principal terms to be reflected in the
mutually acceptable documentation which is to be drafted by ALC counsel
(provided that all lease amendments, new leases or property transfer
documentation will be prepared by NHP counsel). Further agreed that upon (i)
the proposal by the Company of a Plan that reflects the foregoing principal
terms as evidenced by Plan documentation approved in form and substance by NHP
and (ii) receipt by NHP of court-approved solicitation materials in the
Bankruptcy Case in form and substance approved by NHP, and (iii) the
preparation of lease amendments, new leases, and real estate transfer
documentation reflecting the terms set forth in the foregoing letter, all in
form and substance mutually satisfactory to ALC and NHP, and (iv) the support
of such Plan by ALC's other major creditor constituencies (including without
limitation the bond holders and ALC's other major landlord, LTC Properties),
NHP will support and vote in favor of the Plan and will not (a) object to
confirmation of the Plan or otherwise commence or support in any way any
proceeding to oppose or alter the Plan in any way inconsistent with this
Agreement; (b) vote for, support or participate in the formulation of any plan
of reorganization or liquidation for the Company other than the Plan; (c) seek,
solicit, support or encourage any plan other than the Plan; (d) object to the
Disclosure Statement or the solicitation of consents to the Plan; or (e) take
any other action that is inconsistent with or be in derogation of this
Agreement or the Plan or that would delay confirmation of the Plan.
Notwithstanding the foregoing or anything else in this Agreement to the
contrary, NHP shall not be barred from objecting to (x) approval of the
Disclosure Statement if such Disclosure Statement contains a material
misstatement or omission or fails to contain adequate information for the
purposes of Bankruptcy Code Section 1125 or other applicable law, or (y)
confirmation of the Plan if such Plan contains terms that are materially
inconsistent with this Agreement. The foregoing undertakings of NHP are subject
to the filing of a Plan by ALC conforming to the terms of this letter on or
before October 15, 2001 and confirmation of such Plan on or before February 28,
2002.
MLD Delaware Trust
a Delaware business trust
By: /s/ Mark L. Desmond Date: 10/25, 2001
------------------------ -----------
Name: Mark L. Desmond
not in his individual capacity but
solely as trustee
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Mr. R. Bruce Andrews
October 24, 2001
Nationwide Health Properties, Inc.
By: /s/ R. Bruce Andrews Date: Oct. 25, 2001
_____________________ _________________
R. Bruce Andrews
President & Chief Executive Officer
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