<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1996.
REGISTRATION NO. 333-06907
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ATRIA COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8361 61-1303738
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(502) 596-7540
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
W. PATRICK MULLOY, II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ATRIA COMMUNITIES, INC.
515 WEST MARKET STREET
LOUISVILLE KENTUCKY 40202
(502) 596-7540
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
IVAN M. DIAMOND, ESQ. J. VAUGHAN CURTIS, ESQ.
GREENEBAUM DOLL & MCDONALD PLLC ALSTON & BIRD
3300 NATIONAL CITY TOWER ONE ATLANTIC CENTER
LOUISVILLE, KENTUCKY 40202 1201 WEST PEACHTREE STREET
(502) 589-4200 ATLANTA, GEORGIA 30309-3424
(404) 881-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
ATRIA COMMUNITIES, INC.
CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K,
ITEM 501(B), SHOWING THE LOCATION IN THE PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 LOCATION OR
ITEM NO. 1 CAPTION CAPTION IN PROSPECTUS
---------- ------- ---------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Page of
Prospectus......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front and Outside
Back Cover Pages;
Additional Information
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Prospectus Summary; Risk
Charges............................ Factors; Business
4. Use of Proceeds..................... Use of Proceeds
5. Determination of Offering Price..... Underwriting
6. Dilution............................ Dilution
7. Selling Security Holders............ Not Applicable
8. Plan of Distribution................ Outside Front Cover Page;
Underwriting
9. Description of Securities to be Description of Capital Stock
Registered.........................
10. Interests of Named Experts and Legal Matters; Experts
Counsel............................
11. Information with Respect to the Outside Front Cover Page;
Registrant......................... Prospectus Summary; Risk
Factors; The Company and
its Predecessors; Use of
Proceeds; Dividend Policy;
Capitalization; Dilution;
Selected Combined Financial
Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business; Management;
Certain Transactions;
Principal Stockholders;
Description of Capital
Stock; and Shares Eligible
for Future Sale
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ Not applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
AUGUST 20, 1996
5,000,000 Shares
LOGO
Common Stock
--------
All of the 5,000,000 shares of Common Stock offered hereby are being sold by
Atria Communities, Inc. (the "Company" or "Atria"), a wholly owned subsidiary
of Vencor, Inc. ("Vencor"). Prior to this offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price will be between $10.00 and $12.00 per share. See
"Underwriting" for the factors to be considered in determining the initial
offering price.
At the request of the Company, up to 500,000 shares of the Common Stock
offered hereby have been reserved for sale to certain individuals, including
directors and employees of the Company and Vencor, and members of their
families.
Upon completion of this offering, Vencor will own 66.2% of the Common Stock
(63.1% if the Underwriters' over-allotment option is exercised in full).
Accordingly, Vencor will be able to control the management and operations of
the Company. See "Risk Factors--Control by Principal Stockholder."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(2).................................. $ $ $
</TABLE>
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(1) Before deducting expenses of the offering estimated at $850,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 750,000 additional shares of Common Stock to cover over-allotments, if
any. To the extent the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the shares of Common Stock will be made
at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or
about August , 1996.
Alex. Brown & Sons
INCORPORATED
Morgan Stanley & Co.
INCORPORATED
J.C. Bradford & Co.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[Photograph of an Atria community [Photograph of an
with southwestern design and employee of Atria
palm trees.] with a resident.]
Atria communities feature unique Atria's higher-acuity model
architecture designed to blend allows residents to "age in
into the surrounding landscape place" by incorporating
with common internal layouts that rehabilitation and home
allow for construction efficiencies. health services.
[ATRIA LOGO APPEARS HERE]
[United States map indicating [Photograph of Atria
Vencor hospitals and Vencor residents - 4 women and
nursing facilities.] one man.]
Wherever feasible, Atria will Atria focuses on private
network with Vencor's long-term pay, middle- and
care hospitals and skilled upper-income residents.
nursing facilities to combine
available resources.
Our vision of assisted living is a residential community which recognizes,
enhances and celebrates the value of individuals by promoting their
independence and dignity while providing assistance with daily living.
Our mission is to be the leading provider of senior living services by
delivering consistent, high-quality, innovative services to our residents
and their community.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and combined financial statements and the notes thereto appearing
elsewhere in this Prospectus.
THE COMPANY
Atria Communities, Inc. is a national provider of assisted and independent
living communities for the elderly. The Company currently operates 22
communities in 13 states with a total of 3,022 units, including 650 assisted
living units and 2,372 independent living units. The Company owns 16 of these
communities, holds a majority interest in two communities, leases two
communities and manages two communities. The Company also has 13 assisted
living communities under development with a total of approximately 850 units.
For the year ended December 31, 1995, the Company had revenues and net income
of $48.0 million and $3.4 million, respectively, and had an average occupancy
rate of 94.5%. For the six-month period ended June 30, 1996, the Company had
revenues and net income of $25.4 million and $1.7 million, respectively, and
had an average occupancy rate of 95.6%. Substantially all of the Company's
revenues are from private pay sources.
The assisted and independent living industries are rapidly emerging
components of the non-acute health care system for the elderly. The assisted
living industry serves the long-term care needs of the elderly who do not
require the more extensive medical services available in skilled nursing
facilities, yet who are no longer capable of a totally independent lifestyle.
Assisted living residents typically require assistance with two to three
activities of daily living ("ADLs"), such as eating, grooming and bathing,
personal hygiene and toileting, dressing, transportation, walking and
medication reminders. The independent living industry serves the long-term care
needs of elderly individuals who require only occasional assistance with ADLs
and who no longer desire, or cannot maintain, a totally independent lifestyle.
According to industry estimates, the assisted and independent living
industries represented approximately $10 to $12 billion in revenue in 1995. The
Company believes that growth in these industries is being driven by the
continued aging of the population and the increase in demand for elder-care
services; cost-containment efforts that limit access to acute care hospitals
and skilled nursing facilities for the elderly with less intensive medical
needs; changing societal patterns that make it difficult for families to
provide in-home care to the elderly; and an increasing awareness among the
elderly that assisted and independent living communities afford a cost-
effective, secure and attractive lifestyle.
Atria's objective is to expand its position as a national provider of high-
quality assisted and independent living services. Key elements of the Company's
strategy are to: (i) develop or acquire 60 to 85 additional assisted living
communities by the year 2000 (including 13 communities currently being
developed) and to convert at least 750 of its existing independent living units
to assisted living units; (ii) network its operations with Vencor's health care
delivery system where appropriate; (iii) pursue a higher acuity model of care
enabling residents to "age in place;" and (iv) continue to focus on private
pay, middle- and upper-income residents.
Prior to completion of this offering, all of the Company's assisted and
independent living communities have been operated by Vencor. Vencor and its
predecessors have operated assisted and independent living communities for over
a decade. Vencor operates an integrated network of health care services
primarily focusing on the needs of the elderly. After completion of this
offering, Vencor will own 66.2% of the outstanding Common Stock (63.1% if the
Underwriters' over-allotment option is exercised in full). The Company believes
that networking opportunities exist between assisted living communities and
Vencor's long-term care hospitals and skilled nursing facilities. In order to
facilitate an orderly transition of the Company from a division of Vencor to a
separate publicly held entity, Vencor will initially provide certain
administrative and support services to the Company. As a separate public
company, management believes that it will be able to accelerate the development
and acquisition of assisted living facilities. Furthermore, Atria will have
independent access to capital, an enhanced ability to incentivize management
and a management team focused solely on the Company's business.
3
<PAGE>
THE OFFERING
Common Stock offered hereby............. 5,000,000 shares
Common Stock to be outstanding after
this offering.......................... 15,095,000 shares(1)
Use of proceeds......................... To finance the development and
acquisition of additional assisted
living communities, and for working
capital and other general corporate
purposes.
Proposed Nasdaq National Market
symbol................................. ATRC
- --------
(1) Excludes options to purchase 639,500 shares of Common Stock at the initial
public offering price per share and includes 95,000 restricted shares of
Common Stock that vest over a two-year period following this offering. See
"Management--Non-Employee Directors 1996 Stock Incentive Plan," "--Employee
Awards Granted," "--Vencor Employee Option Grants" and "--1996 Stock
Ownership Incentive Plan."
4
<PAGE>
SUMMARY COMBINED FINANCIAL AND STATISTICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED SIX MONTHS ENDED
MAY 31, DECEMBER 31, JUNE 30,
---------------- ----------------------------- ------------------
1992(1) 1993(1) 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues............... $31,664 $36,479 $35,870 $39,758 $47,976 $ 23,264 $ 25,448
Operating income
(loss)................ (2,164) 2,843 4,156(2) 9,551(3) 10,100(4) 4,928 4,791(5)
Income (loss) before
income taxes and
extraordinary loss.... (7,874) (1,770) 1,003(2) 6,343(3) 5,925(4) 2,696 2,867(5)
Income (loss) before
extraordinary loss.... (4,764) (1,071) 607(2) 3,837(3) 3,584(4) 1,631 1,734(5)
Net income (loss)...... (4,764) (1,071) 504 3,837 3,438 1,631 1,734
Pro forma earnings per
common share before
extraordinary loss.... $ .36 $ .16 $ .17
Shares used in
computing earnings per
common share.......... 10,095 10,095 10,095
STATISTICAL DATA:
Number of
communities(6):
Owned and leased....... 21 20 19 19 20 20 20
Managed................ 2 2 2 2 2 2 2
------- ------- ------- ------- ------- -------- --------
Total................. 23 22 21 21 22 22 22
======= ======= ======= ======= ======= ======== ========
Number of units(6):
Owned and leased....... 2,900 2,734 2,574 2,531 2,603 2,603 2,603
Managed................ 419 419 419 419 419 419 419
------- ------- ------- ------- ------- -------- --------
Total................. 3,319 3,153 2,993 2,950 3,022 3,022 3,022
======= ======= ======= ======= ======= ======== ========
Average occupancy(7)... 80.9% 87.1% 90.8% 93.8% 94.5% 93.2% 95.6%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(8)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 4,149 $ 54,449
Assets.................. 141,616 191,916
Long-term debt,
including amounts due
within one year........ 104,411 104,411
Stockholder's equity.... 27,544 77,844
</TABLE>
- --------
(1) For accounting purposes, the historical combined financial information of
Atria for years 1991 and 1992 are based upon the previous fiscal reporting
periods of such entities which most closely approximate the respective
calendar year. Accordingly, operating results for the five months ended May
31, 1993 are included in both May 31, 1993 and December 31, 1993
disclosures. Revenues and net income for such period approximated $15.6
million and $61,000, respectively.
(2) Includes $266,000 ($160,000 net of tax) of income related to settlement of
certain litigation.
(3) Includes $1.3 million of income ($750,000 net of tax) related to settlement
of certain litigation and a $425,000 ($255,000 net of tax) gain on the sale
of property.
(4) Includes a charge of $600,000 ($360,000 net of tax or $.03 per common share
on a pro forma basis) related to the writedown of undeveloped property to
net realizable value.
(5) Includes a charge of $1.1 million ($630,000 net of tax or $.06 per common
share on a pro forma basis) related to the settlement of certain
litigation.
(6) At end of period.
(7) Average occupancy is calculated on a daily basis by dividing the number of
occupied units by the total number of available units.
(8) Adjusted to give effect for the sale by the Company of 5,000,000 shares of
Common Stock (assuming an initial public offering price of $11.00) and the
application of the net proceeds thereof.
At or before completion of this offering, Vencor will contribute to the
Company substantially all of its assisted and independent living communities in
exchange for shares of Common Stock and the Company will assume certain
liabilities related to such communities (the "Contribution Transaction").
Unless otherwise indicated, all share and financial information set forth
herein assumes (i) completion of the Contribution Transaction and the issuance
of 95,000 restricted shares of Common Stock upon completion of this offering
and (ii) no exercise of the Underwriters' over-allotment option. All references
in this Prospectus to the "Company" or "Atria" mean Atria Communities, Inc. and
its subsidiaries, or the assisted and independent living communities held by
Vencor prior to the Contribution Transaction.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment
in the Common Stock offered hereby.
FINANCIAL RISKS ASSOCIATED WITH EXPANSION PROGRAM
Newly developed assisted living communities are expected to incur operating
losses during the first twelve months of operations of between $150,000 and
$250,000 for a 90-unit community. Once opened, the Company estimates that it
will take an average of twelve months for its communities to achieve targeted
occupancy levels of at least 85%. The Company may incur additional operating
losses if it fails to achieve expected occupancy rates at newly developed
communities or if expenses related to the development, acquisition or
operation of new communities exceed expectations. The risks associated with
the Company's development of additional assisted living communities and
uncertainties regarding the profitability of such operations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Development Program."
DEVELOPMENT AND CONSTRUCTION RISKS
The Company intends to develop or acquire 60 to 85 additional assisted
living communities by the year 2000 (including 13 communities currently being
developed). The Company's ability to expand at this pace will depend upon a
number of factors, including, but not limited to, the Company's ability to
acquire suitable properties or communities at reasonable prices; the Company's
success in obtaining necessary zoning, land use, building, occupancy,
licensing and other required governmental permits and authorizations; and the
Company's ability to control construction and renovation costs and project
completion schedules. In addition, the Company's development plan is subject
to numerous factors outside its control, including competition for
acquisitions, shortages of, or the inability to obtain, labor or materials,
changes in applicable laws or regulations or in the method of applying such
laws and regulations, the failure of general contractors or subcontractors to
perform under their contracts, strikes and adverse weather. The Company's
business, financial condition and results of operations could be materially
and adversely affected if the Company is unable to achieve its development
plan. See "Business--Development Program."
In addition, the Company will rely initially on Vencor for certain services
in connection with development projects pursuant to an Administrative Services
Agreement. The Administrative Services Agreement has an initial term of one
year and thereafter may be renewed on a month-to-month basis and terminated by
either party on 60 days' prior written notice. The Company does not currently
have a substantial internal development staff but it has retained third
parties to locate suitable sites for new assisted living communities and to
handle other aspects of the development process on a contract basis. Final
approval of all development sites will be made by officers of the Company. If
Vencor terminates the Administrative Services Agreement before the Company is
able to expand its development staff or if the Company is unable to continue
to retain third-party sources to assist in the development process, the
Company's ability to execute its development and growth plans and the
Company's business, financial condition and results of operations could be
materially and adversely affected. See "Business--Business Strategy," "--
Development Program" and "Certain Transactions."
ACQUISITION RISKS; DIFFICULTIES OF INTEGRATION
In addition to developing additional assisted living communities, the
Company currently plans to acquire additional assisted living facilities or
other properties that can be repositioned as Atria assisted living
communities. The Company has not entered into any agreements with respect to
any material acquisitions. There can be no assurance that the Company's
acquisition of assisted living facilities will be completed at the rate
currently expected, if at all. The success of the Company's acquisitions will
be determined by numerous factors, including the Company's ability to identify
suitable acquisition candidates, competition for such acquisitions, the
purchase price, the financial performance of the
6
<PAGE>
facilities after acquisition and the ability of the Company to integrate
effectively the operations of acquired facilities. Any failure by the Company
to identify suitable candidates for acquisition, or integrate or operate
acquired facilities effectively may have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Business Strategy" and "--Development Program."
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY AND NEW MANAGEMENT
Although the Company's predecessors have operated assisted and independent
living communities for over a decade, the Company itself has never operated as
a stand-alone company. Certain officers, including the President and Chief
Executive Officer of the Company, do not have experience in the assisted and
independent living industry. After this offering, the Company will continue to
be a subsidiary of Vencor, but will operate as a separate public company.
Vencor will have no obligation to provide assistance to the Company except as
described in the Administrative Services Agreement and the Services
Agreements. There can be no assurance that upon termination of such agreements
the Company will have adequate staffing to perform the functions Vencor
performed for the Company. The Administrative Services Agreement and the
Services Agreements each have a one-year term and upon expiration may be
renewed on a month-to-month basis or terminated by either party on 60 days'
prior written notice. Termination of these agreements before the Company is
able to provide such services could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Certain Transactions."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of this offering, Vencor will own 66.2% of the outstanding
Common Stock (63.1% if the Underwriters' over-allotment option is exercised in
full) and, accordingly, will be in a position to elect all of the directors of
the Company and effectively control the management and operations of the
Company. Initially, four of the seven directors will be officers or directors
of Vencor and only two directors of the Company will be independent directors
who are not Vencor affiliates or employees of the Company. Upon completion of
this offering, Vencor will enter into a Voting Agreement pursuant to which it
will agree to vote all of its shares of Common Stock at any meeting at which
directors are elected in favor of the election of independent directors so
that after such election, if such persons are elected, there will be at least
two independent directors. The Voting Agreement will continue in effect for
five years from the date of this offering so long as Vencor beneficially owns
30% or more of the Common Stock. The concentration of ownership in Vencor may
have a limiting effect on the price and trading volume of the Common Stock and
may inhibit changes in control of the Company. See "Certain Transactions,"
"Principal Stockholders" and "Description of Capital Stock."
RELATIONSHIP WITH VENCOR; CONFLICTS OF INTEREST
Certain directors and officers of Vencor, who are also directors of the
Company, and Vencor, as the Company's controlling stockholder, have conflicts
of interest with respect to certain transactions concerning the Company. When
the interests of Vencor and the Company diverge, Vencor may exercise its
influence in its own best interests. The Company anticipates resolving
potential conflicts of interest on a case-by-case basis, which may include the
use of committees comprised of disinterested members of the Board of Directors
and the retention of independent financial and other advisors. Transactions
between the Company and its officers, directors, principal stockholders and
their affiliates will be on terms no less favorable to the Company than could
be obtained from unrelated third parties and any such transactions will be
approved by a majority of the disinterested members of the Board of Directors.
See "Management," "Certain Transactions," and "Principal Stockholders."
The Company and Vencor have entered into certain agreements including an
Administrative Services Agreement, an Incorporation Agreement, a Tax Sharing
Agreement, a Registration Rights Agreement, a Guaranty Fee Agreement and
Services Agreements (the "Vencor Agreements") to resolve certain issues in
connection with the Contribution Transaction and to specify certain services
to be provided to the Company by Vencor. For example, under the Administrative
Services Agreement, Vencor will provide
7
<PAGE>
certain administrative services to the Company, including finance and
accounting, human resources, risk management, legal support, market planning
and information systems support. The annual fee payable to Vencor under the
Administrative Services Agreement is $660,000. The Incorporation Agreement
provides for the Company to pay Vencor $150,000 for its assistance in
connection with this offering. The maximum guaranty fee that the Company
intends to pay Vencor in connection with the Guaranty Fee Agreement is
$1,500,000 per year. The maximum amount that the Company expects to pay Vencor
in connection with the Services Agreements is $150,000 per year. These
agreements were negotiated by officers of Vencor and the Company while the
Company was a wholly owned subsidiary of Vencor. Accordingly, there is no
assurance that (i) the terms and conditions of these arrangements are as
favorable to the Company as those the Company could have obtained from
unaffiliated third parties; or (ii) such arrangements will not be terminated
or modified in the future. Although Vencor has advised the Company that it
does not intend to compete with the Company, the Vencor Agreements do not
contain any covenant not to compete or similar restrictions prohibiting Vencor
from developing or acquiring and operating its own assisted or independent
living communities following completion of this offering. See "Certain
Transactions."
The Company intends to develop communities in close proximity to Vencor's
facilities, which may facilitate participating with Vencor in providing
services to HMOs and other managed care companies. The Company also expects
that the geographic proximity to Vencor's nursing and hospital facilities will
foster transfers between the Company's communities and Vencor's facilities.
There can be no assurance that any such networking potential will be realized.
NEED FOR ADDITIONAL FINANCING
To achieve its growth objectives, the Company will need to obtain
substantial additional financing to fund its development, construction and
acquisition activities. The estimated cost to complete 60 to 85 assisted
living communities targeted for development or acquisition by the year 2000
substantially exceeds the net proceeds from this offering. Accordingly, the
Company's future growth will depend on its ability to obtain additional
financing on acceptable terms. The Company currently estimates that the net
proceeds from this offering together with anticipated financing commitments
and financing expected to be available, will be sufficient to fund its
development and acquisition program for approximately 16 months following
completion of this offering. There can be no assurance, however, that the
Company will not be required to obtain additional capital at an earlier date.
The Company may from time to time seek additional financing through public or
private financing sources, including equity or debt financing. If additional
funds are raised by issuing equity securities, the Company's stockholders may
experience dilution. There can be no assurance that adequate funding will be
available as needed or on terms acceptable to the Company. Insufficient
financial resources may require the Company to delay or eliminate all or some
of its development projects and acquisition plans, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RISKS OF INDEBTEDNESS
Leverage. At June 30, 1996, the Company had long-term debt, including
amounts due within one year, of $104.4 million. The amount of debt and debt-
related payments is expected to increase substantially as the Company pursues
its growth strategy. As a result, an increasing portion of the Company's cash
flow will be devoted to debt service and related payments and the Company will
be subject to risks normally associated with increased financial leverage.
There can be no assurance that the Company will generate sufficient cash flows
from operations to cover required interest, principal and any operating lease
payments. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Risk of Rising Interest Rates. At June 30, 1996, $71.3 million in principal
amount of the Company's indebtedness bore interest at floating rates. At or
shortly after the consummation of this offering, the
8
<PAGE>
Company expects to enter into a bank credit facility (the "Atria Credit
Facility") aggregating up to $200.0 million which will bear interest at
floating rates. In addition, other indebtedness that the Company may incur in
the future may also bear interest at a floating rate. Therefore, increases in
prevailing interest rates could increase the Company's interest payment
obligations and could have a material adverse effect on the Company's
business, financial condition and results of operations.
Bond Financing and Income Qualified Residents. Eight of the Company's
assisted living and independent living communities (containing 1,255 units)
have been financed in whole or in part by industrial revenue bonds. Under the
terms of such bonds, the Company is required to rent approximately 250
assisted and independent living units to individuals who have incomes which
are 80% or less of the average income levels in a designated market. In
certain cases, the Company's ability to increase prices in communities with
such bond financing (in response to higher operating costs or other
inflationary factors) could be limited if it affects the ability of the
Company to attract and retain residents with qualifying incomes. Failure to
satisfy these requirements constitutes an event of default under the bonds,
thereby accelerating their maturity. At June 30, 1996, outstanding amounts
under the bonds totaled $62.1 million. The Company does not presently expect
to seek additional industrial revenue bond financing. See "Business--Funding
for Assisted and Independent Living Care" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Proposed Atria Credit Facility. At or shortly after consummation of this
offering, the Company expects to enter into the Atria Credit Facility
aggregating up to $200.0 million which will bear interest at floating rates
and which will be secured by its properties, the capital stock of the
Company's subsidiaries and intercompany indebtedness owed to the Company by
its subsidiaries. Any borrowings under the Atria Credit Facility will increase
the Company's leverage and will bear the risk of rising interest rates. The
terms of the Atria Credit Facility have not been finalized and there can be no
assurance that the Company will be successful in consummating such financing.
It is also contemplated that the Atria Credit Facility will contain various
affirmative, negative and financial covenants. The Atria Credit Facility will
be conditioned upon, among other things, completion of this offering, the
absence of a change in control of the Company, Vencor's ownership of a
stipulated amount of Common Stock upon the completion of this offering and
Vencor maintaining at least a 30% ownership interest thereafter. In connection
with the Atria Credit Facility, if the net proceeds from this offering
(excluding proceeds from the Underwriters' exercise of the over-allotment
option, if any) are less than $50.0 million, Vencor has agreed to fund the
difference in the form of a cash contribution to the Company before the
completion of this offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 4 of Notes to Combined Financial Statements.
Consequences of Default. There can be no assurance that the Company will
generate sufficient cash flows from operations to cover required interest,
principal and operating lease payments. Any payment or other default could
cause the lender to foreclose upon the communities securing such indebtedness,
with a consequent loss of income and asset value to the Company. In certain
cases, indebtedness secured by a community is also secured by a pledge of the
Company's interests in the community. In the event of a default with respect
to any such indebtedness, the lender could avoid the judicial procedures
required to foreclose on real property by foreclosing on the pledge instead,
thus accelerating the lender's acquisition of the community. Further, because
most of the Company's mortgages contain cross-default and cross-
collateralization provisions, a default by the Company on one of its payment
obligations could adversely affect a significant number of the Company's other
properties.
VARIATIONS IN OPERATING RESULTS
Although the Company was profitable in 1993, 1994, 1995 and the first six
months of 1996, there can be no assurance that revenue growth or profitability
will not fluctuate on a quarterly or annual basis in the future. The Company
may experience variations in quarterly and annual operating results. Quarterly
or annual variations may result from the timing of opening new communities and
the rate at which certain occupancy levels are achieved. The Company's
operating results for any particular quarter or year may not be indicative of
results for future periods. See "Risk Factors--Financial Risks Associated with
Expansion Program" and "Business--Development Program."
9
<PAGE>
MANAGEMENT OF PLANNED RAPID GROWTH
The Company's success will depend, in part, on its ability to manage its
planned rapid growth. The Company does not presently have adequate staff to
manage its planned growth and will rely on Vencor to provide many internal
management functions. The Company will need to expand its operational,
financial and management information systems and continue to attract, motivate
and retain key employees. If the Company does not manage its growth
effectively, its business, financial condition and results of operations could
be materially and adversely affected. See "Risk Factors--Absence of History as
a Stand-Alone Company and New Management," "--Relationship with Vencor;
Conflicts of Interest" and "Certain Transactions."
DEPENDENCE ON PRIVATE PAY RESIDENTS
The Company currently relies, and in the foreseeable future expects to rely,
primarily on the ability of residents to pay for the Company's charges from
their own financial resources. In the event that managed care becomes a
significant factor in the assisted living industry, the amount the Company
receives for its services could be adversely affected. In addition, inflation
or other circumstances which adversely affect the ability of the elderly to
pay for the Company's services could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Funding for Assisted and Independent Living Care."
HIGHLY COMPETITIVE INDUSTRY
The assisted living industry is highly competitive. The Company faces
competition from numerous local, regional and national providers of assisted
living and long-term care. The Company also competes with companies providing
home-based health care. Some of the Company's competitors operate on a not-
for-profit basis or as charitable organizations. Also, many of the Company's
competitors are significantly larger and have greater financial resources than
the Company. The Company believes that the assisted living industry will
become even more competitive in the future. Regulatory barriers to entry into
the assisted living industry are generally not substantial. If the development
of new assisted living facilities surpasses the demand for such facilities in
particular markets, such markets may become saturated. The Company also
expects to compete for acquisitions of additional assisted living facilities
and properties. There can be no assurance that competition will not limit the
Company's ability to attract residents or expand its business or have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
GOVERNMENT REGULATION
The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
define or regulate assisted or independent living facilities. While a number
of states have not yet enacted specific assisted living regulations, the
Company's communities are subject to regulation, licensing, certificate of
need requirements and permitting by state and local health and social service
agencies and other regulatory authorities. Requirements vary from state to
state. Changes in existing laws and regulations, adoption of new laws and
regulations and new interpretations of existing laws and regulations could
have a material impact on the Company's operations. The Company believes that
such regulation will increase in the future. In addition, health care
providers are receiving increased scrutiny under anti-trust laws as the
integration and consolidation of health care delivery increases and affects
competition. Regulation of the assisted living industry is evolving. The
Company is unable to predict the content of new regulations and their effect
on its business. There can be no assurance that the Company's operations will
not be adversely affected by regulatory developments. Failure by the Company
to comply with applicable regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
10
<PAGE>
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients
to such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. Vencor provides certain services to residents
of the Company's communities. The Medicare/Medicaid anti-kickback law has been
broadly interpreted to apply to certain contractual relationships between
health care providers and sources of patient referral. Similar state laws
vary, are sometimes vague and seldom have been interpreted by courts or
regulatory agencies. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or
suppliers from participation in the Medicare and Medicaid programs. There can
be no assurance that such laws will be interpreted in a manner consistent with
the practices of the Company. See "Business--Government Regulation."
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its properties are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated
basis than anticipated, additional costs would be incurred by the Company.
Further legislation may impose additional burdens or restrictions with respect
to access by disabled persons, the costs of compliance with which could be
substantial.
LABOR COSTS
The Company competes with various health care providers and other employers
for qualified and skilled personnel. The Company's labor costs will increase
over time. The Company's business, financial condition and results of
operations could be adversely affected if the Company is unable to control its
labor costs. See "Business--Employees."
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or
toxic substances that may be located on, in or under the property. These laws
and regulations may impose liability regardless of whether the owner or
operator was responsible for, or knew of, the presence of the hazardous or
toxic substances. The liability of the owner or operator and the cost of any
required remediation or removal of hazardous or toxic substances could exceed
the property's value. In connection with the ownership or operation of its
communities, the Company could be liable for these costs. As a result, the
presence of hazardous or toxic substances at any property held or operated by
the Company or acquired or operated by the Company in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations.
LIABILITY AND INSURANCE
In recent years, the long-term care industry has experienced an increase in
the number of lawsuits alleging negligence and other legal theories, many of
which involve significant legal costs and substantial claims. Vencor
maintains, and the Company intends to secure, by completion of this offering,
insurance policies in amounts and with such coverage as it deems appropriate
for its operations. There can be no assurance, however, that the Company will
be able to continue to obtain sufficient liability insurance coverage in the
future or that such coverage will be available on acceptable terms. A
successful claim in excess of the Company's coverage or not covered by the
Company's insurance could have a material adverse effect on the Company's
business, financial condition and results of operations. Claims against the
11
<PAGE>
Company, regardless of their merit or outcome, may involve significant legal
costs and require management to devote considerable time which would otherwise
be utilized in the operation of the Company.
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and Amended and Restated
By-laws, as well as Delaware corporate law, contain certain provisions that
could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire or take
control of the Company. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Certain of these provisions allow the Company to issue, without stockholder
approval, preferred stock having voting rights senior to those of the Common
Stock. Other provisions impose various procedural and other requirements that
could make it more difficult for stockholders to effect certain corporate
actions. In addition, commencing with the 1997 Annual Meeting of Stockholders,
the Company's Board of Directors will be divided into three classes, each of
which will serve for a staggered three-year term, which may make it more
difficult for a third party to gain control of the Board of Directors. As a
Delaware corporation, the Company is subject to Section 203 of the Delaware
General Corporation Law which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" for three years following the date such person became an
interested stockholder unless certain conditions are satisfied. As a result,
third parties may be discouraged from attempting to acquire or take control of
the Company. See "Risk Factors--Control by Principal Stockholder" and
"Description of Capital Stock--Certain Corporate Governance Matters."
SUBSTANTIAL AND IMMEDIATE DILUTION
Purchasers of the Common Stock in this offering will experience substantial
and immediate dilution in the net tangible book value per share of their
investment of $5.95 per share of Common Stock (assuming an initial public
offering price of $11.00 per share). See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 15,095,000 shares of
Common Stock outstanding (15,845,000 shares if the Underwriters' over-
allotment option is exercised in full). Of these shares, the 5,000,000 shares
sold in this offering will be freely transferable without restriction or
limitation under the Securities Act of 1933, as amended ("Securities Act"),
except for any shares purchased by "affiliates" of the Company, as such term
is defined in Rule 144 under the Securities Act. The remaining 10,095,000
shares constitute "restricted securities" within the meaning of Rule 144 such
that the sale of such securities would be restricted for two years (one year
if certain proposed amendments to Rule 144 are adopted). Vencor holds
10,000,000 of the restricted shares and nine officers and directors of the
Company will hold the remaining 95,000 restricted shares. Commencing 180 days
following completion of this offering, Vencor will be entitled to certain
demand and incidental registration rights with respect to such shares. If
Vencor, by exercising its demand registration rights, causes a large number of
shares to be registered and sold in the public market, such sales could have a
material adverse effect on the market price for the Common Stock. Further, the
Company intends to register within 180 days of the date of this offering,
1,250,000 shares of Common Stock reserved for issuance pursuant to the
Company's incentive compensation programs. At the date of this offering, the
Company anticipates that it will have outstanding options to purchase 639,500
shares of Common Stock. The options become exercisable in four equal
installments beginning one year from the date of grant. Sales of substantial
amounts of shares of Common Stock in the public market after this offering or
the perception that such sales could occur may materially and adversely affect
the market price of the Common Stock and the Company's ability to obtain
additional capital. See "Description of Capital Stock--Registration Rights
Agreement" and "Shares Eligible for Future Sale."
12
<PAGE>
Subject to certain exceptions, Vencor, the Company and the Company's
directors and executive officers have agreed with the Underwriters not to sell
or otherwise dispose of any shares of Common Stock, any options to purchase
Common Stock or any securities convertible or exchangeable for shares of
Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of Alex. Brown & Sons Incorporated. See
"Underwriting."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
for the Common Stock after this offering. The trading volume of the Common
Stock following this offering is expected to be limited because Vencor will
hold 66.2% of the outstanding Common Stock (63.1% if the Underwriters' over-
allotment option is exercised in full). The initial public offering price of
the Common Stock will be based on negotiations between the Company and the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of this offering. In addition, the stock
market in recent years has experienced broad price and volume fluctuations
that have frequently been unrelated to the performance of particular
companies. Such market fluctuations may materially and adversely affect the
market price of the Common Stock.
13
<PAGE>
THE COMPANY AND ITS PREDECESSORS
The Company was incorporated in Delaware on May 1, 1996, as a wholly owned
subsidiary of Vencor. Vencor operates an integrated network of health care
services primarily focusing on the needs of the elderly. At or prior to
completion of this offering, Vencor will contribute to the Company
substantially all of its assisted and independent living communities in
exchange for shares of Common Stock and the Company will assume certain
liabilities related to such communities.
On September 28, 1995, Vencor consummated a merger (the "Hillhaven Merger")
with The Hillhaven Corporation ("Hillhaven"). Prior to the Hillhaven Merger,
Hillhaven and its subsidiaries operated the communities now operated by the
Company. Also, prior to the Hillhaven Merger, Hillhaven consummated a share
exchange (the "Nationwide Exchange") with Nationwide Care, Inc. ("Nationwide")
on June 30, 1995. Four of the communities now operated by the Company were
operated by Nationwide until the effective date of the Nationwide Exchange,
and from that date until the consummation of the Hillhaven Merger, by
Hillhaven.
The Company's executive offices are located at 515 West Market Street,
Louisville, Kentucky 40202, and its telephone number is (502) 596-7540.
USE OF PROCEEDS
The net proceeds to the Company of this offering are estimated to be
approximately $50.3 million ($58.0 million if the Underwriters' over-allotment
option is exercised in full), assuming an initial offering price of $11.00 per
share and after deducting the estimated underwriting discounts and offering
expenses payable by the Company. The Company expects to use approximately $46
million of the net proceeds to finance the development and acquisition of
additional assisted living communities and the balance of the net proceeds for
working capital and other general corporate purposes. Pending such uses, the
Company intends to invest the net proceeds in short-term investment grade,
interest-bearing securities or certificates of deposit. The Company does not
have any current agreements or understandings to acquire any additional
facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Business--
Business Strategy."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and currently plans to retain future earnings to finance the growth of
the Company's business rather than to pay cash dividends. Payment of any cash
dividends in the future will depend on the financial condition, results of
operations and capital requirements of the Company as well as other factors
deemed relevant by the Board of Directors. It is also anticipated that the
proposed Atria Credit Facility will prohibit the Company from paying cash
dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
14
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1996, the pro forma
capitalization of the Company (i) after giving effect to the Contribution
Transaction but without giving effect to this offering, and (ii) as adjusted
to reflect the sale of the shares of Common Stock offered hereby (assuming an
initial public offering price of $11.00 per share) and the application of the
estimated net proceeds therefrom, all as if they occurred on June 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
PRO FORMA
PRO FORMA AS ADJUSTED
--------- -----------
<S> <C> <C>
Long-term debt, including amounts due within one year.... $104,411 $104,411
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, 5,000,000 shares au-
thorized;
none issued and outstanding........................... $ - $ -
Common stock, $.10 par value; 50,000,000 shares autho-
rized;
issued and outstanding, 10,095,000 shares (pro forma)
and 15,095,000 shares (pro forma as adjusted)(1)...... 1,010 1,510
Capital in excess of par value......................... 26,534 76,334
-------- --------
Total stockholders' equity............................. 27,544 77,844
-------- --------
Total capitalization................................. $131,955 $182,255
======== ========
</TABLE>
- --------
(1) Excludes options to purchase 639,500 shares of Common Stock at the initial
public offering price and includes 95,000 restricted shares of Common
Stock that vest over a two-year period following this offering. In
addition, 605,500 shares of Common Stock will be available under the
Company's incentive compensation plans for future grants. See
"Management--Non-Employee Directors 1996 Stock Incentive Plan," "--
Employee Awards Granted," "--Vencor Employee Option Grants" and "--1996
Stock Ownership Incentive Plan."
15
<PAGE>
DILUTION
The Company's pro forma net tangible book value at June 30, 1996 was
approximately $26.0 million or $2.57 per share of Common Stock. Net tangible
book value represents the Company's total tangible assets less total
liabilities divided by 10,095,000 shares of Common Stock outstanding. After
giving effect to the sale of 5,000,000 shares of Common Stock pursuant to this
offering (assuming an initial public offering price of $11.00 per share) and
the application by the Company of the estimated net proceeds therefrom, the
Company will have 15,095,000 shares of Common Stock outstanding with a pro
forma adjusted net tangible book value at June 30, 1996, of approximately
$76.3 million or $5.05 per share. This represents an immediate increase in net
tangible book value of $2.48 per share to existing investors and an immediate
dilution of $5.95 per share in net tangible book value per share to new
investors in this offering, as illustrated by the following:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $11.00
Pro forma net tangible book value per share prior to this offer-
ing(1).......................................................... $2.57
Increase per share attributable to new investors................. 2.48
-----
Pro forma adjusted net tangible book value per share after this
offering........................................................ 5.05
------
Net tangible book value dilution per share to new investors(2)... $ 5.95
======
</TABLE>
The following table summarizes on a pro forma basis at June 30, 1996,
certain differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid by the
existing investors and by the new investors purchasing shares in this offering
(based upon an assumed initial public offering price of $11.00 per share)
(dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing investors(1)...... 10,095,000 66.9% $ 27,544 33.4% $ 2.73
New investors.............. 5,000,000 33.1 55,000 66.6 11.00
---------- ----- ----------- ---------
Total.................... 15,095,000 100.0% $82,544 100.0%
========== ===== =========== =========
</TABLE>
- --------
(1) Excludes options to purchase up to 639,500 shares of Common Stock at the
initial public offering price per share and includes 95,000 restricted
shares of Common Stock that vest over a two-year period following this
offering. See "Management--Non-Employee Directors 1996 Stock Incentive
Plan," "--Employee Awards Granted," "--Vencor Employee Option Grants" and
"--1996 Stock Ownership Incentive Plan."
(2) Dilution is determined, after giving effect to this offering, by
subtracting pro forma net tangible book value per share from the assumed
initial public offering price of $11.00 per share. Dilution to new
investors will be $5.70 per share if the Underwriters' over-allotment
option is exercised in full.
16
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following table sets forth selected combined financial and statistical
data of the Company which have been derived from the consolidated financial
statements of Vencor and is presented as if the Company had been operated as a
separate entity. The financial statements of the Company for the years ended
December 31, 1993, 1994 and 1995 have been audited by Ernst & Young LLP,
independent auditors. The selected financial data for the years ended May 31,
1992 and 1993 and the six months ended June 30, 1995 and 1996 were derived
from unaudited consolidated financial statements of Vencor and include all
adjustments which management considers necessary for a fair presentation of
financial position and results of operations for the respective periods. The
following data should be read in conjunction with the combined financial
statements of the Company included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED SIX MONTHS ENDED
MAY 31, DECEMBER 31, JUNE 30,
------------------ ---------------------------- ------------------
1992(1) 1993(1) 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues............... $ 31,664 $ 36,479 $ 35,870 $ 39,758 $ 47,976 $ 23,264 $ 25,448
-------- -------- -------- -------- -------- -------- --------
Salaries, wages and
benefits.............. 13,898 14,620 14,735 14,638 17,455 8,515 9,404
Supplies............... 3,289 4,199 4,360 4,023 4,860 2,359 2,450
Rent................... 1,832 563 351 333 383 196 199
Depreciation and
amortization.......... 4,751 5,025 4,503 4,541 5,113 2,552 2,625
Non-recurring
transactions.......... - - (266) (1,675) 600 - 1,050
Other operating
expenses.............. 10,058 9,229 8,031 8,347 9,465 4,714 4,929
-------- -------- -------- -------- -------- -------- --------
33,828 33,636 31,714 30,207 37,876 18,336 20,657
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................ (2,164) 2,843 4,156 9,551 10,100 4,928 4,791
Interest expense....... 5,718 5,058 3,499 3,538 4,322 2,286 2,033
Investment income...... (8) (445) (346) (330) (147) (54) (109)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss.... (7,874) (1,770) 1,003 6,343 5,925 2,696 2,867
Provision for income
taxes................. (3,110) (699) 396 2,506 2,341 1,065 1,133
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary loss.... (4,764) (1,071) 607 3,837 3,584 1,631 1,734
Extraordinary loss on
extinguishment of
debt, net of income
taxes................. - - (103) - (146) - -
-------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ (4,764) $ (1,071) $ 504 $ 3,837 $ 3,438 $ 1,631 $ 1,734
======== ======== ======== ======== ======== ======== ========
Pro forma data:
Earnings per common
share before
extraordinary loss.... $ .36 $ .16 $ .17
Shares used in
computing earnings
per common share...... 10,095 10,095 10,095
STATISTICAL DATA:
Number of
communities(2):
Owned and leased....... 21 20 19 19 20 20 20
Managed................ 2 2 2 2 2 2 2
-------- -------- -------- -------- -------- -------- --------
Total................ 23 22 21 21 22 22 22
======== ======== ======== ======== ======== ======== ========
Number of units(2):
Owned and leased....... 2,900 2,734 2,574 2,531 2,603 2,603 2,603
Managed................ 419 419 419 419 419 419 419
-------- -------- -------- -------- -------- -------- --------
Total................ 3,319 3,153 2,993 2,950 3,022 3,022 3,022
======== ======== ======== ======== ======== ======== ========
Average occupancy(3)... 80.9% 87.1% 90.8% 93.8% 94.5% 93.2% 95.6%
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 2,251 $ 2,473 $ 1,695 $ 1,497 $ 2,819 $ 2,535 $ 4,149
Assets................. 135,674 141,151 137,308 133,016 140,917 142,656 141,616
Long-term debt,
including amounts due
within one year....... 98,705 108,003 91,744 91,193 105,350 106,074 104,411
Stockholder's equity... 24,045 30,049 34,959 31,835 28,447 30,135 27,544
</TABLE>
- --------
(1) For accounting purposes, the combined financial information of Atria for
years 1991 and 1992 are based upon the previous fiscal reporting periods
of such entities which most closely approximate the respective calendar
year. Accordingly, operating results for the five months ended May 31,
1993 are included in both May 31, 1993 and December 31, 1993 disclosures.
Revenues and net income for such period approximated $15.6 million and
$61,000, respectively.
(2) At end of period.
(3) Average occupancy is calculated on a daily basis by dividing the number of
occupied units by the total number of available units.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Selected Combined Financial Data and the Combined Financial Statements
of Atria included elsewhere in this Prospectus set forth certain information
with respect to Atria's financial position, results of operations and cash
flows which should be read in conjunction with the following discussion and
analysis.
COMPANY INFORMATION
Atria was incorporated in Delaware on May 1, 1996, as a wholly owned
subsidiary of Vencor. Vencor operates an integrated network of health care
services primarily focusing on the needs of the elderly. At or prior to
completion of this offering, Vencor will contribute to Atria substantially all
of its assisted and independent living communities in exchange for shares of
Common Stock and Atria will assume certain liabilities related to such
communities.
On September 28, 1995, Vencor consummated the Hillhaven Merger. For over a
decade prior to the Hillhaven Merger, Hillhaven and its subsidiaries operated
the assisted and independent living communities now operated by Atria. Prior
to the Hillhaven Merger, Hillhaven consummated the Nationwide Exchange on June
30, 1995. Four of the communities now operated by Atria were operated by
Nationwide until the effective date of the Nationwide Exchange, and from that
date until the consummation of the Hillhaven Merger, by Hillhaven.
Atria is a national provider of assisted and independent living communities
for the elderly and currently operates 22 communities in 13 states with a
total of 3,022 units, including 650 assisted living units and 2,372
independent living units. Atria has 13 assisted living communities containing
approximately 850 units under development, of which eleven communities with a
capacity of 693 units have obtained zoning approval (including one community
currently under construction).
Substantially all revenues are derived from private pay sources and are
earned from services provided to residents under both daily residence and
ancillary service agreements. Fees related to management contracts are not
significant.
PLANNED DEVELOPMENT AND EXPANSION
Atria intends to expand its business in the future through both construction
of additional communities and acquisition of existing facilities. The Company
plans to add 60 to 85 assisted and independent living communities by the year
2000 (including 13 communities currently being developed). The estimated cost
to construct, equip or otherwise acquire such communities could approximate
$350 to $500 million.
The estimated cost of Atria's planned development and expansion is
significantly in excess of: (i) estimated cash flows from operations; (ii)
expected proceeds from this offering; and (iii) borrowings to be available
under a planned bank credit facility. Management believes that substantial
additional financing will be required in approximately 16 months following
completion of this offering to complete Atria's growth plans. Available
sources of future capital may include, among other things, equity, public or
private debt, and additional bank revolving credits. However, there can be no
assurance that such financing will be available on terms which are acceptable
to Atria, nor can there be any assurance that additional financing will not be
required or sought by Atria prior to 16 months after completion of this
offering.
Newly opened communities are expected to incur operating losses until
sufficient occupancy levels and operating efficiencies are achieved. Based
upon historical experience, management believes that a typical community will
achieve its targeted occupancy levels one year from commencement of
operations. Accordingly, Atria will require substantial amounts of liquidity
to maintain the operation of
18
<PAGE>
newly opened communities. In addition, if sufficient occupancy levels related
to newly opened communities are not achieved within a reasonable period, the
combined results of operations, financial position and liquidity of Atria
could be materially and adversely impacted.
Atria and Vencor have or will enter into certain agreements which will
become effective on or before the completion of this offering. These
agreements are intended to facilitate an orderly transition of Atria from a
division of Vencor to a separate publicly held entity which will be minimally
disruptive to both Atria and Vencor. See Note 6 of the Notes to Combined
Financial Statements for a description of these agreements.
RESULTS OF OPERATIONS
A summary of operations follows:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------------
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- ------------------
1993 1994 1995 1995 1996
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -------- --------
Salaries, wages and benefits........... 41.1 36.8 36.4 36.6 37.0
Supplies............................... 12.1 10.1 10.1 10.1 9.6
Rent................................... 1.0 0.9 0.8 0.8 0.7
Depreciation and amortization.......... 12.5 11.4 10.7 11.0 10.3
Non-recurring transactions............. (0.8) (4.2) 1.2 - 4.2
Other operating expenses............... 22.5 21.0 19.7 20.3 19.4
----- ----- ----- -------- --------
88.4 76.0 78.9 78.8 81.2
----- ----- ----- -------- --------
Operating income....................... 11.6 24.0 21.1 21.2 18.8
Interest expense....................... 9.8 8.9 9.0 9.8 7.9
Investment income...................... (1.0) (0.9) (0.2) (0.2) (0.4)
----- ----- ----- -------- --------
Income before income taxes and
extraordinary loss.................. 2.8 16.0 12.3 11.6 11.3
Provision for income taxes............. 1.1 6.3 4.8 4.6 4.5
----- ----- ----- -------- --------
Income before extraordinary loss..... 1.7% 9.7% 7.5% 7.0% 6.8%
===== ===== ===== ======== ========
</TABLE>
A summary of constructed and sold communities follows:
<TABLE>
<CAPTION>
COMMUNITIES UNITS
----------- -----
<S> <C> <C>
Balances, December 31, 1992.................................. 23 3,261
Sold....................................................... (2) (268)
--- -----
Balances, December 31, 1993.................................. 21 2,993
Constructed................................................ 1 57
Sold....................................................... (1) (100)
--- -----
Balances, December 31, 1994.................................. 21 2,950
Constructed................................................ 1 72
--- -----
Balances, December 31, 1995 and June 30, 1996................ 22 3,022
=== =====
</TABLE>
Six Months Ended June 30, 1996 and 1995
Revenues increased 9.4% to $25.4 million in the first six months of 1996
compared to $23.3 million in the same period last year. This increase was
primarily attributable to price increases approximating 5% ($1.2 million),
growth in occupancy ($400,000), expansion of ancillary services ($300,000) and
the effect of a newly constructed community in February 1995 ($200,000).
19
<PAGE>
Compensation and supply costs as a percentage of revenues remained
relatively unchanged in the first six months of 1996 compared to the same
period a year ago, while other operating expenses declined to 19.4% of
revenues from 20.3% last year due primarily to operating efficiencies
associated with the growth in occupancy and the fixed nature of a significant
portion of such costs.
Operating income declined 2.8% to $4.8 million in the first six months of
1996 compared to $4.9 million in the same period of 1995, and operating income
margins declined to 18.8% from 21.2%. Excluding the effect of non-recurring
transactions, operating income increased 18.5% to $5.8 million and operating
income margins improved to 23.0%. The improvement in operating income
(excluding non-recurring transactions) was primarily attributable to growth in
revenues, efficiencies associated with growth in occupancy levels and the
expansion of higher margin ancillary services.
Net income increased 6.3% to $1.7 million in the first six months of 1996
compared to $1.6 million a year ago and net margins declined slightly to 6.8%
in 1996 from 7.0% in 1995. Excluding the effect of non-recurring transactions,
net income increased 44.9% to $2.4 million in the first six months of 1996.
The improvement in net income was primarily attributable to growth in
operating income and a decline in interest costs as a result of net reductions
in long-term debt and certain refinancings. Operating results of a newly
constructed community which was opened in February 1995 were not significant
in either period.
In anticipation of this offering, certain allocations and estimates have
been made by management in the combined financial statements to present the
historical financial position and results of operations of Atria as a separate
entity. The operating results of Atria include certain corporate costs and
expenses of Vencor (comprised principally of information systems and various
centralized management services) aggregating $300,000 in the first six months
of 1996 and 1995.
In June 1996, Atria recorded a non-recurring pretax charge of $1.1 million
($630,000 net of tax) in connection with the settlement of certain litigation
involving a minority partner at one of its communities.
Years Ended December 31, 1995, 1994 and 1993
Revenues increased 20.7% to $48.0 million in 1995 and 10.8% to $39.8 million
in 1994. The increase in 1995 revenues was primarily attributable to the
purchase of controlling interest in two communities previously accounted for
under the equity method ($4.4 million), the effect of two newly constructed
communities ($2.2 million), price increases approximating 4% ($1.2 million),
growth in occupancy ($600,000) and expansion of ancillary services ($400,000).
Revenues in 1994 include approximately $600,000 related to the operations of a
sold community. The increase in 1994 revenues was primarily attributable to
price increases approximating 8% ($2.8 million), the purchase of controlling
interest in one community previously accounted for under the equity method
($1.6 million), growth in occupancy ($800,000) and expansion of ancillary
services ($500,000). Revenues in 1993 include approximately $2.4 million
related to the operations of two sold communities.
Compensation and supply costs as a percentage of revenues improved slightly
in 1995 compared to 1994, while other operating expenses declined to 19.7% of
revenues from 21.0% in 1994 due primarily to operating efficiencies associated
with growth in occupancy and the fixed nature of a significant portion of such
costs. Compensation, supply costs and other operating expenses declined
significantly as a percentage of revenues in 1994 compared to 1993 primarily
as a result of accelerated growth in occupancy.
Operating income increased 5.7% to $10.1 million in 1995 and 129.8% to $9.6
million in 1994, and operating income margins declined to 21.1% in 1995 from
24.0% in 1994 and improved from 11.6% in 1993. Excluding the effect of non-
recurring transactions, operating income increased 35.9% in 1995 to $10.7
million and 102.5% to $7.9 million in 1994 and operating income margins
improved to 22.3% in 1995 from 19.8% in 1994 and 10.8% in 1993. The
improvement in operating income (excluding non-recurring transactions) was
primarily attributable to growth in revenues, efficiencies associated with
growth in occupancy levels and the expansion of higher margin ancillary
services.
20
<PAGE>
Income before extraordinary loss totaled $3.6 million, $3.8 million and
$607,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Excluding the effect of non-recurring transactions, income before
extraordinary loss increased 39.3% to $3.9 million in 1995 and 533.6% to $2.8
million in 1994. The increases were primarily attributable to growth in
operating income and, in 1994, to the sale of two unprofitable communities
(the net operating losses from which totaled approximately $200,000 in 1993).
The combined operating results of newly constructed communities, sold
communities and communities in which Atria purchased controlling interests
were approximately the same in 1995 and 1994.
In anticipation of this offering, certain allocations and estimates have
been made by management in the combined financial statements to present the
historical financial position and results of operations of Atria as a separate
entity. The operating results of Atria include certain corporate costs and
expenses of Vencor (comprised principally of information systems and various
centralized management services) aggregating $600,000 in 1995, $570,000 in
1994 and $525,000 in 1993.
Operating results during the past three years include certain non-recurring
transactions. Pretax income in 1995 includes a charge of $600,000 ($360,000
net of tax) related to a writedown of undeveloped property to its estimated
net realizable value. Pretax income in 1994 includes a gain on the sale of
property aggregating $425,000 ($255,000 net of tax). In addition, settlements
of certain litigation increased pretax earnings by approximately $1.3 million
($750,000 net of tax) in 1994 and $266,000 ($160,000 net of tax) in 1993.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for each of the most recent six quarters through the period ended June 30,
1996. Management believes that such unaudited data reflects all adjustments
necessary to present fairly the results of operations for the periods
presented (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
JUNE
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $11,367 $11,897 $12,178 $12,534 $12,611 $12,837
Operating income........ 2,337 2,591 2,007(1) 3,165 2,861 1,930(2)
Income before income
taxes and extraordinary
loss................... 1,203 1,493 1,011(1) 2,218 1,927 940(2)
Income before
extraordinary loss..... 728 903 612(1) 1,341 1,166 568(2)
Net income.............. 728 903 466 1,341 1,166 568
</TABLE>
- --------
(1) Includes a charge of $600,000 ($360,000 net of tax) related to the
writedown of undeveloped property to net realizable value.
(2) Includes a charge of $1.1 million ($630,000 net of tax) related to the
settlement of certain litigation.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $6.4 million and $3.9 million for the
six months ended June 30, 1996 and 1995, respectively, and $8.5 million, $7.6
million and $5.7 million for each of the three years ended December 31, 1995,
1994 and 1993, respectively. The improvement in cash flows from operations in
all periods resulted primarily from growth in net income (excluding non-
recurring transactions) and, in the first six months of 1996, growth in
accounts payable and other accrued liabilities.
Current liabilities exceeded current assets by $1.8 million at June 30, 1996
and $776,000, $1.6 million and $386,000 at December 31, 1995, 1994 and 1993,
respectively, primarily as a result of the timing of cash settlements of
advances from Vencor (which are included in stockholder's equity). Cash and
cash equivalents totaled $4.1 million, $2.8 million, $1.5 million and $1.7
million at June 30, 1996 and December 31, 1995, 1994 and 1993, respectively.
In connection with this offering, Atria expects that approximately $4.3
million of the estimated net proceeds therefrom will be used for working
capital and general corporate purposes.
21
<PAGE>
Atria is currently developing 13 sites for new assisted living communities
(approximately 850 units) and has received zoning approvals for eleven of
these communities. The estimated aggregate cost of these projects will
approximate $55 to $60 million and such communities are expected to be in
operation at various dates through June 1998. Management believes that cash
flows from operations, the anticipated additional capitalization from this
offering, and expected consummation of a separate bank credit facility and
promissory note with Vencor on or about the completion of this offering will
be sufficient to meet liquidity needs for approximately 16 months following
completion of this offering.
Atria plans to retain future earnings to finance the growth of its business
rather than to pay cash dividends. Payment of cash dividends in the future
will depend on the financial condition, results of operations and capital
requirements of Atria as well as other factors deemed relevant by the Board of
Directors. It is also anticipated that the proposed Atria Credit Facility will
prohibit Atria from paying cash dividends.
Net cash used in investing activities totaled $1.7 million and $505,000 for
the six months ended June 30, 1996 and 1995, respectively, and $2.9 million
and $4.0 million for the years ended December 31, 1995 and 1994, respectively.
Net cash provided by investing activities totaled $1.3 million for 1993,
principally due to the sale of certain assets. Atria's investing activities
included capital expenditures related to the development of new facilities and
expansion of existing operations totaling $1.8 million and $1.3 million for
the six months ended June 30, 1996 and 1995, respectively, and $4.0 million,
$5.7 million and $1.7 million for the years ended December 31, 1995, 1994 and
1993, respectively.
Net cash used in financing activities was $3.4 and $2.4 million for the six
months ended June 30, 1996 and 1995, respectively, and $4.3 million, $3.8
million and $4.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. In all periods, operating cash flows in excess of capital
expenditures were used primarily to repay advances from Vencor and, in 1993
and the first six months of 1996, to reduce long-term debt.
Excluding acquisitions and development of new facilities, management
believes that capital expenditures related to the expansion and improvement of
existing communities could approximate $3.0 million in 1996. Management
believes that its capital expenditure program is adequate to expand, improve
and equip existing communities, and expects to finance such expenditures
primarily through cash flows from operations. At June 30, 1996, one project
was under construction, the additional cost of which to complete and equip
could approximate $3.4 million.
The combined financial statements of Atria reflect the anticipated
assumption of approximately $95.3 million of Vencor's long-term debt. In
addition, Atria intends to refinance all outstanding borrowings under the
Vencor bank revolving credit agreement (the balance of which approximated $9.1
million at June 30, 1996) upon completion of this offering from proceeds under
a separate bank credit agreement currently being negotiated by Atria. Although
the terms have not been finalized, the proposed Atria Credit Facility could
aggregate up to $200.0 million in revolving credits, including a letter of
credit option not to exceed $70.0 million. It is anticipated that loans under
the proposed facility will bear interest, at Atria's option, at either (i) a
base rate based on PNC Bank's prime rate of interest or the daily federal
funds rate or (ii) a LIBOR rate, plus an additional percentage based on the
Company's leverage. It is expected that the credit facility will be secured by
all of Atria's property, the capital stock of Atria's subsidiaries and
intercompany indebtedness of subsidiaries to Atria. It is also contemplated
that the Atria Credit Facility will (i) contain financial covenants and other
restrictions that require Atria to meet certain financial tests, (ii) require
Vencor to maintain at least a 30% ownership of the Common Stock, (iii) require
that there be no change in control of the Company, (iv) limit, among other
things, the ability of Atria and certain of its subsidiaries to borrow
additional funds, dispose of assets and engage in mergers or other business
combinations and (v) prohibit distributions to Atria's stockholders. See "Risk
Factors--Need for Additional Financing" and "--Risk of Indebtedness," "Certain
Transactions" and Note 4 of Notes to Combined Financial Statements.
22
<PAGE>
The Company's long-term debt, including amounts due within one year,
approximated $104.4 million at June 30, 1996, of which $62.1 million relates
to indebtedness under industrial revenue bonds which contain covenants
requiring certain numbers of income qualified residents. The Company does not
presently intend to enter into similar bond financing in the future. See "Risk
Factors--Risk of Indebtedness."
The combined financial statements included in this Prospectus are presented
as if Atria had been operated as a separate entity. Accordingly, stockholder's
equity (which represents Vencor's pre-offering 100% interest) comprises both
investments by and non-interest bearing advances from Vencor. Management
expects that in connection with this offering, such amounts will be included
as part of Atria's permanent equity capitalization.
EFFECTS OF INFLATION AND CHANGING PRICES
Atria derives substantially all of its revenues from private pay sources
within its assisted and independent living business. The terms of most rental
agreements approximate one year, generally enabling Atria to increase prices
to maintain operating margins. However, management believes that a significant
number of competing assisted and independent living communities will be
developed in markets in which Atria operates, the effect of which may limit
Atria's ability to increase prices to maintain operating margins in the
future. In addition, other market conditions, including the effect of
unfavorable real estate zoning requirements and increased government
regulation, could adversely impact Atria's ability to increase prices or
control growth in operating expenses.
OTHER INFORMATION
In the event that all or part of the previously discussed assumption of
approximately $95.3 million of Vencor's long-term debt does not occur prior to
the offering, Vencor would remain primarily liable for such debt. Atria and
Vencor have agreed that Atria would pay all amounts and otherwise satisfy all
obligations related to such long-term debt. In the case of any Vencor long-
term debt proposed to be assumed by Atria in the offering, to the extent that
Atria and Vencor are unable to obtain consents from holders of such debt to
the assumption by Atria of primary liability for such debt, the amount of such
debt will be reflected as a liability of Vencor in its financial statements
(although Vencor's financial statements will also reflect as an asset a
receivable from Atria in an equal amount, which will accrue interest and will
be payable on the same terms as such Vencor long-term debt). Furthermore,
Vencor may be contingently liable as guarantor of certain long-term debt
assumed by Atria in the offering.
The Atria Credit Facility is expected to be conditioned upon, among other
things, net proceeds from this offering equal to at least $50.0 million
(excluding proceeds from the Underwriters' exercise of the over-allotment
option, if any). If such net proceeds are less than $50.0 million, Vencor has
agreed to fund the difference in the form of a cash contribution to Atria
before the completion of this offering.
Certain long-term debt agreements contain customary covenants which include:
(i) limitations on additional debt and capital expenditures; (ii) limitations
on sales of assets, mergers and changes in ownership; and (iii) maintenance of
certain financial ratios. Atria was in material compliance with all such
covenants at June 30, 1996.
23
<PAGE>
BUSINESS
OVERVIEW
Atria Communities, Inc. is a national provider of assisted and independent
living communities for the elderly. The Company currently operates 22
communities in 13 states with a total of 3,022 units, including 650 assisted
living units and 2,372 independent living units. The Company owns 16 of these
communities, holds a majority interest in two communities, leases two
communities and manages two communities. The Company also has 13 assisted
living communities under development with a total of approximately 850 units.
To date, the Company has obtained zoning approval for 11 of 13 properties
under development. For the year ended December 31, 1995, the Company had
revenues and net income of $48.0 million and $3.4 million, respectively, and
had an average occupancy rate of 94.5%. For the six months ended June 30,
1996, the Company had revenues and net income of $25.4 million and $1.7
million, respectively, and had an average occupancy rate of 95.6%.
Substantially all of the Company's revenues are from private pay sources.
INDUSTRY BACKGROUND
The assisted and independent living industries are rapidly emerging
components of the non-acute health care system for the elderly. According to
industry estimates, the assisted and independent living industries represented
approximately $10 to $12 billion in revenue in 1995. The assisted living
industry serves the long-term needs of the elderly who do not require the more
extensive medical services available in skilled nursing facilities, yet who
are no longer capable of a totally independent lifestyle. It is estimated that
35% of the people over the age of 85 require assistance with at least one
activity of daily living ("ADL"), such as eating, grooming and bathing,
personal hygiene and toileting, dressing, transportation, walking and
medication reminders. The Company believes that assisted living residents
typically desire the comfort and security of having their own "home" yet
require help with two or more ADLs on a regular basis. The independent living
industry serves the long-term care needs of the elderly who require or prefer
only occasional assistance with ADLs and who no longer desire, or cannot
maintain, a totally independent lifestyle.
The Company believes that a number of significant trends will support the
continued growth of the assisted and independent living industries. These
trends include:
Favorable Demographic Trends. The Bureau of the Census estimates that the 85
and over age group is the fastest growing segment of the population and is
projected to increase approximately 42% from 1990 to 2000. The Company
believes that with a growing elderly population, the number of people who will
need or desire to reside in an assisted or independent living community will
also increase.
Cost-Containment Pressures. The Company believes its business will benefit
from the continuing efforts of the government, private insurers and managed
care organizations to contain health care costs by limiting lengths of stay,
services and reimbursement amounts in acute care hospitals. As a result of
these cost containment efforts, an increasing number of patients seek skilled
nursing facility care. Accordingly, many skilled nursing facilities are
devoting a greater portion of their capacity to residents with higher
reimbursement profiles who require more intensive nursing care. The Company
believes there will be opportunities for assisted and independent living
facilities to provide accommodations and services to residents who require
lower levels of care than may be generally provided to residents in skilled
nursing facilities. If the Company provides services to residents covered by
managed care in the future, the impact of any increased volume may be offset
by the discounts typically negotiated by managed care providers.
Limited Supply of Long-Term Care Facilities. Most states have enacted
certificate of need or similar legislation which restricts the supply of
licensed nursing facility beds. These laws generally limit the construction of
new nursing facilities and the addition of beds or services to existing
nursing facilities. Construction costs, limitations on government
reimbursement for full costs of construction and start-up expenses also
constrain growth in the supply of nursing facility beds. According to a 1993
industry report,
24
<PAGE>
the average occupancy rate for nursing facilities in the United States was
approximately 95%. The Company believes that the limitations on the supply of
skilled nursing facility beds will increase the need for assisted living
communities, although the number of assisted living units has increased
substantially in recent years.
Price Advantages. A 1993 industry report indicated that the annual cost per
patient for nursing facility care averaged approximately $35,000 in 1993,
while the annual per resident cost for assisted living care averaged
approximately $24,000. Because rates paid by private pay patients in skilled
nursing facilities are higher than government reimbursement rates, the
comparable cost advantage of assisted living over a private pay skilled
nursing facility rate is even greater. The Company also believes that assisted
living compares favorably with home health care, particularly when the prices
associated with housing and meal preparation are added to the prices of home
health care.
Consumer Preference. The Company believes that assisted and independent
living communities provide prospective residents and their families with an
attractive alternative to skilled nursing facilities. Assisted and independent
living facilities allow residents to "age in place" and preserve their
independence in a more residential setting.
Changing Family Dynamics. As a result of the growing number of two-income
families, fewer children are able to care for elderly parents in their own
homes. Other factors such as the increase in single-parent households and the
increasing geographic dispersion of families also contribute to the inability
of many children to care for elderly parents in the home.
BUSINESS STRATEGY
The Company's predecessors have operated assisted and independent living
communities as part of a health care network for over a decade. The Company's
objective is to expand its position as a national provider of high-quality
assisted and independent living services. The Company is pursuing the
following strategies to meet this objective:
Rapid Development of Additional Assisted Living Communities and Units. The
Company intends to develop or acquire 60 to 85 additional assisted living
communities by the year 2000 (including 13 communities currently being
developed). The Company plans to expand its base of assisted living
communities on a national basis where Vencor has a presence and in other high
population density areas. The Company has acquired 13 sites for new assisted
living communities and has received zoning approvals for eleven of these
sites. The Company also plans to develop additional units for the memory-
impaired and convert at least 750 of its existing independent living units to
assisted living units by the year 2000. The Company believes that it can
accelerate its development efforts by outsourcing selected development
functions to third parties, such as preliminary site selection, zoning,
architecture and construction.
Network with Vencor. The Company intends to develop communities in close
proximity to Vencor's facilities, which may facilitate participating with
Vencor in providing services to HMOs and other managed care companies. The
Company believes that networking opportunities exist between assisted living
facilities and long-term care hospitals and skilled nursing facilities. The
Company also expects that the geographic proximity to Vencor's nursing and
hospital facilities will foster transfers between the Company's communities
and Vencor's facilities. The Company believes that the proximity of a Vencor
skilled nursing facility is attractive to potential residents and their
families. As resident needs change, the ability to relocate in the same
neighborhood is a significant benefit of the Company's networking strategy.
Fifteen of the Company's communities are located on or adjacent to a Vencor
site and certain of the Company's future development efforts will focus on
sites near existing Vencor facilities. Because Vencor will be the controlling
stockholder of Atria, an inherent conflict of interest will exist. When
conflicts of interest do arise in its dealings with Vencor, the Company
anticipates resolving such conflicts on a case-by-case basis, which may
include the use of committees comprised of disinterested members of the Board
of Directors and the retention of independent financial and other advisors.
Transactions between the Company and its officers, directors, principal
stockholders and their affiliates will be on terms no less favorable to the
Company than could be obtained from unrelated third parties and any such
transactions will be approved by a majority of the disinterested members of
the Board of Directors. See "Risk Factors--Relationship with Vencor; Conflicts
of Interest."
25
<PAGE>
Higher Acuity Service Model. The Company intends to pursue, as appropriate,
a higher acuity model of assisted living to enable the Company's residents to
"age in place." By making available such extended services as home health care
and rehabilitation to its residents, the Company believes that it will be
better able to meet the full range of its residents' needs and facilitate
longer lengths of stay. Residents will be able to continue to live in the
Company's communities unless they develop medical conditions requiring
institutional care in a skilled nursing facility or admission to an acute care
hospital. Residents currently obtain certain health care services from third
parties, including Vencor. The Company may elect to make available certain
health care services to its residents on a direct basis in the future.
Private Pay Focus. The Company intends to focus its development and
marketing efforts on private pay, middle- and upper-income residents. The
Company believes that this market represents the largest market opportunity
for assisted living services and that private pay residents are more
profitable than residents covered by government reimbursement programs.
Substantially all of the Company's revenues are derived from private pay
sources.
SERVICES PROVIDED
The Company's mission is to be the leading provider of senior living
services by delivering consistent, high-quality, innovative services to its
residents and their community. Services provided are designed to respond to
residents' individual needs, while promoting independence and dignity.
Residents live in private studios or apartments with access to basic services,
such as health screenings, blood pressure checks, security, utilities, meal
service, housekeeping and laundry services, dietary, exercise and fitness
classes, social and recreational programs, 24-hour emergency call systems and
local transportation on a van or minibus to physician offices, stores and
community events ("Basic Services").
In addition to Basic Services, assisted living residents are offered
additional services including an increased level of housekeeping, meal
services and assistance with one or more ADLs, such as eating, grooming and
bathing, personal hygiene and toileting, dressing, additional transportation,
walking and medication reminders ("Assisted Living Services"). Health-related
services, which are made available and provided according to the resident's
individual needs and in accordance with state regulatory requirements, may
include assistance with taking medication and injections, as well as health
care monitoring. The Company offers each of its residents a personalized
assisted living service plan that may include any combination of ADLs.
Residents pay a monthly fee for Basic Services and additional Assisted
Living Services are purchased based on hourly rates or in some communities are
purchased as part of an increased service package. Most residents rent units
through a one-year lease. If the resident dies or transfers to another
facility due to the need for a higher level of medical care the lease is no
longer binding on the resident.
The process of customizing services to meet the needs of residents begins
with the resident admission process, where the facility's management staff,
the resident and, if appropriate, the resident's family and physician, discuss
the resident's needs and develop an appropriate service plan. If recommended
by the resident's physician, additional health or medical services may be
provided at the facility by a third-party home health care agency or other
medical provider such as Vencor. In some states, the Company or one of its
subsidiaries is a licensed home health care provider. The service plan is
reviewed, monitored and modified on a regular basis.
In addition to Basic Services and Assisted Living Services, specially
trained staff provide other care and services specifically designed for
memory-impaired residents at two communities. These programs provide the
attention, care programs and services needed to help memory-impaired residents
maintain a higher quality of life.
The Company believes that quality care creates satisfied residents who,
along with their families, are important referral sources for the Company. The
Company has developed quality assurance programs to
26
<PAGE>
ensure that service quality is maintained in its communities. The Company
conducts periodic surveys of residents to monitor satisfaction with
accommodations and services. The Company has established operational standards
and performance goals for its communities addressing such matters as food
service, housekeeping, maintenance and administration.
THE COMPANY'S COMMUNITIES
The Company's communities vary in size from 28 to 356 units. Communities are
designed to maximize privacy in a home-like, non-institutional atmosphere. The
Company adapts its facilities to regional architectural styles and tastes
rather than replicate a "prototype" architectural design. Assisted living
units are typically studio or one bedroom units ranging in size from 375 to
525 square feet. Independent living units may range from a studio (375 to 425
square feet) to a three bedroom unit (700 to 1,000 square feet). The units
typically include a private bathroom, kitchenette, closet, living and sleeping
areas, as well as a lockable door, emergency call system, individual
temperature controls, fire alarm and sprinkler system, among other amenities.
Approximately 40% of a typical community is devoted to common areas and
amenities, including reading rooms, family or living rooms and other areas
(such as beauty salons, cafes and ice cream parlors) designed to promote
interaction among residents. The Company's communities are usually one, two or
three stories. Interior layouts are designed to promote a home-like
environment, efficient delivery of quality resident care and resident
independence.
27
<PAGE>
The table below sets forth certain information regarding communities
operated by the Company. Except as otherwise noted, the Company owns, directly
or indirectly, the following communities:
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF UNITS OCCUPANCY FOR
--------------------------- THE SIX MONTHS
YEAR FIRST INDEPENDENT ASSISTED ENDED
COMMUNITY LOCATION(1) OPERATED(2) LIVING LIVING TOTAL JUNE 30, 1996(3)
- --------- ----------- ----------- ----------- -------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
ARIZONA
Valley Manor........... Tucson 1975 45 24 69 89.1%
Villa Campana.......... Tucson 1984 141 -- 141 96.1
Campana Del Rio(4)..... Tucson 1988 190 24 214 98.8
Kachina Point(4)....... Sedona 1986 102 -- 102 96.2
CALIFORNIA
Courtyard at San Mar-
cos(4)(5)............. San Marcos 1987 178 34 212 94.3
COLORADO
The Court at Castle
Gardens(4)............ Northglenn 1986 -- 99(6) 99 100.0
FLORIDA
Evergreen Woods........ Spring Hill 1979 161 55 216 91.4
The Heritage........... Brooksville 1992 -- 57(7) 57 84.5
Windsor Woods(4)....... Hudson 1988 127 53 180 99.2
Meridian House(4)(8)... Lantana 1986 140 33 173 95.0
IDAHO
Hillcrest.............. Boise 1984 115 -- 115 91.9
INDIANA
The Heritage at Wild-
wood.................. Wildwood 1995 -- 72 72 89.1
Colonial Oaks(9)....... Marion 1978 63 -- 63 92.3
KANSAS
The Hearthstone(4)..... Topeka 1987 115 40 155 98.7
MASSACHUSETTS
Foxhill Village(9)..... Westwood 1990 329 27 356 99.8
New Pond Village(10)... Walpole 1990 167 32 199 94.3
MISSOURI
Villa Ventura.......... Kansas City 1985 129 43 172 96.7
NEW HAMPSHIRE
The Greens............. Hanover 1984 28 -- 28 98.8
OHIO
McMillen(11)........... Newark 1986 80 -- 80 87.3
UTAH
The Crosslands(4)...... Sandy 1986 120 -- 120 95.1
WASHINGTON
The Narrows Glen....... Tacoma 1987 142 -- 142 98.4
Laurel House........... Tacoma 1994 -- 57 57 94.7
----- --- -----
Total........... 2,372 650 3,022 95.6%
===== === =====
</TABLE>
- --------
(1) All communities are within ten miles of a Vencor skilled nursing facility,
except for Meridian House, The Hearthstone and Villa Ventura.
(2) Represents the year in which the Company or a predecessor of the Company
opened or commenced operations.
(3) Average occupancy is calculated on a daily basis by dividing the number of
occupied units by the total number of available units.
(4) The construction of these communities was financed through the issuance of
industrial revenue bonds. See "Risk Factors--Risks of Indebtedness."
(5) The Company owns a 65% interest in this community.
(6) Includes 22 units for the memory impaired.
(7) Includes 44 units for the memory impaired.
(8) The Company owns a 99% interest in this community.
(9) The Company manages these communities pursuant to management agreements
which expire September 30, 1996 (Colonial Oaks) and July 31, 2000 (Foxhill
Village). These communities are owned by unaffiliated entities.
(10) The Company leases this community from a partnership pursuant to a 99-
year lease agreement. The Company will acquire this community in exchange
for assuming certain indebtedness upon the satisfaction of certain
conditions.
(11) The Company leases this community from an unaffiliated entity under a
lease agreement expiring on October 31, 1996, at which time the Company
expects to renew such agreement.
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<PAGE>
DEVELOPMENT PROGRAM
The Company is developing 13 sites for new assisted living communities and
has received zoning approvals for eleven of these communities. The table below
sets forth certain information regarding the Company's development properties:
<TABLE>
<CAPTION>
ESTIMATED NUMBER OF
DEVELOPMENT COMPLETION ASSISTED
LOCATION(1) PHASE DATE(2) LIVING UNITS
----------- ------------------ -------------- ------------
<S> <C> <C> <C>
Sedona, Arizona................. Zoned May 1997 60(3)
Tucson, Arizona................. Zoned(4) September 1997 40
Redding, California(5).......... Zoned April 1997 60
Northglenn, Colorado(6)......... Zoned October 1997 40(7)
Lantana, Florida(6)............. Zoned July 1997 60
Atlanta, Georgia................ Zoned August 1997 90
Topeka, Kansas(6)............... Zoned August 1997 60
Kennebunk, Maine................ Zoned September 1997 90
Dennis, Massachusetts........... Land acquired June 1998 60(3)
Charlotte, North Carolina....... Zoned December 1997 90
Sandy, Utah..................... Under construction February 1997 63
Virginia Beach, Virginia........ Land acquired November 1997 90
Tacoma, Washington.............. Zoned September 1997 40
---
Total......................... 843
===
</TABLE>
- --------
(1) All properties are located within ten miles of a Vencor skilled nursing
facility, except Lantana, Florida, Topeka, Kansas and Charlotte, North
Carolina.
(2) There can be no assurance that zoning or construction delays will not be
experienced. See "Risk Factors--Development and Construction Risks."
(3) Includes 20 units for the memory impaired.
(4) A special use permit is also required.
(5) This property is leased from Vencor pursuant to a 99-year lease, under
which the Company will acquire the property upon obtaining certain
approvals. All other properties in this table are owned by the Company.
(6) These communities are being developed adjacent to existing Company
communities.
(7) All units will be for the memory impaired.
The Company plans to focus on expanding its base of assisted living
communities where Vencor has a presence and in other high-density population
areas. The Company currently expects to develop or acquire 60 to 85
communities by the year 2000, including communities set forth in the table
above. In addition, the Company plans to convert at least 750 of its existing
independent living units to assisted living units by the year 2000. The
Company believes that it can accelerate its development efforts by outsourcing
selected development functions to third parties, including Vencor. While it is
expected that most of its expansion will be as a result of development, the
Company also intends to acquire existing assisted living facilities or
facilities it can reposition as assisted living communities on a selective
basis. See "Risk Factors--Development and Construction Risks."
The Company is following a disciplined development strategy that begins with
site selection. When selecting new development sites, the Company considers
the local and regional economic environment, demographics, competition, the
labor market, the legislative and regulatory environment and other factors.
After targeting a market, the Company engages independent contractors to
identify suitable real estate. After the land is acquired, the Company
typically initiates the zoning, architectural and construction aspects of
development. The Company estimates that zoning and other site approvals may
take approximately six months after a site is acquired. Once such approvals
are obtained, the Company estimates that construction time will be six to ten
months and the cost of each unit will range from $65,000 to $70,000.
29
<PAGE>
Existing communities range in size from 28 to 356 units. The Company plans
in the future to develop communities typically with approximately 90 units.
The Company believes that this size offers marketing and operating advantages,
including economies of scale. However, the number of units in a community will
depend, among other things, on local market conditions, site availability and
site size. Although certain interior layouts will be relatively standard, the
Company intends to customize the exterior appearance of each community to
reflect local architectural styles and tastes.
Prior to the completion of construction, the Company initiates a marketing
campaign, emphasizing contacts with potential referral sources. Once opened,
the Company estimates that it will take an average of twelve months for
communities to achieve targeted occupancy levels. See "Risk Factors--
Development and Construction Risks."
The Company also plans to acquire additional assisted living facilities or
other properties that can be repositioned as Atria assisted living
communities. In evaluating possible acquisitions, the Company considers, among
other factors: (i) location, construction quality, condition and design of the
facility; (ii) current and projected cash flows; (iii) the ability to increase
revenues, occupancy and cash flows by providing a full range of assisted
living services; (iv) costs of repositioning (including renovations, if any);
and (v) the extent to which the acquisition will complement the Company's
development program. See "Risk Factors--Acquisition Risks; Difficulties of
Integration."
MANAGEMENT OF THE COMMUNITIES
An executive director typically manages the day-to-day operations at each
community, including oversight of the quality of care, marketing, coordination
of services and monitoring financial performance. The executive director is
responsible for all personnel, including management, security, staff and
independent contractors. Executive directors are compensated based on service
quality, as well as financial results. Service quality is assessed, in part,
through customer and employee satisfaction surveys.
In most cases, each community also has managers for environmental services,
care services, the business office, dietary services, activities, security,
transportation and sales and marketing. All assisted living communities employ
a licensed practical nurse. Some residents contract with third parties such as
home health agencies to provide additional services.
The Company actively recruits personnel to maintain adequate staffing levels
at its existing communities, as well as new staff for new or acquired
communities prior to opening. The Company maintains training sites in Tacoma,
Washington, and Hudson, Florida, for its executive directors and other key
personnel. The Company expects to open two new training sites by the end of
1996. Participants receive intensive training in all facets of community
management in three- to four-day sessions. Moreover, the Company offers two
different levels of training, such that participants who successfully complete
one level return subsequently for the next level of training.
Executive directors report to area executive directors. The Company has
three area executive directors, each with regional responsibility. Area
executive directors report to the Chief Operating Officer or to the Vice
President of Operations.
MARKETING
Each community employs a sales and marketing director. Before opening new
communities, the Company typically uses telemarketing, direct mail and
newspaper ads for developing awareness of such communities. Once communities
are open, the Company's marketing strategy focuses on enhancing the reputation
of the communities and creating an awareness of the Company's services among
potential referral sources, such as hospitals, rehabilitation hospitals, home
health care agencies and other health care providers located near the
Company's communities. The Company believes that satisfied residents
30
<PAGE>
and their families are the most important referral sources for its established
communities. Accordingly, the Company believes that its emphasis on high-
quality services and resident satisfaction will result in a strong referral
base for its existing communities. The Company also seeks to maintain
occupancy levels by retaining residents for longer periods of time by
expanding the services available to residents, thereby allowing residents to
"age in place."
A typical assisted living resident is a female over the age of 80 whose
residence was generally within five to ten miles of the community. The
decision to relocate to one of the Company's communities is usually made by
the resident and their family.
COMPETITION
The assisted living industry is highly competitive. The Company faces
competition from numerous local, regional and national providers of assisted
living and long-term care. The Company also competes with companies providing
home-based health care. Some of the Company's competitors operate on a not-
for-profit basis or as charitable organizations. Many of the Company's
competitors are significantly larger and have greater financial resources than
the Company. The Company believes that the assisted living industry will
become even more competitive in the future. Regulatory barriers to entry into
this industry are generally not substantial. If the development of new
assisted living communities surpasses the demand for such communities in
particular markets, such markets may become saturated. The Company expects to
face competition with respect to its acquisition of additional assisted living
communities and properties. There can be no assurance that competition will
not limit the Company's ability to attract residents and expand its business
and will not have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company believes that assisted and independent living communities
compete primarily on the basis of quality of service, services offered,
reputation, a facility's location and appearance and prices. The Company
believes its communities are distinguishable from assisted and independent
living facilities that do not cater primarily to private pay residents because
of the quality of services, amenities and physical facilities that the Company
is able to offer. In addition, a number of the Company's communities maintain
both assisted and independent living units. The Company believes that the
ability of these communities to continue to serve residents as their needs
increase may be attractive to potential residents. See "Risk Factors--Highly
Competitive Industry."
FUNDING FOR ASSISTED AND INDEPENDENT LIVING CARE
The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's charges from their
own resources. Inflation or other circumstances that adversely affect the
elderly's ability to pay for services could have an adverse effect on the
Company's business, financial condition and results of operations. Depending
on the nature of an individual's health insurance program or any long-term
care insurance policy, the resident may receive reimbursement for certain
costs under an "alternate care benefit."
Eight of the Company's communities (containing 1,255 units) were financed in
part through the issuance of tax-free industrial revenue bonds (the "Bonds").
At June 30, 1996, there was $62.1 million principal amount of such Bonds
outstanding with an average interest rate of approximately 5.1%. Under the
terms of the Bonds, the Company is required to rent approximately 250 assisted
and independent living units to individuals who have incomes which are 80% or
less of average income levels in a designated market. In certain cases, the
Company's ability to increase prices in communities with such Bond financing
(in response to higher operating costs or other inflationary factors) could be
limited if it affects the ability of the Company to attract and retain
residents with qualifying incomes.
Government payments for assisted and independent living have been limited.
Some state or local governments offer subsidies for rent or services for low-
income elderly persons. Others may provide
31
<PAGE>
subsidies in the form of additional payments for those who receive
Supplemental Security Income. Medicaid provides insurance for certain
financially or medically needy persons, regardless of age, and is funded
jointly by federal, state and local governments. Payments for the services
provided by the Company are not permitted under the Medicaid program absent a
waiver. While there are various federal and state initiatives to provide
reimbursement for assisted and independent living programs, at this time the
Company believes that the level of reimbursement under such federal and state
programs would be insufficient to cover the cost of delivering the level of
service provided by the Company.
GOVERNMENT REGULATION
Changes in existing laws and regulations, adoption of new laws and
regulations and new interpretations of existing laws and regulations could
have a material impact on the Company's operations. Failure by the Company to
comply with applicable regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Government Regulation."
The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living facilities. While a number of states
have not yet enacted specific assisted living regulations, the Company's
communities are subject to regulation, licensing, certificate of need
requirements and permitting by state and local health and social service
agencies and other regulatory authorities. While such requirements vary from
state to state, they typically relate to staffing, physical design, required
services and resident characteristics. The Company believes that such
regulation will increase in the future. In addition, health care providers are
receiving increased scrutiny under anti-trust laws as integration and
consolidation of health care delivery increases and affects competition. The
Company's communities are also subject to various zoning restrictions, local
building codes and other ordinances, such as fire safety codes. Failure by the
Company to comply with applicable regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. Regulation of the assisted living industry is evolving.
The Company is unable to predict the content of new regulations and their
effect on its business. There can be no assurance that the Company's
operations will not be adversely affected by regulatory developments.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients
to such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. Vencor provides certain services to residents
of the Company's communities. The Medicare/Medicaid anti-kickback law has been
broadly interpreted to apply to certain contractual relationships between
health care providers and sources of patient referral. Similar state laws,
which vary from state to state, are sometimes vague and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can
result in loss of licensure, civil and criminal penalties, and exclusion of
health care providers or suppliers from participation in the Medicare and
Medicaid program. There can be no assurance that such laws will be interpreted
in a manner consistent with the practices of the Company.
The Company believes that its communities are in substantial compliance with
applicable regulatory requirements. However, in the ordinary course of
business, one or more of the Company's communities could be cited for
deficiencies. In such cases, the appropriate corrective action would be taken.
To the Company's knowledge, no material regulatory actions are currently
pending with respect to any of the Company's communities.
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
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<PAGE>
federal, state and local laws exist which also may require modifications to
existing and planned properties to create access to the properties by disabled
persons. While the Company believes that its properties are substantially in
compliance with present requirements or are exempt therefrom, if required
changes involve a greater expenditure than anticipated or must be made on a
more accelerated basis than anticipated, additional costs would be incurred by
the Company. Further legislation may impose additional burdens or restrictions
with respect to access by disabled persons, the costs of compliance with which
could be substantial.
EMPLOYEES
The Company has approximately 1,150 employees of which 820 are full time and
330 are part time. Eight full-time employees are employed at the Company's
principal executive offices. None of the Company's employees are currently
represented by a labor union and the Company is not aware of any union
organizing activity among its employees. The Company believes that its
relationship with its employees is satisfactory.
LITIGATION
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition and results of operations.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
W. Bruce Lunsford(1)(2)............ 48 Chairman of the Board
W. Patrick Mulloy, II(1)........... 43 Chief Executive Officer, President and
Director
Ralph H. Bellande.................. 51 Chief Operating Officer
J. Timothy Wesley.................. 37 Chief Financial Officer, Vice President
of Development and Secretary
Sandra Harden Austin(3)(4)......... 48 Director
William C. Ballard Jr.(2)(4)....... 55 Director
Peter J. Grua(4)(5)................ 42 Director designee
Thomas T. Ladt(2)(3)(4)............ 45 Director
R. Gene Smith(1)(2)(3)............. 61 Director
</TABLE>
- --------
(1) Member of the Executive Committee of which Mr. Lunsford is Chairman.
(2) This person also serves as a Vencor director or officer.
(3) Member of the Executive Compensation Committee of which Mr. Smith is
Chairman.
(4) Member of the Audit Committee of which Mr. Ballard is Chairman. Mr. Grua
will become a member of the Audit Committee upon his appointment to the
Board of Directors.
(5) Prior to completion of this offering, Mr. Grua, who has agreed to serve as
a director, will be appointed as a director of the Company.
W. Bruce Lunsford has served as a director of the Company since May 1996. He
is a certified public accountant and an attorney. Mr. Lunsford is a founder of
Vencor and has served as Vencor's Chairman of the Board, President and Chief
Executive Officer since Vencor commenced operations in 1985. He is a director
of National City Corporation, a bank holding company; Churchill Downs
Incorporated; and Res-Care, Inc., a provider of residential training and
support services for persons with developmental disabilities and certain
vocational training services.
W. Patrick Mulloy, II has served as the Chief Executive Officer, President
and a director of the Company since May 1996. From 1994 to 1996, Mr. Mulloy
was a member and of counsel to the law firm of Greenebaum Doll & McDonald
PLLC. From 1992 to 1994, Mr. Mulloy served as the Secretary of the Finance and
Administration Cabinet for the Commonwealth of Kentucky. For over ten years
prior to 1992, Mr. Mulloy engaged in the private practice of law in
Louisville, Kentucky. Mr. Mulloy has also been actively involved in commercial
and multi-family real estate acquisitions and developments through a family
partnership.
Ralph H. Bellande has been the Chief Operating Officer of the Company since
May 1996. From November 1995 to May 1996, Mr. Bellande served as a Vice
President of Vencor and was responsible for managing the assisted living
operations of Vencor which are now owned by the Company. From 1987 to 1995,
Mr. Bellande was a Vice President of The Hillhaven Corporation and was
responsible for managing the assisted living operations which are now owned by
the Company.
J. Timothy Wesley has been the Chief Financial Officer, Vice President of
Development and Secretary of the Company since May 1996. From 1994 to May
1996, Mr. Wesley was Director and Manager of Development at Vencor. From 1992
to 1994, Mr. Wesley was Vice President of Strategic Planning for Home Care
Affiliates, Inc., and from 1986 to 1992, he was employed by Humana Inc., most
recently as Director of Acquisitions.
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<PAGE>
Sandra Harden Austin has served as a director of the Company since May 1996.
Since 1994, Ms. Austin has been President of Physician Services for Caremark
International, a provider of health care products and services. Ms. Austin
served as President and Chief Operating Officer of University of Chicago
Hospitals from 1990 to 1993. Ms. Austin is a director of National City
Corporation and Ferro Corporation, a multi-specialty chemical manufacturer.
William C. Ballard Jr. has been a director of the Company since May 1996.
Mr. Ballard has been a director of Vencor since 1988. Since 1992, Mr. Ballard
has been of counsel to the law firm of Greenebaum Doll & McDonald PLLC. From
1981 to 1992, he served as Executive Vice President--Finance and
Administration of Humana Inc. Mr. Ballard is also a director of Mid-America
Bancorp, United Healthcare Corp., LG&E Energy Corp., Health Care REIT, Inc.
and American Safety Razor Inc.
Peter J. Grua has agreed to serve as a director and will be appointed as a
director prior to the completion of this offering. Since 1992, Mr. Grua has
been a principal of HLM Management, an investment management company
specializing in entrepreneurial and growth companies. Prior to joining HLM
Management, Mr. Grua was a Managing Director of Alex. Brown & Sons
Incorporated where he was a research analyst from 1986 to 1992.
Thomas T. Ladt has been a director of the Company since May 1996. Mr. Ladt
has served as Executive Vice President, Operations of Vencor since February
1996. From November 1995 to February 1996, he served as President of Vencor's
Hospital Division. Mr. Ladt was Vice President of Vencor's Hospital Division
from 1993 to November 1995. From 1989 to 1993, Mr. Ladt was a Regional
Director of Operations for Vencor.
R. Gene Smith has served as a director of the Company since May 1996. Mr.
Smith has been a director of Vencor since 1985 and Vice Chairman of the Board
of Vencor since 1987. From 1987 to 1995, Mr. Smith was President of New Jersey
Blockbuster, Ltd., which held the Blockbuster Video franchise for northern New
Jersey. Since 1988, Mr. Smith has been Chairman of the Board of Taco Tico,
Inc., an operator of Mexican fast-food restaurants. Since 1993, Mr. Smith has
been Managing General Partner of Direct Programming Services, a marketer of
direct broadcast satellite television services.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. The members of the Executive Committee are Messrs.
Mulloy, Smith and Lunsford. The Executive Committee has been delegated all of
the powers of the Board of Directors to the extent permitted under the
Delaware General Corporation Law.
Executive Compensation Committee. The members of the Executive Compensation
Committee are Messrs. Smith and Ladt, and Ms. Austin, all of whom are non-
employee directors. The Compensation Committee makes recommendations to the
full Board of Directors concerning compensation and benefits for executive
officers of the Company.
Audit Committee. The members of the Audit Committee are Messrs. Ballard and
Ladt, and Ms. Austin, all of whom are non-employee directors. Mr. Grua will
become a member of the Audit Committee upon his appointment to the Board of
Directors. The Audit Committee, among other things, makes recommendations
concerning the engagement of independent auditors, reviews the results and
scope of the annual audit and other services provided by the Company's
independent auditors, and reviews the adequacy of the Company's internal
accounting controls.
COMPENSATION OF DIRECTORS
Directors not employed by the Company receive $500 for each board meeting
they attend. Non-employee directors also receive $250 for each committee
meeting they personally attend. In addition, non-
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<PAGE>
employee directors receive a $750 retainer for each calendar quarter they
serve as a director. Directors will be reimbursed for reasonable out-of-pocket
expenses incurred in attending Board meetings.
NON-EMPLOYEE DIRECTORS 1996 STOCK INCENTIVE PLAN
Directors not employed by the Company will receive restricted shares of the
Common Stock and options to purchase shares of the Common Stock pursuant to
the Non-Employee Directors 1996 Stock Incentive Plan (the "Directors Plan").
The Directors Plan provides for an initial, one-time grant of 5,000 restricted
shares of Common Stock as of the date of this offering (the "Initial Grant
Date"). However, the Chairman of the Board of Directors, Mr. Lunsford, will
receive 20,000 restricted shares of Common Stock. The restrictions on all such
shares of Common Stock lapse in two equal annual installments, beginning on
the first anniversary of the Initial Grant Date. The Directors Plan also
provides for an initial grant of options to purchase shares of Common Stock on
the Initial Grant Date at the initial public offering price. Each non-employee
director will receive an option to purchase 10,000 shares on the Initial Grant
Date at the initial public offering price, except the Chairman of the Board of
Directors, Mr. Lunsford, who will receive an option to purchase 80,000 shares
at the initial public offering price. Each new non-employee director will be
granted an option to purchase 10,000 shares of Common Stock on the date of his
or her election. The Company will thereafter annually issue, beginning on the
first anniversary of the Initial Grant Date, to each of the Company's non-
employee directors, an option to purchase 1,000 shares of Common Stock.
Subsequent to this offering, all options for directors will be granted at the
fair market value of the Common Stock on the date of grant. A total of 250,000
shares are reserved for issuance under the Directors Plan. All options granted
under the Directors Plan will become exercisable in four equal annual
installments, beginning on the first anniversary of such option's date of
grant.
COMPENSATION OF EXECUTIVE OFFICERS
The Company was organized in May 1996 and its operations since that time
have related primarily to its formation and to the Contribution Transaction.
During 1996, Messrs. Mulloy, Bellande and Wesley will earn annual salaries of
$180,000, $157,500 and $90,000, respectively, exclusive of performance bonuses
which will not exceed one-third of base salary for Mr. Mulloy and one-quarter
of base salary for Mr. Bellande and Mr. Wesley.
EMPLOYEE AWARDS GRANTED
Pursuant to the Company's 1996 Stock Ownership Incentive Plan (the "1996
Plan"), certain executive officers of the Company will receive restricted
shares and options upon completion of this offering. W. Patrick Mulloy, II,
Chief Executive Officer, President and Director, will be granted 30,000
restricted shares of Common Stock and an option to purchase 200,000 shares of
Common Stock at the initial public offering price. Ralph H. Bellande, Chief
Operating Officer, will receive 15,000 restricted shares of Common Stock and
an option to purchase 75,000 shares of Common Stock at the initial public
offering price. J. Timothy Wesley, Chief Financial Officer, Vice President of
Development and Secretary, will receive 5,000 restricted shares of Common
Stock and an option to purchase 35,000 shares of Common Stock at the initial
public offering price. Restrictions on all of these restricted shares of
Common Stock granted pursuant to the 1996 Plan lapse in two equal annual
installments, beginning on the first anniversary of the grant date. The fair
value of restricted shares will be charged to earnings using the straight-line
method over the vesting period. All options to purchase Common Stock will be
granted at an exercise price equal to the fair market value of the Common
Stock on the date the option is granted. These initial option grants will
become exercisable in four equal annual installments, beginning on the first
anniversary of the grant date.
VENCOR EMPLOYEE OPTION GRANTS
The Company expects to issue options for 90,000 shares of Common Stock to
certain Vencor employees with an exercise price equal to the initial offering
price. These options are being granted to
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incentivize and reward Vencor employees who have provided, and will provide,
support services to the Company. These options will become exercisable in four
equal annual installments, beginning on the first anniversary of the grant
date. See "Certain Transactions."
1996 STOCK OWNERSHIP INCENTIVE PLAN
The 1996 Plan provides for the granting of any of the following awards
("Employee Awards") to eligible employees of the Company and its subsidiaries:
(i) stock options which do not constitute "incentive stock options" within the
meaning of section 422 of the Internal Revenue Code of 1986, as amended ("non-
qualified stock options"); (ii) incentive stock options; (iii) restricted
shares; and (iv) performance units. The 1996 Plan is intended to provide
incentives and rewards for employees to support the execution of the Company's
business plan and to associate the interests of employees with those of the
Company's stockholders.
The 1996 Plan will be administered by a committee composed of two or more
directors or by the entire board of directors (the "Committee"). In
administering the 1996 Plan, the Committee will determine, among other things:
(i) individuals to whom grants of Employee Awards will be made; (ii) the type
and size of Employee Awards; (iii) the terms of an Employee Award including,
but not limited to, a vesting schedule, exercise price, restriction or
performance criteria, and the length of any relevant performance, restriction
or option period. The Committee may also construe, interpret and correct
defects, omissions and inconsistencies in the 1996 Plan.
The Common Stock subject to the 1996 Plan will be authorized but unissued
shares or previously acquired shares. The 1996 Plan provides that 1,000,000
shares of Common Stock will be available for grant of Employee Awards and the
total number of shares of Common Stock with respect to which stock options may
be granted to any individual over the term of the Plan may not exceed 40% of
the total shares authorized for the 1996 Plan. The total number of shares of
Common Stock available for awards of restricted stock is 20% of the total
shares authorized under the 1996 Plan. Pursuant to the 1996 Plan, the number
and kind of shares to which Employee Awards are subject may be appropriately
adjusted in the event of certain changes in capitalization of the Company,
including stock dividends and splits, reclassification, recapitalization,
reorganizations, mergers, consolidations, spin-offs, split-ups, combinations
or exchange of shares, and certain distributions, and repurchases, of shares.
Stock Options. The Committee may grant stock options to eligible individuals
in the form of an incentive stock option or a non-qualified stock option. The
exercise period for any stock option will be determined by the Committee at
the time of grant but may not exceed ten years from the date of grant (five
years in the case of an Incentive Stock Option granted to a "Ten-Percent
Stockholder" as defined in the 1996 Plan). The exercise price per share of
Common Stock covered by a stock option may not be less than 100% of the fair
market value of a share of Common Stock on the date of grant (110% in the case
of an incentive stock option granted to a Ten-Percent Stockholder). The
exercise price is payable, at the Committee's discretion, in cash, in shares
of already owned Common Stock or in any combination of cash and shares. Stock
options will become exercisable in installments as determined by the Committee
and as set forth in the optionee's option agreement. Each option grant may be
exercised in whole, at any time, or in part, from time to time, after the
grant becomes exercisable.
If a participant's employment terminates by reason of death or disability,
any outstanding stock options will vest fully and be exercisable at any time
within two years following the date of death or disability (but in no event
beyond the stated term of the option). Upon an optionee's retirement, stock
options will be exercisable at any time prior to the end of the stated term of
the stock option or two years following the retirement date in the case of
non-qualified stock options and 90 days in the case of incentive stock
options, whichever is the shorter period, but only to the extent the stock
options are exercisable at retirement. Upon termination for any other reason
other than for cause, any previously vested stock options will be exercisable
for the lesser of 90 days or the balance of the stock option's stated term. In
the event of termination for cause, all options, whether or not exercisable,
will terminate.
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<PAGE>
Restricted Stock. Subject to the limitations of the 1996 Plan, the Committee
may grant restricted stock to eligible individuals. Restricted stock awards
are shares of Common Stock that are subject to restrictions on transfer or
other incidents of ownership where the restrictions lapse based solely on
continued employment with the Company for specified periods or based on the
attainment of specified performance standards in either case, as the Committee
may determine. The Committee will determine all terms and conditions pursuant
to which restrictions upon restricted stock will lapse. At the discretion of
the Committee, certificates representing shares of restricted stock will be
deposited with the Company until the restriction period ends. Grantees of
restricted stock will have all the rights of a stockholder with respect to the
restricted stock and may receive dividends, unless the Committee determines
otherwise. Dividends may, at the discretion of the Committee, be deferred
until the restriction period ends and may bear interest if the Committee so
determines.
If a grantee's employment terminates by reason of death or disability prior
to the expiration of the restriction period applicable to any restricted
shares then held by the grantee, all restrictions pertaining to such shares
immediately lapse. Upon termination for any other reason, all restricted
shares are forfeited.
Performance Units. The Committee may grant performance units to eligible
individuals. Each performance unit will specify the performance goals, the
performance period and the number of performance units granted. The
performance period will be not less than one year, nor more than five years,
as determined by the Committee. Performance goals are those objectives
established by the Committee which may be expressed in terms of earnings per
share, price of the Common Stock, pre-tax profit, net earnings, return on
equity or assets, revenues or any combination of the above. Performance goals
may relate to the performance of the Company, a subsidiary, a division or
other operating unit of the Company. Performance goals may be established as a
range of goals if the Committee so desires.
If the Committee determines that the performance goals have been met, the
grantee will be entitled to the appropriate payment with respect thereto. At
the option of the Committee, payment may be made solely in shares of Common
Stock, solely in cash, or a combination of cash and shares of Common Stock.
Change in Control. Generally, in the event of a "change in control" (as
defined in the 1996 Plan) of the Company, all outstanding stock options become
fully vested and immediately exercisable in their entirety. In addition, if
provided in an optionee's agreement, the optionee will be permitted to sell
the option to the Company generally for an amount equal to the excess of (x)
the fair market value over (y) the per share exercise price for such shares
under the stock option. In addition, all restrictions on restricted stock
lapse upon a change in control and outstanding performance units become fully
vested and payable in an amount equal to the greater of: (i) the maximum
amount payable under the performance unit multiplied by a percentage equal to
the percentage that would have been earned assuming the rate at which the
performance goals have been achieved as of the date of the change in control
would have continued until the end of the performance cycle; or (ii) the
maximum amount payable multiplied by the percentage of the performance cycle
completed at the time of the change in control.
Amendments and Termination. The Board may at any time terminate and, from
time to time, may amend or modify the 1996 Plan; provided, however, that no
amendment may impair the rights of a participant with respect to outstanding
Employee Awards without the participant's consent. Any such action of the
Board may be taken without the approval of the Company's stockholders, but
only to the extent that such stockholder approval is not required by
applicable law or regulation. The 1996 Plan will terminate ten years from its
effective date.
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<PAGE>
CERTAIN TRANSACTIONS
The following agreements were entered into between the Company and Vencor:
Incorporation Agreement. To effect the Contribution Transaction and pursuant
to the Incorporation Agreement, Vencor has transferred or agreed to transfer
to the Company, or to cause its respective subsidiaries or affiliates to
transfer to the Company, their respective interests in the communities. The
Company has assumed or agreed to assume all the communities' liabilities in
accordance with the Incorporation Agreement. Except as expressly set forth in
the Incorporation Agreement, no party is making any representation or warranty
as to the assets, businesses or liabilities transferred or assumed as part of
the separation, as to any consents or approvals required in connection
therewith, as to the value or freedom from counterclaim with respect to any
claim of any party, or as to the legal sufficiency of any assignment, document
or instrument delivered to convey title to any asset transferred. Except as
expressly set forth in the Incorporation Agreement, all assets are being
transferred on an "as is," "where is" basis, and the Company has agreed to
bear the economic and legal risks that the conveyance is insufficient to vest
in the Company good and marketable title, free and clear of any security
interest or adverse claim.
The Company will indemnify Vencor and its subsidiaries against certain
losses, claims, damages or liabilities including those arising out of: (i) any
inaccurate representation or breach of warranty under the Incorporation
Agreement; and (ii) any indebtedness, lease, contract or other obligation
referred to in the Incorporation Agreement. The Company will also indemnify
Vencor, as a controlling person, against any loss, claim, damage or liability
arising out of this offering, except for losses, claims, damages or
liabilities arising from information supplied in writing by Vencor for
inclusion in this Prospectus. Vencor will similarly indemnify the Company and
its subsidiaries with respect to any inaccurate representation or breach of
warranty under the Incorporation Agreement.
The Incorporation Agreement contains provisions governing the resolution of
disputes, controversies or claims (collectively, "Disputes") that may arise
between or among the parties. These provisions contemplate that efforts will
first be made to resolve such Disputes by referring the matter to senior
management or other mutually agreed representatives of the parties. If such
efforts are not successful, any party may submit such Dispute to mediation. If
such negotiations and mediation are not successful, any party may submit such
Dispute to mandatory, binding arbitration, subject to the provisions of the
Incorporation Agreement. The Incorporation Agreement contains procedures for
the selection of a sole arbitrator of such Dispute and for the conduct of the
arbitration hearing, including certain limitations on discovery rights of the
parties. These procedures are intended to produce an expeditious resolution of
any such Dispute.
In the event that any such Dispute is, or is reasonably likely to be, in
excess of $5.0 million, or in the event that an arbitration award in excess of
$10.0 million is issued in any arbitration proceeding commenced under the
Incorporation Agreement, subject to certain conditions, any party may submit
such Dispute to a court of competent jurisdiction and the arbitration
provisions contained in the Incorporation Agreement will not apply. In the
event that the parties do not agree that the amount in controversy is in
excess of $5.0 million, the Incorporation Agreement provides for arbitration
of such disagreement.
The Company will pay Vencor $150,000 for legal and accounting assistance
provided to the Company in connection with this offering.
Administrative Services Agreement. The Company and Vencor have entered into
an Administrative Services Agreement pursuant to which Vencor provides certain
administrative services to the Company. The Administrative Services Agreement
is a one-year agreement which may be terminated by the Company at any time
upon 30 days' written notice to Vencor. Some of the services which will be
provided to the Company by Vencor will be finance and accounting, human
resources, risk management, legal support,
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<PAGE>
market planning and information systems support. The purpose of the
Administrative Services Agreement is to provide for the transition of the
Company from being a wholly owned subsidiary of Vencor to being a separate
company. The Company, however, may extend the Administrative Services
Agreement after the first year on a month-to-month basis or for up to one
additional year. In such case, Vencor or the Company may terminate the
Administrative Services Agreement upon 60 days' written notice. The Company
will pay Vencor approximately $660,000 per year for such services. The Company
or Vencor may agree to increase or decrease the services to be provided in
accordance with the Administrative Services Agreement, if needed.
Services Agreements and Sublease Agreement. The Company and subsidiaries of
Vencor have entered into Services Agreements relating to seven communities
which are contiguous to Vencor facilities. The Services Agreements pertain to
the sharing of costs relating to maintenance and lawn services, marketing,
food services, general office, housekeeping and emergency call system. These
Services Agreements may be cancelled by either party upon 90 days prior
written notice. The maximum amount that the Company expects to pay Vencor in
connection with The Services Agreements is $150,000 per year. The Company and
Vencor have also entered into a two-year Sublease Agreement covering
approximately 4,000 square feet of office space used for the Company's
headquarters located in Louisville, Kentucky at an annual rental of $48,300.
New Pond Lease. New Pond Village Associates, a partnership owned by
subsidiaries of Vencor ("New Pond"), will lease the New Pond Village
Retirement Center to Atria pursuant to the terms of a lease which is intended
to be categorized as a finance lease for financial and tax accounting
purposes. The lease has a term of 99 years, unless earlier terminated. Under
the lease, the Company pays no rent as such, but is obligated to pay all ad
valorem property taxes, insurance, utilities and all payments required to be
made on the indebtedness secured by the leased property. New Pond is obligated
to use its reasonable best efforts to obtain the requisite zoning and consent
of the holder of the mortgage on the leased property to the conveyance of the
leased property to the Company. At such time as such conveyance occurs, the
Company will assume the indebtedness secured by the mortgage on the leased
property.
Guaranty Fee Agreement. Vencor and the Company will enter into a Guaranty
Fee Agreement prior to completion of this offering. The Guaranty Fee Agreement
provides that the Company will pay to Vencor a fee equal to 1.5% of the
average outstanding sum of the principal balance of all debts, letters of
credit or obligations of the Company which are guaranteed by Vencor. In
connection with the proposed Atria Credit Facility, Vencor will guarantee up
to $100.0 million in the first year following this offering, declining to
$75.0 million, $50.0 million and $25.0 million in each respective year
thereafter. Vencor currently guarantees $62.1 million of industrial revenue
bonds and the Company intends to replace such Vencor guarantees with the Atria
Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Redding Lease. The Company intends to lease certain real estate in Redding,
California from Vencor pursuant to a lease to be categorized as a finance
lease for financial and tax accounting purposes. This lease will have a term
of 99 years, unless earlier terminated. Under the lease, the Company will pay
$1.00 per year rent and will be obligated to pay all ad valorem property
taxes, insurance and utilities relating to the leased property. The lease will
also require Vencor to use its reasonable best efforts to obtain the requisite
approval for the subdivision of a larger parcel of which the leased property
is a part. If and when such approval is received, Vencor will convey the
property to the Company for $1.00.
Registration Rights Agreement. The Company has granted demand and incidental
registration rights to Vencor for the registration of shares of Common Stock
owned by Vencor under the Securities Act of 1933. See "Description of Capital
Stock--Registration Rights Agreement."
Voting Agreement. Upon completion of this offering, Vencor will enter into a
Voting Agreement pursuant to which it will agree to vote all of its shares of
Common Stock at any meeting at which directors are elected in favor of the
election of independent directors so that after such election, if such persons
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<PAGE>
are elected, there will be at least two independent directors. The Voting
Agreement will continue in effect for five years from the date of this
offering so long as Vencor beneficially owns 30% or more of the Common Stock.
Tax Sharing Agreement. Vencor and the Company have entered into a Tax
Sharing Agreement which generally provides for the manner in which the parties
will bear taxes for the short period ending upon the sale by the Company of
the Common Stock pursuant to this offering, and income tax
deficiencies/refunds resulting from future audit adjustments. The Company will
be required to pay to Vencor an amount equal to the excess of the income tax
liability which the Company would have for the short period over the amount
which the Company has previously paid (or been charged with by Vencor) with
respect to such taxes.
If additional taxes must be paid by the Company or Vencor as a result of an
adjustment made by a tax regulatory authority and as a result of that
adjustment the other party would obtain an offsetting tax benefit, the party
obtaining the tax benefit pays an amount equal to the additional tax to the
party whose income tax liability was increased. Likewise, if income taxes are
reduced as a result of an adjustment made by a tax regulatory authority and as
a result of that adjustment the other party would suffer an offsetting tax
detriment, the party whose taxes were reduced pays that amount to the other
party. The Tax Sharing Agreement also contains provisions dealing with
challenging adjustments made by tax regulatory authorities, who will bear the
expenses of any such challenge and cooperation between the parties.
Borrowing From Vencor. A subsidiary of the Company will be indebted to
Vencor in the amount of $14.0 million. The indebtedness will be evidenced by a
promissory note in favor of Vencor, will bear interest at a rate equal to the
floating prime rate of National City Bank, Kentucky plus 1.0%, payable
quarterly, and the principal amount will be due one year after this offering.
The promissory note may be prepaid, without premium or penalty, at any time
after six months.
Additional Capital Contribution by Vencor. In connection with the Atria
Credit Facility, if the net proceeds from this offering (excluding proceeds
from the Underwriters' exercise of the over-allotment option, if any) are less
than $50.0 million, Vencor has agreed to fund the difference in the form of a
cash contribution to the Company before the completion of this offering.
Other Transactions. SCM Partners, a Kentucky general partnership, leases a
parking lot next to Company's headquarters in Louisville, Kentucky to Vencor
pursuant to a two-year lease. Vencor pays SCM Partners approximately $50,000
per year in connection with such lease. Mr. Mulloy owns a 10.4% interest in
SCM Partners. Vencor believes that the terms of such lease are no less
favorable than terms which could be obtained from an unrelated third party.
William C. Ballard Jr., a director of the Company, is Of Counsel to the law
firm of Greenebaum Doll & McDonald PLLC, which is counsel to the Company.
In the future, transactions between the Company and its officers, directors,
principal stockholders and their affiliates will be on terms no less favorable
to the Company than could be obtained from unrelated third parties and any
such transactions will be approved by a majority of the disinterested members
of the Board of Directors. Although the Company was a wholly owned subsidiary
of Vencor at the time it entered into the above described transactions, the
Company believes that the terms of such agreements are no less favorable than
terms which could be obtained from an unrelated third party.
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PRINCIPAL STOCKHOLDERS
The following table sets forth at June 15, 1996 certain information with
respect to beneficial ownership of the Common Stock (assuming completion of
the Contribution Transaction and the issuance of the restricted shares of
Common Stock), and the common stock of Vencor, by: (i) each person known by
the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock; (ii) each director and executive officer of the
Company; and (iii) all directors and executive officers of the Company as a
group. Information is provided with respect to beneficial ownership of Vencor
common stock because Vencor may be deemed to be a "parent" of the Company as
such term is defined in the rules promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act").
<TABLE>
<CAPTION>
COMPANY VENCOR
-------------------------------- ---------------------
PERCENTAGE OF
NUMBER OF COMMON STOCK NUMBER OF
SHARES ----------------- SHARES
BENEFICIALLY BEFORE AFTER BENEFICIALLY % OF
NAME OWNED(1) OFFERING OFFERING OWNED(1) CLASS
---- -------------- -------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
Sandra Harden Austin..... 5,000(2) * * - -
William C. Ballard Jr.... 5,000(2) * * 28,907(3) *
Ralph H. Bellande........ 15,000(2) * * 592(4) *
Peter J. Grua(5)......... 5,000(2) * * - -
Thomas T. Ladt........... 5,000(2) * * 83,715(6) *
W. Bruce Lunsford........ 10,020,000(7) 99.3% 66.4% 2,251,882(8) 3.2%
W. Patrick Mulloy, II.... 30,000(2) * * 1,445(9) *
R. Gene Smith............ 5,000(2) * * 1,537,117(10) 2.2%
J. Timothy Wesley........ 5,000(2) * * 938(11) *
Vencor, Inc.............. 10,000,000(12) 99.1% 66.2% - -
All executive officers
and directors
as a group (9 persons).. 10,095,000(13) 100.0% 66.9% 3,904,596 5.6%
</TABLE>
- --------
* Less than one percent.
(1) In accordance with Securities and Exchange Commission rules, a person is
deemed to have beneficial ownership of any securities as to which such
person, directly or indirectly, has or shares voting power or investment
power and of any securities with respect to which such person has the
right to acquire such voting or investment power within 60 days. Ownership
information includes the restricted shares to be awarded upon completion
of this offering. Except as otherwise noted in the accompanying footnotes,
the named persons have sole voting and investment power.
(2) Represents restricted shares of Common Stock. The restrictions lapse in
two equal annual installments beginning on the first anniversary of the
grant date.
(3) Includes an aggregate of 3,000 shares held by charitable remainder trusts
for the benefit of family members. Also includes 23,907 shares which may
be acquired by Mr. Ballard through the exercise of options.
(4) Includes 396 shares held jointly with his spouse. Mr. Bellande shares
voting and investment power with his spouse.
(5) Prior to completion of this offering, Mr. Grua, who has agreed to serve as
a director, will be appointed as a director of the Company.
(6) Includes 7,029 shares held by his spouse as custodian for his children and
20,058 shares held by his spouse. With respect to these 27,087 shares, Mr.
Ladt shares voting and investment power with his spouse. Includes 24,188
shares which may be acquired by Mr. Ladt through the exercise of options.
Excludes 738 shares held in the Vencor, Inc. Retirement Savings Plan for
his benefit.
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(7) Includes 10,000,000 shares held by Vencor. Mr. Lunsford is Chairman of the
Board, President and Chief Executive Officer of Vencor. Because Mr.
Lunsford has authority to direct the voting and disposition of such
shares, he may be deemed to beneficially own these shares. Mr. Lunsford
disclaims beneficial ownership of these shares. Includes 20,000 restricted
shares of Common Stock. Restrictions on restricted shares lapse in two
equal annual installments beginning on the first anniversary of the grant
date.
(8) Includes 71,412 shares held by a private foundation with respect to which
Mr. Lunsford has sole voting power and shared investment power. Also
includes 179,159 shares which may be acquired by Mr. Lunsford through the
exercise of options. Excludes 15,465 shares held in trust for the benefit
of his children and 6,908 shares held in the Vencor, Inc. Retirement
Savings Plan for his benefit.
(9) Includes 345 shares held by his spouse. Mr. Mulloy shares voting and
investment power with his spouse.
(10) Includes 36,250 shares held by a private foundation with respect to which
Mr. Smith shares sole voting and investment power, and 140,625 shares
held by a limited partnership with respect to which he has sole voting
and investment power. Also includes 23,907 shares which may be acquired
by Mr. Smith through the exercise of options.
(11) Represents 938 shares which may be acquired by Mr. Wesley upon exercise
of options exercisable as of the day on which he ceased employment with
Vencor and became an executive officer of Atria.
(12) The address of Vencor, Inc. is 3300 Providian Center, 400 W. Market
Street, Louisville, Kentucky 40202.
(13) Includes 95,000 restricted shares of Common Stock. The restrictions lapse
in two equal annual installments beginning on the first anniversary of
the grant date.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Restated Certificate of Incorporation provides that the
authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.10 per share, and 5,000,000 shares of Preferred
Stock, par value $1.00 per share. Upon completion of this offering, 15,095,000
shares of Common Stock will be issued and outstanding (15,845,000 shares if
the Underwriters' over-allotment option is exercised in full), and no shares
of Preferred Stock will be issued or outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share owned of
record on all matters voted upon by stockholders. Subject to the requirements
(including preferential rights) of any Preferred Stock outstanding, holders of
Common Stock are entitled to receive dividends if, as and when declared by the
Board out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all liabilities of the Company
and the liquidation preferences of any outstanding Preferred Stock. Holders of
the Common Stock have no preemptive rights, no cumulative voting rights and no
rights to convert their Common Stock into any other securities, and there are
no redemption or sinking fund provisions with respect to the Common Stock.
National City Bank will act as the transfer agent and registrar for the
Common Stock.
PREFERRED STOCK
The Board has the authority to issue the authorized shares of Preferred
Stock in one or more series and to fix the designations, powers, preferences,
rights, qualifications, limitations and restrictions of all shares of each
such series, including, without limitation, dividend rates, conversion rights,
voting rights, redemption and sinking fund provisions, liquidation preferences
and the number of shares constituting each such series, without any further
vote or action by the stockholders. The issuance of Preferred Stock could
decrease the amount of earnings and assets available for distribution to
holders of Common Stock or adversely affect the rights and powers, including
voting rights, of the holders of Common Stock. The issuance of Preferred Stock
also could have the effect of delaying, deterring or preventing a change in
control of the Company without further action by the stockholders.
CERTAIN CORPORATE GOVERNANCE MATTERS
The Company's Restated Certificate of Incorporation and the Amended and
Restated By-laws provide that, commencing with the 1997 annual meeting of
stockholders, the Board will be divided into three classes. Following
completion of this offering, there will be seven directors. Unless the number
of directors is increased prior to the 1997 annual meeting of stockholders,
two classes of directors will consist of two directors each and one class will
consist of three directors, with the term of office of the first class to
expire at the 1998 annual meeting of stockholders, the term of office of the
second class to expire at the 1999 annual meeting of stockholders, and the
term of office of the third class to expire at the 2000 annual meeting of
stockholders. At each succeeding annual meeting of stockholders, directors
will be elected to a three-year term of office.
The Company's Restated Certificate of Incorporation and the Amended and
Restated By-laws provide that: (i) the number of directors of the Company will
be fixed by resolution of the Board, but in no event will be less than three
nor more than 15 directors; (ii) the directors of the Company in office from
time to time will fill any vacancy or newly created directorship on the Board,
with any new director to serve in the class of directors to which he or she is
so elected; (iii) directors of the Company may be removed only for cause by
the holders of at least a majority of the Company's voting stock, provided,
however,
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that prior to the date that Vencor and its affiliates cease owning at least a
majority of the Company's Common Stock (the "Trigger Date"), cause is not
required for removal of directors; (iv) after the Trigger Date, stockholder
action can be taken only at an annual or special meeting of stockholders and
not by written consent in lieu of a meeting; and (v) except as described
below, special meetings of stockholders may be called only by the Chairman of
the Board, the President of the Company or by a majority of the total number
of directors of the Company and, prior to the Trigger Date, by Vencor, and the
business permitted to be conducted at any such meeting is limited to that
stated in the notice of the special meeting. The Amended and Restated By-laws
also require that stockholders desiring to bring any business before an annual
meeting of stockholders deliver written notice thereof to the Secretary of the
Company not fewer than 60 days nor more than 90 days in advance of the annual
meeting of stockholders; provided, however, if the date of the meeting is not
furnished to stockholders in a notice, or is not publicly disclosed by the
Company, more than 70 days prior to the meeting, notice by the stockholder, to
be timely, must be delivered to the President or Secretary of the Company not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure
was made.
The Amended and Restated By-laws also provide that stockholders desiring to
nominate persons for election as directors must make their nominations in
writing to the President of the Company not fewer than 60 days nor more than
90 days prior to the scheduled date for the annual meeting; provided, however,
if fewer than 70 days notice or prior public disclosure of the scheduled date
for the annual meeting is given or made, notice by the stockholders, to be
timely, must be delivered to the President or Secretary of the Company not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure
was made. Prior to the Trigger Date, Vencor may nominate persons for election
as directors without following the notice pending nomination procedures
required of all other stockholders.
Under applicable provisions of the Delaware General Corporation Law, the
approval of a Delaware corporation's board of directors, in addition to
stockholder approval, is required to adopt any amendment to the corporation's
certificate of incorporation, but a corporation's by-laws may be amended
either by action of its stockholders or, if the corporation's certificate of
incorporation so provides, its board of directors. The Restated Certificate of
Incorporation and Amended and Restated By-laws provide that the provisions
summarized above may not be amended by the stockholders, nor may any provision
inconsistent therewith be adopted by the stockholders, without the affirmative
vote of the holders of at least 80% of the Company's voting stock, voting
together as a single class.
The foregoing provisions of the Restated Certificate of Incorporation and
Amended and Restated By-laws may discourage or make more difficult the
acquisition of control of the Company by means of a tender offer, open market
purchase, proxy contest or otherwise. These provisions may have the effect of
discouraging certain types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of the
Company first to negotiate with the Company. The Company's management believes
that the foregoing measures provide benefits to the Company and its
stockholders by enhancing the Company's ability to negotiate with the
proponent of any unfriendly or unsolicited proposal to take over or
restructure the Company and that such benefits outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a Delaware corporation for three
years following the date such person became an interested stockholder unless:
(i) before such person became an interested stockholder, the board of
directors of the corporation approved either the transaction in which the
interested stockholder became an interested stockholder or the business
combination; (ii) upon
45
<PAGE>
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time such transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business
combinations proposed by an interested stockholder following the public
announcement or notification (as required by Section 203) of a transaction
which is one of certain extraordinary transactions involving the corporation,
is with or by a person who either has not been an interested stockholder
during the previous three years or who became an interested stockholder with
the approval of a majority of the corporation's directors, and is approved or
not opposed by a majority of the board of directors then in office. As a
result of its initial ownership of all of the outstanding Common Stock, Vencor
is not subject to the restrictions imposed upon an interested stockholder
under Section 203.
REGISTRATION RIGHTS AGREEMENT
The Company has granted demand and incidental registration rights to Vencor
for the registration of shares of Common Stock owned by Vencor under the
Securities Act of 1933. Four demand registrations are permitted. The Company
will pay the fees and expenses of two demand registrations and the incidental
registrations, while Vencor will pay all underwriting discounts and
commissions. These registration rights expire five years from the completion
of this offering and are subject to certain conditions and limitations,
including the right of underwriters to limit the number of shares owned by
Vencor included in such registration.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
15,095,000 shares of Common Stock (15,845,000 shares if the Underwriters'
over-allotment option is exercised in full). The 5,000,000 shares sold in this
offering (or a maximum of 5,750,000 shares if the Underwriters' over-allotment
option is exercised in full) will be freely tradable without restriction or
further registration under the Securities Act, unless held by "affiliates" of
the Company as that term is defined in Rule 144 under the Securities Act. The
remaining 10,095,000 shares outstanding are "restricted securities" as that
term is defined under Rule 144 and were issued by the Company in private
transactions in reliance upon one or more exemptions under the Securities Act.
Such restricted securities may be resold in a public distribution only if
registered under the Securities Act (which registration is contemplated with
respect to all of such restricted securities as described below) or pursuant
to an exemption therefrom, including Rule 144. Vencor, the Company and
executive officers and directors of the Company have agreed that they will not
sell any shares of Common Stock prior to the expiration of 180 days from the
date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least two years is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such
sale or one percent of the then outstanding shares of the Common Stock,
provided certain manner of sale and notice requirements and requirements as to
the availability of current public information about the Company are
satisfied. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the holding period, to
sell shares of Common Stock. A person who is deemed not to have been an
"affiliate" of the Company at any time during the 90 days preceding a sale by
such person, and who has beneficially owned such shares for at least three
years, would be entitled to sell such shares without regard to the volume
limitations described above.
The Commission has proposed to amend the holding period required by Rule 144
to permit sales of "restricted securities" after one year rather than two
years (and two years rather than three years for "non-affiliates" under Rule
144(k)). If such proposed amendment is adopted, restricted securities would
become freely tradable (subject to any applicable contractual restrictions) at
correspondingly earlier dates.
Subject to certain exceptions, Vencor, the Company and the Company's
executive officers and directors have agreed with the Underwriters not to sell
or otherwise dispose of any shares of Common Stock, any Common Stock issuable
upon exercise of options to purchase Common Stock or any securities
convertible into or exchangeable for shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent
of Alex. Brown & Sons Incorporated.
After completion of this offering, Vencor will be entitled to certain rights
with respect to the registration of 10,000,000 shares of Common Stock for sale
under the Securities Act. See "Description of Capital Stock--Registration
Rights Agreement."
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
the underwriters named below (the "Underwriters") through their
Representatives, Alex. Brown & Sons Incorporated, Morgan Stanley & Co.
Incorporated and J.C. Bradford & Co. have severally agreed to purchase from
the Company, the following respective numbers of shares of Common Stock at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated......................................
Morgan Stanley & Co. Incorporated....................................
J.C. Bradford & Co...................................................
---------
Total.............................................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 750,000
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 5,000,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same
terms as those on which the 5,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Stockholders of the Company, holding in the aggregate 10,095,000 shares of
Common Stock and restricted shares, have agreed not to offer, sell or
otherwise dispose of any of such Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated. See "Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation among the Company and the
Representatives of the Underwriters. Among the factors considered in such
48
<PAGE>
negotiations are prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company and the Representatives of
the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
At the request of the Company, up to 500,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including directors
and employees of Vencor, the Company and other entities with whom directors of
the Company are affiliated, and members of their families. The price of such
shares to such persons will be the initial public offering price set forth on
the cover of this Prospectus. The number of shares available to the general
public will be reduced to the extent those persons purchase reserved shares.
Any shares not so purchased will be offered hereby at the initial public
offering price set forth on the cover of this Prospectus.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Greenebaum Doll & McDonald PLLC, Louisville, Kentucky. William C.
Ballard Jr., a director of the Company, is Of Counsel to Greenebaum Doll &
McDonald PLLC and as of the date of this Prospectus he beneficially owns 5,000
shares of Common Stock. Alston & Bird, Atlanta, Georgia, is acting as counsel
for the Underwriters in connection with certain legal matters relating to the
sale of the Common Stock offered hereby.
EXPERTS
The audited combined financial statements of Atria Communities, Inc.
included in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included herein in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed through the Electronic Data Gathering, Analysis and
Retrieval system with the Securities and Exchange Commission (the "SEC") in
Washington, D.C., a Registration Statement on Form S-1 (the "Registration
Statement," which includes all amendments, exhibits and schedules thereto),
pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations promulgated thereunder, with respect to this offering. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted from this Prospectus in accordance with the rules
and regulations of the SEC, and to which reference is hereby made.
As a result of this offering, the Company will become subject to the
informational and reporting requirements of the Securities Exchange Act of
1934, as amended, and, in accordance therewith, will be required to file proxy
statements, reports and other information with the SEC. The Registration
Statement, as well as any such report, proxy statement and other information
filed by the Company with the SEC, may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the SEC: Northeast Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048; and Midwest Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such filings
may also be obtained from the SEC through the Internet at http://www.sec.gov.
49
<PAGE>
Statements made in this Prospectus concerning the provisions of any
contract, agreement or other document referred to herein are not necessarily
complete. With respect to each such statement concerning a contract, agreement
or other document filed as an exhibit to the Registration Statement or
otherwise filed with the SEC, reference is made to such exhibit or other
filing for a more complete description of the matter involved and each such
statement is qualified in its entirety by such reference.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent accounting firm. The Company
also intends to furnish such other reports as it may determine or as may be
required by law.
50
<PAGE>
ATRIA COMMUNITIES, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Combined Financial Statements:
Combined Statement of Income for the years ended December 31, 1993, 1994
and 1995............................................................... F-3
Combined Balance Sheet, December 31, 1994 and 1995...................... F-4
Combined Statement of Changes in Investments by and Advances from
Vencor, Inc. for
the years ended December 31, 1993, 1994 and 1995....................... F-5
Combined Statement of Cash Flows for the years ended December 31, 1993,
1994
and 1995............................................................... F-6
Notes to Combined Financial Statements.................................. F-7
Condensed Combined Financial Statements (unaudited):
Condensed Combined Statement of Income for the six months ended June 30,
1995
and 1996............................................................... F-14
Condensed Combined Balance Sheet, December 31, 1995 and June 30, 1996... F-15
Condensed Combined Statement of Cash Flows for the six months ended
June 30, 1995 and 1996................................................. F-16
Notes to Condensed Combined Financial Statements........................ F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Atria Communities, Inc.
We have audited the accompanying combined balance sheet of Atria
Communities, Inc. (formerly the assisted and independent living businesses of
Vencor, Inc.--see Note 1) as of December 31, 1994 and 1995, and the related
combined statements of income, investments by and advances from Vencor, Inc.
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Atria
Communities, Inc. at December 31, 1994 and 1995, and the combined results of
their operations and cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
LOGO
Louisville, Kentucky
June 14, 1996, except for Notes 1 and 7 as to which the date is August 14,
1996
F-2
<PAGE>
ATRIA COMMUNITIES, INC.
COMBINED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenues............................................ $35,870 $39,758 $47,976
------- ------- -------
Salaries, wages and benefits........................ 14,735 14,638 17,455
Supplies............................................ 4,360 4,023 4,860
Rent................................................ 351 333 383
Depreciation and amortization....................... 4,503 4,541 5,113
Non-recurring transactions.......................... (266) (1,675) 600
Other operating expenses (including amounts paid to
Vencor, Inc. of $525 in 1993, $570 in 1994 and $600
in 1995)........................................... 8,031 8,347 9,465
------- ------- -------
31,714 30,207 37,876
------- ------- -------
Operating income.................................... 4,156 9,551 10,100
Interest expense.................................... 3,499 3,538 4,322
Investment income................................... (346) (330) (147)
------- ------- -------
Income before income taxes and extraordinary loss... 1,003 6,343 5,925
Provision for income taxes.......................... 396 2,506 2,341
------- ------- -------
Income before extraordinary loss.................... 607 3,837 3,584
Extraordinary loss on extinguishment of debt, net of
income tax benefit of $69 in 1993 and $93 in 1995.. (103) - (146)
------- ------- -------
Net income........................................ $ 504 $ 3,837 $ 3,438
======= ======= =======
Unaudited pro forma data:
Earnings per common share:
Income before extraordinary loss................... $ .36
Extraordinary loss on extinguishment of debt....... (.02)
-------
Net income........................................ $ .34
=======
Shares used in computing earnings per common
share............................................. 10,095
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
ATRIA COMMUNITIES, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,497 $ 2,819
Accounts receivable less allowance for loss of $46--1994
and $89--1995............................................ 522 561
Other..................................................... 510 366
-------- --------
2,529 3,746
Property and equipment, at cost:
Land...................................................... 19,679 20,668
Buildings................................................. 111,553 122,986
Equipment................................................. 8,820 10,510
Construction in progress.................................. 1,540 73
-------- --------
141,592 154,237
Accumulated depreciation.................................. (18,637) (23,027)
-------- --------
122,955 131,210
Notes receivable........................................... 4,552 -
Intangible assets less accumulated amortization of $2,641--
1994 and
$3,294--1995.............................................. 2,114 2,173
Other...................................................... 866 3,788
-------- --------
$133,016 $140,917
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,853 $ 1,875
Salaries, wages and other compensation.................... 970 1,019
Other accrued liabilities................................. 750 784
Long-term debt due within one year........................ 594 844
-------- --------
4,167 4,522
Long-term debt............................................. 90,599 104,506
Deferred credits and other liabilities..................... 6,415 3,442
Contingencies
Stockholder's equity:
Investments by and advances from Vencor, Inc.............. 31,835 28,447
-------- --------
$133,016 $140,917
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
ATRIA COMMUNITIES, INC.
COMBINED STATEMENT OF CHANGES IN INVESTMENTS BY
AND ADVANCES FROM VENCOR, INC.
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period....................... $27,219 $34,959 $31,835
Net income.......................................... 504 3,837 3,438
Net cash advances by (payments to) Vencor, Inc...... 3,899 (6,811) (6,350)
Non-cash transfers from (to) Vencor, Inc.
(principally property and equipment, at cost)...... 3,337 (150) (476)
------- ------- -------
Balance at end of period............................. $34,959 $31,835 $28,447
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
ATRIA COMMUNITIES, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 504 $ 3,837 $ 3,438
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization................... 4,503 4,541 5,113
Provision for doubtful accounts................. 18 7 79
Deferred income taxes........................... 748 169 (63)
Extraordinary loss on extinguishment of debt.... 172 - 239
Non-recurring transactions...................... - (425) 600
Other........................................... (104) (745) (261)
Change in operating assets and liabilities:
Accounts receivable............................ 913 (212) (240)
Other assets................................... 111 18 234
Accounts payable............................... 436 572 53
Other accrued liabilities...................... (1,633) (179) (661)
-------- ------- -------
Net cash provided by operating activities..... 5,668 7,583 8,531
Cash flows from investing activities:
Purchase of property and equipment................ (1,716) (5,714) (4,025)
Sale of assets.................................... 3,078 672 -
Collection of notes receivable.................... 35 1,800 -
Net change in partnership investments............. 107 (814) 716
Other............................................. (179) 54 437
-------- ------- -------
Net cash provided by (used in) investing
activities................................... 1,325 (4,002) (2,872)
Cash flows from financing activities:
Issuance of long-term debt........................ 12,950 6,450 6,806
Repayment of long-term debt....................... (21,337) (3,348) (4,659)
Net advances from (payments to) Vencor, Inc....... 3,899 (6,811) (6,350)
Other............................................. (412) (70) (134)
-------- ------- -------
Net cash used in financing activities......... (4,900) (3,779) (4,337)
-------- ------- -------
Change in cash and cash equivalents................ 2,093 (198) 1,322
Cash and cash equivalents at beginning of period... (398) 1,695 1,497
-------- ------- -------
Cash and cash equivalents at end of period......... $ 1,695 $ 1,497 $ 2,819
======== ======= =======
Supplemental information:
Interest payments................................. $ 3,352 $ 3,667 $ 4,397
Income tax payments (refunds)..................... (366) 2,336 2,310
Non-cash transactions:
Exchange of note receivable for additional
partnership interest............................ - - 4,552
Exchange of long-term debt in lieu of cash in
connection
with sale of a facility......................... 6,471 - -
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
Basis of Presentation
In May 1996, the Board of Directors of Vencor, Inc. ("Vencor") authorized
management to establish a wholly owned subsidiary, Atria Communities, Inc.
("Atria") to operate Vencor's assisted and independent living business. As
part of that transaction, management intends to consummate an initial public
offering (the "IPO") of 5,000,000 shares of Atria's common stock. Upon
completion of the IPO, it is expected that Vencor will own 10,000,000 shares
of Atria common stock.
The accompanying combined historical financial statements reflect the
operations of the assisted and independent living business of Vencor which are
to be transferred to Atria at or prior to completion of the IPO. These
financial statements have been derived from the consolidated financial
statements of Vencor and are presented as if Atria had been operated as a
separate entity.
The combined financial statements have been prepared in accordance with
generally accepted accounting principles and include amounts based upon the
estimates and judgments of management. Actual amounts may differ from these
estimates.
Revenues
Revenues are recognized when services are rendered and consist of daily
resident fees and fees for other ancillary services. Agreements with residents
are generally for a term of one year. Revenues from management contracts are
recognized in the period earned in accordance with the terms of the management
agreement.
Substantially all revenues are derived from private pay sources. A summary
of revenues follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Owned and leased facilities............................ $35,515 $39,340 $47,635
Managed facilities..................................... 355 418 341
------- ------- -------
$35,870 $39,758 $47,976
======= ======= =======
</TABLE>
The terms of resident agreements at one community require the resident to
forfeit a certain percentage of the face amount of a resident mortgage bond
(purchased by the resident at the inception of the residency agreement) to
Atria upon termination of the residency agreement. These amounts are recorded
as deferred revenue at the inception of the residency agreement and recognized
as income on a straight-line basis over the estimated stay of a resident based
upon the community's historical experience. See Note 4.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of these instruments.
Allowance for Doubtful Accounts
A summary of the allowance for doubtful accounts follows (dollars in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period.............................. $29 $47 $ 46
Provision for doubtful accounts............................ 18 7 79
Accounts written off....................................... - (8) (36)
--- --- ----
Balance at end of period.................................... $47 $46 $ 89
=== === ====
</TABLE>
F-7
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and include interest capitalized
on significant construction projects during the construction period as well as
other costs directly related to the development and construction of
communities.
Depreciation expense, computed by the straight-line method, was $3.7 million
in 1993, $3.8 million in 1994 and $4.4 million in 1995. Depreciable lives for
buildings range generally from 20 to 45 years. Estimated useful lives of
equipment vary from 5 to 10 years.
The Financial Accounting Standards Board (the "FASB") issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," effective for fiscal years beginning after December
15, 1995. The provisions of this statement, which will be adopted in 1996, are
not expected to have a material impact on the combined financial statements.
Intangible Assets
Intangible assets consist primarily of debt issuance costs and are amortized
by the straight-line method based upon the lives of the respective loans.
Income Taxes
Vencor and its wholly owned subsidiaries (including such entities comprising
the operations of Atria) file federal and certain state income tax returns on
a consolidated basis. Accordingly, provision for income taxes recorded in the
consolidated financial statements of Vencor have been apportioned to Atria on
a divisional basis. However, for purposes of the accompanying combined
financial statements, provision for income taxes has been recorded as if Atria
were filing separate income tax returns.
Upon completion of the IPO, Atria and its subsidiaries will file separate
income tax returns and will not be eligible for inclusion in the consolidated
income tax returns of Vencor.
Minority Interest in Consolidated Entities
The combined financial statements include all assets, liabilities, revenues
and expenses of partnerships controlled by Atria. Minority interests in the
earnings and equity of these entities are not significant.
Earnings per Common Share
The operations of Atria are included in the consolidated financial
statements of Vencor on a divisional basis. Accordingly, historical
stockholder's equity accounts and related earnings per common share data are
not presented in the accompanying combined financial statements.
Shares used in the computation of pro forma earnings per common share
include 10,000,000 shares of common stock to be issued to Vencor in exchange
for its contribution of assets to Atria and the assumption by Atria of related
liabilities, and 95,000 shares of restricted stock. See Note 7.
NOTE 2--NON-RECURRING TRANSACTIONS
Results of operations for 1995 include a charge of $600,000 related to the
writedown of undeveloped property to its estimated net realizable value.
Operating results in 1994 include a gain on the sale of property aggregating
$425,000.
Settlements of certain litigation increased income before income taxes by
approximately $1.3 million in 1994 and $266,000 in 1993.
F-8
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES
A summary of provision for income taxes follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
----- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $(348) $1,965 $2,021
State.............................................. (4) 372 383
----- ------ ------
(352) 2,337 2,404
Deferred............................................ 748 169 (63)
----- ------ ------
$ 396 $2,506 $2,341
===== ====== ======
Reconciliation of federal statutory rate to effective income tax rate
follows:
<CAPTION>
1993 1994 1995
----- ------ ------
<S> <C> <C> <C>
Federal statutory rate.............................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax bene-
fit................................................ 2.6 4.1 4.0
Other items, net.................................... 1.9 0.4 0.5
----- ------ ------
Effective income tax rate.......................... 39.5% 39.5% 39.5%
===== ====== ======
</TABLE>
Effective January 1, 1993, Atria adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires, among other things, recognition of deferred income taxes using the
liability method rather than the deferred method. The effect of this change
had no material effect on net income.
A summary of deferred income taxes by source included in the combined
balance sheet at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation........................... $ - $2,441 $ - $2,954
Partnerships........................... 1,645 - 1,908 -
Compensation........................... 118 - 187 -
Other.................................. - 92 152 -
------ ------ ------ ------
$1,763 $2,533 $2,247 $2,954
====== ====== ====== ======
</TABLE>
Deferred income taxes totaling $62,000 and $79,000 at December 31, 1994 and
1995, respectively, are included in other current assets. Non-current deferred
income taxes, included principally in deferred credits and other liabilities,
totaled $832,000 and $786,000 at December 31, 1994 and 1995, respectively.
F-9
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT
A summary of long-term debt at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Industrial revenue bonds, 3.2% to 9.9% (rates, generally
floating, average 5.5%) payable in periodic installments
through 2025............................................ $55,305 $ 66,456
Non-interest bearing residential mortgage bonds, payable
in periodic installments through 2039................... 32,583 33,344
Collateralized borrowings under Vencor bank revolving
credit agreement (floating rates averaging 6.9%)........ - 5,550
Subordinated debentures due 2008 (floating rates averag-
ing 7%)................................................. 3,305 -
------- --------
Total debt, average life of 24 years (rates averaging
3.9%)................................................. 91,193 105,350
Amounts due within one year.............................. 594 844
------- --------
Long-term debt......................................... $90,599 $104,506
======= ========
</TABLE>
Under the terms of a residency agreement at one community, residents are
required to purchase a residential mortgage bond which entitles them to occupy
a residential unit and to receive services and use the community as described
in the agreement. The face amount of each bond is equal to the market value of
the residential unit to be occupied by the resident. The bonds represent non-
interest bearing loans to the Company and are non-transferrable. The first
maturity date of each bond is January 1, 2040; however, the Company is
required to redeem a bond within 180 days of the termination of a residency
agreement, at which time Atria is required to repay the residential mortgage
bond to the resident less a fee of up to 20% of the face amount of the bond.
The combined statement of cash flows includes issuances of resident mortgage
bonds aggregating $10.3 million, $6.5 million and $4.2 million in 1993, 1994
and 1995, respectively, and redemptions of such bonds aggregating $3.4
million, $2.8 million and $3.5 million for each of the respective years.
Maturities of long-term debt in years 1997 through 2000 are $849,000,
$852,000, $854,000 and $857,000, respectively.
Certain long-term debt agreements contain customary covenants which include
(i) limitations on additional debt and capital expenditures, (ii) limitations
on sales of assets, mergers and changes in ownership and (iii) maintenance of
certain financial ratios.
The estimated fair value of Atria's long-term debt was $78.0 million and
$91.8 million at December 31, 1994 and 1995, respectively, compared to
carrying amounts aggregating $91.2 million and $105.4 million. The estimate of
fair value is based upon the quoted market prices for the same or similar
issues of long-term debt, or on rates available to Atria for debt of the same
remaining maturities.
Concurrently with the consummation of the IPO, Atria expects to enter into a
bank credit facility (the "Atria Credit Facility"), which will have a maturity
of four years and may be extended at the option of the banks for an additional
year. Although the terms of the Atria Credit Facility have not yet been
finalized, it is presently expected to aggregate up to $200.0 million in
revolving credits, including a letter of credit option not to exceed $70.0
million. It is anticipated that loans under the Atria Credit Facility will
bear interest, at Atria's option, at either (i) a base rate based on PNC
Bank's prime rate or the daily federal funds rate or (ii) a LIBOR rate, plus
an additional percentage based on Atria's leverage. It is expected that
obligations under the Atria Credit Facility will be secured by all of Atria's
property, the capital stock of Atria's present and future principal
subsidiaries and all intercompany indebtedness owed to Atria by its
subsidiaries. It is also contemplated that the Atria Credit Facility will
contain various affirmative, negative and financial covenants. The Atria
Credit Facility will be conditioned upon, among other things, consummation of
the IPO, the absence of a change in control of Atria, and Vencor's ownership
of a
F-10
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT (CONTINUED)
stipulated percentage of Atria common stock upon consummation of the IPO and
at least a 30% ownership interest thereafter. In connection with the Atria
Credit Facility, if the net proceeds from the IPO (excluding proceeds from the
exercise of the over-allotment option, if any) are less than $50.0 million,
Vencor has agreed to fund the difference in the form of a cash contribution to
Atria before the completion of the IPO.
Upon consummation of the IPO, Atria intends to refinance all outstanding
borrowings under the Vencor bank revolving credit agreement in the table above
through proceeds under the Atria Credit Facility.
NOTE 5--CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as deductions that continue to
be claimed on tax returns.
Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially
affect Atria's liquidity, financial position or results of operations.
Principal contingencies are described below:
Atria is a party to certain litigation involving a minority partner at one
of its communities. In June 1996, Atria agreed to settle such litigation and
acquire all remaining partnership interests in exchange for cash payments
approximating $1.1 million ($630,000 net of tax) payable over three years. The
amounts related to this settlement will be charged to earnings upon execution
of final settlement agreements.
The combined financial statements of Atria reflect the anticipated
assumption of approximately $95.3 million of Vencor's long-term debt. In the
event that all or part of the assumption does not occur prior to the IPO,
Vencor would remain primarily liable for such debt. Atria and Vencor have
agreed that Atria would pay all amounts and otherwise satisfy all obligations
related to such long-term debt. In the case of any Vencor long-term debt
proposed to be assumed by Atria in the IPO, to the extent that Atria and
Vencor are unable to obtain consents from holders of such debt to the
assumption by Atria of primary liability for such debt, the amount of such
debt will be reflected as a liability of Vencor in its financial statements
(although Vencor's financial statements will also reflect as an asset a
receivable from Atria in an equal amount, which will accrue interest and will
be payable on the same terms as such Vencor long-term debt). Furthermore,
Vencor may be contingently liable as guarantor of certain long-term debt
assumed by Atria in the IPO.
NOTE 6--TRANSACTIONS WITH VENCOR
Atria and Vencor or its subsidiaries have or will enter into certain
arrangements which will become effective on or before the completion of the
IPO. The agreements are intended to facilitate an orderly transition of Atria
from a division of Vencor to a separate publicly held entity which will be
minimally disruptive to both Atria and Vencor. A summary of such arrangements
follows:
Administrative Services--Vencor will provide to Atria for a period of one
year various administrative services in such areas as finance and accounting,
human resources, risk management, legal support, market planning and
information systems support. Atria may extend the Administrative Services
Agreement for up to one additional year, subject to termination by either
party upon 60 days prior written notice. Atria will pay Vencor approximately
$660,000 per year for such services.
Shared Services--Atria and subsidiaries of Vencor will share certain costs
at seven communities relating to marketing and certain administrative
services. These agreements may be cancelled by either party upon 90 days prior
written notice. Atria will pay a maximum of $150,000 per year for such
services.
F-11
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--TRANSACTIONS WITH VENCOR (CONTINUED)
Guarantees--Vencor will guarantee for four years certain borrowings by Atria
under the Atria Credit Facility in amounts up to $100.0 million in the first
year following the IPO, declining to $75.0 million, $50.0 million and $25.0
million in each respective year thereafter. Atria will pay to Vencor a fee
equal to 1.5% of any guaranteed amounts.
Leases--Atria will lease certain properties from Vencor, including its
headquarters office space.
Borrowing From Vencor--A subsidiary of Atria is indebted to Vencor in the
amount of $14.0 million. The indebtedness will be evidenced by a promissory
note in favor of Vencor, will bear interest at a rate equal to the floating
prime rate of National City Bank, Kentucky plus 1.0%, payable quarterly, and
the principal amount will be due one year after the IPO. The promissory note
may be prepaid, without premium or penalty, at any time after six months.
Income Taxes--A tax sharing agreement will provide for risk-sharing
arrangements in connection with various income tax related issues.
Registration Rights--Atria has granted demand and piggyback registration
rights to Vencor with respect to registration under the Securities Act of 1933
of Atria Common Stock owned by Vencor. Four demand registrations are
permitted. Atria will pay the fees and expenses of two demand registrations
and the piggyback registrations, while Vencor will pay all underwriting
discounts and commissions. The registration rights expire five years from the
completion of the IPO and are subject to certain conditions and limitations,
including the right of underwriters of an offering to limit the number of
shares owned by Vencor included in such registration.
Registration Expenses--Atria will pay Vencor $150,000 for Vencor's
assistance provided to Atria in connection with the IPO.
Liabilities and Indemnifications--Atria will assume all contractual
liabilities relating to the assets transferred by Vencor to Atria.
In anticipation of the IPO, certain allocations and estimates have been made
by management in the combined financial statements to present the historical
financial position and results of operations of Atria as a separate entity.
The operating results of Atria include certain corporate costs and expenses of
Vencor (comprised principally of information systems and various centralized
management services) aggregating $525,000 in 1993, $570,000 in 1994 and
$600,000 in 1995. Management believes that these allocations reasonably
reflect the proportional costs incurred by Vencor on behalf of Atria.
NOTE 7--CAPITAL STOCK
Atria's Restated Certificate of Incorporation authorizes 50,000,000 shares
of common stock (par value $.10 per share) and 5,000,000 shares of preferred
stock (par value $1.00 per share). Upon consummation of the IPO, 15,095,000
shares of common stock are expected to be issued and outstanding. No shares of
preferred stock will be issued in connection with the IPO.
The accompanying combined financial statements are presented as if Atria had
been operated as a separate entity. Accordingly, stockholder's equity (which
represents Vencor's pre-IPO 100% interest) comprises both investments by and
non-interest bearing advances from Vencor. Management expects that in
connection with the IPO, such amounts will be included as part of Atria's
permanent equity capitalization.
Atria has established certain stock compensation plans under which options
to purchase common stock may be granted to officers, key employees and
directors who are not employees of Atria. Options may be granted at not less
than market price on the date of grant, and the initial options to be granted
will become exercisable as to one-fourth of the shares annually over a four-
year period and are exercisable for a period ending ten years after grant. The
plans also provide that awards of restricted stock may be
F-12
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CAPITAL STOCK (CONTINUED)
distributed to officers, key employees and certain directors. The initial
restricted stock to be granted will vest one-half annually over a two-year
period. No options have been granted and no restricted shares have been
awarded under the plans.
Upon consummation of the IPO, the Board of Directors of Atria intends to
grant approximately 639,500 stock options (to be granted at a value equal to
the IPO price) and award approximately 95,000 restricted shares.
Atria will account for stock option grants in accordance with APB Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". In October
1995, the FASB issued Statement No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation," which provides an alternative to APB 25 and allows for a
fair value-based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for stock-
based compensation arrangements under APB 25, SFAS 123 requires disclosure of
the pro forma effect on net income and earnings per share of the fair value-
based accounting for these arrangements. These disclosure requirements are
effective for Atria beginning in 1996.
The fair value of restricted stock will be charged to earnings using the
straight-line method over the vesting period.
NOTE 8--EMPLOYEE BENEFIT PLANS
Atria participates in Vencor's defined contribution retirement plans
covering employees who meet certain minimum eligibility requirements. Benefits
are determined as a percentage of a participant's contributions and are
generally vested based upon length of service. Retirement plan expense was
$58,000 for 1993, $66,000 for 1994 and $77,000 for 1995. Amounts equal to
retirement plan expense are funded annually.
Upon consummation of the IPO, Atria will continue to participate in a
substantial number of Vencor employee benefit plans.
NOTE 9--ACCRUED LIABILITIES
A summary of other accrued liabilities at December 31 follows (dollars in
thousands):
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Taxes other than income........................................... $579 $697
Interest.......................................................... 145 70
Other............................................................. 26 17
---- ----
$750 $784
==== ====
</TABLE>
NOTE 10--FAIR VALUE DATA
A summary of fair value data at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
---------------- ----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents (Note 1)......... $ 1,497 $ 1,497 $ 2,819 $ 2,819
Notes receivable........................... 4,552 4,249 - -
Long-term debt, including amounts due
within one year (Note 4).................. 91,193 78,028 105,350 91,822
</TABLE>
F-13
<PAGE>
ATRIA COMMUNITIES, INC.
CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revenues..................................................... $23,264 $25,448
------- -------
Salaries, wages and benefits................................. 8,515 9,404
Supplies..................................................... 2,359 2,450
Rent......................................................... 196 199
Depreciation and amortization................................ 2,552 2,625
Non-recurring transactions................................... - 1,050
Other operating expenses (including amounts paid to Vencor,
Inc. of
$300 in 1996 and 1995)...................................... 4,714 4,929
------- -------
18,336 20,657
------- -------
Operating income............................................. 4,928 4,791
Interest expense............................................. 2,286 2,033
Investment income............................................ (54) (109)
------- -------
Income before income taxes................................... 2,696 2,867
Provision for income taxes................................... 1,065 1,133
------- -------
Net income................................................. $ 1,631 $ 1,734
======= =======
Pro forma data:
Earnings per common share................................... $ .16 $ .17
Shares used in computing earnings per common share.......... 10,095 10,095
</TABLE>
The accompanying notes are an integral part of the condensed combined financial
statements.
F-14
<PAGE>
ATRIA COMMUNITIES, INC.
CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1995 AND JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, -------------------
1995 ACTUAL PRO FORMA
------------ -------- ---------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 2,819 $ 4,149 $ 4,149
Accounts receivable less allowance for loss
of $89--1995
and $99--1996.............................. 561 794 794
Other....................................... 366 323 323
-------- -------- --------
3,746 5,266 5,266
Property and equipment, at cost:
Land........................................ 20,668 20,672 20,672
Buildings................................... 122,986 123,227 123,227
Equipment................................... 10,510 10,950 10,950
Construction in progress.................... 73 1,195 1,195
-------- -------- --------
154,237 156,044 156,044
Accumulated depreciation.................... (23,027) (25,319) (25,319)
-------- -------- --------
131,210 130,725 130,725
Intangible assets less accumulated
amortization of $3,294--1995 and $3,456--
1996........................................ 2,173 1,586 1,586
Other........................................ 3,788 4,039 4,039
-------- -------- --------
$140,917 $141,616 $141,616
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................ $ 1,875 $ 3,553 $ 3,553
Salaries, wages and other compensation...... 1,019 1,212 1,212
Other accrued liabilities................... 784 1,440 1,440
Long-term debt due within one year.......... 844 825 825
-------- -------- --------
4,522 7,030 7,030
Long-term debt............................... 104,506 103,586 103,586
Deferred credits and other liabilities....... 3,442 3,456 3,456
Contingencies
Stockholder's equity:
Preferred stock, $1.00 par value, 5,000
shares
authorized; none issued and outstanding
(pro forma)................................ - - -
Common stock, $.10 par value; 50,000 shares
authorized; 10,095 shares issued and out-
standing
(pro forma)................................ - - 1,010
Capital in excess of par value (pro forma).. - - 26,534
Investments by and advances from Vencor,
Inc........................................ 28,447 27,544 -
-------- -------- --------
28,447 27,544 27,544
-------- -------- --------
$140,917 $141,616 $141,616
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed combined financial
statements.
F-15
<PAGE>
ATRIA COMMUNITIES, INC.
CONDENSED COMBINED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 1,631 $ 1,734
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 2,552 2,625
Deferred income taxes...................................... (29) 35
Non-recurring transactions................................. - 1,050
Other...................................................... 127 (13)
Change in operating assets and liabilities:
Accounts receivable....................................... (494) (246)
Other assets.............................................. 256 (151)
Accounts payable.......................................... (627) 896
Other accrued liabilities................................. 494 506
------- -------
Net cash provided by operating activities................ 3,910 6,436
Cash flows from investing activities:
Purchase of property and equipment.......................... (1,252) (1,753)
Net change in partnership investments....................... 722 18
Other....................................................... 25 (10)
------- -------
Net cash used in investing activities.................... (505) (1,745)
Cash flows from financing activities:
Issuance of long-term debt.................................. 2,904 5,178
Repayment of long-term debt................................. (2,623) (6,020)
Net payments to Vencor, Inc................................. (2,560) (2,422)
Other....................................................... (88) (97)
------- -------
Net cash used in financing activities.................... (2,367) (3,361)
------- -------
Change in cash and cash equivalents.......................... 1,038 1,330
Cash and cash equivalents at beginning of period............. 1,497 2,819
------- -------
Cash and cash equivalents at end of period................... $ 2,535 $ 4,149
======= =======
Supplemental information:
Interest payments........................................... $ 1,961 $ 1,278
Income tax payments......................................... 1,155 1,133
Non-cash transactions:
Exchange of note receivable for additional partnership
interest.................................................. 4,552 -
</TABLE>
The accompanying notes are an integral part of the condensed combined financial
statements.
F-16
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying combined financial statements are presented in a condensed
format and consequently do not include all of the disclosures normally
required by generally accepted accounting principles or those normally made in
Atria's annual financial statements. Accordingly, the reader of these
financial statements may wish to refer to Atria's audited combined financial
statements for the year ended December 31, 1995 contained elsewhere in this
Prospectus for further information.
The financial information has been prepared in accordance with Atria's
customary accounting practices and has not been audited. In the opinion of
management, the information presented reflects all adjustments necessary for a
fair statement of interim results. All such adjustments are of a normal and
recurring nature.
The pro forma balance sheet as of June 30, 1996 reflects the contribution of
assets from Vencor and Atria's assumption of related liabilities, and the
issuance of 95,000 shares of restricted stock. No effect of the IPO is
reflected in the pro forma financial information included in accompanying
condensed consolidated financial statements.
NOTE 2--EARNINGS PER COMMON SHARE
The operations of Atria are included in the consolidated financial
statements of Vencor on a divisional basis. Accordingly, historical
stockholder's equity accounts and related earnings per common share data are
not presented in the accompanying combined financial statements.
Shares used in computing pro forma earnings per common share include
10,000,000 shares of common stock to be issued to Vencor in exchange for its
contribution of assets to Atria and the assumption by Atria of related
liabilities, and 95,000 shares of restricted stock.
NOTE 3--NON-RECURRING TRANSACTIONS
In June 1996, Atria recorded a non-recurring pretax charge of $1.1 million
($630,000 net of tax) in connection with the settlement of certain litigation
involving a minority partner at one of its communities.
NOTE 4--CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as deductions that continue to
be claimed on tax returns.
Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially
affect Atria's liquidity, financial position or results of operations.
The combined financial statements of Atria reflect the anticipated
assumption of approximately $95.3 million of Vencor's long-term debt. In the
event that all or part of the assumption does not occur prior to the IPO,
Vencor would remain primarily liable for such debt. Atria and Vencor have
agreed that Atria would pay all amounts and otherwise satisfy all obligations
related to such long-term debt. In the case of any Vencor long-term debt
proposed to be assumed by Atria in the IPO, to the extent that Atria and
Vencor are unable to obtain consents from holders of such debt to the
assumption by Atria of primary liability for such debt, the amount of such
debt will be reflected as a liability of Vencor in its financial statements
(although Vencor's financial statements will also reflect as an asset a
receivable from Atria in an equal amount, which will accrue interest and will
be payable on the same terms as such Vencor long-term debt). Furthermore,
Vencor may be contingently liable as guarantor of certain long-term debt
assumed by Atria in the IPO.
F-17
<PAGE>
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--TRANSACTIONS WITH VENCOR
In anticipation of the IPO, certain allocations and estimates have been made
by management in the combined financial statements to present the historical
financial position and results of operations of Atria as a separate entity.
The operating results of Atria include certain corporate costs and expenses of
Vencor (comprised principally of information systems and various centralized
management services) aggregating $300,000 in the first six months of 1995 and
1996. Management believes that these allocations reasonably reflect the
proportional costs incurred by Vencor on behalf of Atria.
F-18
<PAGE>
Atria's Assisted and Independent Living
Communities
[PHOTOGRAPH OF AN ATRIA [PHOTOGRAPH OF AN ATRIA [PHOTOGRAPH OF AN ATRIA
COMMUNITY IN SEDONA COMMUNITY IN TOPEKA, COMMUNITY IN WALPOLE,
ARIZONA] KANSAS] MASSACHUSETTS]
[PHOTOGRAPH OF
UNITED STATES MAP
INDICATING
EXISTING AND
DEVELOPMENT
COMMUNITIES]
[PHOTOGRAPH OF AN ATRIA [PHOTOGRAPH OF AN [PHOTOGRAPH OF
COMMUNITY IN TACOMA, ATRIA COMMUNITY AN ATRIA
WASHINGTON] IN SPRING HILL, COMMUNITY IN
FLORIDA] TUCSON,
ARIZONA]
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Atria currently operates 22 communities in 13 states with a total of 3,022
units, including 650 assisted living units and 2,372 independent living units.
The Company owns 16 of these communities, holds a majority interest in two
communities, leases two communities and manages two communities. The Company
plans to develop 60 to 85 assisted living communities over the next three to
four years. Currently, there are 13 assisted living communities under
development with a total of approximately 850 units.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURIS-
DICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company and its Predecessors......................................... 14
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Combined Financial Data......................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 34
Certain Transactions..................................................... 39
Principal Stockholders................................................... 42
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Available Information.................................................... 49
Index to Combined Financial Statements................................... F-1
</TABLE>
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UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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5,000,000 Shares
LOGO
Common Stock
-------------
PROSPECTUS
-------------
Alex. Brown & Sons
INCORPORATED
Morgan Stanley & Co.
INCORPORATED
J.C. Bradford & Co.
, 1996
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<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses to be borne
by the Company in connection with the offering described in the Registration
Statement:
<TABLE>
<S> <C>
Registration Fee.................................................. $ 29,742
Legal Fees and Expenses........................................... 300,000*
Accounting Fees and Expenses...................................... 250,000*
Printing and Engraving Expenses................................... 150,000*
Blue Sky Registration Fees and Expenses........................... 35,000*
Transfer Agent's Fees............................................. 10,000*
NASD Listing Fees................................................. 9,125
Miscellaneous Expenses............................................ 66,133*
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Total........................................................... $850,000*
========
</TABLE>
*Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
A. Elimination of Certain Liability. Pursuant to Article IX of the
registrant's Restated Certificate of Incorporation ("Article IX"), a director
of the registrant shall not be personally liable to the registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the registrant or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General registrant Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. If the General Corporation Law of the State of
Delaware is hereafter amended to permit further elimination or limitation of
the personal liability of directors, then the liability of a director of the
registrant shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended. Any
repeal or modification of Section A of Article IX shall not adversely effect
any right or protection of a director of the registrant existing at the time
of such repeal or modification.
B. Right to Indemnification. Subject to Section C of Article XI of the
registrant's Restated Certificate of Incorporation, each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that such
person, or a person of whom such person is the legal representative, is or was
a director or officer of the registrant or is or was serving at the request of
the registrant as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless
by the registrant to the fullest extent authorized by the General Corporation
Law of the State of Delaware, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such
amendment permits the registrant to provide broader indemnification rights
than said law permitted the registrant to provide prior to such amendment),
against all expense, liability and loss (including attorneys' fees, judgments,
fines, excise taxes under the Employee Retirement Income Security Act of 1974,
as in effect from time to time ("ERISA"), penalties and amounts to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith. The registrant may, by action of its Board of Directors, provide
indemnification to other employees or agents of the registrant with the same
scope and effect as the indemnification of directors and officers pursuant to
Article IX.
C. Procedure for Indemnification. Any indemnification under Article IX
(unless ordered by a court) shall be made by the registrant only as authorized
in the specific case upon a determination that
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<PAGE>
indemnification is proper in the circumstances because the indemnitee has met
the applicable standard of conduct set forth in the General Corporation Law of
the State of Delaware, as the same exists or hereafter may be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the registrant to provide broader indemnification rights then said law
permitted the registrant to provide prior to such amendment). Such
determination shall be made (i) by the Board of Directors by a majority vote
of a quorum consisting of directors who are not parties to such action, suit
or proceeding (the "Disinterested Directors"), or (ii) if such a quorum of
Disinterested Directors is not obtainable, or, even if obtainable, a quorum of
Disinterested Directors so directs, by independent legal counsel and a written
opinion, or (iii) by the stockholders. The majority of Disinterested Directors
may, as they deem appropriate, elect to have the registrant indemnify any
other employee, agent or other person acting for or on behalf of the
registrant.
D. Advances for Expenses. Costs, charges and expenses (including attorneys'
fees) incurred by a director or officer of the registrant, or such other
person acting on behalf of the registrant as determined in accordance with
Section C of Article IX, in defending a civil or criminal action, suit or
proceeding shall be paid by the registrant in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer or other person to repay all amounts so
advanced in the event that it shall ultimately be determined that such
director, officer or other person is not entitled to be indemnified by the
registrant as authorized in Article IX or otherwise.
E. Right of Claimant to Bring Suit. If a claim under Sections of Article IX
is not paid in full by the registrant within 30 days after a written claim has
been received by the registrant, the claimant may at any time thereafter bring
suit against the registrant to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the registrant)
that the claimant has not met the standard of conduct which make it
permissible under the General Corporation Law of the State of Delaware for the
registrant to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the registrant. Neither the failure of the
registrant (including its Board of Directors, independent legal counsel, or
its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because the claimant has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an
actual determination by the registrant (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
F. Other Rights; Continuation of Right to Indemnification. The
indemnification and advancement of expenses provided by Article IX shall not
be deemed exclusive of any other rights to which a claimant may be entitled
under any law (common or statutory) by-law, agreement, vote of stockholders or
Disinterested Directors or otherwise, both as to action in his or her official
capacity and as to any action in another capacity while holding office or
while employed by or acting as agent for the registrant, and shall inure to
the benefit of the estate, heirs, executors and administrators of such person.
All rights to indemnification under Article IX shall be deemed to be a
contract between the registrant and each director and officer of the
registrant who serves or served in such capacity at any time while Article IX
is in effect. Any repeal or modification of Article IX or any repeal or
modification of relevant provisions of the General Corporation Law of the
State of Delaware or any other applicable law shall not in any way diminish
any rights to indemnification of such director, officer or the obligations of
the registrant arising hereunder with respect to any action, suit or
proceeding arising out of, or relating to, any actions, transactions or facts
occurring prior to the final adoption of such modification or repeal. For the
purposes of Article IX, references to "the registrant" include all constituent
corporations absorbed in a consolidation or merger as well as the resulting or
surviving corporation, so that any person who is or was a director or officer
of such a constituent corporation or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise shall stand
in the same position under the provisions of this Article IX of the
registrant's
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<PAGE>
Restated Certificate of Incorporation, with respect to the resulting or
surviving corporation, as such person would if such person had served the
resulting or surviving corporation in the same capacity.
G. Insurance. The registrant may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the registrant
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the registrant
would have the power to indemnify such person against such expense, liability
or loss under the General Corporation Law of the State of Delaware.
H. Severability. If any provision or provisions of Article IX shall be held
to be invalid, illegal or unenforceable for any reason whatsoever: (1) the
validity, legality and enforceability of the remaining provisions of Article
IX (including, without limitation, each portion of any paragraph of Article IX
containing any such provision held to be invalid, illegal or unenforceable,
that is not itself held to be invalid, illegal or unenforceable) shall not in
any way be affected or impaired thereby; and (2) to the fullest extent
possible, the provisions of Article IX of the registrant's Restated
Certificate of Incorporation (including, without limitation, each such portion
of any paragraph of Article IX containing any such provision held to be
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested by the provision held invalid, illegal or unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEMS 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Index to and Description of Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE NO.
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<S> <C> <C>
1+ Form of Underwriting Agreement............................................
3.1+ Restated Certificate of Incorporation.....................................
3.2+ Amended and Restated By-laws..............................................
4+ Specimen Common Stock Certificate.........................................
5.1+ Opinion of Greenebaum Doll & McDonald PLLC as to legality of the
securities being registered..............................................
10.1+ Form of Registration Rights Agreement.....................................
10.2+ Form of Incorporation Agreement...........................................
10.3+ Form of Administrative Services Agreement.................................
10.4+ Form of Tax Sharing Agreement.............................................
10.5+ Form of 1996 Stock Ownership Incentive Plan...............................
10.6+ Form of Non-Employee Directors 1996 Stock Incentive Plan..................
10.7+ Mortgage and Trust Indenture dated as of November 1, 1990, by and between
New Pond Village Associates and The First National Bank of Boston, as
Trustee..................................................................
10.8+ Indenture of Trust and Agreement dated as of December 1, 1985, by and
among The Redevelopment Agency of the City of San Marcos, San Marcos
Retirement Village, The First National Bank of Boston, as Trustee, and
Security Pacific National Bank...........................................
10.9+ Form of Services Agreements relating to Kachina Point, San Marcos,
McMillen, Valley Manor, The Greens, Heritage at Wildwood and Villa
Campana..................................................................
10.10+ Form of Sublease Agreement................................................
10.11+ Form of Voting Agreement..................................................
10.12+ Form of Redding Lease.....................................................
10.13+ Form of New Pond Village Associates Lease.................................
10.14+ Form of Term Promissory Note to Vencor....................................
10.15+ Foxhill Village Management Agreement......................................
10.16+ Form of Guaranty Fee Agreement............................................
21+ Subsidiaries of the Registrant............................................
23.1+ Consent of Greenebaum Doll & McDonald PLLC (included in Exhibit 5.1)......
23.2 Consent of Ernst & Young LLP..............................................
23.3+ Consent of Peter J. Grua..................................................
24+ Power of Attorney (included on Signature Page of the Registration
Statement)................................................................
27*+ Financial Data Schedule...................................................
</TABLE>
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+Previously filed.
*Included only in the EDGAR version.
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<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For the purposes of determining liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(b) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, in the City of Louisville, Commonwealth of
Kentucky, on August 20, 1996.
Atria Communities, Inc.
/s/ J. Timothy Wesley
By: _________________________________
J. TIMOTHY WESLEY
CHIEF FINANCIAL OFFICER, VICE
PRESIDENT OF DEVELOPMENT AND
SECRETARY
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
* Chairman of the Board
_________________________________ August 20,
W. BRUCE LUNSFORD 1996
* Chief Executive Officer,
_________________________________ President and Director August 20,
W. PATRICK MULLOY, II 1996
* Chief Financial Officer,
_________________________________ Vice President of August 20,
J. TIMOTHY WESLEY Development and 1996
Secretary (Chief
Financial and
Accounting Officer)
* Director
_________________________________ August 20,
SANDRA HARDEN AUSTIN 1996
* Director
_________________________________ August 20,
WILLIAM C. BALLARD JR. 1996
* Director
_________________________________ August 20,
THOMAS T. LADT 1996
* Director
_________________________________ August 20,
R. GENE SMITH 1996
/s/ June N. King
*By: ____________________________
JUNE N. KING August 20,
ATTORNEY-IN-FACT 1996
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EXHIBIT 23.2
We consent to the reference to our firm under the caption "Experts" and
"Selected Combined Financial Data" and to the use of our report dated June 14,
1996, except for Notes 1 and 7 as to which the date is August 14, 1996, in
Amendment No. 5 to the Registration Statement (Form S-1 No. 333-06907) and
related Prospectus of Atria Communities, Inc. for the registration of 5,000,000
shares of its Common Stock.
/s/ Ernst & Young LLP
Louisville, Kentucky
August 19, 1996
