<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
REGISTRATION NO. 333-23197
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERICAN RETIREMENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
TENNESSEE 8059 62-1674303
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
111 WESTWOOD PLACE, SUITE 402
BRENTWOOD, TENNESSEE 37027
(615) 221-2250
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
W.E. SHERIFF
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
111 WESTWOOD PLACE, SUITE 402
BRENTWOOD, TENNESSEE 37027
(615) 221-2250
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
---------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<C> <C>
T. ANDREW SMITH JEFFREY S. LOWENTHAL
BASS, BERRY & SIMS PLC STROOCK & STROOCK & LAVAN LLP
FIRST AMERICAN CENTER 180 MAIDEN LANE
NASHVILLE, TENNESSEE 37238 NEW YORK, NEW YORK 10038
(615) 742-6200 (212) 806-5400
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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.
================================================================================
<PAGE> 2
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, DATED APRIL 28, 1997
PROSPECTUS
3,125,000 SHARES
AMERICAN RETIREMENT CORPORATION (LOGO)
COMMON STOCK
------------------
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), of American Retirement Corporation (the "Company") offered hereby (the
"Offering") are being offered by the Company. Prior to the Offering, there has
been no public market for the Common Stock. It is currently anticipated that the
initial public offering price will be between $15.00 and $17.00 per share. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price. Approximately $25.0 million of
the net proceeds of the Offering will be received by the existing shareholders
of the Company. See "The Company -- Pending Reorganization" and "Certain
Transactions -- Pending Reorganization." It is anticipated that approximately
500,000 shares of Common Stock will be offered outside of the United States.
The Common Stock has been approved for listing on The New York Stock
Exchange (the "NYSE"). At the request of the Company, up to 300,000 shares of
Common Stock have been reserved for sale in the Offering to certain individuals,
including directors and employees of the Company, members of their families, and
other persons having business relationships with the Company. See
"Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3)................................... $ $ $
=============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 468,750 shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, and Proceeds to Company will
be $ , $ , and $ , respectively.
------------------
The shares of Common Stock are offered by the Underwriters when, as, and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to withdraw, cancel, or modify the Offering and
to reject orders in whole or in part. It is expected that delivery of stock
certificates will be made in New York, New York on or about , 1997.
------------------
NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION
MCDONALD & COMPANY SECURITIES, INC.
The date of this Prospectus is , 1997
<PAGE> 3
[MAP/PICTURES TO FOLLOW]
FOR UNITED KINGDOM PURCHASERS: This Prospectus has not been registered in
the United Kingdom and, accordingly, the shares of Common Stock offered hereby
may not be and are not being offered or sold in the United Kingdom other than to
persons whose ordinary activities involve them in acquiring, holding, managing,
or disposing of investments, whether as principal or agent (except in
circumstances that do not constitute an offer to the public within the meaning
of the Public Offers of Securities Regulations 1995 or the Financial Services
Act 1986), and this Prospectus may only be issued or passed on to any person in
the United Kingdom if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or a person to whom this Prospectus may otherwise lawfully be passed on.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS, AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Prospective investors
should consider carefully the information set forth under "Risk Factors."
Immediately prior to the consummation of the Offering, American Retirement
Communities, L.P. ("ARCLP" or the "Predecessor") will be reorganized (the
"Reorganization") such that all of ARCLP's assets and liabilities will be
contributed to the Company in exchange for a total of 7,812,500 shares of Common
Stock, which will be immediately distributed to ARCLP's partners, and a
promissory note in the principal amount of $25.0 million (the "Reorganization
Note"). See "The Company -- Pending Reorganization." Unless otherwise indicated,
all information in this Prospectus (i) gives effect to the Reorganization, and
(ii) assumes no exercise of the Underwriters' over-allotment option. Unless the
context otherwise requires, references to the Company include the Company, its
subsidiary partnerships and corporations, and the Predecessor.
THE COMPANY
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. The Company has pioneered numerous developments in the provision of
care and services for the elderly since its inception in 1978, and believes it
ranks among the leading operators in the senior living and health care services
industry. Currently, the Company operates 21 senior living communities in 12
states, consisting of ten owned communities, four leased communities, and seven
managed communities, with an aggregate capacity for approximately 5,700
residents. The Company also owns and operates eight home health care agencies.
At March 31, 1997, the Company's owned and leased communities had an occupancy
rate of 94% and its managed communities had an occupancy rate of 93%. For the
year ended December 31, 1996, revenues attributable to the Company's senior
living communities accounted for 91.5% of the Company's total revenues and
revenues attributable to the Company's home health care agencies accounted for
8.5% of the Company's total revenues. Approximately 92.1% of the Company's total
revenues for the year ended December 31, 1996 were derived from private pay
sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 11 senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $75.6 million in 1996, an average
annual growth rate of 43.5%. During the same period, the Company's income from
operations has grown from $2.3 million to $15.6 million, an average annual
growth rate of 61.7%. The Company intends to continue its growth through a
combination of (i) development of free-standing assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (ii) selective acquisitions of senior living
communities, including assisted living residences; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
As part of its growth strategy, the Company is currently developing 20
free-standing assisted living residences, with an estimated aggregate capacity
for 1,762 residents, and is expanding eight of its existing communities to add
capacity to accommodate an additional 704 residents. The Company has also
entered into a letter of intent to acquire one additional home health care
agency and intends to commence operations at four additional home health care
agencies during 1997.
The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America (now a subsidiary of
Columbia/HCA Healthcare Corporation). The Company's operating philosophy was
inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the
elderly by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents. The Company
believes that its senior management, led by W.E. Sheriff, its Chairman and Chief
Executive Officer, and Christopher J. Coates, its President and Chief Operating
Officer, is one of the most experienced management teams in the senior living
industry. The Company's 12 senior officers have been employed by the Company for
an average of nine years and have an average of 14 years of industry experience.
3
<PAGE> 5
The executive directors of the Company's communities have been employed by the
Company for an average of four years and have an average of 11 years of
experience in the senior living industry.
The Company's target market, which consists of seniors age 75 and older, is
one of the fastest growing segments of the United States population. According
to the United States Census Bureau, this age group is expected to grow from 13.2
million in 1990 to over 16.6 million by 2000, an increase of 26%. The Company
believes that the market for senior living and health care services, including
Alzheimer's and dementia care services, will continue to grow as a result of (i)
the aging of the U.S. population, (ii) rising public and private
cost-containment pressures, (iii) declining availability of traditional nursing
home beds as a result of nursing home operators focusing on higher acuity
patients, (iv) the quality of life advantages of assisted living residences over
traditional skilled nursing facilities, and (v) the decreasing availability of
family care as an option for elderly family members. The Company believes that
its experience, reputation, and market presence favorably position it to take
advantage of opportunities in the rapidly growing senior living and health care
industry.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................ 3,125,000 shares
Common Stock to be outstanding after the Offering.......... 10,937,500 shares(1)
Use of proceeds............................................ To repay the Reorganization Note; to
complete a home health care agency
acquisition; to fund development
activities and possible future acqui-
sitions; and for general corporate
purposes, including working capital. See
"The Company -- Pending Reorganization"
and "Use of Proceeds."
Proposed NYSE symbol....................................... ARQ
</TABLE>
- ---------------
(1) Includes 7,812,500 shares of Common Stock to be issued in the
Reorganization. Does not include 635,000 shares of Common Stock reserved
for issuance pursuant to outstanding stock options under the Company's 1997
Stock Incentive Plan, which options are exercisable at the initial public
offering price. See "Management -- Compensation Pursuant to Plans -- 1997
Stock Incentive Plan" and "Description of Capital Stock."
4
<PAGE> 6
SUMMARY COMBINED AND CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary combined and consolidated financial and other data is
qualified in its entirety by the more detailed information in the financial
statements and pro forma financial information appearing elsewhere in this
Prospectus. The summary financial data for the year ended December 31, 1994 and
for the three months ended March 31, 1995 is derived from the combined financial
statements of certain affiliated partnerships and corporations (collectively,
the "Predecessor Entities"). The summary financial data for the nine months
ended December 31, 1995 and the year ended December 31, 1996 is derived from the
consolidated financial statements of the Predecessor. See Note 1 to the Combined
and Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR
--------------------------- ----------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED
YEAR ENDED ENDED ENDED DECEMBER 31, 1996
DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------
1994 1995 1995 ACTUAL PRO FORMA(1)
------------ ------------ ------------ -------- ------------
(in thousands, except per share, community, and resident data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................... $33,341 $12,356 $48,763 $ 75,617 $ 79,543
Operating expenses................................ 28,126 10,270 38,730 60,066 63,861
------- ------- ------- -------- --------
Income from operations.......................... 5,215 2,086 10,033 15,551 15,682
Other income (expense), net....................... (5,053) (3,334) (6,682) (10,938) (11,353)
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item.............................. 162 (1,248) 3,351 4,613 4,329
Income tax expense (benefit)(2)................... -- 20 55 (920) (920)
------- ------- ------- -------- --------
Income (loss) before extraordinary item........... 162 (1,268) 3,296 5,533 5,249
Extraordinary item(3)............................. -- -- -- (2,335) (2,335)
------- ------- ------- -------- --------
Net income (loss)................................. $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914
------- ------- ------- -------- --------
Net income (loss) available for distribution to
partners and shareholders....................... $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590
======= ======= ======= ======== ========
UNAUDITED PRO FORMA TAX DATA(4):
Income before income taxes and extraordinary
item............................................ $ 4,613 $ 4,329
Pro forma income tax expense...................... 820 712
-------- --------
Pro forma income before extraordinary item........ $ 3,793 $ 3,617
======== ========
Pro forma per share data:
Income per share before extraordinary item...... $ 0.40 $ 0.39
======== ========
Shares used in computing pro forma per share
data(5)....................................... 9,375 9,375
======== ========
Pro forma as adjusted per share data(6):
Income per share before extraordinary item...... $ 0.33
========
Shares used in computing pro forma as adjusted per
share data...................................... 10,938
========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------
COMPANY
PREDECESSOR ---------------
---------------------- PRO FORMA
PRO AS
ACTUAL FORMA(7) ADJUSTED(8)
-------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,222 $ 11,514 $ 32,114
Working capital (deficit)................................... (14,289) 3,913 24,513
Total assets................................................ 228,162 212,925 233,525
Long-term debt, including current portion................... 170,689 156,096 156,096
Partners' and shareholders' equity.......................... 37,882 37,882 44,966
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR
------------------------------- ----------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED
YEAR ENDED ENDED ENDED DECEMBER 31, 1996
DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------
1994 1995 1995 ACTUAL PRO FORMA(1)
------------- ------------- ------------ -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE, COMMUNITY, AND RESIDENT DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Distribution to partners, including preferred
distributions................................ 2,580 1,400 5,189 7,139 6,359(9)
Revenue mix:
Private pay.................................. 93.0% 92.2% 91.2% 92.1% 92.5%
Medicare and other(10)....................... 7.0 7.8 8.8 7.9 7.5
------- ------- ------- -------- --------
Total.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Communities (at period end):
Owned........................................ 8 9 10 12 12(11)
Managed...................................... 11 10 10 7 7
------- ------- ------- -------- --------
Total.................................. 19 19 20 19 19
Resident capacity (at period end):
Owned........................................ 2,141 2,386 2,594 3,369 3,369(11)
Managed...................................... 3,315 3,079 3,008 2,159 2,159
------- ------- ------- -------- --------
Total.................................. 5,456 5,456 5,602 5,528 5,528
Average occupancy rate:
Owned........................................ 89% 91% 93% 94% 94%(11)
Managed...................................... 93 95 90 91 90
------- ------- ------- -------- --------
Total.................................. 91% 93% 92% 92% 92%
</TABLE>
- ---------------
(1) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the May 1996 acquisition (the "Carriage Club
Acquisitions") of Carriage Club of Charlotte, L.P. and Carriage Club of
Jacksonville, L.P. (collectively, "Carriage Club"), and (b) the January
1997 sale-leaseback by the Company of two senior living communities (the
"Sale-Leaseback Transactions") and the application of a portion of the net
proceeds therefrom to retire debt. See "Unaudited Pro Forma Condensed
Combined Financial Information."
(2) Provision for income taxes reflects income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. No income tax expense is reflected for periods
prior to 1995 because of losses or the availability of net operating loss
carryforwards ("NOLs"). Both periods in 1995 reflect a provision for
alternative minimum taxes. In 1996, the Company recorded an income tax
benefit and a deferred tax asset of $920,000 because of the anticipated
utilization of NOLs that will offset taxable gains recognized from the
Sale-Leaseback Transactions. See Note 12 to the Combined and Consolidated
Financial Statements.
(3) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.
(4) Except for one of the Predecessor Entities, the Predecessor and the
Predecessor Entities, as partnerships, were exempt from U.S. Federal and
state income taxes. The pro forma financial data reflects the effect on
certain income statement data of income tax expense that would have been
recorded had the Predecessor and the other Predecessor Entities not been
exempt from paying such income taxes. Pro forma income tax expense has been
calculated using the statutory U.S. Federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset
described in footnote (2) above.
(5) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500
shares, representing the value of the $25.0 million principal amount of the
Reorganization Note (based upon the assumed initial public offering price
of $16.00 per share).
(6) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the transactions described in footnote (1) above; (b)
the Reorganization; and (c) the sale of the 3,125,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $16.00
per share, and the application of a portion of the estimated net proceeds
to retire the Reorganization Note . The pro forma as adjusted per share
data does not give effect to a non-recurring $13.5 million ($1.23 per
share) charge to income that will be incurred at the time of the
Reorganization in connection with the conversion from a non-taxable to a
taxable entity and the resulting recognition of a deferred income tax
liability for the differences between the accounting and tax bases of the
Company's assets and liabilities. See Note 16 to the Combined and
Consolidated Financial Statements.
(7) Gives effect to the Sale-Leaseback Transactions and the application of a
portion of the net proceeds therefrom to retire debt as if they had
occurred on December 31, 1996.
(8) Gives effect to the following transactions as if they had occurred at
December 31, 1996: (a) the Sale-Leaseback Transactions and the application
of a portion of the net proceeds therefrom to retire debt; (b) the
Reorganization, including a $13.5 million charge to income resulting in a
reduction of shareholders' equity that will be incurred at the time of the
Reorganization in connection with the conversion from a non-taxable to a
taxable entity and the resulting recognition of a deferred tax liability
for the differences between the accounting and tax bases of the Company's
assets and liabilities; and (c) the sale of the 3,125,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $16.00
per share, and the application of a portion of the estimated net proceeds
to retire the Reorganization Note.
(9) Reflects the elimination, on a pro forma basis, of the preferred
distributions paid with respect to $5.2 million of ARCLP's special
redeemable preferred limited partnership interests (the "Preferred
Partnership Interests"), which interests were redeemed with a portion of
the net proceeds from the Sale-Leaseback Transactions. The Company redeemed
$4.8 million of the Preferred Partnership Interests in June 1996 out of
operating cash flow and distributions of $324,000 paid from January 1996
through June 1996 with respect to the Preferred Partnerships Interests were
not eliminated.
(10) Includes Medicare (including Medicare-related private co-insurance) and
Medicaid.
(11) Includes the two senior living communities with total aggregate capacity
for 483 residents that were the subject of the Sale-Leaseback Transactions
effected January 2, 1997.
6
<PAGE> 8
RISK FACTORS
Potential investors should consider carefully the following factors, as
well as the more detailed information contained elsewhere in this Prospectus,
before making a decision to invest in the Common Stock offered hereby.
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENTS
Following the Sale-Leaseback Transactions on January 2, 1997, the Company
had long-term debt (including current portion) of $156.1 million, of which
$144.2 million was payable to one lender. In addition, the Company is obligated
to pay annual rental obligations of $2.5 million under long-term operating
leases. The Company has entered into non-binding letters of intent to establish
operating lease facilities with Nationwide Health Properties, Inc. ("NHP") and
National Health Investors, Inc. ("NHI"), both health care real estate investment
trusts, pursuant to which NHP and NHI, at the Company's request and upon certain
conditions, would develop, construct, or acquire up to $110.0 million and $100.0
million, respectively, of senior living communities and lease the communities to
the Company (collectively, the "REIT Facilities"). The Company currently intends
to finance its growth through a combination of bank indebtedness, construction
and mortgage financing, transactions with NHP and NHI or other real estate
investment trusts, proceeds from the Offering, and joint venture arrangements.
As a result, a substantial portion of the Company's cash flow will be devoted to
debt service and lease payments and the Company will be subject to risks
normally associated with a high degree of financial leverage. 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, or, in the case of an operating lease, could
terminate the lease, with a consequent loss of income and asset value to the
Company. Furthermore, because most of the Company's mortgages and sale-leaseback
agreements contain cross-default provisions, a default by the Company on one of
its payment obligations could adversely affect a significant number of the
Company's other properties and, consequently the Company's business, results of
operations, and financial condition.
NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES
The Company's ability to sustain any operating losses and to otherwise meet
its growth objectives will depend, in part, on its ability to obtain additional
financing on acceptable terms from available financing sources. Raising
additional funds through the issuance of equity securities could cause existing
shareholders to experience further dilution and could adversely affect the
market price of the Common Stock. There can be no assurance that the Company
will be successful in securing additional financing or that adequate financing
will be available and, if available, will be on terms that are acceptable to the
Company. The Company's inability to obtain additional financing on acceptable
terms could delay or eliminate some or all of the Company's growth plans.
At March 31, 1997, $43.2 million in principal amount, or approximately
27.4%, of the Company's indebtedness, bore interest at floating rates, with a
weighted average annual rate of 7.7%. In addition, it is anticipated that the
REIT Facilities will require operating lease payments that will be based on
prevailing interest rates. Future indebtedness, from commercial banks or
otherwise, and lease obligations are also expected to be based on interest rates
prevailing at the time such debt and lease arrangements are obtained. Therefore,
increases in prevailing interest rates could increase the Company's interest or
lease payment obligations and could have a material adverse effect on the
Company's business, financial condition, and results of operations.
DEPENDENCE ON PRIVATE PAY RESIDENTS
Approximately 92.1% of the Company's total revenues for the year ended
December 31, 1996 were attributable to private pay sources. For the same period,
7.9% of the Company's revenues were attributable to reimbursement from
third-party payors, including Medicare. The Company expects to continue to rely
primarily on the ability of residents to pay for the Company's services from
their own or familial financial
7
<PAGE> 9
resources. Inflation or other circumstances that 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.
SUBSTANTIAL PORTION OF THE PROCEEDS OF THE OFFERING TO BENEFIT EXISTING
SHAREHOLDERS
The Company will use $25.0 million of the estimated net proceeds of the
Offering to repay the Reorganization Note, regardless of the price per share at
which the Common Stock is sold or the net proceeds received by the Company from
the Offering. The principal amount of the Reorganization Note was established by
the general partner of ARCLP in consultation with representatives of the limited
partners of ARCLP, and was not the result of arms length negotiation. See "The
Company -- Pending Reorganization" and "Use of Proceeds." ARCLP will distribute
in liquidation all amounts received from the repayment of the Reorganization
Note to its limited partners, who are the existing shareholders of the Company,
including approximately $17.4 million to the Company's non-employee directors
and their immediate family members and affiliates, and $1.5 million to the
Company's executive officers and their immediate family members and affiliates.
See "Certain Transactions -- Pending Reorganization."
NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH
The Company intends to expand its operations through the development,
construction, and acquisition of free-standing assisted living residences and,
to a lesser extent, through the acquisition of other types of senior living
communities, as well as through the expansion of the Company's home health care
services. See "Business -- Growth Strategy." The success of the Company's growth
strategy will depend, in large part, on its ability to effectively operate any
newly acquired or developed residences, communities, or home health care
agencies, as to which there can be no assurance. The Company has limited
experience developing and operating assisted living residences on a
free-standing basis. The Company's growth plans will also place significant
demands on the Company's management and operating personnel. The Company's
ability to manage its future growth effectively will require it to improve its
operational, financial, and management information systems and to continue to
attract, retain, train, motivate, and manage key employees. If the Company is
unable to manage its growth effectively, its business, results of operations,
and financial condition will be adversely affected. See "Business -- Growth
Strategy" and "Management -- Directors and Executive Officers."
LOSSES FROM NEWLY DEVELOPED RESIDENCES AND ACQUISITIONS
Although the Company was profitable in 1994, 1995, and 1996, in view of its
growth plan for development and acquisitions, there can be no assurance that the
Company will continue to be profitable in any future period. Newly developed
assisted living residences are expected to incur operating losses during a
substantial portion of their first twelve months of operations, on average,
until the residences achieve targeted occupancy levels. Newly acquired
residences and communities may also incur losses pending their integration into
the Company's operations. The Company may also incur operating losses as a
result of the expansion of its existing home health care agencies and the
establishment of additional home health care agencies in new markets. See
"Business -- Growth Strategy" and "Business -- Development Activities."
NO ASSURANCE AS TO ABILITY TO DEVELOP ADDITIONAL ASSISTED LIVING RESIDENCES
An integral component of the Company's growth strategy is to develop and
operate free-standing assisted living residences. As part of its growth
strategy, the Company is currently developing 20 free-standing assisted living
residences, with an estimated aggregate capacity for 1,762 residents, and is
expanding eight of its existing senior living communities to add capacity to
accommodate an additional 704 residents. The Company's ability to develop
successfully assisted living residences will depend on a number of factors,
including, but not limited to, the Company's ability to acquire suitable
development sites at reasonable prices; the Company's success in obtaining
necessary zoning, licensing, and other required governmental permits and
authorizations; and the Company's ability to control construction costs and
project completion schedules. In addition, the Company's development plans are
subject to numerous factors over which it has little or no
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control, including competition for developable properties; shortages of labor or
materials; changes in applicable laws or regulations or their enforcement; the
failure of general contractors or subcontractors to perform under their
contracts; strikes; and adverse weather conditions. As a result of these
factors, there can be no assurance that the Company will not experience
construction delays, that it will be successful in developing and constructing
currently planned or additional assisted living residences, or that any
developed assisted living residences will be economically successful. If the
Company's development schedule is delayed, the Company's growth plans could be
adversely affected. Additionally, the Company anticipates that the development
and construction of additional assisted living residences will involve a
substantial commitment of capital with little or no revenue associated with
residences under development, the consequence of which could be an adverse
impact on the Company's liquidity. See "Business -- Development Activities."
ACQUISITION OF COMMUNITIES AND COMPLEMENTARY BUSINESSES
The Company plans to make strategic acquisitions of senior living
communities (which may include a variety of independent living, assisted living,
and skilled nursing facilities), free-standing assisted living residences, home
health care agencies, and other properties or businesses that are complementary
to the Company's operations and growth strategy. The acquisition of existing
communities or other businesses involves a number of risks. Existing communities
available for acquisition frequently serve or target different markets than
those presently served by the Company. The Company may also determine that
renovations of acquired communities and changes in staff and operating
management personnel are necessary to successfully integrate such communities or
businesses into the Company's existing operations. The costs incurred to
reposition or renovate newly acquired communities may not be recovered by the
Company. In undertaking acquisitions, the Company also may be adversely impacted
by unforeseen liabilities attributable to the prior operators of such
communities or businesses, against whom the Company may have little or no
recourse. The success of the Company's acquisition strategy will be determined
by numerous factors, including the Company's ability to identify suitable
acquisition candidates, the competition for such acquisitions, the purchase
price, the requirement to make operational or structural changes and
improvements, the financial performance of the communities or businesses after
acquisition, the Company's ability to finance the acquisitions, and the
Company's ability to integrate effectively any acquired communities or
businesses into the Company's management, information, and operating systems.
There can be no assurance that the Company's acquisition of senior living
communities and complementary properties and businesses will be completed at the
rate currently expected, if at all, or, if completed, that any acquired
communities or businesses will be successfully integrated into the Company's
operations.
GEOGRAPHIC CONCENTRATION
The Company's growth strategy involves the development of assisted living
residences and the acquisition of senior living communities in concentrated
geographic service areas. See "Business -- Growth Strategy." Accordingly, the
Company's occupancy rates in existing, developed, or acquired communities may be
adversely affected by a number of factors, including regional and local economic
conditions, general real estate market conditions including the supply and
proximity of senior living communities, competitive conditions, and applicable
local laws and regulations. See "Business -- Operating Residences,"
"Business -- Development Activities," and "Business -- Government Regulation."
COMPETITION
The senior living and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. The Company competes with other
companies providing independent living, assisted living, skilled nursing, home
health care, and other similar service and care alternatives. Although the
Company believes there is a need for assisted living residences in the markets
where the Company is operating and developing residences, the Company expects
that competition will increase from existing competitors and new market
entrants, some of whom may have substantially greater financial resources than
the Company. In addition, some of the Company's competitors operate on a
not-for-profit basis or as charitable organizations and have the ability to
finance capital
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expenditures on a tax-exempt basis or through the receipt of charitable
contributions, neither of which are readily available to the Company.
Furthermore, if the development of new senior living communities (particularly
given the rapid pace of development of new assisted living residences) outpaces
the demand for such communities in the markets in which the Company has or is
developing senior living communities, such markets may become saturated. An
oversupply of such communities in the Company's markets could cause the Company
to experience decreased occupancy, reduced operating margins, and lower
profitability. Consequently, there can be no assurance that the Company will not
encounter increased competition that adversely affects its occupancy rates,
pricing for services, and growth prospects. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the services of its executive officers,
particularly the Company's Chairman and Chief Executive Officer, W.E. Sheriff,
and the Company's President and Chief Operating Officer, Christopher J. Coates,
for the management of the Company. Neither Mr. Sheriff, Mr. Coates, nor any of
the Company's other executive officers has an employment agreement with the
Company. The Company has a key employee life insurance policy in the amount of
$2.0 million covering Mr. Sheriff. The loss by the Company of certain of its
executive officers and the inability to attract and retain qualified management
personnel could adversely affect the Company's business, financial condition,
and results of operations. See "Management -- Directors and Executive Officers."
RESIDENCE MANAGEMENT, STAFFING, AND LABOR COSTS
The Company competes with other providers of senior living and health care
services with respect to attracting and retaining qualified management personnel
responsible for the day-to-day operations of each of the Company's communities
and skilled technical personnel responsible for providing resident care. A
shortage of nurses or trained personnel may require the Company to enhance its
wage and benefits package in order to compete in the hiring and retention of
such personnel or to hire more expensive temporary personnel. The Company will
also be dependent on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which it operates. No assurance can be given
that the Company's labor costs will not increase, or that, if they do increase,
they can be matched by corresponding increases in rates charged to residents.
Any significant failure by the Company to attract and retain qualified
management and staff personnel, to control its labor costs, or to pass on any
increased labor costs to residents through rate increases could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS
Upon completion of the Offering, the Company's officers and directors and
entities controlled by them will, collectively, beneficially own approximately
42.4% of the outstanding shares of Common Stock (40.7% if the Underwriters'
over-allotment option is exercised in full). Accordingly, such persons will have
the ability, by voting their shares in concert, to influence the election of the
Company's Board of Directors and the outcome of all other matters submitted to
the Company's shareholders. Furthermore, such influence could preclude any
unsolicited acquisition of the Company and, consequently, adversely affect the
market price of the Common Stock. See "Principal Shareholders."
GOVERNMENT REGULATION
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
staffing (including professional licensing), operating policies and procedures,
fire prevention measures, environmental matters, and compliance with building
and safety codes. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, temporary suspension of
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admission of new patients, suspension or decertification from the Medicare
programs, restrictions on the ability to acquire new facilities or expand
existing facilities, and, in extreme cases, the revocation of a community's
license or closure of a community. There can be no assurance that federal,
state, or local governments will not impose additional restrictions on the
Company's activities that could materially adversely affect the Company.
Many states, including several of the states in which the Company currently
operates, control the supply of licensed skilled nursing beds and home health
care agencies through certificate of need ("CON") programs. Presently, state
approval is required for the construction of new health care communities, the
addition of licensed beds, and certain capital expenditures at such communities,
as well as the opening of a home health care agency. To the extent that a CON or
other similar approval is required for the acquisition or construction of new
facilities, the expansion of the number of licensed beds, services, or existing
communities, or the opening of a home health care agency, the Company could be
adversely affected by the failure or inability to obtain such approval, changes
in the standards applicable for such approval, and possible delays and expenses
associated with obtaining such approval. In addition, in most states the
reduction of the number of licensed beds or the closure of a community requires
the approval of the appropriate state regulatory agency and, if the Company were
to seek to reduce the number of licensed beds at, or to close, a community, the
Company could be adversely affected by a failure to obtain or a delay in
obtaining such approval.
Federal and state anti-remuneration laws, such as "anti-kickback" laws,
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.
Federal anti-kickback laws have 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.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although the
Company believes that its communities 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.
See "Business -- Government Regulation."
POTENTIAL FOR ENVIRONMENTAL LIABILITY
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean-up responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminants, and
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation, or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or lease such property or to borrow using such property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such
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substances at the disposal or treatment facility, whether or not such facility
is owned or operated by such person. Finally, the owner of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
LIABILITY AND INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the health care services industry
have become subject to an increasing number of lawsuits alleging negligence or
related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. Moreover, assisted living residences
offer residents a greater degree of independence in their daily living. This
increased level of independence may subject the resident and the Company to
certain risks that would be reduced in more institutionalized settings. The
Company currently maintains liability insurance in amounts it believes are
sufficient to cover such claims based on the nature of the risks, its historical
experience, and industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance or claims not covered by the
Company's insurance, such as claims for punitive damages, will not arise. A
claim against the Company not covered by, or in excess of, the Company's
insurance could have a material adverse effect upon the Company. In addition,
the Company's insurance policies must be renewed annually. There can be no
assurance that the Company will be able to obtain liability insurance in the
future or that, if such insurance is available, it will be available on
acceptable economic terms. See "Business -- Insurance and Legal Proceedings."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority, without action by the
shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the
rights and preferences of such shares. This authority, together with certain
provisions of the Company's Charter (including provisions that implement
staggered terms for directors, limit shareholder ability to call a shareholders'
meeting or to remove directors, and require a supermajority vote to amend
certain provisions of the Charter), may delay, deter, or prevent a change in
control of the Company. In addition, as a Tennessee corporation, the Company is
subject to the provisions of the Tennessee Business Combination Act and the
Tennessee Greenmail Act, each of which may be deemed to have anti-takeover
effects and may delay, deter, or prevent a takeover attempt that might be
considered by the shareholders to be in their best interests. See "Description
of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee
Law."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market following
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. Upon completion of the
Offering, the Company will have 10,937,500 shares of Common Stock outstanding.
Of these shares, the 3,125,000 shares sold in the Offering will be freely
tradeable without restriction or limitation under the Securities Act of 1933, as
amended (the "Securities Act"), except for shares purchased by "affiliates" of
the Company, as such term is defined in Rule 144 promulgated under the
Securities Act. The remaining 7,812,500 shares will be issued in the
Reorganization and will be "restricted securities" within the meaning of Rule
144 and may not be resold in the public markets unless registered under the
Securities Act or pursuant to an exemption, such as the safe harbor provided by
Rule 144. Holders of the restricted shares will have certain contractual
registration rights with respect thereto. The Company and all directors and
executive officers of the Company (who in the aggregate will beneficially own
4,637,986 shares of Common Stock) have agreed, and certain holders of 5% or more
of the Company's Common Stock outstanding after the Offering will be asked to
agree, subject to certain exceptions, not to offer, sell, or otherwise dispose
of any Common Stock for a period of 180 days after the date hereof. See
"Principal Shareholders," "Description of Capital Stock -- Registration Rights,"
and "Shares Eligible for Future Sale."
As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register the issuance of an aggregate of 1,343,750 shares under the Company's
1997 Stock Incentive Plan and Employee Stock Purchase Plan. As of the date
hereof,
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options to purchase 635,000 shares of Common Stock have been granted under the
1997 Stock Incentive Plan, which options are exercisable at the initial public
offering price. Following the effective date of such registration statement,
shares of Common Stock issued pursuant to either plan will be freely tradeable
in the open market, subject to lock-up agreements, if applicable. See
"Management -- Compensation Pursuant to Plans" and "Shares Eligible For Future
Sale."
ABSENCE OF PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public trading market for the
Common Stock. The public offering price for the Common Stock will be determined
by negotiations among the Company and the Underwriters based upon several
factors and will not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth, or any other generally accepted
criteria of value, and should not be considered as indicative of the actual
value of the Company. See "Underwriting." Although the Common Stock has been
approved for listing on the NYSE, there can be no assurance that an active
trading market will develop or be sustained after the Offering. To the extent
that an active trading market does develop, factors such as quarterly variations
in the Company's financial results, announcements by the Company or others,
general market conditions, or certain regulatory pronouncements may cause the
market price of the Common Stock to fluctuate substantially. There can be no
assurance that the Common Stock can be resold at or above the initial public
offering price.
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the amount of $11.89 per share in the pro forma net
tangible book value of their shares of Common Stock, based upon the assumed
initial public offering price of $16.00 per share. See "Dilution."
------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Those statements include,
but may not be limited to, the discussions of the Company's expectations
concerning its future profitability and the discussion of the Company's
operating and growth strategy, including possible acquisitions. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, without limitation, the factors set forth under the caption "Risk
Factors" in this Prospectus. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate and there can be no assurance that the
forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
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THE COMPANY
GENERAL
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. The Company has pioneered numerous developments in the provision of
care and services for the elderly since its inception in 1978, and believes it
ranks among the leading operators in the senior living and health care industry.
Currently, the Company operates 21 senior living communities in 12 states,
consisting of ten owned communities, four leased communities, and seven managed
communities, with an aggregate capacity for approximately 5,700 residents. The
Company also owns and operates eight home health care agencies. At March 31,
1997, the Company's owned and leased communities had an occupancy rate of 94%
and its managed communities had an occupancy rate of 93%. For the year ended
December 31, 1996, revenues attributable to the Company's senior living
communities accounted for 91.5% of the Company's total revenue and revenues
attributable to the Company's home health care agencies accounted for 8.5% of
the Company's total. Approximately 92.1% of the Company's total revenues for the
year ended December 31, 1996 were derived from private pay sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 11 senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $75.6 million in 1996, an average
annual growth rate of 43.5%. During the same period, the Company's income from
operations has grown from $2.3 million to $15.6 million, an average annual
growth rate of 61.7%. The Company intends to continue its growth through a
combination of (i) development of free-standing assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (ii) selective acquisitions of senior living
communities, including assisted living residences; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
As part of its growth strategy, the Company is currently developing 20
free-standing assisted living residences, with an estimated aggregate capacity
for 1,762 residents, and is expanding eight of its existing communities to add
capacity to accommodate an additional 704 residents. The Company has also
entered into a letter of intent to acquire one additional home health care
agency and intends to commence operations at four additional home health care
agencies during 1997.
The Company was incorporated under the laws of the State of Tennessee in
February 1997 as a wholly-owned subsidiary of ARCLP in anticipation of the
Reorganization and the Offering. The Company's principal executive offices are
located at 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027, and its
telephone number at that address is (615) 221-2250.
THE 1995 ROLL-UP
The Company's predecessor, ARCLP, was formed in February 1995 in connection
with the reorganization (the "1995 Roll-Up") of certain Predecessor Entities
that owned, operated, or managed various senior living communities. Each of the
Predecessor Entities was organized at the direction of the members of the
Company's management and controlling shareholders. As a result of the 1995
Roll-Up, ARCLP issued partnership interests to the partners and shareholders of
the Predecessor Entities in exchange for their limited partnership interests and
stock, respectively, and thereby became the owner, directly or indirectly, of
all of the assets of the Predecessor Entities. The general partner of ARCLP is
American Retirement Communities, LLC, a Tennessee limited liability company (the
"LLC"), whose members include W.E. Sheriff, the Company's Chairman and Chief
Executive Officer, and other Company executive officers. See "Certain
Transactions -- The 1995 Roll-Up."
PENDING REORGANIZATION
Prior to the consummation of the Offering, ARCLP will undergo another
series of transactions that will result in the Reorganization. Pursuant to the
Reorganization, ARCLP will contribute all of its assets, subject to all of its
liabilities, to the Company in exchange for 7,812,500 shares of Common Stock and
the
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Reorganization Note in the principal amount of $25.0 million. The principal
amount of the Reorganization Note was established by ARCLP and the Company in
connection with the Reorganization based on a number of factors, including the
value of the assets to be contributed to the Company. Immediately after
consummation of the Reorganization, ARCLP will distribute approximately
1,350,000 shares of Common Stock to the LLC, as general partner of ARCLP, and an
aggregate of approximately 6,412,500 shares of Common Stock to the limited
partners of ARCLP, generally in accordance with the limited partners' ARCLP
contribution accounts. The actual number of shares of Common Stock allocated to
the LLC will be determined at the time of the consummation of the Offering and
will have a value, based on the initial public offering price, equal to the sum
of $15.0 million plus a percentage of the value of the Company (including the
principal amount of the Reorganization Note) immediately prior to the Offering
(the "Pre-IPO Valuation") over $84.0 million. The Pre-IPO Valuation will be
determined by the Company by reference to the initial public offering price. See
"Principal Shareholders" and "Certain Transactions -- Pending Reorganization."
Upon consummation of the Offering, the Reorganization Note will be repaid by the
Company out of the net proceeds from the Offering and such amounts received by
ARCLP will be distributed to the limited partners of ARCLP in liquidation. See
"Risk Factors -- Substantial Portion of the Proceeds of the Offering to Benefit
Existing Shareholders," "Use of Proceeds," and "Certain Transactions -- Pending
Reorganization."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $45.6 million (approximately $52.6 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $16.00 per share (the midpoint of the range shown on
the cover page of this Prospectus) and after deduction of the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company will use $25.0 million of the net proceeds to repay the
Reorganization Note. See "The Company -- Pending Reorganization" and "Certain
Transactions -- Pending Reorganization." The principal amount of the
Reorganization Note was established by ARCLP and the Company in connection with
the Reorganization based on a number of factors, including the value of the
assets to be contributed to the Company.
The Company has entered into a non-binding letter of intent to acquire a
home health care agency located in Corpus Christi, Texas. The Company intends to
use approximately $1.0 million of the net proceeds from the Offering to complete
the acquisition. There can be no assurance, however, that the Company will
complete the transaction or, if completed, that the terms of the transaction
will not differ materially from those currently contemplated. Although the
Company regularly evaluates acquisition opportunities and conducts preliminary
discussions regarding acquisitions, the Company presently has no agreements,
arrangements, or commitments with respect to the acquisition of any business
except as set forth above.
The Company intends to use the balance of the net proceeds, together with
funding under the REIT Facilities, future bank indebtedness, construction and
mortgage financings, and funds from other sources for working capital purposes,
including the development and construction of free-standing assisted living
residences and possible acquisitions of businesses engaged in activities similar
or complementary to the Company's business. The Company currently has 20
assisted living residences under development with an aggregate capacity for
1,762 residents. See "Business -- Development Activities." The Company
anticipates that the cost to develop its assisted living residences will range
from $65,000 to $90,000 per unit.
Pending the use of the net proceeds as described above, the net proceeds
will be invested in short-term, investment-grade securities.
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DIVIDEND POLICY AND PRIOR DISTRIBUTIONS
Following the Offering, it will be the policy of the Company's Board of
Directors to retain all future earnings to finance the operation and expansion
of the Company's business. Accordingly, the Company does not anticipate
declaring or paying cash dividends on the Common Stock in the foreseeable
future. The payment of cash dividends in the future will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, the Company's earnings, operations, capital requirements, financial
condition, restrictions in then existing financing agreements, and other factors
deemed relevant by the Board of Directors.
Prior to the Offering, the Predecessor and the Predecessor Entities have
made periodic distributions to their respective partners or shareholders in
accordance with their ownership interests therein. During 1995 and 1996, ARCLP
made or accrued for distributions of approximately $6.6 million and $7.1
million, respectively, to its partners, including approximately $30,000 and
$59,000, respectively, to the LLC. In addition, in 1996 ARCLP redeemed its
Preferred Partnership Interests for $10.0 million. See "Certain Transactions --
Redemption of Preferred Partnership Interests." Prior to the consummation of the
Reorganization, ARCLP will distribute approximately $2.5 million to its
partners, which amount approximates the income taxes associated with ARCLP's
anticipated earnings in 1997 through the date of the Reorganization. In
addition, immediately following the consummation of the Offering, and in
connection with ARCLP's liquidation, the proceeds from the repayment of the
Reorganization Note will be distributed by ARCLP to its limited partners,
generally in accordance with their respective contribution accounts. See "The
Company -- Pending Reorganization" and "Certain Transactions -- Pending
Reorganization."
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CAPITALIZATION
The following table sets forth (i) the actual capitalization of the
Predecessor at December 31, 1996, (ii) the capitalization of the Predecessor at
December 31, 1996 on a pro forma basis as if the Sale-Leaseback Transactions had
occurred on such date, and (iii) the capitalization of the Company at December
31, 1996 on a pro forma as adjusted basis to reflect (a) the Sale-Leaseback
Transactions; (b) the Reorganization (including a $13.5 million one-time charge
to income resulting in a reduction of shareholders' equity which will be
incurred at the time of the Reorganization in connection with the conversion
from a non-taxable to a taxable entity and the resulting recognition of a
deferred income tax liability for the differences between the accounting and tax
bases of the Company's assets and liabilities); and (c) the issuance and sale of
the 3,125,000 shares of Common Stock offered hereby, at an assumed initial
public offering price of $16.00 per share, and the application of a portion of
the estimated net proceeds to retire the Reorganization Note, as if all such
events had occurred on December 31, 1996. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Combined and Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------
PREDECESSOR COMPANY
-------------------- -----------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including current portion of long-term
debt...................................................... $ 8,053 $ 2,838 $ 2,838
======== ======== ========
Long-term debt, less current portion........................ $162,636 $153,258 $153,258
Partners'/shareholders' equity:
Partners' equity.......................................... 37,882 37,882 --
Preferred Stock, no par value; 5,000,000 shares
authorized, no shares issued and outstanding........... -- -- --
Common Stock, par value $.01 per share; 50,000,000 shares
authorized; 10,937,500 shares issued and outstanding,
pro forma as adjusted (1).............................. -- -- 109
Additional paid-in capital................................ -- -- 44,857
-------- -------- --------
Total partners'/shareholders' equity................... 37,882 37,882 44,966
-------- -------- --------
Total capitalization................................... $200,518 $191,140 $198,224
======== ======== ========
</TABLE>
- ---------------
(1) Includes 7,812,500 shares of Common Stock to be issued in the
Reorganization. Does not include 635,000 shares of Common Stock reserved
for issuance pursuant to outstanding stock options under the Company's
Stock Incentive Plan, which options are exercisable at the initial public
offering price. See "Management -- Compensation Pursuant to Plans -- 1997
Stock Incentive Plan" and "Description of Capital Stock."
17
<PAGE> 19
DILUTION
The actual and pro forma net tangible book value of the Company at December
31, 1996 was approximately $37.9 million, or $4.04 per share of Common Stock.
Net tangible book value per share represents the amount of the Company's total
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding, which, for purposes of these calculations, is presumed
to be 9,375,000 shares (which reflects 7,812,500 shares issuable in the
Reorganization, plus 1,562,500 shares, representing the value of the $25.0
million principal amount of the Reorganization Note, based upon an assumed
initial public offering price of $16.00 per share). After giving effect to (i)
the Reorganization (including a $13.5 million one-time charge to income
resulting in a reduction of shareholders' equity which will be incurred at the
time of the Reorganization in connection with the conversion from a non-taxable
to a taxable entity and the resulting recognition of a deferred income tax
liability for the differences between the accounting and tax bases of the
Company's assets and liabilities); (ii) the sale of the 3,125,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$16.00 per share, and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company; and (iii) the
application of a portion of the estimated net proceeds to retire the
Reorganization Note, the pro forma net tangible book value of the Company as of
December 31, 1996 would have been approximately $45.0 million, or $4.11 per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value per share of $0.07 to existing shareholders and an immediate
dilution of $11.89 per share to investors purchasing Common Stock in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $16.00
Pro forma net tangible book value prior to the Offering... $4.04
Increase in pro forma net tangible book value attributable
to new investors....................................... 0.07
-----
Pro forma net tangible book value after the Offering........ 4.11
------
Dilution to new investors................................... $11.89
======
</TABLE>
The following table summarizes the number of shares of Common Stock issued
by the Company, the total consideration paid to the Company, and the average
price per share paid by the existing shareholders and to be paid by the new
investors. For purposes of the total consideration and average price per share
paid by the existing shareholders, the Company has based such valuation on the
aggregate amount of the partners' cash contributions to the Predecessor and the
Predecessor Entities, without deducting distributions paid to such partners.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 7,812,500 71.4% $34,838,000 41.1% $ 4.46
New investors............................ 3,125,000 28.6% $50,000,000 58.9% $16.00
---------- ----- ----------- ------
Total.......................... 10,937,500 100.0% $84,838,000 100.0%
========== ===== =========== ======
</TABLE>
18
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1996 reflects the pro forma effects of the
Carriage Club Acquisitions and the Sale-Leaseback Transactions and the
application of a portion of the net proceeds therefrom to retire debt, as if
these transactions had occurred on January 1, 1996.
The accompanying Unaudited Pro Forma Consolidated Balance Sheet at December
31, 1996 reflects the pro forma effects of (i) the Sale-Leaseback Transactions
and the application of a portion of the net proceeds therefrom to retire debt,
(ii) the Reorganization (including the recognition of a non-recurring $13.5
million charge to income resulting in a reduction of shareholders' equity which
will be incurred at the time of the Reorganization in connection with the
conversion from a non-taxable to a taxable entity and the resulting recognition
of a deferred income tax liability for the differences between the accounting
and tax bases of the Company's assets and liabilities), and (iii) the sale of
the 3,125,000 shares of Common Stock offered hereby, at an assumed initial
public offering price of $16.00 per share, and the application of a portion of
the estimated net proceeds to retire the Reorganization Note, as if all of these
transactions had occurred at December 31, 1996.
These unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and may not be indicative of the actual
results that would have been obtained if the transactions had occurred on the
dates indicated or that may be realized in the future. The pro forma information
should be read in conjunction with the historical financial statements of the
Predecessor and the historical combined financial statements of Carriage Club
and the notes thereto included elsewhere in this Prospectus.
19
<PAGE> 21
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SALE-
CARRIAGE CLUB LEASEBACK
CARRIAGE CLUB ACQUISITIONS TRANSACTIONS
PREDECESSOR(A) ACQUISITIONS(B) ADJUSTMENTS(C) ADJUSTMENTS(D)
-------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue............... $ 73,878 $4,086 $ -- $ --
Management services revenue.................... 1,739 -- (160) --
-------- ------ -------- -------
Total revenues............................... 75,617 4,086 (160) --
Operating expenses:
Community operating expense.................... 46,960 2,498 (160) --
General and administrative..................... 6,200 -- -- --
Lease expense.................................. -- -- -- 2,090
Depreciation and amortization.................. 6,906 464 104 (1,201)
-------- ------ -------- -------
Total operating expenses..................... 60,066 2,962 (56) 889
-------- ------ -------- -------
Income (loss) from operations................ 15,551 1,124 (104) 889
Other income (expense):
Interest expense............................... (12,160) (833) (991) 1,388
Interest income................................ 434 21 -- --
Other.......................................... 788 -- -- --
-------- ------ -------- -------
Other income (expense), net.................. (10,938) (812) (991) 1,388
-------- ------ -------- -------
Income (loss) before income taxes and
extraordinary item......................... 4,613 312 (1,095) 499
Income tax expense (benefit)................. (920) -- -- --
-------- ------ -------- -------
Income (loss) before extraordinary item...... $ 5,533 $ 312 $ (1,095) $ 499
======== ====== ======== =======
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item............................. $ 4,613 $ 312 $ (1,095) $ 499
Pro forma income tax expense (benefit)(E)........ 820 119 (416) 189
-------- ------ -------- -------
Pro forma income (loss) before extraordinary
item........................................... $ 3,793 $ 193 $ (679) $ 310
======== ====== ======== =======
Pro forma per share data:
Income per share before extraordinary
item(F)...................................... $ 0.40
========
Shares used in computing pro forma per share
data(G)...................................... 9,375
========
Pro forma as adjusted per share data:
Income per share before extraordinary
item(H)......................................
Shares used in computing pro forma as adjusted
per share data(I)............................
<CAPTION>
PRO FORMA
---------
<S> <C>
Revenues:
Resident and health care revenue............... $ 77,964
Management services revenue.................... 1,579
--------
Total revenues............................... 79,543
Operating expenses:
Community operating expense.................... 49,298
General and administrative..................... 6,200
Lease expense.................................. 2,090
Depreciation and amortization.................. 6,273
--------
Total operating expenses..................... 63,861
--------
Income (loss) from operations................ 15,682
Other income (expense):
Interest expense............................... (12,596)
Interest income................................ 455
Other.......................................... 788
--------
Other income (expense), net.................. (11,353)
--------
Income (loss) before income taxes and
extraordinary item......................... 4,329
Income tax expense (benefit)................. (920)
--------
Income (loss) before extraordinary item...... $ 5,249
========
PRO FORMA TAX DATA:
Income (loss) before income taxes and
extraordinary item............................. $ 4,329
Pro forma income tax expense (benefit)(E)........ 712
--------
Pro forma income (loss) before extraordinary
item........................................... $ 3,617
========
Pro forma per share data:
Income per share before extraordinary
item(F)...................................... $ 0.39
========
Shares used in computing pro forma per share
data(G)...................................... 9,375
========
Pro forma as adjusted per share data:
Income per share before extraordinary
item(H)...................................... $ 0.33
========
Shares used in computing pro forma as adjusted
per share data(I)............................ 10,938
========
</TABLE>
- ---------------
(A) Reflects the historical consolidated statement of operations of the
Predecessor for the year ended December 31, 1996, including the operations
of Carriage Club for the period May 1, 1996 (the effective date of the
Carriage Club Acquisitions) through December 31, 1996.
(B) Reflects the historical combined statement of operations for Carriage Club
for the period January 1, 1996 through April 30, 1996.
(C) Includes the following adjustments relating to the Carriage Club
Acquisitions for the period January 1, 1996 through April 30, 1996: (i)
elimination of $160,000 in management fees paid to the Predecessor by
Carriage Club; (ii) additional depreciation expense of $104,000 attributable
to the increase in the carrying value of the acquired assets; and (iii)
additional interest costs of $991,000 associated with the financing of the
Carriage Club Acquisitions. Additional interest costs represent the
difference between the interest that would have been incurred by the Company
if the Company had acquired the Carriage Club properties on January 1, 1996,
and the actual interest cost incurred by the seller of these properties for
the period from January 1, 1996 through April 30, 1996.
(D) Includes the following adjustments relating to the Sale-Leaseback
Transactions: (i) elimination of $1.2 million of depreciation and
amortization expense on assets sold in the Sale-Leaseback Transactions; (ii)
lease expense of approximately $2.5 million, less $455,000 representing
amortization of the deferred gain on the Sale-Leaseback Transactions ($4.6
million over ten years); and (iii) elimination of $1.4 million of interest
expense on debt retired with a portion of the net proceeds from the
Sale-Leaseback Transactions.
(E) Reflects income tax expense that would have been recognized if the
Predecessor, the Predecessor Entities, and Carriage Club had been
corporations since January 1, 1996, filing a consolidated tax return.
(F) Income per share before extraordinary item is calculated before subtracting
the return on the Preferred Partnership Interests.
(G) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500
shares, representing the value of the $25.0 million principal amount of the
Reorganization Note (based upon an assumed initial public offering price of
$16.00 per share).
(H) Does not reflect a $13.5 million ($1.23 per share) one-time charge to income
which will be incurred at the time of the Reorganization in connection with
the conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities.
(I) Reflects 7,812,500 shares issuable in the Reorganization, plus the 3,125,000
shares offered hereby.
20
<PAGE> 22
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
[CAPTION]
<TABLE>
<CAPTION>
SALE-LEASEBACK REORGANIZATION
TRANSACTIONS AND OFFERING PRO FORMA
PREDECESSOR ADJUSTMENTS(A) PRO FORMA ADJUSTMENTS(B) AS ADJUSTED
----------- --------------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents..................... $ 3,222 $ 8,292 $ 11,514 $ 20,600 $ 32,114
Assets whose use is limited................... 1,022 (500) 522 -- 522
Resident and health care receivables.......... 2,782 -- 2,782 -- 2,782
Other current assets.......................... 2,245 -- 2,245 -- 2,245
-------- -------- -------- -------- --------
Total current assets.................. 9,271 7,792 17,063 20,600 37,663
Land, buildings and equipment, net............ 213,124 (22,890) 190,234 -- 190,234
Other assets.................................. 5,767 (139) 5,628 -- 5,628
-------- -------- -------- -------- --------
Total assets.......................... $228,162 $(15,237) $212,925 $ 20,600 $233,525
======== ======== ======== ======== ========
Current portion of long-term debt............. $ 8,053 $ (5,215) $ 2,838 $ -- $ 2,838
Redemption payable............................ 5,195 (5,195) -- -- --
Promissory note............................... -- -- -- 25,000 --
(25,000)
Other current liabilities..................... 10,312 -- 10,312 -- 10,312
-------- -------- -------- -------- --------
Total current liabilities............. 23,560 (10,410) 13,150 -- 13,150
Long-term debt................................ 162,636 (9,378) 153,258 -- 153,258
Deferred income taxes......................... -- -- -- 13,516 13,516
Other long-term liabilities................... 4,084 4,551 8,635 -- 8,635
-------- -------- -------- -------- --------
Total liabilities..................... 190,280 (15,237) 175,043 13,516 188,559
Partners' equity.............................. 37,882 -- 37,882 (37,882) --
Shareholders' equity:
Common stock................................ -- -- -- 109 109
Additional paid-in capital.................. -- -- -- 44,857 44,857
-------- -------- -------- -------- --------
Total shareholders' equity............ -- -- -- 44,966 44,966
-------- -------- -------- -------- --------
Total liabilities and
partners'/shareholders' equity...... $228,162 $(15,237) $212,925 $ 20,600 $233,525
======== ======== ======== ======== ========
</TABLE>
- ---------------
(A) Includes the following adjustments relating to the Sale-Leaseback
Transactions: (i) the cash proceeds received of $27.6 million; (ii) the
application of a portion the net proceeds therefrom to repay $14.6 million
of debt, including $5.2 million of short-term debt and $9.4 million of
long-term debt, and to redeem the remaining balance of the Preferred
Partnership Interests for $5.2 million; (iii) the sale of $22.9 million of
land, buildings, and equipment; (iv) the write-off of $139,000 of deferred
financing costs on long-term debt which was repaid with the net proceeds;
(v) the recognition of a deferred gain of $4.6 million reflecting the excess
of the sale price of such assets over the Company's bases in the assets; and
(vi) the reclassification of $500,000 which was previously restricted as to
use.
(B) Includes the following adjustments relating to the Reorganization and the
Offering: (i) the reorganization of the Predecessor from a limited
partnership to a corporation; (ii) the issuance of the Reorganization Note;
(iii) the recognition of a non-recurring $13.5 million ($1.23 per share)
charge to income resulting in a reduction of shareholders' equity which will
be incurred at the time of the Reorganization in connection with the
conversion from a non-taxable to a taxable entity and the resulting
recognition of a deferred income tax liability for the differences between
the accounting and tax bases of the Company's assets and liabilities; (iv)
the issuance and sale of the 3,125,000 shares of Common Stock offered
hereby, at an assumed initial public offering price of $16.00 per share, and
the receipt by the Company of estimated net proceeds of $45.6 million; and
(v) the application of a portion of the net proceeds from the Offering to
retire the Reorganization Note.
21
<PAGE> 23
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and pro forma data
of the Company, the Predecessor, and the Predecessor Entities. The selected
financial data as of and for the years ended December 31, 1992, 1993, and 1994
and the three months ended March 31, 1995 are derived from the combined
financial statements of the Predecessor Entities. The selected financial data as
of and for the nine months ended December 31, 1995 and as of and for the year
ended December 31, 1996 are derived from the consolidated financial statements
of the Predecessor. The selected data as of and for the periods ended December
31, 1994, March 31, 1995, December 31, 1995, and December 31, 1996 are derived
from the combined and consolidated financial statements of the Predecessor,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The combined and consolidated
financial statements as of December 31, 1995 and 1996, and for the year ended
December 31, 1994, the three months ended March 31, 1995, the nine months ended
December 31, 1995, and the year ended December 31, 1996, and the report thereon,
are included elsewhere in this Prospectus. The information below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined and consolidated financial
statements of the Predecessor, the related notes, and the independent auditors'
report, which refers to a change in cost basis as a result of a purchase
business combination in connection with the 1995 Roll-Up.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES (COMBINED) PREDECESSOR
------------------------------------------- -------------------------------------
THREE MONTHS NINE MONTHS YEAR ENDED
YEARS ENDED DECEMBER 31, ENDED ENDED DECEMBER 31, 1996
--------------------------- MARCH 31, DECEMBER 31, ----------------------
1992 1993 1994 1995 1995 ACTUAL PRO FORMA(1)
------- ------- ------- ------------- ------------ ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and health care revenue... $16,045 $23,162 $30,979 $11,761 $47,239 $73,878 $77,964
Management services revenue........ 1,774 2,752 2,362 595 1,524 1,739 1,579
------- ------- ------- ------- ------- ------- -------
Total revenues............... 17,819 25,914 33,341 12,356 48,763 75,617 79,543
Operating expenses:
Community operating expense........ 11,329 16,401 21,780 8,035 30,750 46,960 49,298
General and administrative......... 2,656 3,290 3,455 1,108 3,446 6,200 6,200
Lease expense...................... -- -- -- -- -- -- 2,090
Depreciation and amortization...... 1,557 2,251 2,891 1,127 4,534 6,906 6,273
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 15,542 21,942 28,126 10,270 38,730 60,066 63,861
------- ------- ------- ------- ------- ------- -------
Income from operations........... 2,277 3,972 5,215 2,086 10,033 15,551 15,682
------- ------- ------- ------- ------- ------- -------
Other income (expense):
Interest expense................... (2,914) (3,569) (5,354) (2,370) (7,930) (12,160) (12,596)
Interest income.................... 145 122 203 49 329 434 455
Other.............................. 39 189 98 (1,013)(2) 919 788 788
------- ------- ------- ------- ------- ------- -------
Other income (expense), net...... (2,730) (3,258) (5,053) (3,334) (6,682) (10,938) (11,353)
Income (loss) before income taxes
and extraordinary item......... (453) 714 162 (1,248) 3,351 4,613 4,329
Income tax expense (benefit) (3)..... -- -- -- 20 55 (920) (920)
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item............................... (453) 714 162 (1,268) 3,296 5,533 5,249
Extraordinary item(4)................ -- -- -- -- -- (2,335) (2,335)
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... (453) 714 162 (1,268) 3,296 3,198 2,914
Preferred return on special
redeemable preferred limited
partnership interests(5)........... -- -- -- -- (1,125) (1,104) (324)
------- ------- ------- ------- ------- ------- -------
Net income (loss) available for
distribution to partners and
shareholders....................... $ (453) $ 714 $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590
======= ======= ======= ======= ======= ======= =======
Distribution to partners, excluding
preferred distributions............ $ 404 $ 5,708 $ 2,580 $ 1,400 $ 4,064 $ 6,035 $ 6,035
======= ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
PREDECESSOR
--------------------
YEAR ENDED
DECEMBER 31, 1996
--------------------
PRO
ACTUAL FORMA(1)
------ --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
UNAUDITED PRO FORMA TAX DATA(6):
Income before income taxes and extraordinary item........... $4,613 $4,329
Pro forma income tax expense................................ 820 712
------ ------
Pro forma income before extraordinary item.................. 3,793 3,617
Preferred return on special redeemable preferred limited
partnership interests(5).................................. (1,104) (324)
------ ------
Pro forma income before extraordinary item available for
distribution to partners and shareholders................. $2,689 $3,293
====== ======
Pro forma per share data:
Income before extraordinary item.......................... $0.40 $ 0.39
Preferred return on special redeemable preferred limited
partnership interests................................... 0.12 0.03
------ ------
Income before extraordinary item available for
distribution to partners and shareholders............... $0.29 $ 0.35
====== ======
Shares used in computing pro forma per share data(7)...... 9,375 9,375
====== ======
Pro forma as adjusted per share data(8):
Income before extraordinary item.......................... $ 0.33
Preferred return on special redeemable preferred limited
partnership interests................................... 0.03
------
Income before extraordinary item available for
distribution to partners and shareholders............... $ 0.30
======
Shares used in computing pro forma as adjusted per share
data.................................................... 10,938
======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------
PREDECESSOR ENTITIES
(COMBINED) PREDECESSOR COMPANY
---------------------------- ---------------------------------------- ------------
1996
PRO FORMA
1996 1996 AS
1992 1993 1994 1995 ACTUAL PRO FORMA(9) ADJUSTED(10)
------- ------- -------- -------------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 2,186 $ 3,205 $ 2,894 $ 3,825 $ 3,222 $ 11,514 $ 32,114
Working capital (deficit)........... 1,545 2,529 3,168 (1,048) (14,289) 3,913 24,513
Total assets........................ 54,419 63,393 111,425 165,579 228,162 212,925 233,525
Long-term debt, including current
portion........................... 38,469 43,335 89,414 102,245 170,689 156,096 156,096
Partners' and shareholders'
equity............................ 11,937 15,042 12,823 51,823 37,882 37,882 44,966
</TABLE>
- ---------------
(1) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the Carriage Club Acquisitions, and (b) the
Sale-Leaseback Transactions and the application of a portion of the net
proceeds therefrom to retire debt.
(2) Includes a one-time expense of $964,000 incurred in connection with the
1995 Roll-Up. See Note 11 to the Combined and Consolidated Financial
Statements.
(3) Provision for income taxes reflects income tax expense of only one of the
Predecessor Entities because the Predecessor and the other Predecessor
Entities were partnerships. No income tax expense is reflected for periods
prior to 1995 because of losses or the availability of NOLs. Both periods
in 1995 reflect a provision for alternative minimum taxes. In 1996, the
Company recorded an income tax benefit and a deferred tax asset of $920,000
because of the anticipated utilization of NOLs that will offset taxable
gains recognized from the Sale-Leaseback Transactions. See Note 12 to the
Combined and Consolidated Financial Statements.
(4) Amount represents loss on early extinguishment of debt. See Note 9 to the
Combined and Consolidated Financial Statements.
(5) In connection with the 1995 Roll-Up, $10.0 million of promissory notes were
exchanged for $10.0 million of Preferred Partnership Interests bearing a
15% cumulative distribution right. From October 1994 (when such notes were
created) through the 1995 Roll-Up, interest expense at 15% was recorded and
paid. Following the 1995 Roll-Up, the Company has paid preferred 15%
distributions to the holders of the Preferred Partnership Interests. From
January 1996 to June 1996, the Company paid $324,000 of distributions with
respect to $4.8 million of the Preferred Partnership Interests which were
redeemed in June 1996 out of operating cash flow and were not eliminated.
The remaining $5.2 million of the Preferred Partnership Interests were
redeemed with a portion of the net proceeds from the Sale-Leaseback
Transactions, and therefore distributions with respect to this $5.2 million
portion of the Preferred Partnership Interests have been eliminated in the
Pro Forma Statement of Operations data.
(6) Except for one of the Predecessor Entities, the Predecessor and the
Predecessor Entities, as partnerships, were exempt from U.S. Federal and
state income taxes. The pro forma financial data reflects the effect on
certain income statement data of income tax expense that would have been
recorded had the Predecessor and the other Predecessor Entities not been
exempt from paying such income taxes. Pro forma income tax expense has been
calculated using statutory U.S. Federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset
described in footnote (3) above.
(7) Reflects 7,812,500 shares issuable in the Reorganization, plus 1,562,500
shares, representing the value of the $25.0 million principal amount of the
Reorganization Note (based upon an assumed initial public offering price of
$16.00 per share).
23
<PAGE> 25
(8) Gives effect to the following transactions as if they had occurred on
January 1, 1996: (a) the transactions described in footnote (1) above; (b)
the Reorganization; and (c) the sale of the 3,125,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $16.00
per share, and the application of a portion of the estimated net proceeds
to retire the Reorganization Note. The pro forma as adjusted per share data
does not give effect to a non-recurring $13.5 million ($1.23 per share)
charge to income that will be incurred at the time of the Reorganization in
connection with the conversion from a non-taxable to a taxable entity and
the resulting recognition of a deferred income tax liability for the
differences between the accounting and tax bases of the Company's assets
and liabilities. See Note 16 to the Combined and Consolidated Financial
Statements.
(9) Gives effect to the Sale-Leaseback Transactions and the application of a
portion of the net proceeds therefrom to retire debt as if they had
occurred on December 31, 1996.
(10) Gives effect to the following transactions as if they had occurred at
December 31, 1996: (a) the Sale-Leaseback Transactions and the application
of a portion of the net proceeds therefrom to retire debt; (b) the
Reorganization, including a $13.5 million charge to income resulting in a
reduction of shareholders' equity which will be incurred at the time of the
Reorganization in connection with the conversion from a non-taxable to a
taxable entity and the resulting recognition of a deferred income tax
liability for the differences between the accounting and tax bases of the
Company's assets and liabilities; and (c) the sale of the 3,125,000 shares
of Common Stock offered hereby, at an assumed initial public offering price
of $16.00 per share, and the application of a portion of the estimated net
proceeds to retire the Reorganization Note.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly within a residential
setting. The Company currently operates 19 senior living communities in 12
states with an aggregate capacity for approximately 5,500 residents. The Company
currently owns ten communities, leases two communities pursuant to long-term
leases, and manages seven communities pursuant to management agreements. The
Company's total revenues have grown from $17.8 million in 1992 to $75.6 million
in 1996, an average annual growth rate of 43.5%. During the same period, the
Company's income from operations has grown from $2.3 million to $15.6 million,
an average annual growth rate of 61.7%.
The Company and its predecessors have owned, operated, or managed senior
living communities since 1978. The Predecessor, ARCLP, was formed in February
1995 in connection with the 1995 Roll-Up. The 1995 Roll-Up, effective April 1,
1995, was accounted for as a purchase business combination by the Predecessor.
The Company was incorporated in February 1997 for purposes of effecting the
Reorganization and the Offering. See "The Company -- Pending Reorganization."
For the purposes of the following discussion, amounts for the year ended
December 31, 1995 represent the sum of the combined results of operations of the
Predecessor and Predecessor Entities for the period from January 1, 1995 through
March 31, 1995 and the consolidated results of operations of the Predecessor for
the period from April 1, 1995 (the effective date of the 1995 Roll-Up) through
December 31, 1995. See Note 1 to the Combined and Consolidated Financial
Statements.
In its early history, the Company focused its efforts on providing contract
management, marketing, and development services primarily to third parties.
Beginning in 1990 and continuing through 1996, the Company embarked on a
strategy of acquiring senior living communities through the Predecessor Entities
and the Predecessor. During that period, the Company acquired the 12 communities
it now owns or leases. Over the last three years, the Company acquired eight of
these senior living communities, with an aggregate capacity for 2,186 residents,
at a total cost of approximately $139.0 million. See Note 3 to the Combined and
Consolidated Financial Statements.
During the next three years, the Company intends to develop approximately
35 free-standing assisted living residences with an aggregate capacity for
approximately 2,900 residents at an aggregate estimated cost to complete and
lease-up such residences of approximately $250.0 million to $300.0 million. The
Company is currently constructing an $11.6 million expansion at one of its owned
communities and is constructing, on behalf of the lessor, a $14.0 million
expansion at one of its leased communities. In addition, the Company plans to
commence additional expansions at five of its owned communities, which are
expected to cost approximately $50.0 million to $60.0 million to complete and
lease-up. These seven expansion projects will add capacity to accommodate an
additional 613 residents. The development of assisted living residences
typically involves a substantial commitment of capital over a twelve month
construction period, during which no revenues are generated, followed by a
twelve month lease-up period. The Company anticipates that newly opened or
expanded communities will operate at a loss during a substantial portion of the
lease-up period. See " -- Liquidity and Capital Resources" and "Risk
Factors -- Losses from Newly Developed Residences and Acquisitions" and "Risk
Factors -- No Assurance as to Ability to Develop Additional Assisted Living
Residences." In addition to the expansion of its owned and leased communities,
the Company is currently managing the expansion of one of its managed
communities.
The Company's growth strategy also includes the acquisition of
free-standing assisted living residences and, to a lesser extent, other senior
living communities; home health care agencies; and other properties or
businesses that are complementary to the Company's operations and growth
strategy.
The Company's total revenues are comprised of (i) resident and health care
revenues, which include all resident and home health care agency fees, and (ii)
management services revenues, which include fees, net of reimbursements, for the
development, marketing, and management of facilities owned by third parties. The
25
<PAGE> 27
Company's resident and health care revenues are derived primarily from three
principal sources: (i) monthly service fees from independent and assisted living
residents, representing 75.2%, 71.6%, and 61.9% of total revenues for the years
ended December 31, 1996, 1995, and 1994, respectively; (ii) per diem charges
from nursing patients, representing 14.0%, 17.2%, and 29.1% of total revenues
for the years ended December 31, 1996, 1995, and 1994, respectively; and (iii)
per visit billings from home health care patients and companion services
clients, representing 8.5%, 7.7%, and 1.9% of total revenues for the years ended
December 31, 1996, 1995, and 1994, respectively. Management services revenues
represented 2.3%, 3.5%, and 7.1% of total revenues for the years ended December
31, 1996, 1995, and 1994, respectively. Approximately 92.1%, 91.3%, and 93.0% of
the Company's total revenues for the years ended December 31, 1996, 1995, and
1994, respectively, were attributable to private pay sources, with the balance
attributable to Medicare (7.8% in 1996), including Medicare-related private
co-insurance, and Medicaid (0.1% in 1996).
The Company's operating expenses are comprised, in general, of (i)
community operating expense, which includes all operating expenses of the
Company's owned or leased facilities, including the expenses of its home health
care agencies; (ii) general and administrative expense, which includes all
corporate office overhead; and (iii) depreciation and amortization expense. As a
result of the Sale-Leaseback Transactions in January 1997, the Company will
incur lease expense for periods after such date.
RESULTS OF OPERATIONS
The Company operates senior living communities and home health care
agencies under three general types of arrangements: fee ownership, leases, and
management agreements. At March 31, 1997, the Company owned ten communities and
eight home health care agencies; leased four senior living communities; and
operated seven communities pursuant to management agreements. Ownership of
senior living communities and home health care agencies typically requires a
larger capital investment than managed or leased operations, but provides
maximum control over operations and all growth in owned community and agency
revenues flows directly to the Company. The Company's lease arrangements are
typically for terms of ten to 15 years, include renewal options, and provide for
a contractually fixed rent, plus additional rent, subject to certain limits,
based upon the gross revenues of the community. The Company's lease agreements
also typically limit the Company's right to operate other senior living
communities within a limited geographic area adjacent to the leased community
during the term of the lease and for one year thereafter. Leased communities
require a longer commitment and a larger capital investment by the Company than
managed communities, but provide a more stable source of revenue because of
their longer terms and provide a greater opportunity for long-term revenue
growth.
The Company's management agreements are generally for terms of three to
five years, but may be canceled by the owner of the community, without cause, on
three to six months notice. Pursuant to the management agreements, the Company
is generally responsible for providing management personnel, marketing, nursing,
resident care and dietary services, accounting and data processing reports, and
other services for these communities at the owner's expense. The Company
receives a monthly fee for its services based on either a contractually fixed
amount or a percentage of revenues or income. Certain management agreements also
provide the Company with an incentive fee based on various performance goals.
The Company's current management agreements expire on various dates between June
1997 and July 2000.
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<PAGE> 28
The following table sets forth, for the periods indicated, selected
Statements of Operations data in thousands of dollars and expressed as a
percentage of total revenues, and certain resident capacity and occupancy data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
$ % $ % $ %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Resident and health care revenue........... $30,979 92.9% $59,000 96.5% $73,878 97.7%
Management services revenue................ 2,362 7.1 2,119 3.5 1,739 2.3
------- ----- ------- ----- ------- -----
Total revenues................... 33,341 100.0 61,119 100.0 75,617 100.0
Community operating expense................ 21,780 65.3 38,785 63.5 46,960 62.1
General and administrative................. 3,455 10.4 4,554 7.5 6,200 8.2
Depreciation and amortization.............. 2,891 8.7 5,661 9.3 6,906 9.1
------- ----- ------- ----- ------- -----
Total operating expenses......... 28,126 84.4 49,000 80.2 60,066 79.4
------- ----- ------- ----- ------- -----
Income from operations........... 5,215 15.6 12,119 19.8 15,551 20.6
Interest expense........................... (5,354) (16.0) (10,300) (16.9) (12,160) (16.1)
Interest income............................ 203 0.6 378 0.6 434 0.6
Other...................................... 98 0.3 (94) (0.1) 788 1.0
------- ----- ------- ----- ------- -----
Other income (expense), net.............. (5,053) (15.1) (10,016) (16.4) (10,938) (14.5)
Income before income taxes and
extraordinary item.................... 162 0.5% 2,103 3.4% 4,613 6.1%
Income tax expense (benefit)............... -- -- 75 (0.1) (920) 1.2
------- ----- ------- ----- ------- -----
Income before extraordinary item........... 162 0.5% 2,028 3.3% 5,533 7.3%
Extraordinary item......................... -- -- -- -- 2,335 3.1
------- ----- ------- ----- ------- -----
Net income................................. $ 162 0.5% $ 2,028 3.3% $ 3,198 4.2%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996
--------------- ---------------- ---------------
<S> <C> <C> <C>
OPERATING DATA:
End of year capacity:
Owned................................... 2,141 2,594 3,377
Managed................................. 3,315 3,008 2,158
----- ----- -----
Total........................... 5,456 5,602 5,535
===== ===== =====
Average occupancy rate:
Owned................................... 89% 93% 94%
Managed................................. 93 91 90
----- ----- -----
Total........................... 91% 92% 92%
===== ===== =====
End of year occupancy rate:
Owned................................... 91% 94% 96%
Managed................................. 96 91 92
----- ----- -----
Total........................... 94% 92% 94%
===== ===== =====
Stabilized average occupancy rate (1):
Owned................................... 89% 93% 95%
Managed................................. 93 95 95
----- ----- -----
Total........................... 91% 94% 95%
===== ===== =====
</TABLE>
- ---------------
(1) Excludes the effect of new communities or expansions of the Company's
existing communities including: (i) the opening of a managed community in
1995 with a capacity for 242 residents; (ii) the opening of two expansions
of owned communities in mid-1996 with an aggregate additional capacity for
114 residents; and (iii) the opening of a managed community in mid-1996 with
a capacity for 76 residents. These openings resulted in decreased average
occupancy rates for the periods noted.
27
<PAGE> 29
The following table sets forth certain selected financial and operating
data on a Same Facility basis. For purposes of the following discussion, "Same
Facility basis" refers to communities that were owned by the Company throughout
each of the periods being compared. Revenues on a Same Facility basis do not
include any management services revenues.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------- -----------------
1994 1995 % CHANGE 1995 1996 % CHANGE
------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Monthly/per diem service fees............ $26,384 $29,040 10.1% $46,398 $48,888 5.4%
Home health and companion services
revenue................................ 627 2,699 330.5% 2,699 3,789 40.4%
------- ------- ------- -------
Resident and health care revenue....... 27,011 31,739 17.5% 49,097 52,677 7.3%
Community operating expense.............. 19,212 21,795 13.4% 32,854 34,314 4.4%
------- ------- ------- -------
Resident income from operations(1)..... $ 7,799 $ 9,944 27.5% $16,243 $18,363 13.1%
======= ======= ======= =======
Resident income from operations
margin(1)(2)........................ 28.9% 31.3% 33.1% 34.9%
OTHER DATA:
Average occupancy rate(2)................ 88% 91% 92% 94%
Average monthly revenue per occupied
unit(3)................................ $ 2,322 $ 2,467 6.2% $ 2,217 $ 2,295 3.5%
Average monthly expense per occupied
unit(4)................................ 1,639 1,665 1.6% 1,465 1,475 0.7%
</TABLE>
- ---------------
(1) "Resident income from operations" and "Resident income from operations
margin" are not measures of performance determined in accordance with
generally accepted accounting principles. This information is included
because the Company believes it is useful for investors in measuring
operating trends on a Same Facility basis. "Resident income from operations"
reflects resident and health care income from operations on a Same Facility
basis before depreciation and amortization, interest, general and
administrative expense, and other non-operating expenses. This information
should be considered in conjunction with the historical and pro forma
financial statements of the Company included elsewhere in this Prospectus,
which include certain significant items excluded from the foregoing
calculations for the Company as a whole.
(2) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(3) Average occupancy rate is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and
assisted living residences, and occupied beds to available beds on a per
diem basis for nursing beds.
(4) Average monthly revenue per occupied unit is total annual resident and
health care revenues, excluding home health care agency and companion
services fees, divided by total occupied apartments and nursing beds,
expressed on a monthly basis.
(5) Average monthly expense per unit is total annual community operating
expenses, excluding home health care agency and companion services expenses,
divided by total occupied apartments and nursing beds, expressed on a
monthly basis.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues were $75.6 million in 1996 compared to $61.1
million in 1995, representing an increase of $14.5 million, or 23.7%. Resident
and health care revenues increased by $14.9 million, which was offset, in part,
by a decrease in management services revenues of $380,000. Of the increase in
resident and health care revenues, $11.3 million, or 75.9%, was attributable to
revenues derived from acquired senior living communities, with the remaining
$3.6 million, or 24.1%, of such increase attributable to Same Facility growth.
During 1995 and 1996, the Company acquired four senior living communities that
the Company had previously managed, resulting in a decrease in management
services revenues in 1996 to $1.7 million, as compared to $2.1 million in 1995.
Revenues attributable to Same Facilities were $52.7 million in 1996,
representing an increase of $3.6 million, or 7.3%, over 1995. Home health care
agency and companion services fees on a Same Facility basis increased by $1.1
million, or 40.4%, over 1995. Monthly/per diem service fee revenue on a Same
Facility basis increased $2.5 million, or 5.4%, over 1995. Of this increase,
3.6% was due primarily to rate increases and 1.8% was due to higher occupancy.
Same Facility average occupancy rates increased from 92% in 1995 to 94% in 1996.
Same Facility end of year occupancy rates increased from 93% in 1995 to 96% in
1996.
Community Operating Expense. Community operating expense increased to
$47.0 million in 1996, as compared to $38.8 million in 1995, representing an
increase of $8.2 million, or 21.1%. Of the increase in community operating
expense, $6.7 million, or 82.0%, was attributable to expenses from acquired
senior living communities, and 18.0% of this increase was attributable to Same
Facility operating expenses, which increased by $1.5 million, or 4.4%, over
1995. Of such increase, $694,000 was attributable to increases in home
28
<PAGE> 30
health care agency and companion services expenses. Same Facility operating
expenses, exclusive of home health care agency and companion services expenses,
increased 2.5% in 1996 as compared to 1995. Community operating expense as a
percentage of resident and health care revenues declined to 63.6% in 1996 from
65.7% in 1995. Same Facility community operating expense as a percentage of Same
Facility resident and health care revenues declined to 65.1% in 1996 from 66.9%
in 1995, primarily due to improved economies of scale resulting from higher
occupancy.
General and Administrative. General and administrative expense increased
to $6.2 million in 1996, as compared to $4.6 million in 1995, representing an
increase of $1.6 million, or 36.1%. General and administrative expense as a
percentage of total revenues increased to 8.2% in 1996 from 7.5% in 1995. Of
this increase in general and administrative expense, $546,000 was directly
related to the creation of a new operating department by the Company in 1996 to
manage the Company's home health care agencies, which had previously been
managed by a third party. The remaining increase of approximately $1.1 million
resulted from continued investments in infrastructure necessary to support the
Company's growth, including the incurrence of costs related to personnel
training, the expansion of the development services department, the upgrade of
management information systems, and the centralization of the Company's
accounting staff and functions.
Depreciation and Amortization. Depreciation and amortization expense
increased to $6.9 million in 1996 from $5.7 million in 1995, representing an
increase of $1.2 million, or 22.0%. This increase was primarily the result of
depreciation associated with acquisitions and amortization of related financing
costs, offset in part by a decrease in amortization resulting from the write-off
of certain financing costs. As a result of the Sale-Leaseback Transactions
effected in January 1997, the Company expects Same Facility depreciation and
amortization expense to decrease in the future, which decrease will be offset,
in part, by increased lease expense.
Other Income (Expense). Interest expense increased to $12.2 million in
1996 from $10.3 million in 1995, representing an increase of $1.9 million, or
18.1%. The increase in interest expense was related to indebtedness incurred in
connection with the acquisition of senior living communities. Interest expense,
as a percentage of total revenues, declined to 16.1% in 1996 from 16.9% in 1995.
Interest income increased to $434,000 in 1996 from $378,000 in 1995. The Company
had other income of $788,000 in 1996, including a gain on the sale of assets of
$874,000, compared to other expense of $94,000 in 1995. The 1995 other expense
included: (i) $982,000 of nonrecurring expense related to the 1995 Roll-Up; (ii)
a gain on the sale of assets of $1.1 million; and (iii) other non-operating
expenses of $256,000. As a result of the Sale-Leaseback Transactions, the
Company expects Same Facility interest expense will decrease in the future,
which decrease will be offset, in part, by increased lease expense.
Income Tax Expense (Benefit). At December 31, 1996, the Company had NOLs
of approximately $5.4 million. In 1996, the Company recognized an income tax
benefit of $920,000 because of the anticipated utilization of such net operating
loss carryforwards to offset taxable gains related to the Sale-Leaseback
Transactions. The provision for income taxes reflects income tax expense of only
one of the Predecessor Entities, because the Predecessor and the other
Predecessor Entities were partnerships.
Extraordinary Loss. In 1996, the Company wrote off $2.3 million of
financing costs in connection with the refinancing of $62.1 million of mortgage
financing.
Net Income. As a result of the foregoing factors, net income increased
to $3.2 million ($5.5 million before extraordinary item) in 1996 from $2.0
million in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues were $61.1 million in 1995 compared to $33.3
million in 1994, representing an increase of $27.8 million, or 83.3%. Resident
and health care revenues increased by $28.0 million, which was offset, in part,
by a decrease in management services revenues of $243,000. Of the increase in
resident and health care revenues, $23.3 million, or 83.1%, was attributable to
revenues derived from acquired senior living communities, with the remaining
$4.7 million, or 16.9%, of such increase attributable to Same Facility growth.
29
<PAGE> 31
During 1994 and 1995, the Company acquired six senior living communities, three
of which had been previously managed by the Company, resulting in a decrease in
management services revenues in 1995 to $2.1 million, as compared to $2.4
million in 1994.
Revenues attributable to Same Facilities were $31.7 million in 1995,
representing an increase of $4.7 million, or 17.5%, over 1994. Home health care
agency and companion services fees on a Same Facility basis increased by $2.1
million, or 330.5%, over 1994. Monthly/per diem service fee revenue on a Same
Facility basis increased $2.6 million, or 10.1%, over 1994. Of this increase,
6.5% was due primarily to rate increases and 3.6% was due to higher occupancy.
Same Facility average occupancy rates increased from 89% in 1994 to 91% in 1995.
Same Facility end of year occupancy rates increased from 90% in 1994 to 92% in
1995.
Community Operating Expense. Community operating expense increased to
$38.8 million in 1995, as compared to $21.8 million in 1994, representing an
increase of $17.0 million, or 78%. Of the increase in community operating
expense, $14.4 million, or 84.8%, was attributable to operating expenses from
acquired senior living communities, and 15.2% of this increase was attributable
to Same Facility operating expenses, which increased by $2.6 million, or 13.4%,
over 1994. Of such increase, $1.6 million was attributable to increases in home
health care agency and companion services expenses. Same Facility operating
expenses, exclusive of home health care agency and companion services expenses,
increased 5.2% in 1995 as compared to 1994. Community operating expense as a
percentage of resident and health care revenues declined to 65.7% in 1995 from
70.3% in 1994. Same Facility community operating expense as a percentage of Same
Facility resident and health care revenues increased to 71% in 1995 from 69% in
1994.
General and Administrative. General and administrative expense increased
to $4.6 million in 1995, as compared to $3.5 million in 1994, representing an
increase of $1.1 million, or 31.8%. General and administrative expense as a
percentage of total revenues decreased to 7.5% in 1995 from 10.4% in 1994. The
majority of the increase resulted from costs incurred in connection with
increased personnel costs incurred to support the Company's growth, including
costs associated with the upgrade of management information systems and the
centralization of the Company's accounting staff and functions.
Depreciation and Amortization. Depreciation and amortization expense
increased to $5.7 million in 1995 from $2.9 million in 1994, representing an
increase of $2.8 million, or 95.8%. This increase was primarily the result of
depreciation associated with acquisitions and amortization of related financing
costs.
Other Income (Expense). Interest expense increased to $10.3 million in
1995 from $5.4 million in 1994, representing an increase of $4.9 million, or
92.4%. The increase in interest expense was related to indebtedness incurred in
connection with the acquisition of senior living communities. Interest expense,
as a percentage of total revenues, increased to 16.9% in 1995 from 16.1% in
1994. Interest income increased to $378,000 in 1995 from $203,000 in 1994. The
Company had other expense of $94,000 in 1995 compared to other income of $98,000
in 1994, primarily as a result of $981,000 of nonrecurring expenses related to
the 1995 Roll-Up, and $268,000 of other expenses associated with a 1995
acquisition, which was offset, in part, by a $1.1 million gain on sale of
assets.
Net Income. As a result of the foregoing factors, net income increased to
$2.0 million in 1995 from $162,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has traditionally financed its activities from net proceeds
from private placements of equity interests, long-term mortgage borrowing, and
cash flows from operations. At March 31, 1997, the Company had $157.5 million of
indebtedness outstanding, including $146.1 million payable to General Electric
Capital Corporation ("GECC"), with fixed maturities ranging from December 31,
2001 to April 30, 2003. In addition, the Company has the capacity to borrow up
to an additional $15.9 million from GECC to finance future acquisitions or
expansions. The Company also maintains a $2.5 million line of credit with a bank
that is available for working capital and to secure various debt instruments. At
March 31, 1997, approximately $1.6 million of this line of credit had been used
to obtain letters of credit. The Company also maintains a $5.0 million line of
credit with a bank that is available for land acquisitions. At March 31, 1997,
$825,000 was
30
<PAGE> 32
outstanding under this line of credit. Substantially all of the Company's
indebtedness is cross-defaulted with other indebtedness and contains customary
restrictive covenants. The Company does not believe that these restrictive
covenants materially limit its operations.
As of March 31, 1997, approximately 72.6% of the Company's indebtedness
bore interest at fixed rates, with a weighted average interest rate of 8.6%. The
Company's variable rate indebtedness carried an average rate of 7.7% as of March
31, 1997. Less than 12% of the Company's currently outstanding indebtedness
matures before December 31, 2002. The Sale-Leaseback Transactions resulted in
minimum annual lease obligations of $2.5 million, beginning in 1997. The Company
expects to service current outstanding indebtedness and lease obligations with
internally generated funds.
Net cash provided by operating activities was $11.9 million, $9.0 million,
and $3.5 million in 1996, 1995, and 1994, respectively. Unrestricted cash
balances were $3.2 million, $3.8 million, and $2.9 million at December 31, 1996,
1995, and 1994, respectively. As of March 31, 1997, unrestricted cash balances
were $8.9 million.
Net cash used by investing activities totaled $67.6 million, $11.0 million,
and $46.3 million in 1996, 1995, and 1994, respectively. Over this period, the
Company acquired an aggregate of $139.0 million of senior living community
assets, and made capital expenditures at its owned properties in an aggregate
amount of $8.9 million, including expansion activity in the amount of $3.5
million. During the same period, the Company sold an aggregate of $2.8 million
of assets.
Net cash provided by financing activities was $55.1 million, $2.9 million,
and $42.6 million in 1996, 1995, and 1994, respectively. Proceeds from the
issuance of long-term debt was $73.9 million, $26.7 million, and $49.0 million
in 1996, 1995, and 1994, respectively, including $23.5 million of debt assumed
by the Company pursuant to acquisitions in 1995. The Company also raised $11.0
million in a private placement of equity in 1995. The Company retired debt in
the amount of $5.5 million, $4.3 million, and $2.5 million in 1996, 1995, and
1994, respectively; made cash distributions to its partners of $7.1 million,
$6.6 million, and $2.6 million in 1996, 1995, and 1994, respectively; and
redeemed all of the outstanding Preferred Partnership Interests for $10.0
million in 1996. The Company intends to make a distribution in April 1997 in the
amount of approximately $2.5 million, which amount substantially approximates
the income taxes associated with the Predecessor's anticipated earnings in 1997
through the date of the Reorganization. Following the Reorganization and
conversion from partnership to corporate form, the Company does not anticipate
declaring or paying cash dividends on the Common Stock in the foreseeable
future. The Company intends to retain future earnings to finance the operation
and expansion of the Company's business. See "Dividend Policy and Prior
Distributions."
In January 1997, the Company effected the Sale-Leaseback Transactions with
respect to its Holley Court Terrace and Trinity Towers senior living communities
and realized net cash proceeds therefrom of $27.6 million. Of such proceeds,
$14.6 million were used to retire indebtedness and $5.2 million were used to
redeem the Predecessor's outstanding Preferred Partnership Interests (which
redemption had been accrued as of December 31, 1996). The Sale-Leaseback
Transactions resulted in a gain of approximately $4.6 million, which will be
recognized over the ten-year initial term of the lease.
The Company is currently constructing an $11.6 million expansion at one of
its owned communities. The Company has a construction loan commitment from a
bank, as well as a permanent loan commitment from a mortgage lender to fund the
costs of construction. The Company also plans to expand certain of its other
owned communities; to open home health care agencies at certain of its owned
and/or leased communities that do not currently operate home health care
agencies; to develop new assisted living residences; and to acquire assisted
living residences and selected senior living and health care services assets.
The Company has signed a non-binding letter of intent for the acquisition
of a home health care agency located in Corpus Christi, Texas for $1.0 million.
The Company expects to complete this acquisition in the second quarter of 1997.
Capital expenditures and preopening costs planned for 1997 total
approximately $55.0 million. Of this amount, the Company anticipates that
approximately $24.4 million will be used for the development of
31
<PAGE> 33
approximately 20 free-standing assisted living residences; $27.1 million will be
used for the expansion of existing communities; and $3.3 million will be used
for renovation and replacement of equipment at existing communities. The Company
estimates that capital expenditures and preopening costs for the development of
additional free-standing assisted living residences in 1998 will range from
approximately $25.0 million to $30.0 million.
The Company has entered into non-binding letters of intent with respect to
the REIT Facilities pursuant to which NHP and NHI, at the Company's request,
will develop, construct, or acquire up to $110.0 million and $100.0 million,
respectively, of senior living communities and lease the communities to the
Company.
The Company expects that its current cash and the net proceeds from the
Offering, together with cash flow from operations, the REIT Facilities, and the
proceeds of borrowings available to it under existing credit arrangements, will
be sufficient to meet its operating requirements and to fund its anticipated
growth for at least the next 12 to 18 months. The Company expects to use a wide
variety of financing sources to fund its future growth, including public and
private debt and equity, conventional mortgage financing, and unsecured bank
financing, among other sources. There can be no assurance that financing from
such sources will be available in the future or, if available, that such
financing will be available on terms acceptable to the Company.
DEFERRED TAX LIABILITY
The Company will incur a one-time $13.5 million ($1.23 per share) charge to
income resulting in a reduction of shareholders' equity at the time of the
Reorganization in connection with the conversion from a non-taxable to a taxable
entity and the resulting recognition of a deferred income tax liability for the
differences between the accounting and tax bases of the Company's assets and
liabilities.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
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<PAGE> 34
BUSINESS
OVERVIEW AND HISTORY
The Company is a national senior living and health care services company
providing a broad range of care and services to the elderly, including
independent living, assisted living, skilled nursing, and home health care
services. The Company has pioneered numerous developments in the provision of
care and services for the elderly since its inception in 1978, and believes it
ranks among the leading operators in the senior living and health care services
industry. Currently, the Company operates 21 senior living communities in 12
states, consisting of ten owned communities, four leased communities, and seven
managed communities, with an aggregate capacity for approximately 5,700
residents. The Company also owns and operates eight home health care agencies.
At March 31, 1997, the Company's owned and leased communities had an occupancy
rate of 94% and its managed communities had an occupancy rate of 93%. For the
year ended December 31, 1996, revenues attributable to the Company's senior
living communities accounted for 91.5% of the Company's total revenues and
revenues attributable to the Company's home health care agencies accounted for
8.5% of the Company's total revenues. Approximately 92.1% of the Company's total
revenues for the year ended December 31, 1996 were derived from private pay
sources.
Since 1992, the Company has experienced significant growth, primarily
through the acquisition of 11 senior living communities. The Company's revenues
have grown from $17.8 million in 1992 to $75.6 million in 1996, an average
annual growth rate of 43.5%. During the same period, the Company's income from
operations has grown from $2.3 million to $15.6 million, an average annual
growth rate of 61.7%. The Company intends to continue its growth through a
combination of (i) development of free-standing assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (ii) selective acquisitions of senior living
communities, including assisted living residences; (iii) expansion of existing
communities; and (iv) development and acquisition of home health care agencies.
As part of its growth strategy, the Company is currently developing 20
free-standing assisted living residences, with an estimated aggregate capacity
for 1,762 residents, and is expanding eight of its existing communities to add
capacity to accommodate an additional 704 residents. The Company has also
entered into a letter of intent to acquire one additional home health care
agency and intends to commence operations at four additional home health care
agencies during 1997.
The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the
principal founders of Hospital Corporation of America (now a subsidiary of
Columbia/HCA Healthcare Corporation). The Company's operating philosophy was
inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the
elderly by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents. The Company
believes that its senior management, led by W.E. Sheriff, its Chairman and Chief
Executive Officer, and Christopher J. Coates, its President and Chief Operating
Officer, is one of the most experienced management teams in the senior living
industry. The Company's 12 senior officers have been employed by the Company for
an average of nine years and have an average of 14 years of industry experience.
The executive directors of the Company's communities have been employed by the
Company for an average of four years and have an average of 11 years of
experience in the senior living industry.
GROWTH STRATEGY
The Company believes that the fragmented nature of the senior living
industry and the limited capital resources available to many small, private
operators provide a unique opportunity for the Company to expand its existing
base of senior living operations. The Company believes that its existing senior
living communities serve as the foundation on which the Company can build senior
living networks in targeted geographic markets and thereby provide a broad range
of high quality care in a cost-efficient manner. The following are the principal
elements of the Company's growth strategy:
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<PAGE> 35
Develop New Assisted Living Residences
The Company has implemented an aggressive growth plan to expand primarily
through the development and construction of new assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia. The Company's primary strategy is to develop a cluster
of residences within a particular geographic service area and thereby achieve
regional density. In this regard, the Company believes that its existing senior
living communities and its extensive knowledge of the local markets in which the
Company operates provide the Company with a strong platform from which to expand
its operations. In addition, the Company believes that through clustering its
residences it can maximize operational, marketing, and management efficiencies
while achieving economies of scale. The Company believes that regional density
also provides strengthened local presence, community familiarity, and
reputation, and will enhance the Company's opportunities in the evolving managed
care environment. The Company currently is developing 20 free-standing assisted
living residences, with an estimated aggregate capacity for 1,762 residents. See
"Business -- Development Activities."
The Company follows a disciplined development strategy that includes the
following sequential components: (i) a market demographic analysis is conducted
by the Company to assess and confirm the relative strength of a potential
market; (ii) cohesive neighborhoods and submarkets are identified within the
market; (iii) within each neighborhood and submarket, competitive projects are
identified and assessed as to their market niche, program of services and
pricing, physical condition, and likely financial condition; (iv) based on the
prior three steps, a determination is then made as to whether to participate in
the market by acquisition or development; (v) if the Company elects to develop
within the market, the Company then determines which submarkets to serve,
selects a specific design type for each submarket and determines the number of
assisted living units and dementia care units to develop; and (vi) specific
sites are analyzed, whereby the Company considers a number of factors including
site visibility, location within a submarket, the specific neighborhoods which
can be served from the site, probability of achieving zoning approvals and the
proximity of the site to the Company's other assisted living residences and
senior living communities. Architectural design and hands-on construction
functions are usually performed by outside architects and contractors with whom
the Company has an historical relationship. The Company expects that the average
construction time for a typical assisted living residence will be approximately
10 to 12 months. Once construction is completed, the Company estimates that it
will take approximately 12 months on average for the assisted living residence
to achieve a stabilized level of occupancy.
The Company's senior management and development staff have extensive
experience in the development of senior living communities, including assisted
living residences, real estate acquisition, engineering, general construction,
and project management. The Company's development team has the demonstrated
ability to target potential markets, perform appropriate market and demographic
studies, identify zoning and development issues, and determine the appropriate
size and configuration of residences to be developed.
Expand Existing Facilities
The Company plans to expand certain of its existing communities to include
additional assisted living residences (including special programs and living
units for residents with Alzheimer's and other forms of dementia), and skilled
nursing beds. The Company currently has three expansion projects under
construction (including one managed community) and five expansion projects under
development, representing an aggregate increase in capacity to accommodate an
additional 704 residents. The expansion of existing senior living communities
allows the Company to create operating efficiencies and capitalize on its local
presence, community familiarity, and reputation in markets in which the Company
currently operates.
Pursue Strategic Acquisitions
The Company intends to continue to pursue single or portfolio acquisitions
of assisted living residences and, to a lesser extent, other senior living and
long-term care communities. Through strategic acquisitions, the Company plans to
enter new markets or acquire communities in existing markets as a means to
increase market share, augment existing clusters, strengthen its ability to
provide a broad range of care, and create
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<PAGE> 36
operating efficiencies. The Company believes that the current fragmentation of
the industry, combined with the Company's financial resources and extensive
contacts within the industry, should provide it with the opportunity to consider
a number of potential acquisition opportunities. In reviewing acquisition
opportunities, the Company will consider, among other things, geographic
location, competitive climate, reputation and quality of management and
residences, and the need for renovation or improvement of the residences.
Develop and Acquire Additional Home Health Care Agencies
The Company intends to expand its home health care services by developing,
acquiring, and managing new home health care agencies and expanding its range of
existing home health care services. The Company currently anticipates that its
home health care agencies will be based at the Company's communities, and will
serve both the Company's communities and the surrounding area. The Company
believes that the expansion of its home health care services will enhance its
ability to provide a broad range of health care services, increase its market
visibility, and augment the creation of senior living networks in targeted
areas. The Company currently operates eight home health care agencies, four of
which are in their initial year of operation, and has entered into a letter of
intent to acquire an additional home health care agency in Corpus Christi,
Texas. The Company expects to complete such acquisition in the second quarter of
1997.
Expand Referral Networks and Strategic Alliances
The Company intends to continue to develop relationships (which, in certain
instances, may involve strategic alliances or joint ventures) with local and
regional hospital systems, managed care organizations, and other referral
sources to attract new residents to the Company's communities. The Company
believes that such arrangements or alliances, which could range from joint
marketing arrangements to priority transfer agreements, will enable it to be
strategically positioned within the Company's markets if, as the Company
believes, senior living programs become an integral part of the evolving health
care delivery system.
Pursue Additional Third-Party Management Opportunities
Although the Company intends to focus its efforts primarily on development
and acquisition activities, it may in certain instances pursue third-party
management opportunities as a means to enter new markets or expand its presence,
market knowledge, and influence in a targeted market. The Company currently
manages seven communities with an aggregate capacity for 2,159 residents
pursuant to management contracts. Furthermore, the Company intends to continue
its consulting and contract activities on a selective basis.
OPERATING STRATEGY
The Company's operating strategy is to provide high quality health care
services to its residents while achieving and sustaining a strong competitive
position within its chosen markets, as well as to continue to enhance the
performance of its operations.
Continue to Provide A Broad Range of High-Quality Personalized Care
Central to the Company's operating strategy is its focus on providing
high-quality care and services that are personalized and tailored to meet the
individual needs of each community resident. The Company's residences and
services are designed to provide a broad range of care that permits residents to
"age in place" as their needs change and as they develop further physical or
cognitive frailties. By creating an environment that maximizes resident autonomy
and provides individualized service programs, the Company seeks to attract
seniors at an earlier stage, before they need the higher level of care provided
in a skilled nursing facility. The Company also maintains a comprehensive
quality assurance program designed to ensure the satisfaction of its residents
and their family members.
Offer Services Across a Range of Pricing Options
The Company is continually expanding its range of personal, health care,
and support services to meet the evolving needs of its residents. The Company
has developed several different care plans and residence designs
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<PAGE> 37
which may, in each instance, be customized to serve the upper income and
moderate income markets of a particular targeted geographic area. By offering a
range of pricing options that are customized for each target market, the Company
believes it can develop synergies, economies of scale, and operating
efficiencies in its efforts to serve a larger percentage of the elderly
population within a particular geographic market.
Maintain and Improve Occupancy Rates
The Company also seeks to maintain and improve occupancy rates by (i)
retaining residents as they "age in place" by emphasizing quality and breadth of
care and service; (ii) attracting new residents through marketing programs
directed towards family decision makers, namely adult children, and prospective
residents; and (iii) actively seeking referrals from hospitals, rehabilitation
hospitals, physicians' clinics, home health care agencies, and other acute and
sub-acute health care providers in the markets served by the Company.
Improve Operating Efficiencies
The Company will seek to improve operating efficiencies at its communities
by continuing to actively monitor and manage operating costs. By concentrating
residences within selected geographic regions, the Company believes it will be
able to achieve operating efficiencies through economies of scale and reduced
corporate overhead, and provide more effective management supervision and
financial controls.
Emphasize Employee Training
The Company devotes special attention to the hiring, screening, training,
and supervising of its employees and caregivers to ensure that quality standards
are achieved. During 1997, the Company expects to spend in excess of $700,000 on
personnel training and development of on-site field personnel. In 1995, the
Company, together with Dr. Frist, founded The Frist Center at Belmont University
in Nashville, Tennessee. The Frist Center is a non-profit foundation providing
training, education, and career services for management and front line personnel
involved in the senior living and health care services industry. The Company
works closely with The Frist Center and the Company's employees actively
participate in the training programs, seminars, and classes sponsored by The
Frist Center. In addition, professional training programs designed to be
delivered on-site by The Frist Center staff have been and are being developed by
the Company and The Frist Center. The Company believes its commitment to and
emphasis on employee training differentiates the Company from many of its
competitors.
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living and health care services
to the elderly at its communities, including independent living, assisted living
(with special programs and living units for residents with Alzheimer's and other
forms of dementia), skilled nursing, and home health care services. By offering
a variety of services and involving the active participation of the resident and
the resident's family and medical consultants, the Company is able to customize
its service plan to meet the specific needs and desires of each resident. As a
result, the Company believes that it is able to maximize customer satisfaction
and avoid the high cost of delivering all services to every resident without
regard to need, preference, or choice.
Independent Living Services
The Company provides independent living services to seniors who do not yet
need assistance or support with the activities of daily life ("ADLs"), but who
prefer the physical and psychological comfort of a residential community that
offers health care and other services. The Company currently owns or leases
twelve communities and manages an additional five communities which provide
independent living services, with an aggregate capacity for 2,724 residents and
1,496 residents, respectively.
Independent living services provided by the Company include daily meals,
transportation, social and recreational activities, laundry, housekeeping,
security, and health care monitoring. The Company also fosters the wellness of
its residents by offering health screenings such as blood pressure checks,
periodic special
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services such as influenza inoculations, chronic disease management (such as
diabetes with its attendant blood glucose monitoring), dietary and similar
programs, as well as ongoing exercise and fitness classes. Classes are given by
health care professionals to keep residents informed about health and disease
management. Subject to applicable government regulation, personal care and
medical services are available to independent living residents through either
community staff or through the Company's or independent home health care
agencies. The Company's independent living residents pay a fee ranging from
$1,150 to $4,105 per month, in general depending on the specific community,
program of services, size of the units, and amenities offered. The Company's
contracts with its independent living residents are generally for a term of one
year and are terminable by the resident upon 60 days' notice.
Assisted Living and Memory Impaired Services
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services, at all of its owned and leased communities and at six
managed communities. The residents of the Company's assisted living residences
generally need help with some or all ADLs, but do not require the more acute
medical care traditionally given in nursing homes. Upon admission to the
Company's assisted living residences, and in consultation with the resident and
the resident's family and medical consultants, each resident is assessed to
determine his or her health status, including functional abilities, and need for
personal care services, and completes a lifestyles assessment to determine the
resident's preferences. From these assessments, a care plan is developed for
each resident to ensure that all staff members who render care meet the specific
needs and preferences of each resident where possible. Each resident's care plan
is reviewed periodically to determine when a change in care is needed.
The Company has adopted a philosophy of assisted living care that allows a
resident to maintain a dignified independent lifestyle. Residents and their
families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic type of assisted
living services offered by the Company include the following:
Personal Care Services. These services include assistance with ADLs
such as ambulation, bathing, dressing, eating, grooming, personal hygiene,
monitoring or assistance with medications, and confusion management.
Support Services. These services include meals, assistance with
social and recreational activities, laundry services, general housekeeping,
maintenance services, and transportation services.
Supplemental Services. These services include extra transportation
services, personal maintenance, extra laundry services, non-routine care
services, and special care services, such as services for residents with
Alzheimer's and other forms of dementia. Certain of these services require
an extra charge in addition to the pricing levels described below.
In pricing its services, the Company has developed the following three
levels or tiers of assisted living care:
- Level I typically provides for minimum levels of care and service, for
which the Company generally charges a monthly fee per resident ranging
from $1,500 to $2,100, depending upon apartment size and the project
design type. Typically, Level I residents need minimal assistance with
ADLs.
- Level II provides for relatively higher levels and increased frequency of
care, for which the Company generally charges a monthly fee per resident
ranging from $1,800 to $2,700, depending upon the apartment size and the
project design type. Typically, Level II residents require moderate
assistance with ADLs and may need additional personal care, support, and
supplemental services.
- Level III provides for the highest level of care and service, for which
the Company generally charges a monthly fee per resident ranging from
$2,400 to $3,100, depending upon the apartment size and the project design
type. Typically, Level III residents are either very frail or impaired and
utilize many of the Company's services on a regular basis.
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The Company maintains programs and special units at its assisted living
residences for residents with Alzheimer's and other forms of dementia, which
provide the attention, care, and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with
ADLs, behavior management, and a lifeskills based activities program, the goal
of which is to provide a normalized environment that supports residents'
remaining functional abilities. Whenever possible, residents assist with meals,
laundry, and housekeeping. Special units for residents with Alzheimer's and
other forms of dementia are located in a separate area of the community and have
their own dining facilities, resident lounge areas, and specially trained staff.
The special care areas are designed to allow residents the freedom to ambulate
as they wish while keeping them safely contained within a secure area with a
minimum of disruption to other residents. Special nutritional programs are used
to help ensure caloric intake is maintained in residents whose constant movement
increases their caloric expenditure. Resident fees for these special units are
dependent on the size of the unit, the design type, and the level of services
provided.
Skilled Nursing and Sub-Acute Services
The Company provides traditional skilled nursing services in four
communities owned or leased by the Company and five communities managed by the
Company, with an aggregate capacity for 321 residents at the Company's owned and
leased communities and 393 residents at the Company's managed communities. In
addition, the Company has communities under development or expansion which will
add estimated additional capacity of 393 skilled nursing beds. In its skilled
nursing facilities, the Company provides traditional long-term care through
24-hour a day skilled nursing care by registered nurses, licensed practical
nurses, and certified nursing aides. The Company also offers a range of
sub-acute care services in certain of its communities. Sub-acute care is
generally short-term, goal-oriented rehabilitation care intended for individuals
who have a specific illness, injury or disease, but who do not require many of
the services provided in an acute care hospital. Sub-acute care is typically
rendered immediately after, or in lieu of, acute hospitalization in order to
treat such specific medical conditions.
Home Health Care
The Company provides home health care services to residents at certain of
its senior living communities and the surrounding areas through home health care
agencies based at certain of its existing senior living communities. The
services and products that the Company provides through its home health care
agencies include (i) general and specialty nursing services to individuals with
acute illnesses, long-term chronic health conditions, permanent disabilities,
terminal illnesses or post-procedural needs; (ii) therapy services consisting
of, among other things, physical, occupational, speech, and medical social
services; (iii) personal care services and assistance with ADLs; (iv) hospice
care for persons in the final phases of incurable disease; (v) respiratory,
monitoring, medical equipment services, and medical supplies to patients; and
(vi) a comprehensive range of home infusion and enteral therapies. The Company
intends to expand its home health care services to additional senior living
communities and to develop, acquire, or manage home health care service
businesses at other communities. In addition, the Company will make available to
residents certain physician, dentistry, podiatry, and other health related
services that will be offered by third-party providers. The Company may elect to
provide these services directly or through participation in managed care
networks or in joint ventures with other providers. The Company currently
operates eight home health care agencies, four of which are in their initial
year of operation.
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OPERATING COMMUNITIES AND HOME HEALTH CARE AGENCIES
The table below sets forth certain information with respect to the senior
living communities and home health care agencies currently owned or operated by
the Company.
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY
RESIDENT CAPACITY (1) COMMENCEMENT 1996 RATE AT
------------------------- OF OCCUPANCY MARCH 31,
COMMUNITY LOCATION IL AL SN TOTAL OPERATIONS(2) RATE 1997
- --------- -------- ----- --- --- ----- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED(3):
Homewood at Tarpon Springs........... Tarpon Springs, FL -- 64 -- 64 May-97 --(4) --(4)
Broadway Plaza....................... Ft. Worth, TX 252 40 122 414 Apr-92 94% 90%(5)
Carriage Club of Charlotte........... Charlotte, NC 355 54 50 459 May-96 91(6) 91(6)
Carriage Club of Jacksonville........ Jacksonville, FL 292 60 -- 352 May-96 89(6) 88(6)
The Hampton at Post Oak.............. Houston, TX 162 21 -- 183 Oct-94 94 95
Heritage Club........................ Denver, CO 220 35 -- 255 Feb-95 100 99
Parkplace............................ Denver, CO 195 48 -- 243 Oct-94 99 96
Richmond Place....................... Lexington, KY 204 4 -- 208 Apr-95 98 98
Santa Catalina Villas................ Tucson, AZ 197 15 -- 212 Jun-94 90 94
The Summit at Westlake Hills......... Austin, TX 167 30 89 286 Apr-92 98 99
Westlake Village..................... Cleveland, OH 246 54 -- 300 Oct-94 94 94
----- --- --- ----- --- ---
Subtotal/Average................. 2,290 425 261 2,976 94% 94%
LEASED(7):
Holley Court Terrace................. Oak Park, IL 179 17 -- 196 Jul-93 81 94
Remington at Corpus Christi.......... Corpus Christi, TX -- 90 -- 90 May-97 --(8) --(8)
Remington at Victoria................ Victoria, TX 60 30 -- 90 May-97 --(8) --(8)
Trinity Towers....................... Corpus Christi, TX 195 32 60 287 Jan-90 94 98
----- --- --- ----- --- ---
Subtotal/Average................. 434 169 60 663 89% 96%
MANAGED(9):
Burcham Hills........................ East Lansing, MI 143 66 133 342 Nov-78 92% 89%
Meadowood............................ Worcester, PA 355 51 59 465 Oct-89 94 95
Parklane West........................ San Antonio, TX -- 17 124 141 Oct-94 86 90
Reeds Landing........................ Springfield, MA 148 54 40 242 Aug-95 65(10) 91(10)
USAA Towers.......................... San Antonio, TX 505 -- -- 505 Oct-94 100 100
Weinberg Village..................... Tampa, FL -- 75 -- 75 May-96 25 59
Williamsburg Landing................. Williamsburg, VA 345 7 37 389 Sept-85 98 97
----- --- --- ----- --- ---
Subtotal/Average................. 1,496 270 393 2,159 89% 93%
----- --- --- ----- --- ---
Grand Total/Average.............. 4,220 864 714 5,798 92% 94%
===== === === ===== === ===
HOME HEALTH CARE AGENCIES(11): LOCATION
Broadway Plaza....................... Fort Worth, TX
Carriage Club of Charlotte........... Charlotte, NC
The Hampton at Post Oak.............. Houston, TX
Heritage Club........................ Denver, CO
Holley Court Terrace................. Oak Park, IL
Parkplace............................ Denver, CO
Richmond Place....................... Lexington, KY
Westlake Village..................... Westlake, OH
</TABLE>
- ---------------
(1) Independent living residences (IL), assisted living residences (including
areas dedicated to residents with Alzheimer's and other forms of dementia)
(AL), and skilled nursing beds (SN).
(2) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities. The Company operated the
following communites pursuant to management agreements for the period
indicated prior to the acquisition of such communities by the Company:
Carriage Club of Charlotte - July 1988 to May 1996; Carriage Club of
Jacksonville - January 1990 to May 1996; Heritage Club - April 1988 to
February 1995; Holley Court Terrace -- April 1992 to July 1993; Richmond
Place - October 1983 to April 1995; Santa Catalina Villas - November 1991
to June 1994; and Trinity Towers -- November 1986 to November 1990.
(3) Each of the Company's owned communities is subject to a mortgage lien.
(4) Homewood at Tarpon Springs was acquired by the Company in May 1997. The
Company expects to commence operations at the community in July 1997 upon
completion of the licensure process.
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(5) Broadway Plaza's skilled nursing facility contains a sub-acute unit.
Sub-acute units generally experience shorter lengths of stay and
corresponding higher fluctuations in occupancy rates. Excluding the skilled
nursing facility, Broadway Plaza's occupancy rate at March 31, 1997, was
99%.
(6) Communities at which expansions opened in 1996, which resulted in decreased
occupancy rates for the period. Excluding the effect of the expansions, the
average 1996 occupancy rate and the occupancy rate at March 31, 1997 would
have been 97% and 97%, respectively, at Carriage Club of Charlotte and 91%
and 93%, respectively, at Carriage Club of Jacksonville.
(7) Leased pursuant to operating leases with initial terms of ten to 15 years
expiring December 31, 2006 and renewal options for up to three additional
ten year terms, provided that both leases are extended concurrently. The
Company pays contractually fixed rent, plus additional rent, subject to
certain limits, based upon the gross revenues of the community. Without the
lessor's consent, the Company may not operate any other type of senior care
facility within three miles of either of the premises during the term of
the leases and for one year thereafter.
(8) The Company acquired the Remington at Corpus Christi and Remington at
Victoria communities in May 1997. The Company will commence operating the
communities in May 1997.
(9) The Company's management agreements are generally for terms of three to
five years, but may be canceled by the owner of the community, without
cause, on three to six months' notice. Pursuant to the management
agreements, the Company is generally responsible for providing management
personnel, marketing, nursing, resident care and dietary services,
accounting and data processing reports, and other services for these
communities at the owner's expense and receives a monthly fee for its
services based either on a contractually fixed amount or a percentage of
revenues or income. Certain management agreements also provide the Company
with an incentive fee based on various performance goals. The Company's
existing management agreements expire at various times between June 1997
and July 2000. None of the communities managed by the Company is owned by
an affiliate of the Company.
(10) Reeds Landing is a life care community. Its fill-up rate has been
consistent with the feasibility projection for its bond financing, and the
fill-up rate of life care communities generally.
(11) Each of the home health care agencies is owned by the Company and is based
at one of the Company's senior living communities.
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DEVELOPMENT ACTIVITIES
The table below summarizes information regarding the expansion of certain
of the Company's existing senior living communities and the residences and home
health care agencies currently under development.
<TABLE>
<CAPTION>
ADDITIONAL RESIDENT CAPACITY
SCHEDULED -----------------------------
COMMUNITIES COMPLETION IL AL SN TOTAL STATUS(1)
- ----------- ---------- ---- ------ ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
EXPANSION PROJECTS:
Santa Catalina Village, Tucson, AZ.................. 12/97 20 70 42 132 Construction
Williamsburg Landing, Williamsburg, VA(2)........... 12/97 10 58 21 89 Construction
Trinity Towers, Corpus Christi, TX.................. 3/98 27 68 16 111 Construction
Richmond Place, Lexington, KY....................... 4/98 -- 73 -- 73 Development
Carriage Club of Charlotte, Charlotte, NC........... 7/98 -- 30 -- 30 Development
Carriage Club of Jacksonville, Jacksonville, FL..... 10/98 -- 15 60 75 Development
The Hampton at Post Oak, Houston, TX................ 11/98 -- 15 76 91 Development
Westlake Village, Cleveland, Ohio................... 6/99 -- 15 88 103 Development
-- ----- --- -----
Subtotal................................... 57 344 303 704
-- ----- --- -----
DEVELOPMENT PROJECTS:
Lady Lake, FL....................................... 11/97 -- 55 -- 55 Construction
Halls, TN........................................... 1/98 -- 55 -- 55 Construction
Pearland, TX........................................ 2/98 -- 82 -- 82 Development
Spring Shadow, TX................................... 4/98 -- 67 -- 67 Development
Houston, TX (Willowchase)........................... 4/98 -- 67 -- 67 Development
Houston, TX (Northwest)............................. 4/98 -- 95 -- 95 Development
Knoxville, TN....................................... 4/98 -- 108 -- 108 Development
Marietta, GA........................................ 4/98 -- 60 -- 60 Development
Lakeway, TX......................................... 5/98 -- 70 -- 70 Development
Houston, TX (West).................................. 7/98 -- 85 -- 85 Development
Nashville, TN (West)................................ 8/98 -- 90 -- 90 Development
Tampa, FL........................................... 8/98 -- 90 -- 90 Development
St. Petersburg, FL.................................. 9/98 -- 100 -- 100 Development
Aurora, CO.......................................... 10/98 -- 95 -- 95 Development
Lakewood, CO........................................ 10/98 -- 93 -- 93 Development
Del Ray Beach, FL................................... 10/98 -- 80 -- 80 Development
Greenwood Village, CO............................... 11/98 -- 85 90 175 Development
Austin, TX.......................................... 1/99 -- 95 -- 95 Development
Nashville, TN (Central)............................. 3/99 -- 115 -- 115 Development
Houston, TX (West University)....................... 7/99 -- 85 -- 85 Development
-- ----- --- -----
Subtotal................................... -- 1,672 90 1,762
-- ----- --- -----
Grand Total................................ 57 2,016 393 2,466
== ===== === =====
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
HOME HEALTH CARE AGENCIES: LOCATION
Air Force Village(3).................................... San Antonio, TX(4)
Carriage Club Jacksonville(5)........................... Jacksonville, FL(6)
Hale County(3).......................................... Greensboro, AL(7)
Meadowood(3)............................................ Worcester, PA(4)(6)
Santa Catalina Villas(5)................................ Tucson, AZ(6)
The Summit at Westlake Hills(5)......................... Austin, TX(6)
Tri-County(8)........................................... Corpus Christi, TX
</TABLE>
- ---------------
(1) "Development" means that development activities, such as site surveys,
preparation of architectural plans, or initiation of zoning processes, have
commenced (but construction has not commenced). "Construction" means that
construction activities, such as ground-breaking activities, exterior
construction, or interior build-out, have commenced.
(2) Williamsburg Landing is a managed community. The Company is providing full
development services related to the expansion for the owner.
(3) Managed by the Company for an unaffiliated third party.
(4) Scheduled to commence operations in May 1997.
(5) Owned by the Company.
(6) Based at one of the Company's senior living communities.
(7) Scheduled to commence operations in June 1997.
(8) The Company has entered into a letter of intent to acquire the agency. The
Company expects to complete the acquisition in June 1997.
41
<PAGE> 43
The Company has developed a portfolio of flexible designs for its assisted
living residences, each of which may be configured in a number of different ways
thereby providing the Company with flexibility in adapting to a particular
geographic market, neighborhood, or site. In addition, each design has been
developed to facilitate the prompt, efficient, cost-effective delivery of health
care and personal services. Site requirements for the various designs range from
2.5 to 6.0 acres. Each of the Company's designs also provide for specially
designed residential units, common areas, and dining rooms for residents with
Alzheimer's and other forms of dementia.
The Company believes that its designs meet the desire of many of its
residents to move into a new residence that approximates, as nearly as possible,
the comfort of their prior home. The Company also believes that its designs
achieve several other objectives, including (i) lessening the trauma of change
for residents and their families, (ii) facilitating resident mobility and
caregiver access, (iii) enhancing operating efficiencies, (iv) enhancing the
Company's ability to match its products to targeted markets, and (v)
differentiating the Company from its competitors.
The Company intends to develop new assisted living residences by using a
combination of in-house development personnel and experienced third-party
project managers and by acquiring newly constructed residences from developers
under "turnkey" purchase and sale agreements. To the extent the Company acquires
newly developed residences from a developer on a "turnkey" basis, it intends to
enter into a purchase and sale agreement whereby the Company, subject to
construction of the residence to the Company's designs and specifications and
satisfaction of typical purchase and sale contingencies for the Company's
benefit, will commit to purchase the residence upon completion at an agreed upon
price.
The Company has also entered into contractual arrangements with
established, regional real estate development contractors pursuant to which such
developers will provide assistance in the development process. These
arrangements are intended to enable the Company to develop and construct
additional assisted living residences while reducing the investment of, and
associated risk to, the Company. The Company's development contractors provide
construction management experience, knowledge of local state and building codes
and zoning laws, and assistance with site locations. As a result, the Company's
development staff is able to evaluate and direct overall development activity
more efficiently. The Company has also entered into a development and management
agreement with a development contractor which provides that the Company will
manage nine assisted living residences to be developed using the Company's
residence designs and grants the Company an option to purchase the residences.
OPERATIONS
Centralized Management
The Company centralizes its corporate and other administrative functions so
that the community-based management and staff can focus their efforts on
resident care. The Company maintains centralized accounting, finance, human
resources, training, and other operational functions at its national corporate
office in Brentwood (Nashville), Tennessee. The Company's corporate office is
generally responsible for (i) establishing Company-wide policies and procedures
relating to, among other things, resident care and operations, (ii) performing
accounting functions, (iii) developing employee training programs and materials,
(iv) coordinating human resources and food service functions, (v) coordinating
marketing functions, and (vi) providing strategic direction. In addition,
financing, development, construction and acquisition activities, including
feasibility and market studies, residence design, development, and construction
management, are conducted by the Company's corporate office.
The Company seeks to control operational expenses for each of its
communities through standardized management reporting and centralized controls
of capital expenditures, asset replacement tracking, and purchasing for larger
and more frequently used supplies. Community expenditures are monitored by
regional operations teams headed by the Company's Regional Vice Presidents who
are accountable for the resident satisfaction and financial performance of the
communities in their region. The Company's assisted living residences
operational activities are directed by the Senior Director for Assisted Living
Operations who is responsible, together with the appropriate Regional Vice
President, for the opening and operation of the Company's assisted living
residences.
42
<PAGE> 44
Community-Based Management
An executive director manages the day-to-day operations at each senior
living community, including oversight of the quality of care, delivery of
resident services, and monitoring of financial performance, and is responsible
for all personnel, including food service, maintenance, activities, security,
assisted living, housekeeping, and, where applicable, nursing. Executive
directors are compensated based on certain quality of service goals and on the
financial performance of the community. In most cases, each senior living
community also has department managers that direct the environmental services,
nursing or care services, business management functions, dining services,
activities, transportation, housekeeping, and marketing functions.
A residence manager manages the day-to-day operations at each assisted
living residence. While the residence managers have many of the same operational
responsibilities as the Company's executive directors, their primary
responsibility is to oversee resident care. For its assisted living residences,
the Company has adopted the concept of universal workers whereby each employee's
responsibilities span a number of traditional job descriptions. For example, an
assisted living residence employee may, during the course of a day, provide
housekeeping, food service, activities, and assistance with ADLs services to
residents. As a result, and because the Company's senior living communities
located near assisted living residences provide certain support personnel and
services on an on-going basis, each assisted living residence employs fewer
associates. On-site care managers and residents' assistants provide most of the
actual resident care in conjunction with a small support team consisting of a
housekeeper, a maintenance helper, an administrative coordinator, and a small
dining service team. In most assisted living residences, the residence manager
is also a licensed nurse.
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 has adopted comprehensive recruiting
and screening programs for management positions that utilize personnel
profiling, corporate office interviews, and drug screening company-wide. The
Company offers system-wide training and orientation for its front line
employees, department level managers, and executive staff at the community level
through a combination of Company-sponsored seminars and conferences and through
its contract for training services with The Frist Center.
Home Health Management
The Company centralizes all home health financial and clinical data through
an electronic data collection system. This data warehouse allows corporate
regional directors to identify emerging trends, establish critical pathways, and
develop and monitor cost and utilization controls. All accounting functions
including claims submission and processing are performed at the corporate
office.
The Company's centralized approach allows its home health care agencies to
achieve a more efficient delivery of care. Each community-based agency is
operated under the auspices of the community's executive director and under the
direct control of an agency director. This director and his or her team of
nurses, personal care aides, physical therapists, speech therapists,
occupational therapists, and social workers focus on assessing the health care
needs of residents in the Company's senior living or assisted living
communities, as well as clients in the surrounding market.
Quality Assurance
The Company's quality assurance program is designed to achieve and maintain
a high degree of resident and family satisfaction with the care and services the
Company provides. The Company coordinates the implementation of its quality
assurance program at each of its communities through its corporate office. The
Company encourages resident and family participation and seeks feedback from
families and residents through surveys conducted on a regular basis. In
addition, inspections of each community are conducted regularly by corporate
staff. These inspections, performed periodically, review all aspects of
operations, care, and services provided, and the overall appearance and
cleanliness of the community.
43
<PAGE> 45
Marketing
The Company's marketing efforts are implemented on a regional and local
level, all under the supervision of the corporate marketing staff, and are
intended to create awareness of the Company and its services among prospective
residents, their families, professional referral sources, and other key decision
makers. The corporate marketing staff conducts regional and state-wide surveys
of age- and income-qualified seniors to ensure that the Company understands the
needs and demands of that marketplace. To further both market awareness of the
Company by prospective residents and to more accurately assess the needs and
demands of seniors in that market, the Company periodically conducts regional
focus groups. Corporate office personnel develop the overall marketing
strategies for each community, produce all marketing materials, maintain
marketing databases, oversee direct mailings, place all media advertising, and
assist community personnel in the initial development and continuing refinement
of marketing plans for each community.
Before opening a new assisted living residence, the Company makes referral
source contacts and conducts marketing programs such as lead-generating media
consisting of direct mail, telemarketing follow-up, and print media advertising.
These public awareness campaigns usually begin with the start of construction
and intensify several months before the opening of the residence. An on-site
marketing person is at the residence approximately six months prior to the
opening of the residence and is supported by the Company's corporate marketing
department.
Once the residence opens, the Company believes that satisfied residents and
their families are the most important referral sources. 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. In addition,
the Company focuses on enhancing the reputation of the communities and the
services provided among potential referral sources, such as hospitals, home
health care agencies, physicians, therapy companies, and other health care
professionals.
INDUSTRY BACKGROUND
The senior living and health care services industry encompasses a broad and
diverse range of living accommodations and health care services that are
provided primarily to persons 75 years of age or older. For the elderly who
require limited services, care in their own or family members' homes or in
independent living residences or retirement centers, supplemented at times by
home health care, offers a viable option. For the elderly who are interested in
a community housing option, most independent living residences and retirement
centers typically offer a basic services package limited to meals, housekeeping,
and laundry. As a senior's need for assistance increases, care in an assisted
living residence is often preferable and more cost-effective than home-based
care or nursing home care. Assisted living residents usually enter a residence
when other living accommodations no longer provide the level of care required by
the individual. Typically, assisted living represents a combination of housing
and 24-hour a day personal support services designed to aid elderly residents
with ADLs. Certain assisted living residences may also provide assistance to
residents with low acuity medical needs, or may offer higher levels of personal
assistance for incontinent residents or residents with Alzheimer's disease or
other forms of dementia. Generally, assisted living residents require higher
levels of care than residents of independent living residences and retirement
living centers, but require lower levels of care than patients in skilled
nursing facilities. For seniors who need the constant attention of a skilled
nurse or medical practitioner, a skilled nursing facility may be required.
According to the United States Health Care Financing Administration, annual
expenditures in the assisted living sector of the senior living and health care
services industry range from $12.0 billion to $14.0 billion and include
facilities ranging from "board and care" (generally 12 or fewer residents with
little or no services) to full-service assisted living residences such as those
operated by the Company. The assisted living sector is highly fragmented and
characterized by numerous small operators. Moreover, the scope of assisted
living services varies substantially from one operator to another. Many smaller
assisted living providers do not operate in purpose-built residences, do not
have professional training for staff, and provide only limited assistance with
low-level care activities. The Company believes that few assisted living
operators provide the
44
<PAGE> 46
required comprehensive range of assisted living services, such as dementia care
and other services designed to permit residents to "age in place" within the
community as they develop further physical or cognitive frailties.
The Company believes there will continue to be significant growth
opportunities in the senior living market for providing health care and other
services to the elderly, particularly in the assisted living segment of the
market. The Company believes that a number of demographic, regulatory, and other
trends will contribute to the continued growth in the assisted living market,
the Company's targeted market for future development and expansion, including
the following:
Consumer Preference
The Company believes that assisted living is increasingly becoming the
setting preferred by prospective residents and their families for the care of
the frail elderly. Assisted living offers residents greater independence and
allows them to age in place in a residential setting, which the Company believes
results in a higher quality of life than that experienced in more institutional
or clinical settings.
Demographics
The primary market for the Company's senior living and health care services
is comprised of persons age 75 and older. This age group is one of the fastest
growing segments of the United States population. According to United States
Census Bureau information, this population segment will increase from
approximately 13.2 million in 1990 to over 16.6 million by 2000, an increase of
26%. The population of seniors aged 85 and over is expected to increase from
approximately 3.1 million in 1990 to over 4.3 million by 2000, an increase of
39%. As the number of persons aged 75 and over continues to grow, the Company
believes that there will be corresponding increases in the number of persons who
need assistance with ADLs. According to the United States General Accounting
Office, in 1991 there were over seven million people in the United States who
needed assistance with ADLs, and the number of people needing such assistance
was expected to double by the year 2020. Furthermore, the number of persons
afflicted with Alzheimer's disease is also expected to grow from the current 3.8
million to 4.5 million, or an increase of 26.3%, by the year 2000, according to
data published by the Alzheimer's Association.
Restricted Supply of Nursing Beds
The majority of states in the United States have adopted CON or similar
statutes generally requiring that, prior to the addition of new beds, the
addition of new services, or the making of certain capital expenditures, a state
agency must determine that a need exists for the new beds or the proposed
activities. The Company believes that this CON process tends to restrict the
supply and availability of licensed nursing facility beds. High construction
costs, limitations on government reimbursement for the full costs of
construction, and start-up expenses also act to constrain growth in the supply
of such facilities. At the same time, nursing facility operators are continuing
to focus on improving occupancy and expanding services to sub-acute patients
requiring significantly higher levels of nursing care. As a result, the Company
believes that there has been a decrease in the number of skilled nursing beds
available to patients with lower acuity levels and that this trend should
increase the demand for the Company's senior living communities, including
particularly the Company's assisted living residences and skilled nursing
facilities.
Cost-Containment Pressures
In response to rapidly rising health care costs, governmental and private
pay sources have adopted cost-containment measures that have reduced admissions
and encouraged reduced lengths of stays in hospitals and other acute care
settings. The federal government had previously acted to curtail increases in
health care costs under Medicare by limiting acute care hospital reimbursement
for specific services to pre-established fixed amounts. Private insurers have
begun to limit reimbursement for medical services in general to predetermined
reasonable charges, and managed care organizations (such as health maintenance
organizations) are attempting to limit the hospitalization costs by negotiating
for discounted rates for hospital and acute care services and by monitoring and
reducing hospital use. In response, hospitals are discharging patients earlier
45
<PAGE> 47
and referring elderly patients, who may be too sick or frail to manage their
lives without assistance, to nursing homes and assisted living residences where
the cost of providing care is typically lower than hospital care. In addition,
third-party payors are increasingly becoming involved in determining the
appropriate health care settings for their insureds or clients based primarily
on cost and quality of care. Based on industry data, in 1993 the annual cost per
patient for skilled nursing care averaged approximately $35,000, in contrast to
the annual per patient cost for assisted living care of approximately $24,000.
Senior Affluence
According to United States Census Bureau information, the average net
income per senior citizen household member is 9% higher than for non-senior
citizen households. In addition, seniors frequently have accumulated equity,
primarily through home ownership. The Company believes that a substantial
portion of the senior population thus has significant resources available for
their retirement and long-term care needs. The Company's target population is
comprised of middle- to upper-income seniors who have, either directly or
indirectly through familial support, the financial resources to pay for senior
living communities, including an assisted living alternative to traditional
long-term care.
Reduced Reliance on Family Care
Historically, the family has been the primary provider of care for seniors.
The Company believes that the increase in the percentage of women in the work
force, the reduction of average family size, and the increased mobility in
society will reduce the role of the family as the traditional care-giver for
aging parents. The Company believes that this trend will make it necessary for
many seniors to look outside the family for assistance as they age.
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 effect 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.
Accordingly, the Company devotes significant resources to monitoring legal and
regulatory developments on local and national levels.
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 residences. While a number of states
have not yet enacted specific assisted living regulations, the Company's
communities are subject to regulation, licensing, CON 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. 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
46
<PAGE> 48
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 federal, state, and
local laws exist which also may require modifications to existing and planned
properties to permit access to the properties by disabled persons. While the
Company believes that its communities 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.
In addition, the Company is subject to various Federal, state and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties.
The Company believes that the structure and composition of government, and
specifically health care, regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environment changes. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.
COMPETITION
The senior living and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. Although there are a number of
substantial companies active in the senior living and health care industry, the
industry continues to be very fragmented and characterized by numerous small
operators. The Company believes that the primary competitive factors in the
senior living and health care services industry are (i) reputation for and
commitment to a high quality of care; (ii) quality of support services offered
(such as home health care and food services); (iii) price of services; (iv)
physical appearance and amenities associated with the communities; and (v)
location. The Company competes with other companies providing independent
living, assisted living, skilled nursing, home health care, and other similar
service and care alternatives, some of whom may have greater financial resources
than the Company. Because seniors tend to choose senior living communities near
their homes, the Company's principal competitors are other senior living and
long-term care communities in the same geographic areas as the Company's
communities. The Company also competes with other health
47
<PAGE> 49
care businesses with respect to attracting and retaining nurses, technicians,
aides, and other high quality professional and non-professional employees and
managers.
INSURANCE AND LEGAL PROCEEDINGS
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability, and professional medical malpractice
insurance policies for the Company's owned and certain of its managed
communities under a master insurance program in amounts and with such coverages
and deductibles which the Company believes are within normal industry standards
based upon the nature and risks of the Company's business. The Company also has
an umbrella excess liability protection policy in the amount of $15.0 million
per location. There can be no assurance that a claim in excess of the Company's
insurance will not arise. A claim against the Company not covered by, or in
excess of, the Company's insurance could have a material adverse effect upon the
Company. In addition, the Company's insurance policies must be renewed annually.
There can be no assurance that the Company will be able to obtain liability
insurance in the future or that, if such insurance is available, it will be
available on acceptable terms.
Under various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The Company believes that its communities are in
compliance in all material respects with all federal, state, and local laws,
ordinances, and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware of any material non-compliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the communities it currently operates.
The Company currently is not party to any legal proceeding that it believes
would have a material adverse effect on its business, financial condition, or
results of operations.
EMPLOYEES
The Company employs approximately 2,160 persons, of which approximately
1,350 are full-time employees (approximately 50 of whom are located at the
Company's corporate offices) and 810 are part-time employees. In addition, there
are approximately 535 full-time employees and 455 part-time employees who are
employed by the owners of communities managed by the Company who are under the
direction and supervision of the Company. None of the Company's employees is
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 good.
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<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W.E. Sheriff.............................. 54 Chairman and Chief Executive Officer
Christopher J. Coates..................... 46 President and Chief Operating Officer
George T. Hicks........................... 39 Executive Vice President -- Finance, Chief
Financial Officer, Treasurer, and Secretary
H. Todd Kaestner.......................... 41 Executive Vice President -- Corporate Development
James T. Money............................ 49 Executive Vice President -- Development Services
Tom G. Downs.............................. 51 Senior Vice President -- Operations
Lee A. McKnight........................... 51 Senior Vice President -- Marketing
H. Lee Barfield II........................ 50 Director
Jack O. Bovender, Jr...................... 51 Director
Frank M. Bumstead......................... 54 Director
Robin G. Costa............................ 30 Director
Clarence Edmonds.......................... 63 Director
John A. Morris, Jr., M.D.................. 50 Director
Daniel K. O'Connell....................... 68 Director
Nadine C. Smith........................... 39 Director
Lawrence J. Stuesser...................... 54 Director
</TABLE>
W.E. Sheriff has served as Chairman and Chief Executive Officer of the
Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff
served in various capacities for Ryder System, Inc., including as president and
chief executive officer of its Truckstops of America division. Mr. Sheriff also
serves on the boards of various educational and charitable organizations and in
varying capacities with several trade organizations, including as a member of
the board of the National Association for Senior Living Industries, and as a
member of the American Association of Homes and Services for the Aging and the
American Senior Housing Association.
Christopher J. Coates has served as President and Chief Operating Officer
of the Company and its predecessors since January 1993. From 1988 to 1993, Mr.
Coates served as chairman of National Retirement Company ("NRC"), a senior
living management company acquired by a subsidiary of the Company in 1992. From
1985 to 1988, Mr. Coates was senior director of the Retirement Housing Division
of Radice Corporation, following that company's purchase in 1985 of National
Retirement Consultants, a company formed by Mr. Coates. Mr. Coates is chairman
of the board of directors of the American Senior Housing Association.
George T. Hicks, a certified public accountant, has served as the Executive
Vice President -- Finance, Chief Financial Officer, Treasurer, and Secretary
since September 1993. Mr. Hicks has served in various capacities for the
Company's predecessors since 1985, including Vice President -- Finance and
Treasurer from November 1989 to September 1993.
H. Todd Kaestner has served as Executive Vice President -- Corporate
Development since September 1993. Mr. Kaestner has served in various capacities
for the Company's predecessors since 1985, including Vice President -
Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.
James T. Money has served as Executive Vice President -- Development
Services since September 1993. Mr. Money has served in various capacities for
the Company's predecessors since 1978, including Vice President -- Development
from 1985 to 1993. Mr. Money is a member of the board of directors and the
executive committee of the National Association for Senior Living Industries.
49
<PAGE> 51
Tom G. Downs has served as Senior Vice President -- Operations since 1989.
Mr. Downs has served in various capacities for the Company's predecessors since
1979.
Lee A. McKnight has served as Senior Vice President -- Marketing since
September 1991. Mr. McKnight has served in various capacities for the Company's
predecessors since 1979.
H. Lee Barfield II has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since its formation
in 1995, and as director of various of the Company's predecessors since 1978.
Mr. Barfield is a member in the law firm of Bass, Berry & Sims PLC, the
Company's outside general counsel, and has served in various capacities for that
firm since 1974.
Jack O. Bovender, Jr. has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since September
1996. Until his retirement in March 1994, Mr. Bovender worked for Hospital
Corporation of America for over 18 years in various capacities, including
Executive Vice President and Chief Operating Officer. Mr. Bovender is a director
of Response Oncology, Inc., a physician practice management company specializing
in oncology, and a director of Quorum Health Group, Inc., a hospital management
company.
Frank M. Bumstead has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Since 1989, Mr. Bumstead has been president and a principal shareholder of
Flood, Bumstead, McCready & McCarthy, Inc., a business management firm that
represents, among others, artists, songwriters, and producers in the music
industry. Since 1993, Mr. Bumstead has also served as the chairman and chief
executive officer of FBMS Financial, Inc., an investment advisor registered
under the Investment Company Act of 1940. Mr. Bumstead is vice chairman and a
director of Response Oncology, Inc., a physician practice management company
specializing in oncology, and a director of Nashville Country Club, Inc., an
owner and operator of restaurants and hotels. Mr. Bumstead also serves as a
director, secretary, and treasurer of Imprint Records, Inc., a music recording
company.
Robin G. Costa has served as a director of the Company since its inception
and as a member of ARCLP's limited partners committee since October 1996. Since
1994, Ms. Costa has served as chief operating officer of Maddox Companies, a
group of over 40 entities involved in oil and gas exploration, real estate
development and investment, and other investments. Ms. Costa has served in
various capacities for the Maddox Companies since 1985, including as Secretary
and Treasurer from 1992 to 1994.
Clarence Edmonds has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since June 1995,
and as a director of various of the Company's predecessors since 1987. Mr.
Edmonds has served in various capacities, including vice president and
treasurer, of Massey Company, an investment services firm, since 1969.
John A. Morris, Jr., M.D. has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Dr. Morris has served in varying capacities of the medical profession since
1977, and is currently a Professor of Surgery and the Director of the Division
of Trauma and Surgical Critical Care at the Vanderbilt University School of
Medicine, the Medical Director of the Life Flight Air Ambulance Program at
Vanderbilt University Hospital, and an Associate in the Department of Health
Policy and Management at the Johns Hopkins University. Dr. Morris is also
chairman of the board of Sirrom Capital Corporation, a small business investment
company.
Daniel K. O'Connell has served as a director of the Company since its
inception, as a member of ARCLP's limited partners committee since June 1995,
and as a director of various of the Company's predecessors since 1985. Until his
retirement in 1990, Mr. O'Connell worked for Ryder System, Inc. for over 25
years in various capacities, including legal counsel and chief financial
officer.
Nadine C. Smith has served as a director of the Company since its inception
and as a member of ARCLP's limited partners committee since June 1995. Since
1990, Ms. Smith has been managing general partner of NC Smith & Co., a financial
and management consulting firm. Ms. Smith is also a director of UTI Energy
Corp., an oil services company.
50
<PAGE> 52
Lawrence J. Stuesser has served as a director of the Company since its
inception and as a member of ARCLP's limited partners committee since June 1995.
Since June 1996, Mr. Stuesser has been the president and chief executive officer
and a director of Computer People, Inc., an information technology professional
services and staffing company. From August 1993 to May 1996, Mr. Stuesser was a
private investor and independent business consultant. From January 1991 to July
1993, Mr. Stuesser was chairman and chief executive officer of Kimberly Quality
Care, Inc., a home health care services company. Mr. Stuesser is chairman of the
board of Curative Health Services Inc., a disease management company in the
chronic wound care market, and a director of IntegraMed America, Inc., an owner
and operator of clinical ambulatory care facilities.
The Company's Board of Directors, currently consisting of ten members, is
divided into three classes of as nearly equal size as possible. At each annual
meeting of shareholders, directors constituting one class are elected for a
three-year term. The terms of Messrs. Bovender, O'Connell, and Stuesser will
expire at the 1998 Annual Meeting of Shareholders, the terms of Messrs. Bumstead
and Edmonds and Ms. Smith will expire at the 1999 Annual Meeting of
Shareholders, and the terms of Messrs. Sheriff, Barfield, and Morris and Ms.
Costa will expire at the 2000 Annual Meeting of Shareholders. See "Description
of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee
Law." Executive officers serve at the discretion of the Board of Directors.
The Board of Directors has established a policy of holding meetings on a
regular quarterly basis and on other occasions when required by special
circumstances. Certain directors also devote their time and attention to the
Board's principal standing committees. The committees and their primary
functions are as follows.
Executive Committee. The Executive Committee is authorized generally
to act on behalf of the Board of Directors between scheduled meetings,
subject to certain limitations established by the Board of Directors and
applicable corporate law. The Executive Committee currently consists of
Messrs. Bovender, Bumstead, Morris, and Sheriff.
Audit Committee. The Audit Committee makes recommendations to the
Board of Directors with respect to the Company's financial statements and
the appointment of independent accountants, reviews significant audit and
accounting policies and practices, meets with the Company's independent
accountants concerning, among other things, the scope of audits and
reports, and reviews the performance of the overall accounting and
financial controls of the Company. The Audit Committee currently consists
of Messrs. Barfield and Edmonds and Ms. Costa.
Compensation Committee. The Compensation Committee has the
responsibility for reviewing and approving salaries, bonuses, and other
compensation and benefits of executive officers, advising management
regarding benefits and other terms and conditions of compensation, and
administering the Company's stock incentive, employee stock purchase,
401(k), and other executive compensation plans. See "-- Compensation
Pursuant to Plans." The Compensation Committee currently consists of
Messrs. O'Connell and Stuesser and Ms. Smith.
51
<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
ARCLP on behalf of the Chief Executive Officer and the four other most highly
paid executive officers (collectively, the "Named Executive Officers") for the
year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($)
--------------------------- ---------- --------- ----------------
<S> <C> <C> <C>
W.E. Sheriff.......................................... 212,400 30,515 84,000(2)
Chairman and Chief Executive Officer
Christopher J. Coates................................. 153,400 22,038 11,033(3)
President and Chief Operating Officer
George T. Hicks....................................... 100,300 14,410 7,214(3)
Executive Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary
H. Todd Kaestner...................................... 106,200 15,257 7,637(3)
Executive Vice President -- Corporate Development
James T. Money........................................ 100,300 14,410 7,214(3)
Executive Vice President -- Development Services
</TABLE>
- ---------------
(1) Does not include amounts distributed by the LLC to its members, including
Named Executive Officers. In 1996, ARCLP distributed to the LLC an
aggregate of approximately $59,000 and the LLC distributed approximately
$13,561 to Mr. Sheriff, $9,686 to Mr. Coates, and $7,749 to each of Messrs.
Hicks, Kaestner, and Money in accordance with their ownership interests in
the LLC.
(2) Reflects insurance premiums paid by the Company for insurance policies
benefiting Mr. Sheriff.
(3) Reflects contributions by the Company under the Company's Section 162 Plan.
See "-- Compensation Pursuant to Plans -- Section 162 Plan."
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors are
entitled to an annual retainer of $12,000 payable, in arrears, on the date of
each annual meeting of shareholders, commencing with the 1998 Annual Meeting of
Shareholders. Non-employee directors are also entitled to a fee of $500 for each
board meeting attended by such director, and $250 for each committee meeting
attended by such director that is not on the same day as a meeting of the Board
of Directors. All directors are entitled to reimbursement for their actual
out-of-pocket expenses incurred in connection with attending meetings. In
addition, non-employee directors receive options to purchase shares of Common
Stock in accordance with the provisions of the 1997 Stock Incentive Plan. See
"-- Compensation Pursuant to Plans -- 1997 Stock Incentive Plan."
COMPENSATION PURSUANT TO PLANS
1997 Stock Incentive Plan
The Company has adopted a stock incentive plan (the "Stock Incentive Plan")
that will become effective upon the consummation of the Offering. The Stock
Incentive Plan was approved by the Board of Directors and shareholder of the
Company in February 1997. Under the Stock Incentive Plan, the Compensation
Committee has the authority to grant to key employees and consultants of the
Company, and the Board of Directors has the authority to grant to directors who
are not employed by the Company ("Outside Directors"), the following types of
awards: (1) stock options; (2) stock appreciation rights; (3) restricted stock;
and/or (4) other stock-based awards. Pursuant to the Stock Incentive Plan,
1,093,750 shares of Common Stock have been reserved and will be available for
issuance, which may include authorized and unissued shares or treasury shares.
The number of shares reserved and available for issuance pursuant to the Stock
Incentive Plan will, upon the consummation of any Equity Issuance (as defined in
the Plan), increase
52
<PAGE> 54
automatically by 10% of the number of shares of Common Stock issued in such
Equity Issuance; provided, however, that Incentive Stock Options ("ISOs") may
not be issued after 1,093,750 shares of Common Stock have been issued under the
Stock Incentive Plan. The maximum number of shares of Common Stock for which
awards may be made under the Stock Incentive Plan to any officer of the Company
or other person whose compensation may be subject to the limitations on
deductibility under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), is 200,000 during any single year. As of the date hereof,
and subject to the consummation of the Offering, options to purchase 635,000
shares of Common Stock, exercisable at the initial public offering price, have
been awarded to 105 key employees, directors, and consultants of the Company.
Any shares as to which an option or other award expires, lapses unexpired, or is
forfeited, terminated, or canceled may become subject to a new option or other
award. The Stock Incentive Plan will terminate on, and no award may be granted
later than, the tenth anniversary of the date of adoption of the Stock Incentive
Plan, but the exercise date of awards granted prior to such tenth anniversary
may extend beyond that date.
The Stock Incentive Plan provides for automatic grants of non-qualified
stock options to purchase shares of Common Stock to Outside Directors. Options
to purchase 9,000 shares of Common Stock have been automatically granted to each
person serving as an Outside Director as of the consummation of the Offering at
an exercise price equal to the initial public offering price. If any person who
was not previously a member of the Board of Directors is elected or appointed an
Outside Director following the consummation of the Offering but prior to the
date of the Annual Meeting of Shareholders of the Company in the year 2000, such
Outside Director will automatically be granted an option to purchase 7,000
shares of Common Stock if such Outside Director's service begins prior to the
second anniversary of the Offering and 5,000 shares of Common Stock if such
Outside Director's service begins after the second anniversary of the Offering.
The Board of Directors may, in its discretion, increase or decrease the number
of shares subject to such option to reflect the extent to which such Outside
Director's expected service may exceed two years or may be less than one year.
Such options shall vest with respect to 5,000 shares on the date of the first
annual meeting of shareholders following the date of grant, 2,000 shares on the
date of the second annual meeting of shareholders following the date of grant,
and any remaining shares on the date of the third annual meeting of shareholders
following the date of grant.
On the date of each annual meeting of the shareholders of the Company
beginning with the annual meeting of shareholders held in the year 2000, unless
the Stock Incentive Plan has been terminated, each Outside Director who will
continue as a director following such meeting will receive an option to purchase
3,000 shares of Common Stock. Such options will vest with respect to all 3,000
shares on the date of the next annual meeting of shareholders. All options
automatically granted to an Outside Director will enable the optionee to
purchase shares of Common Stock at the fair market value of the Common Stock on
the date of grant. Outside Director optionees will not be able to transfer or
assign their options without the prior written consent of the Board of Directors
other than (i) transfers by the optionee to a member of his or her immediate
family or a trust for the benefit of the optionee or a member of his or her
immediate family, or (ii) transfers by will or by the laws of descent and
distribution. Options automatically granted to Outside Directors will have a
term of ten years from the date of grant. The exercise price may be paid in
cash, shares of Common Stock, or a combination thereof. The Board of Directors
has the discretion to reduce, but not increase, the number of shares awardable
to Outside Directors.
ISOs and non-qualified stock options may be granted for such number of
shares as the Board or Compensation Committee may determine and may be granted
alone, in conjunction with, or in tandem with other awards under the Stock
Incentive Plan or cash awards outside the Stock Incentive Plan. A stock option
will be exercisable at such times and subject to such terms and conditions as
the Compensation Committee will determine. In the case of an ISO, however, the
term will be no more than ten years after the date of grant (five years in the
case of ISOs for certain 10% shareholders). The option price for an ISO will not
be less than 100% (110% in the case of certain 10% shareholders) of the fair
market value of the Common Stock as of the date of grant and for any
non-qualified stock option will not be less than 50% of the fair market value as
of the date of grant. ISOs granted under the Stock Incentive Plan may not be
transferred or assigned other than by will or by the laws of descent and
distribution. Non-qualified stock options and stock appreciation rights may
53
<PAGE> 55
not be transferred or assigned without the prior written consent of the
Compensation Committee, other than (i) transfers by the optionee to a member of
his or her immediate family or a trust for the benefit of the optionee or a
member of his or her immediate family, or (ii) transfers by will or by the laws
of descent and distribution.
Stock appreciation rights may be granted under the Stock Incentive Plan in
conjunction with all or part of a stock option and will be exercisable only when
the underlying stock option is exercisable. Once a stock appreciation right has
been exercised, the related portion of the stock option underlying the stock
appreciation right will terminate. Upon the exercise of a stock appreciation
right, the Company will pay to the employee or consultant in cash, Common Stock,
or a combination thereof (the method of payment to be at the discretion of the
Committee), an amount equal to the excess of the fair market value of the Common
Stock on the exercise date over the option price, multiplied by the number of
stock appreciation rights being exercised.
Restricted stock awards may be granted alone, in addition to, or in tandem
with, other awards under the Stock Incentive Plan or cash awards made outside
the Plan. The provisions attendant to a grant of restricted stock may vary from
participant to participant. In making an award of restricted stock, the
Compensation Committee will determine the periods during which the restricted
stock is subject to forfeiture and may provide such other awards designed to
guarantee a minimum value for such stock. During the restriction period, the
employee or consultant may not sell, transfer, pledge, or assign the restricted
stock but will be entitled to vote the restricted stock and to receive, at the
election of the Compensation Committee, cash or deferred dividends.
The Compensation Committee also may grant other types of awards such as
performance shares, convertible preferred stock, convertible debentures, or
other exchangeable securities that are valued, as a whole or in part, by
reference to or otherwise based on the Common Stock. These awards may be granted
alone, in addition to, or in tandem with, stock options, stock appreciation
rights, restricted stock, or cash awards outside of the Stock Incentive Plan.
Awards will be made upon such terms and conditions as the Compensation Committee
may determine.
If there is a change in control or a potential change in control of the
Company (as defined in the Stock Incentive Plan), stock appreciation rights and
limited stock appreciation rights, and any stock options which are not then
exercisable, will become fully exercisable and vested and the restrictions and
deferral limitations applicable to restricted stock and other stock-based awards
may lapse and such shares and awards will be deemed fully vested. Stock options,
stock appreciation rights, limited stock appreciation rights, restricted stock
and other stock-based awards, will, unless otherwise determined by the
Compensation Committee in its sole discretion, be cashed out on the basis of the
change in control price (as defined in the Stock Incentive Plan and as described
below). The change in control price will be the highest price per share paid in
any transaction reported on the NYSE or paid or offered to be paid in any bona
fide transaction relating to a change in control or potential change in control
at any time during the immediately preceding 60-day period, as determined by the
Compensation Committee.
Employee Stock Purchase Plan
The Company has adopted an employee stock purchase plan (the "Stock
Purchase Plan") that will become effective on the later of July 1, 1997 or the
consummation of the Offering. The Stock Purchase Plan was approved by the Board
of Directors and shareholder of the Company in February 1997. An aggregate of
250,000 shares of Common Stock has been reserved for issuance pursuant to the
Stock Purchase Plan. Under the Stock Purchase Plan, employees, including
executive officers, who have been employed by the Company continuously for at
least one year are eligible, as of the first day of any option period (January 1
through June 30, or July 1 through December 31) (an "Option Period"), to
contribute on an after-tax basis up to 15% of their base pay per pay period
through payroll deductions and/or a single lump-sum contribution per Option
Period to be used to purchase shares of Common Stock. Notwithstanding the
foregoing, no employee who is a 5% or greater shareholder of the Company's
voting stock is eligible to participate in the Stock Purchase Plan. On the last
trading day of each Option Period (the "Exercise Date"), the amount contributed
by each participant over the course of the Option Period will be used to
purchase shares of Common Stock at a
54
<PAGE> 56
purchase price per share equal to the lesser of (a) 85% of the closing market
price of the Common Stock on the Exercise Date, or (b) 85% of the closing market
price of the Common Stock on the first trading date of such Option Period. The
Stock Purchase Plan is intended to qualify for favorable tax treatment under
Section 423 of the Code.
401(k) Plan
Employees of the Company participate in a savings plan (the "401(k) Plan")
which is qualified under Sections 401(a) and 401(k) of the Code. To be eligible,
an employee must have been employed by the Company for at least three months.
The 401(k) Plan permits employees to make voluntary contributions up to
specified limits. Additional contributions may be made by the Company at its
discretion, which contributions vest ratably over a five-year period.
Section 162 Plan
The Company maintains a non-qualified deferred compensation plan which
allows employees who are "highly compensated" under IRS guidelines to make
after-tax contributions to an investment account established in such employee's
name. Additional contributions may be made by the Company at its discretion. All
contributions to the Section 162 Plan are subject to the claims of the Company's
creditors. Approximately 45 employees are eligible to participate in the Section
162 Plan, which is administered by the Compensation Committee. In each of 1995
and 1996, the Company contributed approximately $271,000 to the Section 162
Plan.
Officers' Incentive Compensation Plan
The officers of the Company participate in an Officers' Incentive
Compensation Plan which provides contingent incentive compensation. The plan
provides for a single annual incentive compensation payment in the amount of up
to 60% of an officer's base salary dependent upon the degree to which the
Company achieves its operational and financial objectives, or up to a maximum
total of 100%, contingent upon the degree to which the Company exceeds its
objectives.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any of its directors and officers against liability incurred in
connection with a proceeding if (i) such person acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in an official
capacity, that such conduct was in the corporation's best interests, or, in all
other cases, that such conduct was not opposed to the best interests of the
corporation, and (iii) in connection with any criminal proceeding, the director
or officer had no reasonable cause to believe his or her conduct was unlawful.
In actions brought by or in the right of the corporation, however, the TBCA
provides that no indemnification may be made if the director or officer was
adjudged liable to the corporation. The TBCA also provides that in connection
with any proceeding charging improper personal benefit to a director or officer,
no indemnification may be made if such director or officer is adjudged liable on
the basis that such personal benefit was improperly received. In cases where the
director or officer is wholly successful, on the merits or otherwise, in the
defense of any proceeding instigated because of his or her status as a director
or officer of a corporation, the TBCA mandates that the corporation indemnify
the director or officer against reasonable expenses incurred in the proceeding.
Notwithstanding the foregoing, the TBCA provides that a court of competent
jurisdiction, upon application, may order that a director or officer be
indemnified for reasonable expenses if, in consideration of all relevant
circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, even if such director or officer (i) was
adjudged liable to the corporation in a proceeding by or in right of the
corporation, (ii) was adjudged liable on the basis that personal benefit was
improperly received, or (iii) breached his or her duty of care to the
corporation.
The Company's Charter provides that to the fullest extent permitted by
Tennessee law no director shall be personally liable to the Company or its
shareholders for monetary damages for breach of any fiduciary duty
55
<PAGE> 57
as a director. Under the TBCA, this charter provision relieves the Company's
directors of personal liability to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability arising
from a judgment or other final adjudication establishing (i) any breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or (iii) any
unlawful distributions. In addition, the Company's Charter and Bylaws provide
that each director and officer of the Company shall be indemnified by the
Company to the fullest extent allowed by Tennessee law.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, consisting of Messrs. O'Connell and Stuesser
and Ms. Smith, each an Outside Director, was established in February 1997. Prior
to the Offering, the Company's executive officers were compensated as employees
of ARCLP and compensation decisions were made by ARCLP's compensation committee,
which was comprised in 1996 of the persons who now constitute the Company's
Compensation Committee. No executive officer of the Company served during 1996
as a member of a compensation committee or as a director of any entity of which
any of the Company's directors or members of ARCLP's limited partners committee
serves as an executive officer.
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<PAGE> 58
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock after giving effect to the
Reorganization with respect to (i) each of the Named Executive Officers, (ii)
each of the Company's directors, (iii) each person known by the Company to own
beneficially more than 5% of the Common Stock, and (iv) all directors and
executive officers of the Company as a group, both before and after giving
effect to the Offering. Under the rules of the Securities and Exchange
Commission (the "Commission"), a person is deemed to be a "beneficial owner" of
a security if he or she has or shares the power to vote or direct the voting of
such security or the power to dispose of or direct the disposition of such
security. Accordingly, more than one person may be deemed to be a beneficial
owner of the same security. Shares of Common Stock subject to options held by
the directors and executive officers that are not exercisable within 60 days of
the date hereof are not, in accordance with beneficial ownership rules
promulgated by the Commission, deemed outstanding for the purpose of computing
such director's or executive officer's beneficial ownership.
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED(1) OFFERING OFFERING
---- --------------------- -------- --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS:
W.E. Sheriff........................................... 1,670,353(2)(3) 21.4% 15.3%
Christopher J. Coates.................................. 242,603(4) 3.1 2.2
George T. Hicks........................................ 170,259(5) 2.2 1.6
H. Todd Kaestner....................................... 180,244(6) 2.3 1.6
James T. Money......................................... 175,252(7) 2.2 1.6
DIRECTORS:
H. Lee Barfield II..................................... 602,661(8)(9) 7.7 5.5
Jack O. Bovender, Jr................................... -- -- --
Frank M. Bumstead...................................... -- -- --
Robin G. Costa......................................... 1,467,526(10)(11) 18.8 13.4
Clarence Edmonds....................................... 360,907(12) 4.6 3.3
John A. Morris, Jr., M.D............................... 358,490(13) 4.6 3.3
Daniel K. O'Connell.................................... 10,285 * *
Nadine C. Smith........................................ 29,956 * *
Lawrence J. Stuesser................................... 67,547(14) * *
OTHER 5% SHAREHOLDERS:
American Retirement Communities, LLC................... 1,350,000(15) 17.3 12.3
Dan Maddox............................................. 1,419,782(10)(16) 18.2 13.0
DMAR Limited Partnership............................... 1,372,037(17) 17.6 12.5
Mary Louise Frist Barfield............................. 602,661(18)(19) 7.7 5.5
Robert A. Frist, M.D................................... 573,872(20)(21) 7.3 5.2
All directors and executive officers as a group (16
persons)............................................. 4,637,986 59.4% 42.4%
</TABLE>
- ---------------
* Less than 1%.
(1) The information listed below with respect to the beneficial ownership of
the Common Stock is based upon the estimated allocation of the Common Stock
in the Reorganization. See "Certain Transactions -- Pending
Reorganization."
(2) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027.
(3) Includes 320,353 shares beneficially owned by a family limited partnership
in which Mr. Sheriff is a general partner and 1,350,000 shares beneficially
owned by the LLC. See Note 15. Mr. Sheriff is Chief Manager and a member of
the LLC. Mr. Sheriff disclaims beneficial ownership of the shares owned by
the LLC except to the extent of the 294,698 shares as to which he holds a
pecuniary interest.
(4) Includes 210,499 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I, L.P. ("Sylvester I") as to which Mr.
Coates holds a pecuniary interest.
(5) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Hicks holds a pecuniary
interest.
(6) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Kaestner holds a
pecuniary interest.
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<PAGE> 59
(7) Includes 168,399 shares beneficially owned by the LLC and 1,860 shares
beneficially owned by Sylvester I as to which Mr. Money holds a pecuniary
interest.
(8) Address: 2700 First American Center, Nashville, Tennessee 37238.
(9) Includes 457,857 shares beneficially owned by Mr. Barfield's wife, Mary
Louise Frist Barfield. See Note 19. Mr. Barfield is the brother-in-law of
Robert A. Frist.
(10) Address: 3833 Cleghorn Avenue, Suite 400, Nashville, Tennessee 37215.
(11) Includes 1,372,037 shares beneficially owned by DMAR Limited Partnership
("DMAR") and 95,489 shares beneficially owned by Little Buck Limited
Partnership ("Little Buck"). Ms. Costa is a Vice President of Margaret
Energy, Inc., the general partner of DMAR and Little Buck. See Note 16.
(12) Includes 335,888 shares beneficially owned by The Jack C. Massey Foundation
("The Massey Foundation"), of which Mr. Edmonds serves as a co-trustee, and
25,019 shares beneficially owned by Mr. Edmonds' wife. Mr. Edmonds
disclaims beneficial ownership of his wife's shares.
(13) All shares are beneficially owned by partnerships owned and controlled by
Dr. Morris, his brother Alfred Morris, and members of Dr. Morris' family.
(14) All shares are beneficially owned by B&W Development Centers ("B&W"), of
which Mr. Stuesser is a director and 50% shareholder.
(15) Address: 111 Westwood Place, Suite 402, Brentwood, Tennessee 37027. The
members of the LLC include the Named Executive Officers and other members
of management of the Company. See Notes 3, 4, 5, 6, and 7.
(16) Includes 1,372,037 shares beneficially owned by DMAR and 47,745 shares
beneficially owned by Little Buck as to which Mr. Maddox holds a pecuniary
interest. See Notes 11 and 17.
(17) The partners in DMAR include corporations and trusts owned by, or for the
benefit of, Mr. Maddox and his wife.
(18) Address: c/o H. Lee Barfield II, 2700 First American Center, Nashville,
Tennessee 37238.
(19) Includes 144,804 shares beneficially owned by Mrs. Barfield's husband, H.
Lee Barfield II, and an aggregate of 169,084 shares beneficially owned by
trusts for the benefit of Mrs. Barfield's children, of which Mrs. Barfield
serves as trustee. See Note 9. Mrs. Barfield is the sister of Robert A.
Frist.
(20) Address: 1326 Page Road, Nashville, Tennessee 37205.
(21) Includes 22,569 shares beneficially owned by Dr. Frist's wife. Does not
include an aggregate of 191,554 shares beneficially owned by Dr. Frist's
children who are 18 years of age or older. Dr. Frist is the brother of Mary
Louise Barfield Frist and the brother-in-law of H. Lee Barfield II.
CERTAIN TRANSACTIONS
THE 1995 ROLL-UP
ARCLP was formed in February 1995 in anticipation of the 1995 Roll-Up of
the Predecessor Entities. As a result of the 1995 Roll-Up, ARCLP issued
partnership interests to the partners and shareholders of the Predecessor
Entities, many of whom are directors, executive officers, and greater than 5%
shareholders of the Company, in exchange for their limited partnership interests
and stock in the Predecessor Entities and thereby became the owner, directly or
indirectly, of all of the assets of the Predecessor Entities. The LLC was
organized in connection with the formation of ARCLP and serves as its general
partner. The members of the LLC include each of the Named Executive Officers and
certain other members of management of the Company. Messrs. Sheriff and Coates
have LLC membership interests of approximately 21.8% and 15.6%, respectively,
and Messrs. Kaestner, Money, and Hicks have LLC membership interests of
approximately 14.5% each.
REDEMPTION OF PREFERRED PARTNERSHIP INTERESTS
In connection with the 1995 Roll-Up, partners in certain of the Predecessor
Entities exchanged promissory notes for the Preferred Partnership Interests. In
1996, the Company redeemed the Preferred Partnership Interests for an aggregate
amount of $10.0 million. In connection with the redemption of the Preferred
Partnership Interests, certain executive officers, directors, and certain other
limited partners who will be greater than five percent (5%) beneficial owners of
the Common Stock (including, unless otherwise noted, their immediate family
members and affiliates) received the following amounts in payment for the
redemption of their Preferred Partnership Interests: H. Lee Barfield II and Mary
Louise Frist Barfield -- $1.12 million (does not include amounts distributed to
Robert A. Frist or an aggregate of $780,000 distributed to Mrs. Barfield's
sister and trusts for the benefit of Mr. and Mrs. Barfield's nephews); Lawrence
J. Stuesser -- $150,000 (distributed to B&W); DMAR -- $2.16 million; Robert A.
Frist -- $1.57 million (does not include an aggregate of $1.24 million
distributed to Dr. Frist's children who are 18 years of age or older; amounts
distributed to H. Lee Barfield II and Mary Louise Frist Barfield, or an
aggregate of $780,000 distributed to Dr. Frist's sister and trusts for the
benefit of Dr. Frist's nephews); and Dan Maddox -- $2.52 million (includes
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<PAGE> 60
$2.16 million distributed to DMAR and $360,000 distributed to Little Buck; does
not include $240,000 distributed to a partnership controlled by Mr. Maddox's
son).
PENDING REORGANIZATION
In connection with the Reorganization, the Company will issue an aggregate
of 7,812,500 shares of Common Stock and the Reorganization Note to ARCLP. ARCLP
will distribute approximately 1,350,000 shares of Common Stock to the LLC, as
general partner of ARCLP, and an aggregate of approximately 6,462,500 shares of
Common Stock to the limited partners of ARCLP, generally in accordance with the
limited partners' ARCLP contribution accounts. The number of shares of Common
Stock allocated to the LLC will be determined at the time of the consummation of
the Offering and will have a value, based upon the initial public offering
price, equal to the sum of (i) $15.0 million, plus (ii) 10% of the value of the
Company (including the value of the Reorganization Note) immediately prior to
the Offering (the "Pre-IPO Valuation") between $84.0 million and $160.0 million,
plus (iii) 20% of the Pre-IPO Valuation over $160.0 million. The information
below assumes an initial public offering price of $16.00. In addition, ARCLP
will distribute, in liquidation, proceeds from the repayment of the
Reorganization Note to the limited partners of ARCLP, generally in accordance
with the limited partners' contribution accounts.
In connection with the Reorganization, certain executive officers,
directors, and other limited partners of ARCLP who will beneficially own more
than 5% of the Common Stock (and, in each case, their immediate family members
and affiliates), will receive shares of Common Stock and proceeds from the
Reorganization Note as set forth in the table below.
<TABLE>
<CAPTION>
NUMBER OF SHARES PROCEEDS FROM THE
NAME OF COMMON STOCK(1) REORGANIZATION NOTE($)
---- ------------------ ----------------------
<S> <C> <C>
W.E. Sheriff......................................... 1,670,353 $1,239,281.70(2)
Christopher J. Coates................................ 242,603(3) 124,191.71(4)
George T. Hicks...................................... 170,259(3) 7,194.55(4)
H. Todd Kaestner..................................... 180,244(3) 45,822.69(4)
James T. Money....................................... 175,252(3) 26,508.62(4)
H. Lee Barfield II................................... 602,661(5) 2,331,370.74(6)
Robin G. Costa....................................... 1,467,526 5,677,087.37(7)
Clarence Edmonds..................................... 360,907 1,396,160.43(8)
John A. Morris, Jr., M.D............................. 358,490 1,386,809.40(9)
Daniel K. O'Connell.................................. 10,285 39,786.98
Nadine C. Smith...................................... 29,956 115,884.42
Lawrence J. Stuesser................................. 67,547 261,302.67(10)
American Retirement Communities, LLC................. 1,350,000 --
Dan Maddox........................................... 1,419,782(11) 5,492,388.24(12)
DMAR Limited Partnership............................. 1,372,037 5,307,689.10
The Jack C. Massey Foundation........................ 335,888 1,299,375.88
Mary Louise Frist Barfield........................... 602,661(13) 2,331,370.74(14)
Robert A. Frist, M.D................................. 573,872(15) 2,220,008.29(16)
</TABLE>
- ---------------
(1) See Notes to "Principal Shareholders" for certain beneficial ownership
information.
(2) Amounts to be distributed to a family limited partnership in which Mr.
Sheriff is a general partner.
(3) Does not include shares to be distributed to other members of the LLC or
other partners in Sylvester I.
(4) Includes $7,194.55 which represents such person's pro rata portion of
amounts to be distributed to Sylvester I.
(5) Does not include shares to be distributed to Robert A. Frist or an
aggregate of 841,555 shares to be distributed to Mr. Barfield's
father-in-law, sister-in-law, and trusts for the benefit of Mr. Barfield's
brother-in-law and nephews.
(6) Includes $1,117,109.09 to be distributed to Mr. Barfield's wife, Mary
Louise Frist Barfield, and an aggregate of $654,092.04 to be distributed to
trusts for the benefit of Mr. Barfield's children, of which Mrs. Barfield
serves as trustee. See Note 12. Does not include amounts to be distributed
to Robert A. Frist, Mr. Barfield's brother-in-law, or an aggregate of
$3,255,533.84 to be distributed to Mr. Barfield's father-in-law,
sister-in-law, and trusts for the benefit of Mr. Barfield's brother-in-law
and nephews.
(7) Includes $5,307,689.10 to be distributed to DMAR and $369,398.27 to be
distributed to Little Buck. Ms. Costa is a Vice President of Margaret
Energy, Inc., the general partner of DMAR and Little Buck.
(8) Includes $1,299,375.88 to be distributed to The Massey Foundation and
$96,784.55 to be distributed to Mr. Edmonds' wife.
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<PAGE> 61
(9) All amounts to be distributed to partnerships owned and controlled by Dr.
Morris, his brother Alfred Morris, and members of Dr. Morris' family.
(10) Amounts to be received by B&W, of which Mr. Stuesser is a director and 50%
shareholder.
(11) Does not include 111,672 shares to be distributed to a partnership
controlled by Mr. Maddox's son or 47,745 shares to be distributed to Little
Buck as to which Mr. Maddox's son holds a pecuniary interest.
(12) Includes $5,307,689.10 to be distributed to DMAR and $184,699.14 which
represents Mr. Maddox's pro rata portion of amounts to be distributed to
Little Buck. Does not include $431,999.70 to be distributed to a
partnership controlled by Mr. Maddox's son and $184,699.14 which represents
Mr. Maddox's son's pro rata portion of amounts to be distributed to Little
Buck.
(13) Does not include shares to be distributed to Robert A. Frist or an
aggregate of 841,555 shares to be distributed to Ms. Barfield's father,
sister, and trusts for the benefit of Ms. Barfield's brother and nephews.
(14) Includes $560,169.61 to be distributed to Mrs. Barfield's husband, H. Lee
Barfield II, and an aggregate of $654,092.04 to be distributed to trusts
for the benefit of Mrs. Barfield's children, of which Mrs. Barfield serves
as trustee. See Note 5. Does not include amounts to be distributed to
Robert A. Frist, Mrs. Barfield's brother, or an aggregate of $3,255,533.84
to be distributed to Ms. Barfield's father, sister, and trusts for the
benefit of Ms. Barfield's brother and nephews.
(15) Does not include shares to be distributed to H. Lee Barfield II or Mary
Louise Frist Barfield, or an aggregate of 841,555 shares to be distributed
to Dr. Frist's father, sister, or trusts for the benefit of Dr. Frist's
brother and nephews.
(16) Includes $87,306.35 to be distributed to Dr. Frist's wife. Does not include
an aggregate of $741,022.43 to be distributed to Dr. Frist's children who
are 18 years of age or older. Dr. Frist is the brother of Mary Louise Frist
Barfield and the brother-in-law of H. Lee Barfield II. Does not include
amounts to be distributed to H. Lee Barfield II or Mary Louise Frist
Barfield, or an aggregate of $3,255,533.84 to be distributed to Dr. Frist's
father, sister, and trusts for the benefit of Dr. Frist's brother and
nephews.
POLICY OF THE BOARD OF DIRECTORS
The Board of Directors has adopted a policy providing that any transaction
between the Company and any of its directors, officers, or principal
shareholders or affiliates thereof must be on terms no less favorable to the
Company than can be obtained from unaffiliated parties. Management believes that
past transactions have complied with this policy.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share, and 5,000,000 shares of preferred stock, no par value per
share (the "Preferred Stock"). Upon consummation of the Offering, 10,937,500
shares of Common Stock will be issued and outstanding, no shares of Preferred
Stock will be outstanding, and 635,000 shares of Common Stock will be reserved
for issuance pursuant to outstanding stock options under the Stock Incentive
Plan.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and are not entitled to cumulative voting
in the election of directors, which means that the holders of a majority of the
shares voting for the election of directors can elect all of the directors then
standing for election by the holders of Common Stock. The holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. See "Dividend Policy and Prior Distributions."
The holders of Common Stock are entitled to share ratably in any assets
remaining after satisfaction of all prior claims upon liquidation of the
Company. The Company's Charter gives holders of Common Stock no preemptive or
other subscription or conversion rights, and there are no redemption provisions
with respect to such shares. All shares of Common Stock to be outstanding upon
consummation of the Offering, including the shares offered hereby, will be, when
issued and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or
more designated series or classes. The Board of Directors may issue shares of
Preferred Stock without approval of the shareholders, except as may be required
by applicable law or by the rules of the NYSE. The Board of Directors is also
authorized to establish the voting, dividend, redemption, conversion,
liquidation, and other relative provisions as may be provided in a particular
series or class. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting power of the holders of Common Stock
and, under certain circumstances, make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company. The Company has no present intention to
issue any series or class of Preferred Stock.
The Common Stock has been approved for listing on the NYSE. The current
rules of the NYSE effectively preclude the listing on the NYSE of any securities
of an issuer which has issued securities or taken other corporate action that
would have the effect of nullifying, restricting, or disparately reducing the
per share voting rights of holders of an outstanding class or classes of
securities registered under Section 12 of the Exchange Act. The Company does not
intend to issue any additional shares of stock that would make the Common Stock
ineligible for continued listing or cause the Common Stock to be delisted from
the NYSE.
CERTAIN PROVISIONS OF THE CHARTER, BYLAWS, AND TENNESSEE LAW
General
The provisions of the Charter, the Bylaws, and Tennessee statutory law
described in this section may delay or make more difficult acquisitions or
changes of control of the Company that are not approved by the Board of
Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of the
Company and its shareholders.
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<PAGE> 63
Directors
The Bylaws provide that the number of directors shall be no fewer than
three nor more than fifteen, with the exact number to be established by the
Board of Directors and subject to change from time to time as determined by the
Board of Directors. Vacancies on the Board of Directors (including vacancies
created by an increase in the number of directors) may be filled by the Board of
Directors, acting by a majority of the remaining directors then in office, or by
a plurality of the votes cast by the shareholders at a meeting at which a quorum
is present. Officers are elected annually by and serve at the pleasure of the
Board of Directors.
The Charter and Bylaws provide that the Board of Directors is divided into
three classes of as nearly equal size as possible, and the term of office of
each class expires in consecutive years so that each year only one class is
elected. The Charter also provides that directors may be removed only for cause
and only by (i) the affirmative vote of the holders of a majority of the voting
power of all the shares of the Company's capital stock then entitled to vote in
the election of directors, voting together as a single class, unless the vote of
a special voting group is otherwise required by law, or (ii) the affirmative
vote of a majority of the entire Board of Directors then in office. The overall
effect of these provisions in the Company's Charter and Bylaws may be to render
more difficult a change in control of the Company or the removal of incumbent
management.
Advance Notice for Shareholder Proposals or Making Nominations at Meetings
The Bylaws establish an advance notice procedure for shareholder proposals
to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Board of Directors, or by a shareholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
shareholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors, or the
committee of the Board of Directors designated to make nominations, or who are
nominated by a shareholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to shareholders.
The notice of any shareholder proposal or nomination for election as
director must set forth various information required under the Bylaws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them.
Amendment of the Bylaws and Charter
The Bylaws provide that a majority of the members of the Board of Directors
who are present at any regular or special meeting or, subject to greater voting
requirements imposed by the Charter, the holders of a majority of the voting
power of all shares of the Company's capital stock represented at regular or
special meeting have the power to amend, alter, change, or repeal the Bylaws.
Any proposal to amend, alter, change, or repeal provisions of the Charter
relating to staggered terms for directors, and limitations on the ability of
shareholders to call a shareholders' meeting or to remove directors require
approval by the affirmative vote of both a majority of the members of the Board
of Directors then in office and the holders of three-fourths of the voting power
of all of the shares of the Company's capital stock entitled to vote on the
amendments. Other amendments to the Charter require the affirmative vote of both
a
62
<PAGE> 64
majority of the members of the Board of Directors then in office and the holders
of a majority of the voting power of all of the shares of the Company's capital
stock entitled to vote on the amendments, with shareholders entitled to
dissenters' rights as a result of the Charter amendment voting together as a
single class. Shareholders entitled to dissenters' rights as a result of a
Charter amendment are those whose rights would be materially and adversely
affected because the amendment (i) alters or abolishes a preferential right of
the shares; (ii) creates, alters, or abolishes a right in respect of redemption;
(iii) alters or abolishes a preemptive right; (iv) excludes or limits the right
of the shares to vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other securities with
similar voting rights; or (v) reduces the number of shares held by such holder
to a fraction if the fractional share is to be acquired for cash. In general,
however, under the TBCA no shareholder is entitled to dissenters' rights if the
security he or she holds is listed on a national securities exchange, such as
the NYSE.
ANTI-TAKEOVER LEGISLATION
The Tennessee Business Combination Act (the "Combination Act") provides,
among other things, that any corporation to which the Combination Act applies,
including the Company, shall not engage in any "business combination" with an
"interested shareholder" for a period of five years following the date that such
shareholder became an interested shareholder unless prior to such date the board
of directors of the corporation approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder. The Combination Act defines "business combination," generally, to
mean any: (i) merger or consolidation; (ii) share exchange; (iii) sale, lease,
exchange, mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder. The Combination Act defines "interested shareholder,"
generally, to mean any person who is the beneficial owner, either directly or
indirectly, of 10% or more of any class or series of the outstanding voting
stock, or any affiliate or associate of the corporation who has been the
beneficial owner, either directly or indirectly, of 10% or more of the voting
power of any class or series of the corporation's stock at any time within the
five year period preceding the date in question. Consummation of a business
combination that is subject to the five-year moratorium is permitted after such
period if the transaction (i) complies with all applicable charter and bylaw
requirements and applicable Tennessee law and (ii) is approved by at least
two-thirds of the outstanding voting stock not beneficially owned by the
interested shareholder, or when the transaction meets certain fair price
criteria. The fair price criteria include, among others, the requirement that
the per share consideration received in any such business combination by each of
the shareholders is equal to the highest of (i) the highest per share price paid
by the interested shareholder during the preceding five-year period for shares
of the same class or series plus interest thereon from such date at a treasury
bill rate less the aggregate amount of any cash dividends paid and the market
value of any dividends paid other than in cash since such earliest date, up to
the amount of such interest, (ii) the highest preferential amount, if any, such
class or series is entitled to receive on liquidation, or (iii) the market value
of the shares on either the date the business combination is announced or the
date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has elected not
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will not be made in the future.
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<PAGE> 65
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class.
The effect of the Combination Act, the Acquisition Act, and the Greenmail
Act may be to render more difficult a change of control of the Company.
REGISTRATION RIGHTS
Following the consummation of the Offering, beneficial holders of an
aggregate of 7,812,500 shares of Common Stock will have contractual rights with
respect to the registration of the sale of such shares ("Registrable Shares").
Beginning one year after the date hereof (the "IPO Date"), holders of
Registrable Shares that may not otherwise be sold pursuant to Rule 144 of the
Securities Act will be entitled to two demand registrations upon the written
demand to the Company to register the sale of 25% or more of the Registrable
Shares; provided, however, that in no event will any holder of Registrable
Shares participating in such demand registrations be permitted to sell in excess
of 20% of such holder's Registrable Shares. In addition, until the second
anniversary of the IPO Date, holders of Registrable Shares that may not
otherwise be sold pursuant to Rule 144 of the Securities Act may require the
Company to include all or a portion of such holder's Registrable Shares in a
registration statement filed by the Company for its own account for cash,
provided, among other conditions, that the managing underwriter (if any) of such
offering has the right, subject to certain conditions, to limit the number of
Registrable Shares included in such registration statement. In general, all
fees, costs, and expenses of such registrations (other than the underwriting
commissions, dealers' fees, brokers' fees and concessions applicable to Common
Stock) will be borne by the Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company, New York, New York will be the
transfer agent and registrar for the Common Stock.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions described below lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of the Offering, the Company will have outstanding
10,937,500 shares of Common Stock (11,406,250 shares if the underwriters'
over-allotment option is exercised in full). Of these shares, the 3,125,000
shares of Common Stock sold in the Offering will be freely tradeable without
restriction or limitation under the Securities Act, except to the extent such
shares are subject to the Agreement with the representatives of the Underwriters
described below, and except for any shares purchased by "affiliates," as that
term is defined under the Securities Act, of the Company. The remaining
7,812,500 shares will be "restricted securities" within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). The Restricted
Shares were issued by the Company in the Reorganization in reliance upon an
exemption from registration under the Securities Act and none of such shares may
be sold in the public market, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. Upon consummation of the Offering, the beneficial holders of all of the
Restricted Shares will have demand and piggyback registration rights with
respect to the sale of such shares. See "Description of Capital Stock --
Registration Rights."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least a one-year period (as computed under Rule 144) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock (109,375
shares after giving effect to the Offering), and (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
the date on which the notice of sale is filed with the Commission. Sales under
Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A shareholder who is not an affiliate of the Company at any time during
the 90 days immediately preceding a sale, and who has beneficially owned his or
her shares for at least two years (as computed under Rule 144), is entitled to
sell such shares under Rule 144(k) without regard to the volume, manner and
notice of sale, and availability of public information limitations described
above. Shares properly sold in reliance upon Rule 144 to persons who are not
affiliates are thereafter freely tradeable without restrictions or registration
under the Securities Act.
The Company and all directors and executive officers of the Company (who in
the aggregate will beneficially own 4,637,986 shares of Common Stock) have
agreed, and certain holders of 5% or more of the shares of Common Stock
outstanding after the Offering will be asked to agree, with the Underwriters
that, for a period of 180 days following the Offering (the "Lock-up Period"),
they will not offer to sell, sell, contract to sell, grant an option to purchase
or otherwise dispose (or announce any offer, sale, grant of any option or other
distribution) of any shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock without the prior written consent of
NatWest Securities Limited (except that the Company may grant options to
purchase or award shares of Common Stock under the Stock Incentive Plan and the
Stock Purchase Plan and issue privately placed shares in connection with
acquisitions). See "Principal Shareholders" and "Management -- Compensation
Pursuant to Plans."
As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register shares of Common Stock issuable pursuant to the Stock Incentive Plan
and the Stock Purchase Plan. See "Management -- Compensation Pursuant to Plans."
Shares of Common Stock issued pursuant to the Stock Incentive Plan and the Stock
Purchase Plan after the effective date of such registration statement will be
available for sale in the open market, subject to the Lock-up Period, if
applicable.
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<PAGE> 67
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
names below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
NatWest Securities Limited..................................
Equitable Securities Corporation............................
McDonald & Company Securities, Inc..........................
Total.............................................
</TABLE>
The Underwriters are obligated to purchase all the shares of Common Stock
offered hereby, if any such shares are purchased.
The Underwriters propose to offer the shares directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession
not in excess of $ per share of Common Stock. Such dealers may re-allow a
concession not in excess of $ per share of Common Stock to certain
other brokers and dealers. After the public offering, the per share price and
such concessions may be changed by the Underwriters. The Underwriters have
informed the Company that they do not intend to confirm sales of shares of
Common Stock to any accounts over which they exercise discretionary authority.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the federal securities laws, or will contribute to payments that the
Underwriters may be required to make in respect thereof.
The Company has granted an option to the Underwriters, exercisable for 30
days from the date of this Prospectus, to purchase up to 468,750 additional
shares of Common Stock at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock offered hereby.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United States,
its territories or possessions or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit the sale of the
Common Stock offered hereby outside of the United States.
NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or disposing of investments
(whether as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom; and (c) it has only
issued or passed on and will only issue or pass on, in the United Kingdom, any
document that consists of or any part of listing
66
<PAGE> 68
particulars, supplementary listing particulars, or any other document required
or permitted to be published by listing rules under Part IV of the Act, to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
the document may otherwise be lawfully issued or passed on.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiation between the Company and the Underwriters. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, are the history of, and
prospects for, the industry in which the Company operates, the ability of the
Company's management, the Company's past and present operations, the Company's
historical results of operations, the Company's earnings prospects, the prices
of similar securities of comparable companies, and other relative factors. There
can be no assurance, however, that the price at which the Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is sold by the Underwriters. See "Risk Factors -- Absence of Prior
Public Trading Market."
The Company, directors and officers of the Company, and certain holders of
5% or more of the shares of Common Stock and options to purchase Common Stock
outstanding after the Offering will agree with the Underwriters that, for a
period of 180 days following the Offering, they will not offer to sell, sell,
contract to sell, grant an option to purchase or otherwise dispose (or announce
any offer, sale, grant of any option or other distribution) of any shares of
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock without the prior written consent of NatWest Securities Limited
(except that the Company may grant options to purchase or award shares of Common
Stock under the Stock Incentive Plan and the Stock Purchase Plan and issue
privately placed shares in connection with acquisitions). See "Principal
Shareholders" and "Management -- Compensation Pursuant to Plans."
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specific maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Representatives to
reclaim a selling concession from a syndicate member when the securities
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions, and penalty bids may cause the price of the
securities to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the NYSE or otherwise and,
if commenced, may be discontinued at any time.
At the request of the Company, up to 300,000 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families, and other
persons having business relationships with the Company. 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 for sale to the general
public will be reduced to the extent these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. H. Lee
Barfield II, a member of Bass, Berry & Sims PLC, is a director of the Company.
Mr. Barfield and his wife and children beneficially own 602,661 shares of Common
Stock, and will receive approximately $2.3 million pursuant to ARCLP's
liquidation and distribution of the repayment of the Reorganization Note. See
"The Company -- Pending Reorganization," "Principal Shareholders," and "Certain
Transactions -- Pending Reorganization." Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Stroock & Stroock
& Lavan LLP, New York, New York.
67
<PAGE> 69
EXPERTS
The Predecessor Entities' and the Predecessor's Combined and Consolidated
Financial Statements and schedule as of December 31, 1995 and 1996, and for the
year ended December 31, 1994, the three months ended March 31, 1995, the nine
months ended December 31, 1995, and the year ended December 31, 1996, and the
combined financial statements of Carriage Club for the four months ended April
30, 1996 have been included herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the Predecessor Entities'
and the Predecessor's Combined and Consolidated Financial Statements refers to a
change in cost basis as a result of a purchase business combination.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments thereto, called the "Registration
Statement"), of which this Prospectus constitutes a part, under the Securities
Act and the rules and regulations promulgated thereunder, with respect to the
Common Stock offered hereby. This Prospectus omits certain information contained
in the Registration Statement, and reference is made to the Registration
Statement, including the exhibits thereto, for further information with respect
to the Company and the securities offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents; when any such document is an exhibit to the Registration Statement,
each such statement is qualified in its entirety by reference to the copy of
such document filed with the Commission. The Registration Statement and the
exhibits and schedules thereto may be reviewed without charge at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the New York Regional Office located at Seven World Trade Center,
13th Floor, New York, New York 10048, and at the Chicago Regional Office located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained, upon payment of the fee prescribed by the Commission,
at the Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a web site that contains reports, proxy statements, and
other information regarding registrants, including the Company. The address of
the Commission's web site is http://www.sec.gov.
---------------------
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent public
accountants.
68
<PAGE> 70
AMERICAN RETIREMENT COMMUNITIES, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Retirement Communities, L.P.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- December 31, 1995, and
1996...................................................... F-3
Combined Statements of Operations -- Year Ended December 31,
1994 and Three Months Ended March 31, 1995 and
Consolidated Statements of Operations -- Nine Months Ended
December 31, 1995 and Year Ended December 31, 1996........ F-4
Combined Statements of Partners'/Shareholders'
Equity -- Year Ended December 31, 1994 and Three Months
Ended March 31, 1995 and Consolidated Statements of
Partners' Equity -- Nine Months Ended December 31, 1995
and Year Ended December 31, 1996.......................... F-6
Combined Statements of Cash Flows -- Year Ended December 31,
1994 and Three Months Ended March 31, 1995 and
Consolidated Statements of Cash Flows -- Nine Months Ended
December 31, 1995 and Year Ended December 31, 1996........ F-7
Notes to Combined and Consolidated Financial Statements..... F-9
Carriage Club of Charlotte, Limited Partnership and Carriage
Club of Jacksonville, Limited Partnership
Independent Auditors' Report................................ F-21
Combined Statement of Operations -- Four Months Ended April
30, 1996.................................................. F-22
Combined Statement of Partners' Equity -- Four Months Ended
April 30, 1996............................................ F-22
Combined Statement of Cash Flows -- Four Months Ended April
30, 1996.................................................. F-23
Notes to Combined Financial Statements...................... F-24
</TABLE>
F-1
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
The Partners
American Retirement Communities, L.P.:
We have audited the accompanying consolidated balance sheets of American
Retirement Communities, L.P. and consolidated subsidiaries (the Predecessor) as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, changes in partners' equity, and cash flows for the period April 1,
1995 through December 31, 1995 and for the year ended December 31, 1996
(Predecessor periods), and the related combined statements of operations,
changes in partners'/shareholders' equity, and cash flows of American Retirement
Corporation and combined entities (Predecessor Entities) for the year ended
December 31, 1994 and for the period from January 1, 1995 through March 31, 1995
(Predecessor Entities periods). These combined and consolidated financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined and consolidated
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 audits 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 aforementioned Predecessor consolidated financial
statements present fairly, in all material respects, the financial position of
American Retirement Communities, L.P. and consolidated entities as of December
31, 1995 and 1996, and the results of their operations and their cash flows for
the Predecessor periods, in conformity with generally accepted accounting
principles. Further, in our opinion, the aforementioned Predecessor Entities
combined financial statements present fairly, in all material respects, the
results of operations and cash flows of American Retirement Corporation and
combined entities for the Predecessor Entities periods, in conformity with
generally accepted accounting principles.
As discussed in note 1 to the combined and consolidated financial
statements, effective April 1, 1995, an exchange of common stock or partnership
interests for limited partnership interests in American Retirement Communities,
L.P. was accounted for as a purchase business combination (the Roll-up). As a
result of the Roll-up, net assets not previously owned by the acquirer were
recorded at fair value. Accordingly, consolidated financial information for
periods after the Roll-up is presented on a different cost basis than that for
periods before the Roll-up and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
January 22, 1997
F-2
<PAGE> 72
AMERICAN RETIREMENT COMMUNITIES, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,825 $ 3,222
Assets limited as to use (note 5)......................... 2,411 1,022
Resident and health care receivables, less allowance for
doubtful accounts of $78 in 1995 and $108 in 1996...... 1,585 2,782
Management services receivables........................... 876 565
Inventory................................................. 324 420
Prepaid expenses.......................................... 233 340
Deferred income taxes (note 12)........................... -- 920
-------- --------
Total current assets................................... 9,254 9,271
Assets limited as to use, excluding amounts classified as
current (note 5).......................................... 3,532 3,607
Land, buildings and equipment, net (notes 6, 9, and 15)..... 149,082 213,124
Marketable securities (note 4).............................. 102 52
Other assets (note 7)....................................... 3,609 2,108
-------- --------
Total assets...................................... $165,579 $228,162
======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 9)................ $ 1,800 $ 8,053
Accounts payable.......................................... 2,615 2,441
Redemption payable (note 10).............................. -- 5,195
Accrued expenses (note 8)................................. 4,442 6,239
Accrued partner distributions............................. 1,445 1,632
-------- --------
Total current liabilities.............................. 10,302 23,560
Tenant deposits............................................. 2,748 3,850
Long-term debt, excluding current portion (note 9).......... 100,445 162,636
Other long-term liabilities................................. 261 234
-------- --------
Total liabilities...................................... 113,756 190,280
Partners' equity:
Special redeemable preferred partnership interests (note
10).................................................... 10,000 --
Other general and limited partners' interests............. 41,823 37,882
-------- --------
Total partners' equity................................. 51,823 37,882
-------- --------
Commitments and contingencies (notes 13 and 14)
Total liabilities and partners' equity............ $165,579 $228,162
======== ========
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-3
<PAGE> 73
AMERICAN RETIREMENT COMMUNITIES, L.P.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Resident and health care revenue............ $30,979 $11,761 $47,239 $ 73,878
Management services revenue................. 2,362 595 1,524 1,739
------- ------- ------- --------
Total revenues........................... 33,341 12,356 48,763 75,617
Expenses:
Community operating expenses................ 21,780 8,035 30,750 46,960
General and administrative.................. 3,455 1,108 3,446 6,200
Depreciation and amortization............... 2,891 1,127 4,534 6,906
------- ------- ------- --------
Total operating expenses................. 28,126 10,270 38,730 60,066
------- ------- ------- --------
Income from operations................... 5,215 2,086 10,033 15,551
------- ------- ------- --------
Other income (expense):
Interest expense............................ (5,354) (2,370) (7,930) (12,160)
Interest income............................. 203 49 329 434
Other (note 11)............................. 98 (1,013) 919 788
------- ------- ------- --------
Other income (expense), net.............. (5,053) (3,334) (6,682) (10,938)
------- ------- ------- --------
Income (loss) before income taxes and
extraordinary item..................... 162 (1,248) 3,351 4,613
Income tax expense (benefit) (note 12)........ -- 20 55 (920)
------- ------- ------- --------
Income (loss) before extraordinary
item................................... 162 (1,268) 3,296 5,533
Extraordinary loss on extinguishment of debt
(note 9).................................... -- -- -- 2,335
------- ------- ------- --------
Net income (loss)........................ 162 (1,268) 3,296 3,198
Preferred return on special redeemable
preferred limited partnership interests
(note 10)................................... -- -- 1,125 1,104
------- ------- ------- --------
Net income (loss) available for
distribution to partners and
shareholders........................... $ 162 $(1,268) $ 2,171 $ 2,094
======= ======= ======= ========
</TABLE>
(Continued)
F-4
<PAGE> 74
AMERICAN RETIREMENT COMMUNITIES, L.P.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996
------
<S> <C>
Pro forma earnings data (unaudited) (note 16):
Income before income taxes and extraordinary items, as
reported.................................................. $4,613
Pro forma income taxes...................................... 820
------
Pro forma income before extraordinary item................ 3,793
Preferred return on special redeemable preferred limited
partnership interests..................................... 1,104
------
Pro forma income before extraordinary item available
for distribution to partners and shareholders......... $2,689
======
Pro forma earnings per common share (note 16):
Pro forma income before extraordinary item................ $ 0.40
Preferred return on special redeemable preferred limited
partnership interests.................................. 0.12
------
Pro forma income before extraordinary item available for
distribution to partners and shareholders.............. $ 0.29
======
Shares used in computing pro forma income per common
share.................................................. 9,375
======
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-5
<PAGE> 75
AMERICAN RETIREMENT COMMUNITIES, L.P.
COMBINED AND CONSOLIDATED STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994; THREE MONTHS ENDED MARCH 31, 1995;
NINE MONTHS ENDED DECEMBER 31, 1995; AND YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS'/
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Combined balance, January 1, 1994........................... $15,042
Combined income for 1994.................................. 162
Exercise of stock options (ARC)........................... 199
Distributions to partners during 1994..................... (2,580)
-------
Combined balance, December 31, 1994......................... 12,823
Combined loss for the period January 1, 1995 through March
31, 1995............................................... (1,268)
Exercise of stock options (ARC)........................... 257
Acquisition of treasury stock by ARC...................... (1,619)
Contribution by ARC-LP partners........................... 11,000
Distributions to partners................................. (1,400)
-------
Combined balance, March 31, 1995............................ $19,793
=======
</TABLE>
<TABLE>
<CAPTION>
SPECIAL REDEEMABLE OTHER GENERAL
PREFERRED LIMITED AND LIMITED
PARTNERSHIP INTERESTS PARTNERSHIP INTERESTS TOTAL
--------------------- --------------------- --------
<S> <C> <C> <C>
Combined balance, March 31, 1995................. $ -- $19,793 $ 19,793
Adjustment to equity as a result of business
combination (note 1)........................ -- 23,923 23,923
Conversion of debt to special redeemable
preferred limited partnership interests..... 10,000 -- 10,000
Earnings for the period April 1, 1995 through
December 31, 1995........................... 1,125 2,171 3,296
Distribution to partners for the period April
1, 1995 through December 31, 1995........... (1,125) (4,064) (5,189)
-------- ------- --------
Consolidated balance, December 31, 1995.......... 10,000 41,823 51,823
Earnings for 1996.............................. 1,104 2,094 3,198
Redemption of preferred limited partnership
interests................................... (10,000) -- (10,000)
Distribution to partners....................... (1,104) (6,035) (7,139)
-------- ------- --------
Consolidated balance, December 31, 1996.......... $ -- $37,882 $ 37,882
======== ======= ========
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-6
<PAGE> 76
AMERICAN RETIREMENT COMMUNITIES, L.P.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 162 $(1,268) $ 3,296 $ 3,198
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization............ 2,891 1,127 4,534 6,906
Deferred taxes........................... -- -- -- (920)
Extraordinary loss on extinguishment of
debt................................... -- -- -- 2,335
Write-down of value of insurance
policies............................... -- -- -- 66
Gain on sale of assets................... (155) -- (1,143) (874)
Increase (decrease), net of retirement
communities acquired, in cash, due to
changes in:
Receivables............................ (653) (903) 701 (431)
Inventory.............................. (67) (6) (21) (56)
Prepaid expenses....................... 27 (1,496) 1,894 (105)
Other assets........................... (97) 382 -- 748
Accounts payable....................... 586 381 948 (249)
Accrued expenses....................... 1,004 (157) 487 1,130
Tenant deposits........................ 344 60 279 202
Other long-term liabilities............ (588) -- (87) (27)
-------- ------- ------- --------
Net cash provided (used) by
operating activities.............. 3,454 (1,880) 10,888 11,923
-------- ------- ------- --------
Cash flows from (used by) investing
activities:
Additions to land, building and equipment... (45,606) (3,237) (6,032) (71,545)
Proceeds from (purchases of) assets limited
as to use................................ (904) 17 (2,915) 2,578
Proceeds from the sale of assets............ 205 6 1,214 1,346
Purchases of marketable securities.......... (52) -- (50) --
-------- ------- ------- --------
Net cash used by investing
activities........................ (46,357) (3,214) (7,783) (67,621)
-------- ------- ------- --------
</TABLE>
(Continued)
F-7
<PAGE> 77
AMERICAN RETIREMENT COMMUNITIES, L.P.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
---------------------------- ----------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Contributions from partners............ -- 11,000 -- --
Distributions to partners.............. (2,580) (485) (4,659) (6,952)
Payment of redeemable preferred
interests........................... -- -- -- (4,805)
Proceeds from issuance of long-term
debt................................ 48,979 1,636 1,614 73,922
Principal payments on long-term debt... (2,471) (628) (3,720) (5,479)
Expenditures for financing costs....... (1,535) (130) (346) (1,591)
Proceeds from the issuance of common
stock............................... 199 257 -- --
Acquisition of treasury stock.......... -- (1,619) -- --
------- ------- ------- -------
Net cash provided (used) by
financing activities......... 42,592 10,031 (7,111) 55,095
------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents......... (311) 4,937 (4,006) (603)
Cash and cash equivalents at beginning of
period................................. 3,205 2,894 7,831 3,825
------- ------- ------- -------
Cash and cash equivalents at end of
period................................. $ 2,894 $ 7,831 $ 3,825 $ 3,222
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest............................ $ 4,946 $ 2,381 $ 7,772 $11,907
======= ======= ======= =======
Income taxes paid...................... $ -- $ -- $ 20 $ 55
======= ======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION
During 1994, 1995, and 1996, as discussed in note 3, the Partnership acquired
certain communities. In conjunction with the acquisitions, net assets and
liabilities were assumed as follows:
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
---------------------------- ----------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current assets......................... $ -- $ 486 $ 892 $ 497
Other assets........................... 481 -- -- 674
Debt................................... -- (15,480) (8,010) --
Current liabilities.................... (597) -- (384) (502)
Other liabilities...................... (580) (77) -- --
</TABLE>
As discussed in note 1, the Partnership engaged in a roll-up transaction in
1995.
See accompanying notes to combined and consolidated financial statements.
F-8
<PAGE> 78
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) BASIS OF PRESENTATION
The accompanying financial statements include the combined financial
statements of (1) American Retirement Corporation II, formerly known as American
Retirement Corporation (ARC) and its wholly owned subsidiaries; (2) Trinity
Towers Limited Partnership; (3) Fort Austin Limited Partnership; (4) Holley
Court Terrace L.P.; and (5) American Retirement Communities, L.P. (ARC-LP) for
the period January 1, 1994 through March 31, 1995 and, as a result of a purchase
business combination, the consolidated financial statements of these entities
for the periods since April 1, 1995. In these financial statements, activities
or transactions occurring on or after April 1, 1995 relate to those of the
consolidated entity and are referred to as those of the Partnership.
Prior to March 31, 1995, ARC-LP, and three limited partnerships (Trinity
Towers Limited Partnership, Fort Austin Limited Partnership and Holley Court
Terrace L.P.) were entities that were each managed and/or partially owned by
ARC. ARC provided management services to ARC-LP and was the managing general
partner of and had contracts to provide management services to each of the other
three limited partnerships. The accompanying financial statements for the
periods prior to March 31, 1995 are presented on a combined basis. All material
intercompany transactions and balances have been eliminated.
Effective March 31, 1995, substantially all of the shareholders of ARC and
the non-ARC partners of the three limited partnerships exchanged their common
stock or partnership interests for limited partnership interests in ARC-LP (the
Roll-up). Certain minority shareholders of ARC tendered their common stock for
approximately $1.6 million of cash. The Roll-up was accounted for as a purchase
business combination in which ARC was determined to be the accounting acquirer.
Accordingly, the ownership interests in ARC-LP and the three operating
partnerships not previously owned by ARC were recorded at fair value as of the
date of the Roll-up. The net assets acquired were allocated as follows:
land -- $2.6 million; buildings and improvements -- $20.4 million; and furniture
and fixtures -- $1.0 million. The general partner of ARC-LP is American
Retirement Communities, LLC, whose members are the senior management of ARC.
The accompanying financial statements for the periods beginning after March
31, 1995 are presented on a consolidated basis. All material intercompany
transactions and balances have been eliminated.
Concurrent with the Roll-up, holders of $10.0 million of notes receivable
from Fort Austin Limited Partnership exchanged their notes for an equivalent
amount of preferred limited partnership interests in the Partnership (see note
10).
As further discussed in note 16, a reorganization of the Partnership is
planned for 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(b) Recognition of Revenue
Resident and health care revenues are reported at the estimated net
realizable amounts from residents, third-party payors, and others for services
rendered, including estimated retroactive adjustments under reimbursement
agreements with third-party payors. Retroactive adjustments are accrued on an
estimated
F-9
<PAGE> 79
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis in the period the related services are rendered and adjusted in future
periods as final settlements are determined. Resident and health care revenues,
primarily Medicare, subject to retroactive adjustments, were 7.5%, 9.0%, and
7.8% of resident and health care revenues in 1994, 1995 and 1996, respectively.
Management services revenue is recorded as earned and relates to providing
certain management and administrative support services under management
agreements. Such management agreements generally are for terms of three to five
years, but may be canceled by the owner, without cause, on three to six months
notice. The management services revenues are based either on a contractually
fixed fee or a percentage of revenues. Certain management agreements also
provide the Partnership with an incentive fee based on various performance
goals. Revenues are shown, in these financial statements, net of reimbursed
expenses. The reimbursed expenses were $2.5 million, $0.6 million, $1.7 million,
and $2.3 million for the year ended December 31, 1994, the three months ended
March 31, 1995, the nine months ended December 31, 1995, and the year ended
December 31, 1996, respectively.
(c) Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
(d) Marketable Securities
Marketable securities consist of U.S. Treasury securities and marketable
corporate debt securities. All of the Partnership's marketable securities are
classified as held-to-maturity securities which are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts. A decline
in the market value of any held-to-maturity security below cost that is deemed
other than temporary is charged to earnings resulting in the establishment of a
new cost basis for the security. Discounts are accreted over the life of the
related held-to-maturity security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
(e) Assets Limited as to Use
Assets limited as to use include assets held by lenders under loan
agreements in escrow for property taxes and property improvements, certificates
of deposit held as collateral for letters of credit, and resident deposits.
(f) Inventory
Inventory consists of supplies and is stated at the lower of cost
(first-in, first-out) or market.
(g) Land, Buildings and Equipment
Land, buildings, and equipment are stated at cost. Depreciation is provided
over the estimated useful life of each class of depreciable asset and is
computed on the straight-line basis. Buildings and improvements are depreciated
over 15 to 40 years, and furniture, fixtures and equipment are depreciated over
5 to 7 years.
The Partnership adopted the provisions of Statement of Financial Accounting
Standard (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, on January 1, 1996. SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
F-10
<PAGE> 80
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Adoption of this Statement did not have a material impact on the Partnership's
financial position, results of operations, or liquidity.
(h) Other Assets
Other assets consist primarily of deferred financing charges being
amortized on the straight-line basis over the terms of the debt agreement and
management contract rights being amortized over the initial terms of the
management contracts.
(i) Income Taxes
Except for ARC, the entities included in these financial statements are
partnerships, and the income and losses of the partnerships and distributions
are allocated to the partners in accordance with the various partnership
agreements. Accordingly, no provision has been made in the accompanying
financial statements for federal and state income taxes related to the
partnerships since such taxes are the liabilities of the partners.
ARC follows the asset and liability method of accounting for income taxes,
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
See note 16 for a discussion of pro forma taxes.
(j) Disclosure of Fair Value of Financial Instruments
The fair values of the financial instruments are estimates based upon
current market conditions and quoted market prices for the same or similar
instruments as of December 31, 1996. Book value approximates fair value for
substantially all of the Partnership's assets and liabilities meeting the
definition of a financial instrument.
(3) ACQUISITIONS
During 1994, Fort Austin Limited Partnership acquired the assets of four
retirement communities. Santa Catalina Villas was acquired on June 15, 1994 for
a purchase price of $10.9 million. Hampton at Post Oak, Park Place Retirement
Community, and Westlake Village were acquired on October 31, 1994 for a purchase
price of $34.7 million. The purchases were financed primarily through various
borrowings.
On February 1, 1995, ARC-LP acquired certain assets and assumed certain
liabilities of a retirement community in Denver, Colorado known as Heritage
Club. The purchase price was $22.0 million and was a combination of cash of
approximately $6.5 million and assumption of debt of $15.5 million.
Effective April 1, 1995, ARC-LP acquired all of the assets and all
contractual liabilities of a retirement community and related home health agency
in Lexington, Kentucky known as Richmond Place. The purchase price approximated
$10.3 million and included the payment of cash of $2.3 million and the
assumption of debt of $8.0 million.
Effective May 1, 1996, ARC-LP acquired all assets and all contractual
liabilities of a retirement community in Charlotte, North Carolina known as
Carriage Club of Charlotte and a retirement community in Jacksonville, Florida
known as Carriage Club of Jacksonville. The purchase price totaled $61.1 million
and was financed primarily through various borrowings. The purchase prices have
been allocated to the assets acquired and liabilities assumed based on fair
market value at the date of acquisition.
The above acquisitions were accounted for as purchases, and the
accompanying financial statements include the results of operations from the
date of the acquisitions. The following unaudited pro forma financial
F-11
<PAGE> 81
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information presents the results of operations as if the acquisitions noted
above occurring subsequent to January 1, 1995 had occurred on January 1, 1995,
after giving effect to certain adjustments primarily additional depreciation
expense and increased interest expense on debt related to the acquisitions. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the acquisitions occurred at the
beginning of the year:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Total revenues................................... $74,308 $79,543
======= =======
Income (loss) before extraordinary item.......... $ (93) $ 4,750
======= =======
Net income (loss)................................ $ (93) $ 2,415
======= =======
</TABLE>
(4) MARKETABLE SECURITIES
Marketable securities consist of securities which are classified as
held-to-maturity and are reported at amortized cost of $102,000 and $52,000 at
December 31, 1995 and 1996, respectively.
The amortized cost, which approximates market, for marketable securities
was as follows:
<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Held-to-maturity:
U.S. Treasury securities............................ $ 52 $52
Exxon Capital Corporation marketable corporate debt
securities....................................... 50 --
---- ---
$102 $52
==== ===
</TABLE>
Maturities of marketable securities classified as held-to-maturity was due
between one and five years.
(5) ASSETS LIMITED AS TO USE
Assets limited as to use that are required for obligations classified as
current liabilities are reported as current assets. Assets limited as to use,
other than tenant deposits, are on deposit with the lender of the mortgage note
payable. The residency agreements which govern the terms under which some of the
communities lease apartments to residents require each resident to place a
tenant deposit with the Partnership in an amount equal to one month's rent. The
deposit functions as a security deposit. These deposits are carried as a
liability on the balance sheet. In compliance with state laws when applicable,
cash reserve accounts are maintained for the tenant deposits. Assets limited as
to use consist of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Operating expense reserve.......................... $ 349 $ 349
Tax escrow account................................. 1,904 285
Capital improvement escrow......................... 890 218
Bond principal and interest escrow................. 617 862
Tenant deposits.................................... 1,292 2,114
Collateral for letter of credit with bank.......... 891 801
------ ------
5,943 4,629
Less amounts classified as current assets.......... 2,411 1,022
------ ------
Assets limited as to use, excluding amounts
classified as current assets..................... $3,532 $3,607
====== ======
</TABLE>
F-12
<PAGE> 82
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings and equipment is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................... $ 18,326 $ 26,519
Buildings and improvements..................... 132,775 187,239
Furniture, fixtures and equipment.............. 8,960 11,512
-------- --------
160,061 225,270
Less accumulated depreciation.................. 11,141 17,423
-------- --------
148,920 207,847
Construction in progress....................... 162 5,277
-------- --------
Land, buildings and equipment, net............. $149,082 $213,124
======== ========
</TABLE>
(7) OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred financing costs, net of accumulated $2,941 $1,790
amortization.....................................
Long term investments.............................. 435 --
Other.............................................. 233 318
------ ------
$3,609 $2,108
====== ======
</TABLE>
Long-term investments at December 31, 1995 consisted of an investment in
property held by ARC for resale or development. During September 1996,
Williamsburg Landing, Inc. (WLI), a third party, exercised its $1.3 million
option to purchase an unimproved parcel of land adjacent to Williamsburg
Landing, a facility managed by the Partnership. The basis of the land to ARC was
approximately $435,000 resulting in a net gain of approximately $865,000.
In 1996, the Partnership entered into a development management agreement
with WLI whereby the Partnership oversees the land development and administers
any relevant payments; however, WLI provides full funding of the development and
the Partnership has no financial obligation with respect to the project. The
development management agreement provides for a fixed fee to be paid by WLI to
the Partnership on a predetermined schedule throughout the term of the planned
development. The Partnership has a contractual right to participate in the
appreciation value upon any subsequent sale of the real property to the extent
of 20% of the net realized profit.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Property taxes payable............................. $2,454 $2,550
Accrued payroll.................................... 628 1,439
Other.............................................. 1,360 2,250
------ ------
$4,442 $6,239
====== ======
</TABLE>
F-13
<PAGE> 83
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Lexington-Fayette Urban County Government Residential
Facilities Revenue Bonds refinanced May 1, 1987,
collateralized by mortgage liens on property and
equipment. The refinancing bond issue is remarketed to set
the coupon rate on April 1 of each year (3.65% for the
year ended March 31, 1997) until the bonds mature on April
1, 2015. Interest is due semi- annually on April 1 and
October 1. ............................................... $ 8,010 $ 8,010
Mortgage note payable bearing interest at a fixed rate of
8.2%. Interest is due monthly with principal payments due
monthly in varying amounts with remaining principal and
unpaid interest due at maturity on December 31, 2002. The
loan is secured by land, buildings, equipment and
assignment of rents and leases. See note (a) below. ...... 62,109 62,332
Mortgage note payable bearing interest at 2.65% above the
lender's composite commercial paper rate, as defined in
the promissory note (8.16% at December 31, 1996). Interest
is due monthly with principal payments due monthly in
varying amounts. The remaining principal and unpaid
interest is due at maturity on December 31, 2002. The loan
is secured by land, buildings, equipment and assignment of
rents and leases. See note (a) below. .................... -- 16,767
Mortgage note payable bearing interest at a fixed rate of
9.28%. Interest is due monthly with principal payments of
$61,000 per month continuing until and including April 30,
2003, the maturity date of the note. The loan is secured
by land, buildings, equipment, assignment of leases and
rents, and escrow accounts. .............................. -- 37,000
Mortgage note payable bearing interest at 3.25% above the
lender's composite commercial paper rate, as defined in
the promissory note (8.76% at December 31, 1996). Interest
is due monthly with principal payments of $19,000 due
monthly continuing until and including April 30, 2003, the
maturity date of the note. The loan is secured by land,
buildings, equipment, assignment of rents and leases, and
escrow accounts. ......................................... -- 13,110
Note payable to a bank bearing interest at a floating rate
equal to the bank's index rate (8.25% at December 31,
1996). Interest is due monthly with quarterly principal
payments of an amount equal to 20% of the excess of total
project value over the amount of the note beginning
September 30, 1997, and continuing until December 31,
1998, the maturity date of the note. The note is secured
by a land deed. .......................................... -- 825
Mortgage note payable bearing interest at a fixed rate of
8.2%. Interest is due monthly with principal payments of
$20,000 per month with remaining principal and unpaid
interest due at maturity on December 31, 2001. The loan is
secured by land, buildings, equipment and assignment of
rents and leases. ........................................ 15,260 15,020
</TABLE>
F-14
<PAGE> 84
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable to a bank bearing interest at 7.6%. Interest
due quarterly with principal due at maturity on June 30,
1997. The loan is secured by land, buildings and equipment
and assignment of rents and leases, and is guaranteed by
certain limited partners. This debt instrument was repaid
during January 1997 (note 15). See note (b) below. ....... 5,000 5,000
Term loan note to a bank with a fixed interest rate of
10.07%. Principal and interest of $288,822 due quarterly
through March 31, 1998. This debt instrument was repaid
during January 1997 (note 15). See note (b) below. ....... 9,768 9,585
Term loan note payable to a bank. Principal of $160,000 and
interest at a variable rate (8.04% at December 31, 1996)
tied to the LIBOR rate are due quarterly on the 10th day
of each January, April, July, and October until October
31, 1998, when all remaining principal and interest become
due. The note was amended during 1996 increasing the face
amount by $1,150,000. .................................... 2,000 2,630
Other long-term debt, generally payable monthly............. 98 410
-------- --------
Total long-term debt...................................... 102,245 170,689
Less current portion...................................... 1,800 8,053
-------- --------
Long-term debt, excluding current portion......... $100,445 $162,636
======== ========
</TABLE>
The aggregate scheduled maturities of long-term debt at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997................................... $ 8,053(b)
1998................................... 14,402(b)
1999................................... 2,303
2000................................... 2,287
2001................................... 2,272
Thereafter............................. 141,372
--------
$170,689
========
</TABLE>
- ---------------
(a) In 1996, the Partnership refinanced two of its notes held with a capital
corporation. In 1995, the debt was in the form of two notes, one for $38.5
million and one for $23.5 million, both of which had a variable interest
rate of 4.5% above the lender's composite commercial paper rate. The
maturity date of both notes was October 31, 2001. The refinancing combined
the two notes into a single loan with a $62.0 million initial advance and a
$35.0 million commitment for additional borrowing. In 1996, the Partnership
borrowed $17.7 million against the remaining commitment. The initial $62.0
million advance bears interest at a fixed rate of 8.2%. Borrowings against
the remaining commitment bear interest at a variable rate of 2.65% over the
lenders' composite commercial paper rate. All principal reductions under the
advances are first applied to any balance outstanding under the variable
rate portion of the advances. The maturity of the loan is December 31, 2002.
In conjunction with the refinancing, the Partnership wrote off net financing
costs related to the previous notes of $2,335,000. This loss was recorded as
an extraordinary loss in 1996.
(b) Of the $14,585,000 of debt repaid in January 1997, $5,207,000 and $9,378,000
matured in 1997 and 1998, respectively (see note 15).
The Partnership is also required to comply with certain restrictive
financial and other covenants. At December 31, 1996, the Partnership was in
compliance with its debt covenants.
F-15
<PAGE> 85
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of various long-term debt accounts, the Partnership is
required to maintain certain deposits with trustees. Such deposits are included
with assets limited as to use in these financial statements.
(10) EQUITY
As discussed in note 1, in connection with the Roll-up, the shareholders of
ARC and the partners in various partnerships exchanged their common stock or
partnership interests for limited partnership interests in the Partnership.
Additionally, holders of $10.0 million of notes payable by the Fort Austin
Limited Partnership exchanged these notes for special redeemable preferred
limited partnership interests. Such preferred interests were entitled to a
cumulative 15% preferred distribution. Such preferred interests were redeemable,
in whole or in part, at the option of the Partnership. During 1996, the
Partnership redeemed $4.8 million of the preferred interests and on December 4,
1996, the Partnership approved the redemption of the remaining $5.2 million.
Accordingly, the $5.2 million was removed from equity and shown as redemption
payable at December 31, 1996 (see note 15). During both 1995 and 1996, the
Partnership distributed $1.1 million of preferred distributions. There were no
cumulative unpaid preferred distributions at December 31, 1995 or 1996.
Distributions of all or any portion of the net cash flow from operations or
from the proceeds of capital transactions are at the discretion of the general
partner. Such distributions are made pursuant to formulas set forth in the
limited partnership agreement.
(11) OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gain on sale of assets........................ $155 $ -- $1,143 $874
Costs incurred for the roll-up (see note 1)... -- (964) (17) --
Other, net.................................... (57) (49) (207) (86)
---- ------- ------ ----
$ 98 $(1,013) $ 919 $788
==== ======= ====== ====
</TABLE>
The 1995 gain resulted primarily from the sale of certain assets and
liabilities of a retirement center by a general partnership in which ARC had an
investment, and the 1996 gain included a gain of approximately $865,000 from the
sale of land owned by ARC (see note 7).
F-16
<PAGE> 86
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) INCOME TAXES
As discussed in note 2, income taxes, other than those for ARC, are the
responsibility of the individual partners. Accordingly, the information shown
below relates solely to ARC.
The income tax expense (benefit), all of which was allocated to income,
consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES PREDECESSOR
--------------------------- ---------------------------
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. federal:
Current..................................... $ -- $ 20 $ 55 $ --
Deferred.................................... -- -- -- (823)
------ ------ ------ ------
-- 20 55 (823)
------ ------ ------ ------
State:
Current..................................... -- -- -- --
Deferred.................................... -- -- -- (97)
------ ------ ------ ------
Total......................................... $ -- $ 20 $ 55 $ (920)
====== ====== ====== ======
</TABLE>
For 1994 and 1995, ARC had no income tax expense other than an alternative
minimum tax expense of $75,000 in 1995. ARC has net operating loss carryforwards
available to offset further taxable income. Such carryforwards represent a
deferred tax asset. However, a valuation allowance was applied to produce a net
tax asset of zero for 1994 and 1995, since it was not likely the net operating
loss carryforwards could be realized. In 1996, ARC has recorded an income tax
benefit and a deferred tax asset of $920,000 because of the anticipated
utilization of net operating loss carryforwards that will offset taxable gains
recognized from a January 1997 sale/leaseback transaction (see note 15).
The components of deferred tax assets and liabilities at December 31, 1995
and 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Federal and state operating loss carryforward............. $1,900 $2,052
Deferred compensation..................................... 28 46
Other..................................................... -- 32
------ ------
Total gross deferred tax assets........................ 1,928 2,130
Less valuation allowance............................... 1,164 339
------ ------
764 1,791
------ ------
Deferred tax liabilities:
Partnership income or loss................................ 740 847
Accumulated depreciation.................................. 24 24
------ ------
Total gross deferred tax liabilities................... 764 871
------ ------
Net deferred tax asset................................. $ -- $ 920
====== ======
</TABLE>
F-17
<PAGE> 87
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, ARC had unused net operating loss carryforwards of
approximately $5.4 million for regular tax purposes, and $5.0 million for
alternative minimum tax purposes, which expire in varying amounts from 2004 to
2009. Additionally, the Corporation had alternative minimum tax credit
carryovers in the amount of approximately $143,000 at December 31, 1996, to be
used to offset regular tax in the future in the event the regular tax expense
exceeds the alternative minimum tax expense.
See note 16 for a discussion of pro forma income taxes.
(13) RETIREMENT PLAN
The Partnership has established the American Retirement Communities, L.P.
401(k) Plan (the "Plan") for eligible employees who have completed ninety days
of service and are at least 21 years old. This Plan is administered by the
Partnership with a bank serving as trustee. A Plan participant may elect to
contribute up to 20% of his or her annual compensation, subject to certain
Internal Revenue Service limitations. The Partnership can elect to make
voluntary contributions to the Plan. Such contributions will be allocated to
each participant's account. Participants vest in Partnership contributions at
20% per year beginning the first year of employment becoming fully vested after
five years of service. The Partnership contributed $54,000 and $277,000 to the
Plan during the periods ended December 31, 1995 and 1996, respectively.
At retirement, the participant receives the balance in his or her
individual account. Upon termination of employment prior to retirement, the
participant receives 100% of his or her individual contributions plus related
earnings and the vested portion of the Partnership's contributions and related
earnings. The nonvested portion of a terminated employee's account is
reallocated among the remaining Plan participants.
The Partnership has also established a post tax deferral plan (the 162
plan) for highly compensated employees. The Partnership and the individual
participant can both make contributions to the 162 plan and the individual has
freedom of investment elections. The Partnership contributed $99,000 and
$274,000 to the 162 plan during 1995 and 1996, respectively.
(14) COMMITMENTS AND CONTINGENCIES
The Partnership is subject to claims for medical malpractice liabilities;
however, management is unaware of any incidents which would have a material
impact on the Partnership's financial position or results of operations.
Commercial insurance on a claims-made basis is maintained to cover any such
incidents.
In the normal course of business, the Partnership is a defendant in certain
litigation. However, management is unaware of any action which would have a
material adverse impact on the financial position or results of operation of the
Partnership.
The Partnership is self-insured for workers' compensation claims with
excess loss coverage of $250,000 per individual claim and $1.3 million for
aggregate claims. The Partnership utilizes a third party administrator to
process and pay filed claims. The Partnership has accrued $300,000 to cover open
claims not yet settled and incurred but not reported claims as of December 31,
1996. Management is of the opinion that such amounts are adequate to cover any
such claims.
The Partnership leases its corporate facilities. The current lease expires
December 31, 2001 and requires annual rentals of $252,000.
The Partnership maintains a $2.5 million line of credit with a bank which
is available to provide working capital and to secure various debt instruments.
At December 31, 1996, $925,000 of this line of credit had been used to obtain
letters of credit.
At December 31, 1996, the Partnership has construction in process at the
two retirement communities acquired during the year. The costs to complete the
construction approximates $600,000. The Partnership has
F-18
<PAGE> 88
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an outstanding commitment from a mortgage lender of $1.1 million to complete the
construction. In December 1996, The Partnership began an expansion of another
retirement community. The total cost of construction is expected to be
approximately $11.6 million. The partnership has a construction loan commitment
from a bank, as well as a permanent loan commitment from a mortgage lender to
cover the construction.
(15) SUBSEQUENT EVENTS
In January 1997, the Partnership entered into a sale-leaseback transaction
with a third party for the property, plant, and equipment of Holley Court
Terrace and Trinity Towers retirement communities owned by the Partnership. The
net cash proceeds to the Partnership were approximately $27.5 million. The lease
is an operating lease with the gain from the transaction of approximately $4.6
million to be recognized over the life of the lease, which is ten years. Lease
payments will consist of a base rent which totals approximately $2.5 million per
year and additional rent, not to exceed 2.5% over the prior year's rent, based
on an increase in revenues at the leased facilities. The agreement contains
three separate ten-year renewal options. The proceeds from the sale were used to
retire debt of approximately $14.6 million and to fund the redemption of the
special redeemable preferred limited partnership interests of $5.2 million.
(16) FORMATION OF NEW AMERICAN RETIREMENT CORPORATION AND PRO FORMA ADJUSTMENTS
(UNAUDITED)
The Partnership intends to proceed with a reorganization and a concurrent
initial public offering of the common stock of the reorganized entity.
Immediately following the effective date of the registration statement covering
the planned public offering of newly issued shares of common stock, the
Partnership will be reorganized such that all of its assets and liabilities will
be contributed to a newly formed corporation known as American Retirement
Corporation (New ARC) in exchange for common stock totaling 7,812,500 shares and
a promissory note to the Partnership in the original principal amount
approximating $25.0 million. The Partnership will distribute its common stock of
New ARC to its partners. New ARC plans to sell up to an additional 3,593,750
shares of its common stock in the initial public offering, including the
overallotment option; the proceeds of which will be utilized to, among other
things, repay the approximately $25.0 million promissory note to the
Partnership. The Partnership will distribute to its limited partners all amounts
received upon repayment of the Reorganization Note. New ARC will only commence
operations and issue shares of common stock upon completion of the
reorganization and initial public offering. New ARC currently has no assets or
liabilities. The Partnership's historical carrying value for assets and
liabilities will carry over to New ARC upon consummation of the reorganization.
(a) Pro Forma Statement of Earnings Information (Unaudited)
The income taxes on earnings of the Partnership, other than for ARC, are
the responsibility of the partners. The pro forma adjustments reflected on the
statement of earnings provide for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, assuming
the Partnership was subject to income taxes. Pro forma income tax expense has
been calculated using statutory U.S. federal and state tax rates and gives
effect to the recognition in 1996 of the $920,000 deferred tax asset as
described in Note 12.
(b) Pro Forma Net Earnings Per Share (unaudited)
Pro forma net earnings per share are based on the number of shares which
would have been outstanding assuming the partners had been shareholders and is
based on the 7,812,500 the partners will receive when the reorganization is
effective plus 1,562,500 shares for the $25.0 million promissory note assuming
an offering price of $16.00 per share.
F-19
<PAGE> 89
AMERICAN RETIREMENT COMMUNITIES, L.P.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Tax Expense Charge to Income
At the time of the reorganization and as a result of the conversion from a
limited partnership to a corporation, New ARC will record, as a one-time charge
to income, a deferred income tax liability of approximately $13.5 million
resulting from the difference between the accounting and tax bases of New ARC's
assets and liabilities.
F-20
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
The Partners
American Retirement Communities, L.P.:
We have audited the accompanying combined statements of operations,
partners' equity and cash flows of the Carriage Club of Charlotte Limited
Partnership and Carriage Club of Jacksonville Limited Partnership for the four
months ended April 30, 1996. These combined financial statements are the
responsibility of the Partnerships' management. Our responsibility is to express
an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the operations and cash flows of Carriage Club
of Charlotte Limited Partnership and Carriage Club of Jacksonville Limited
Partnership for the four month period ending April 30, 1996, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
January 22, 1997
F-21
<PAGE> 91
CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP
COMBINED STATEMENT OF OPERATIONS
FOUR MONTHS ENDED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Resident and health care revenue............................ $4,086
Expenses:
Community operating expenses.............................. 2,498
Depreciation and amortization............................. 464
------
Total operating expenses............................... 2,962
------
Income from operations................................. 1,124
------
Other income (expense):
Interest expense.......................................... (833)
Interest income........................................... 21
------
Other income (expense), net............................ (812)
------
Net income........................................ $ 312
======
Pro Forma Earnings Data (unaudited) (note 6):
Income as reported........................................ $ 312
Pro forma income taxes.................................... 119
------
Pro forma net income...................................... $ 193
======
</TABLE>
COMBINED STATEMENT OF PARTNERS' EQUITY
FOUR MONTHS ENDED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS'
EQUITY
---------
<S> <C>
Combined balance, December 31, 1995......................... $1,090
Combined net income for the four months ended April 30,
1996................................................... 312
Contributions from partners............................... 646
------
Combined balance, April 30, 1996............................ $2,048
======
</TABLE>
See accompanying notes to combined financial statements.
F-22
<PAGE> 92
CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
FOUR MONTHS ENDED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 312
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 464
Increase (decrease) in cash, due to changes in:
Resident, patient, and personal care receivables..... 4
Inventory............................................ 2
Prepaid expenses..................................... 8
Other assets......................................... (4)
Accounts payable..................................... (65)
Property taxes payable............................... (42)
Accrued expenses and other current liabilities....... 24
Tenant deposits...................................... (34)
-------
Net cash provided by operating activities......... 669
-------
Cash flows used by investing activities:
Expenditures for purchases of furniture, fixtures and
equipment............................................. (2,664)
Purchases of assets limited as to use.................. (81)
-------
Net cash used by investing activities............. (2,745)
-------
Cash flows from financing activities:
Contributions from partners............................ 646
Proceeds from the issuance of long-term debt........... 727
Expenditures for financing costs....................... (27)
-------
Net cash provided by financing activities................... 1,346
-------
Net decrease in cash and cash equivalents................... (730)
Cash and cash equivalents at beginning of period............ 1,963
-------
Cash and cash equivalents at end of period.................. $ 1,233
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................... $ 833
=======
</TABLE>
See accompanying notes to combined financial statements
F-23
<PAGE> 93
CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
APRIL 30, 1996
(1) BASIS OF PRESENTATION
The accompanying financial statements include the combined financial
statements of Carriage Club of Charlotte Limited Partnership and Carriage Club
of Jacksonville Limited Partnership (the Partnerships) for the four months ended
April 30, 1996. Carriage Club of Charlotte is a retirement living community
located in Charlotte, North Carolina with 306 units. Carriage Club of
Jacksonville is a retirement community located in Jacksonville, Florida with 260
units. The limited partners in the Partnerships are shareholders of the
corporate general partners. Allocations of profits, losses and cash
distributions of the Partnership are made pursuant to the terms of the
partnership agreement. Generally, such allocations and cash distributions are
made to the partners in proportion to their respective ownership interests.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(b) Cash Equivalents
For the purposes of the statement of cash flows, the Partnerships consider
highly liquid debt investments with a maturity of three months or less when
purchased to be cash equivalents.
(c) Income Taxes
The entities included in these financial statements are partnerships, and
the income and losses of the partnerships and distributions are allocated to the
partners in accordance with the various partnership agreements. Accordingly, no
provision has been made in the accompanying financial statements for federal and
state income taxes related to the partnerships since such taxes are the
liabilities of the partners.
(d) Recognition of Revenue
Resident and health care revenues are reported at the estimated net
realizable amounts from residents, third-party payors, and others for services
rendered, including estimated retroactive adjustments under reimbursement
agreements with third-party payors. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and adjusted in
future periods as final settlements are determined.
(e) Depreciation
Depreciation is provided over the estimated useful life of each class of
depreciable asset and is computed on the straight-line basis.
F-24
<PAGE> 94
CARRIAGE CLUB OF CHARLOTTE LIMITED PARTNERSHIP
AND CARRIAGE CLUB OF JACKSONVILLE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(3) RENTS
The partnerships lease the majority of their units to their tenants under
leases that have lease terms of one year with rents due monthly. The leases are
noncancelable except for instances of tenant death or tenant health reasons.
(4) MANAGEMENT AGREEMENT
Carriage Club of Charlotte and Carriage Club of Jacksonville each have a
management agreement with a wholly-owned subsidiary of American Retirement
Corporation II (ARC) which provides for management of daily operations of the
retirement communities. Each entity pays ARC $20,000 per month for these
services.
(5) SUBSEQUENT EVENTS
Effective May 1, 1996, American Retirement Communities, L.P. acquired all
assets and all contractual liabilities of Carriage Club of Charlotte Limited
Partnership and Carriage Club of Jacksonville Limited Partnership.
(6) PRO FORMA INCOME TAXES
The income taxes of the Partnerships are the responsibility of the
partners. The pro forma adjustment reflected in the statement of operations
provides for income taxes as if the Partnership were subject to the taxes.
F-25
<PAGE> 95
======================================================
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 14
Use of Proceeds....................... 15
Dividend Policy and Prior
Distributions....................... 16
Capitalization........................ 17
Dilution.............................. 18
Unaudited Pro Forma Condensed Combined
Financial Information............... 19
Selected Combined and Consolidated
Financial Data...................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 33
Management............................ 49
Principal Shareholders................ 57
Certain Transactions.................. 58
Description of Capital Stock.......... 61
Shares Eligible for Future Sale....... 65
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 68
Additional Information................ 68
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------
UNTIL , 1997 (FOR 25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
3,125,000 SHARES
AMERICAN RETIREMENT CORPORATION (LOGO)
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
NATWEST SECURITIES LIMITED
EQUITABLE SECURITIES CORPORATION
MCDONALD & COMPANY SECURITIES, INC.
, 1997
======================================================
<PAGE> 96
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 of the
Registrant in connection with the Offering described in the Registration
Statement.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 18,514
NASD fee.................................................... 6,610
New York Stock Exchange listing fee......................... 112,600
Accounting fees and expenses................................ 150,000*
Legal fees and expenses..................................... 375,000*
Printing and engraving expenses............................. 150,000*
Blue sky fees and expenses.................................. 2,500*
Transfer agent and registrar fees........................... 10,000*
Miscellaneous fees and expenses............................. 74,776*
--------
Total............................................. $900,000
========
</TABLE>
- ---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any director or officer against liability incurred in connection
with a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interest, or, in all other cases, that his or her conduct was
not opposed to the best interests of the corporation, and (iii) in connection
with any criminal proceeding, the director or officer had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the corporation, however, the TBCA provides that no indemnification may
be made if the director or officer is adjudged to be liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to a director or officer, if such director or
officer is adjudged liable on the basis that a personal benefit was improperly
received. In cases where the director or officer is wholly successful, on the
merits or otherwise, in the defense of any proceeding instigated because of his
or her status as a director or officer of a corporation, the TBCA mandates that
the corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court of competent jurisdiction, upon application, may order that a
director or officer be indemnified for reasonable expense if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, whether or not the standard
of conduct set forth above was met.
The Charter and Bylaws of the Company provide that the Company will
indemnify from liability, and advance expenses to, any present or former
director or officer of the Company to the fullest extent allowed by the TBCA, as
amended from time to time, or any subsequent law, rule, or regulation adopted in
lieu thereof. Additionally, the Charter provides that no director of the Company
will be personally liable to the Company or any of its shareholders for monetary
damages for breach of any fiduciary duty except for liability arising from (i)
any breach of a director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) any unlawful distributions, or (iv)
receiving any improper personal benefit.
The proposed form of the Underwriting Agreement to be filed as Exhibit 1 to
this Registration Statement contains certain provisions relating to the
indemnification of the Company and its controlling persons by the Underwriters
and relating to the indemnification of the Underwriters by the Company and its
controlling persons.
II-1
<PAGE> 97
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All of the shares of Common Stock outstanding on the date hereof will be
distributed to the Registrant's shareholders immediately prior to the
effectiveness of the Offering in connection with the transfer of assets to the
Registrant by an affiliated limited partnership and the simultaneous liquidation
of the affiliated limited partnership. Prior to such distribution, the
Registrant's shareholders have been partners of the affiliated limited
partnership. In accordance with the provisions of the limited partnership's
Partnership Agreement, the partners voted prior to the filing of this
Registration Statement to organize the Registrant and liquidate the limited
partnership, subject only to the effectiveness of the Offering. The Registrant
believes that the distribution of shares of Common Stock by the affiliated
limited partnership will be an exempt transaction in accordance with Section
4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D
promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement*
2.1 -- Limited Partnership Agreement of American Retirement
Communities, L.P., dated February 7, 1995, as amended April
1, 1995**
2.2 -- Articles of Share Exchange between American Retirement
Communities, L.P., and American Retirement Corporation,
dated March 31, 1995 (including attached Plan and Agreement
of Share Exchange)**
2.3 -- Reorganization Agreement, dated February 28, 1997*
3.1 -- Charter of the Registrant**
3.2 -- Bylaws of the Registrant**
4.1 -- Specimen Common Stock certificate*
4.2 -- Article 8 of the Registrant's Charter (included in Exhibit
3.1)
5 -- Opinion of Bass, Berry & Sims PLC*
10.1 -- American Retirement Corporation 1997 Stock Incentive Plan**
10.2 -- American Retirement Corporation Employee Stock Purchase
Plan**
10.3 -- American Retirement Corporation 401(k) Retirement Plan**
10.4 -- Officers' Incentive Compensation Plan**
10.5 -- Registration Rights Policy**
10.6 -- Lease and Security Agreement, dated January 2, 1997, by and
between Nationwide Health Properties, Inc. and American
Retirement Communities, L.P.**
10.7 -- Lease and Security Agreement, dated January 2, 1997, by and
between N.H. Texas Properties Limited Partnership and
Trinity Towers Limited Partnership**
10.8 -- Amended and Restated Loan Agreement, dated December 21,
1994, between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.9 -- Amended and Restated Promissory Note, dated December 21,
1994 between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.10 -- Assumption, Consent and Loan Modification Agreement, dated
February 8, 1995, by and among Carriage Club of Denver,
L.P., American Retirement Communities, and General Electric
Capital Corporation**
10.11 -- Loan Agreement, dated October 31, 1995, by and between
American Retirement Communities, L.P. and First Union
National Bank of Tennessee, as amended**
10.12 -- Amended and Restated Promissory Note, dated October 31,
1995, by American Retirement Communities, L.P. to First
Union National Bank of Tennessee, as amended**
10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. to First Union
National Bank of Tennessee, as amended**
10.14 -- Standby Note, dated October 31, 1995, by American Retirement
Communities, L.P. to First Union National Bank of North
Carolina**
10.15 -- Reimbursement Agreement, dated October 31, 1995, between
American Retirement Communities, L.P. and First Union
National Bank of North Carolina, as amended**
10.16 -- Loan Agreement, dated January 4, 1996, between General
Electric Capital Corporation and Fort Austin Limited
Partnership**
</TABLE>
II-2
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.17 -- Promissory Note, dated January 4, 1996, by Fort Austin
Limited Partnership to General Electric Capital
Corporation**
10.18 -- Promissory Note, dated April 1, 1992, by Fort Austin Limited
Partnership to General Electric Capital Corporation, as
amended**
10.19 -- Loan Agreement, dated May 7, 1996, between ARCLP-Charlotte,
LLC, American Retirement Communities, L.P. and General
Electric Capital Corporation**
10.20 -- Junior Promissory Note, dated May 7, 1996, by
ARCLP-Charlotte, LLC and American Retirement Communities,
L.P. to General Electric Capital Corporation**
10.21 -- Senior Promissory Note, dated May 7, 1996, by
ARCLP-Charlotte, LLC and American Retirement Communities,
L.P. to General Electric Capital Corporation**
11 -- Statement re Computation of Per Share Earnings**
21 -- Subsidiaries of the Registrant
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit
5)
24 -- Power of Attorney (included on page II-4)
27 -- Financial Data Schedule (for SEC use only)**
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered hereunder, 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 Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) 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 a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Nashville, Tennessee on April 25,
1997.
AMERICAN RETIREMENT CORPORATION
By: /s/ W.E. SHERIFF
------------------------------------
W.E. Sheriff
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ W.E. SHERIFF Chairman and Chief Executive April 25, 1997
- ----------------------------------------------------- Officer (Principal Executive
W.E. Sheriff Officer)
/s/ GEORGE T. HICKS Executive Vice April 25, 1997
- ----------------------------------------------------- President -- Finance, Chief
George T. Hicks Financial Officer (Principal
Financial and Accounting
Officer)
* Director April 25, 1997
- -----------------------------------------------------
H. Lee Barfield II
* Director April 25, 1997
- -----------------------------------------------------
Jack O. Bovender, Jr.
* Director April 25, 1997
- -----------------------------------------------------
Frank M. Bumstead
* Director April 25, 1997
- -----------------------------------------------------
Robin G. Costa
* Director April 25, 1997
- -----------------------------------------------------
Clarence Edmonds
* Director April 25, 1997
- -----------------------------------------------------
John A. Morris, Jr., M.D.
* Director April 25, 1997
- -----------------------------------------------------
Daniel K. O'Connell
* Director April 25, 1997
- -----------------------------------------------------
Nadine C. Smith
* Director April 25, 1997
- -----------------------------------------------------
Lawrence J. Stuesser
* /s/ W. E. SHERIFF
- -----------------------------------------------------
W.E. Sheriff, Attorney-in-fact
</TABLE>
II-4
<PAGE> 100
AMERICAN RETIREMENT COMMUNITIES, L.P.
SCHEDULE II -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED DECEMBER 31, 1994, THREE MONTHS ENDED MARCH 31, 1995,
NINE MONTHS ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance January 1, 1994..................................... $ 19
1994 charge to expense.................................... 5
Write-offs against allowance.............................. (5)
----
Balance December 31, 1994................................... 19
Charge to expense for three months ended March 31, 1995... --
Write-offs against allowance for three months ended March
31, 1995............................................... --
----
Balance March 31, 1995...................................... 19
Charge to expense for nine months ended December 31,
1995................................................... 122
Write-offs against allowance for nine months ended
December 31, 1995...................................... (63)
----
Balance December 31, 1995................................... 78
1996 charge to expense.................................... 123
Write-offs against allowance.............................. (93)
----
Balance December 31, 1996................................... $108
====
</TABLE>
S-1
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1 -- Form of Underwriting Agreement*
2.1 -- Limited Partnership Agreement of American Retirement
Communities, L.P., dated February 7, 1995, as amended April
1, 1995**
2.2 -- Articles of Share Exchange between American Retirement
Communities, L.P., and American Retirement Corporation,
dated March 31, 1995 (including attached Plan and Agreement
of Share Exchange)**
2.3 -- Reorganization Agreement, dated February 28, 1997*
3.1 -- Charter of the Registrant**
3.2 -- Bylaws of the Registrant**
4.1 -- Specimen Common Stock certificate*
4.2 -- Article 8 of the Registrant's Charter (included in Exhibit
3.1)
5 -- Opinion of Bass, Berry & Sims PLC*
10.1 -- American Retirement Corporation 1997 Stock Incentive Plan**
10.2 -- American Retirement Corporation Employee Stock Purchase
Plan**
10.3 -- American Retirement Corporation 401(k) Retirement Plan**
10.4 -- Officers' Incentive Compensation Plan**
10.5 -- Registration Rights Policy**
10.6 -- Lease and Security Agreement, dated January 2, 1997, by and
between Nationwide Health Properties, Inc. and American
Retirement Communities, L.P.**
10.7 -- Lease and Security Agreement, dated January 2, 1997, by and
between N.H. Texas Properties Limited Partnership and
Trinity Towers Limited Partnership**
10.8 -- Amended and Restated Loan Agreement, dated December 21,
1994, between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.9 -- Amended and Restated Promissory Note, dated December 21,
1994 between Carriage Club of Denver, L.P. and General
Electric Capital Corporation**
10.10 -- Assumption, Consent and Loan Modification Agreement, dated
February 8, 1995, by and among Carriage Club of Denver,
L.P., American Retirement Communities, and General Electric
Capital Corporation**
10.11 -- Loan Agreement, dated October 31, 1995, by and between
American Retirement Communities, L.P. and First Union
National Bank of Tennessee, as amended**
10.12 -- Amended and Restated Promissory Note, dated October 31,
1995, by American Retirement Communities, L.P. to First
Union National Bank of Tennessee, as amended**
10.13 -- Revolving Credit Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. to First Union
National Bank of Tennessee, as amended**
10.14 -- Standby Note, dated October 31, 1995, by American Retirement
Communities, L.P. to First Union National Bank of North
Carolina**
10.15 -- Reimbursement Agreement, dated October 31, 1995, between
American Retirement Communities, L.P. and First Union
National Bank of North Carolina, as amended**
10.16 -- Loan Agreement, dated January 4, 1996, between General
Electric Capital Corporation and Fort Austin Limited
Partnership**
10.17 -- Promissory Note, dated January 4, 1996, by Fort Austin
Limited Partnership to General Electric Capital
Corporation**
10.18 -- Promissory Note, dated April 1, 1992, by Fort Austin Limited
Partnership to General Electric Capital Corporation, as
amended**
10.19 -- Loan Agreement, dated May 7, 1996, between ARCLP-Charlotte,
LLC, American Retirement Communities, L.P. and General
Electric Capital Corporation**
10.20 -- Junior Promissory Note, dated May 7, 1996, by
ARCLP-Charlotte, LLC and American Retirement Communities,
L.P. to General Electric Capital Corporation**
10.21 -- Senior Promissory Note, dated May 7, 1996, by
ARCLP-Charlotte, LLC and American Retirement Communities,
L.P. to General Electric Capital Corporation**
11 -- Statement re Computation of Per Share Earnings**
21 -- Subsidiaries of the Registrant
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit
5)
24 -- Power of Attorney (included on page II-4)
27 -- Financial Data Schedule (for SEC use only)**
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
American Retirement Corporation II
ARCLP - Charlotte, LLC
A.R.C. Management Corporation
ARC Corpus Christi, Inc.
ARC Oak Park, Inc.
ARC Equities - Lexington, Inc.
ARC Fort Austin Properties, Inc.
Fort Austin Limited Partnership
Trinity Towers Limited Partnership
Holley Court Terrace, L.P.
A.R.C. Chattanooga, Inc.
<PAGE> 1
Exhibit 23.1
The Partners
American Retirement Communities, L.P.:
The audits of American Retirement Communities, L.P. referred to in our report
dated January 22, 1997, included the related financial statement schedule for
the year ended December 31, 1994, the three months ended March 31, 1995, the
nine months ended December 31, 1995, and the year ended December 31, 1996,
included in the registration statement. The financial statement schedule is the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic combined and consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein. Our
report dated January 22, 1997 contains an explanatory paragraph which refers to
a change in cost basis as a result of a purchase business combination.
We consent to the use of our reports included herein on (1) American Retirement
Communities L.P. and (2) Carriage Club of Charlotte, Limited Partnership and
Carriage Club of Jacksonville, Limited Partnership and to the reference to our
firm under the headings "Selected Combined and Consolidated Financial Data" and
"Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
April 25, 1997
